The latest figures from the International Energy Agency (IEA) make grim reading. It estimates, for the first time in nearly two decades, growth in new renewable energy capacity will be lower this year than last year. Disruptions to construction and supply chains as a result of the Covid-19 pandemic will slow many projects this year, while a global economic slowdown will particularly hit small-scale solar and distributed storage markets.
A slower economy is also vexing power markets, depressing demand and prices and, as a result, undermining the economics of merchant renewables projects that rely on wholesale prices. Overall, the IEA expects an increase in renewable energy capacity of 167 GW this year, a figure that is 13% lower than last year’s growth, and 10% lower than its previous forecast.
But this is only part of the story.
On a more positive note, the IEA forecasts growth will return in 2021, predicting a return to the levels seen in 2019 as we move beyond the impacts of the pandemic and as pressure to decarbonise the global economy builds. Certainly, we are seeing continuing strong demand from institutional investors for clean energy assets, while numerous players within the ecosystem see opportunities for acquisitions and expansion; notably, outside their local markets.
So, as developers and investors begin to think about a post-Covid-19 global economy, how is the renewable energy landscape evolving, and where is the next stage of market growth likely to take place?
The latest EY Renewable Energy Country Attractiveness Index (RECAI) offers some insights. The big change was the US taking first place for the first time since 2016. There, an extension to the crucial federal renewables incentive – the Production Tax Credit – has created a scramble to get projects underway. In the longer term, the increasing cost-competitiveness of wind and solar, and expectations for strong growth in offshore wind, promise continuing high levels of investment.
China fell to second place suffering from its exposure to two critical negative pressures for the renewables sector: one short-term, and the other with potential to pose medium-term challenges.
The first was the effect of the Covid-19 pandemic and the economic slowdown. The shutdown in the first quarter slowed project development and, even now, as China’s economy restarts, social distancing measures are acting as a drag on recovery. The second is the Government’s shift away from subsidies towards a more competitive landscape; increasingly, renewables projects in China are expected to compete in wholesale power markets rather than rely on state-guaranteed tariffs.
The RECAI also highlights a trend towards merchant renewables in a number of jurisdictions. This was expected to drive significant growth in the market this year and beyond, as continuing cost reductions make renewables increasingly viable without subsidies. However, the decline in wholesale power prices is putting pressure on these projects and their developers.
Around the world, the renewable energy market is split into two camps: projects that are continuing to benefit from fixed feed-in tariffs or from price floors, and those that are at the mercy of spot power prices. The latter are expected to struggle more in the months to come.
This dynamic means that, just as taxpayer support was becoming less relevant for the renewables sector, the role of government is expected to become important again. In some jurisdictions, climate change is at the centre of recovery efforts. In the EU, at least 25% of the €750 billion Next Generation EU fund will be targeted at measures to address climate change, while the European Investment Bank will provide support for projects close to financial close, and auctions will look to secure 15 GW of new capacity over two years.
However, the reality is that there is likely to be less support for renewables from governments that are less able to deficit-finance economic support packages. Prior to Covid-19, a number of African jurisdictions were attracting interest from renewables investors; there, we anticipate that progress will slow. In addition, low prices for natural gas may discourage renewables expansion in regions such as Central America and the Caribbean.
Meanwhile, growth in residential solar and small-scale energy storage is also likely to slow. Difficulties in selling and installing equipment during lockdowns have already trimmed installation numbers, while an economic slowdown will make many householders reluctant to make large discretionary investments. This coincides with lower power prices also reducing the economic attractiveness of self-generation.
In summary, the combination of Covid-19 and economic slowdown may, in the near term, slow the growth of renewables and change the relative attractiveness of various technology types and jurisdictions. But we expect this to be a bump in the road, rather than a car crash.
We continue to see growing interest among institutional investors for clean energy assets; they recognise that the longer-term imperative to decarbonise the global economy will underpin continued growth in renewables, and that well-structured projects still promise attractive, predictable yields.
Indeed, in some respects, recent months have given us a preview of what a decarbonised power sector will look like. As demand fell, renewables accounted for a much larger percentage of power supplied. The Covid-19 slowdown offered a trial run in how to integrate renewables and balance grids where fossil-fuelled supply fell away. That grids passed the test without disruption has helped make the case for ever-deeper penetration of renewables into power markets.
The views expressed in this opinion are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy
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