Attractiveness of UK renewables fall to its lowest level in five years

Posted on Sep 18 2014 - 9:45am by Sustainable News
  • UK falls to 7th place in renewable energy attractiveness index for the first time since December 2009
  • Fall prompted by yet more policy tinkering and the Government’s rush to allocate available funding
  • Dynamic emerging markets further threaten UK’s appeal as an investment destination

The UK’s appeal as a destination for renewable energy investment is now at its lowest level for almost five years as a result of a combination of domestic and international factors, according to the EY’s Renewable Energy Country Attractiveness Index (RECAI) published today.

The sector is currently weighing the impact of a recent consultation on solar subsidies that will see the UK Government withdraw Renewables

The UK’s appeal as a destination for renewable energy investment is now at its lowest level for almost five years

The UK’s appeal as a destination for renewable energy investment is now at its lowest level for almost five years

Obligation (RO) support for solar projects above 5MW two years earlier than planned. In addition, the Government has already allocated the majority of the funding available to support renewable energy projects through to 2020.

Internationally, competition is intensifying and new dynamic emerging markets are increasingly threatening the UK’s ability to attract investors. India’s new government is proactively overhauling its energy sector to galvanize public and private renewables investment. Brazil, Chile, South Africa and Kenya are developing robust deployment pipelines and consistent policy support, while major project financing in the Netherlands and Israel have prompted a boost for these markets.

Ben Warren, Environmental Finance Leader at EY said: “What we are seeing is a ‘perfect storm’ of reasons prompting a fall in the appeal of the UK’s renewables market.

“The booming UK solar sector, one of only six markets globally to surpass the 5GW installed capacity, was caught by surprise by the Government’s consultation in May. Legal challenges and investor petitions have been launched in response, urging the Government to give the sector more time and greater policy stability to compete with conventional fuels.

“At the same time there is simply not much left in the pot. 60% of the funding available has already been allocated leaving investors and developers concerned about budgetary constraints for future projects.

“To continue to compete for international capital, the UK’s market reform and upcoming Contract for Difference (CfDs) regime will have to go a long way to repair the damage of recent policy mishaps.”

Index reshuffle

In a significant reshuffle at the top of the index, China returns to the top for the first time since May 2013 while Europe and the US continue to lose ground to emerging markets, according to the RECAI, which ranks 40 renewables markets on their attractiveness in the eyes of investors. Despite significant deployment and investment opportunities in the US renewables market, congressional gridlock and drawn-out approvals have had a negative effect on the country’s ability to provide investors with long-term certainty causing it to fall to second place.

Elsewhere in the index, only two of the traditionally attractive markets managed to hold on to their spots. Germany and Japan managed to remain static in third and fourth place respectively as their markets reflect on the latest legislative and energy strategy updates. In contrast, mixed signals and policy tinkering have prompted yet another drop in the rankings for Australia to tenth place. At the same time Italy and Spain are seeing the repercussions of retroactive changes to support mechanisms, with both falling several places down the index.

Ben comments: “China’s government is placing increased emphasis on cleantech as the country battles pollution, ushering in new market opportunities for foreign investors. Aggressive policy targets, an increased focus on consolidation and the roll-out of pilot carbon emissions trading schemes also support the country’s pollution reduction initiatives and reflect cleantech’s strategic economic value.”

Reviving Europe

The latest report highlights that Europe is currently at an inflexion point, striving to become a global sector leader but facing strained infrastructure and supply capabilities.

Ben adds: “The industry must liberate itself from the shackles of the past and go in search of grid parity as the fastest route to secure and affordable energy. The role of policy-makers therefore becomes one of enablement rather than support, and they should be looking to create a level playing field across all energy sources through greater cost transparency.”

Alternative funding models increasingly becoming the trend

The report highlights that smaller-scale distributed applications are becoming more critical to both developed and emerging markets, and that as a result the outlet for localized financing models, such as crowd-funding is expanding. The pool of capital available for such financing has significant potential to increase if the risk-reward profile can be structured such that it becomes a viable alternative to other retail investment channels.

Ben comments: “Far from just being the remit of the ‘socially conscious’ investor, crowd and community sourced finance is increasingly becoming a smart investment channel with a significant role to play in shaping our future energy mix and creating the stimulus for new funding models to emerge.”

The report also focuses on the imperative for more cost-effective and sustainable energy across the world’s island nations, representing significant investment and deployment opportunities as well as the potential to lead in the creation of new energy microsystems. According to Warren, “The question is whether today’s investors, developers and innovators want to be at the forefront of creating an island model of energy with potentially far-reaching implications for the global energy sector, or just wait to ride the second wave as micro goes macro.”

Looking forward

With new clean energy investment of US$63.6b in Q2 representing the strongest quarterly performance in two years and indicating a rebound in annual global investment for 2014, the latest RECAI report concludes that an increasing shift toward democratic finance and the opening up of new markets will be critical in maintaining this uplift in global investment volumes.

Ben concluded: “Consumers, including home owners, commercial businesses and corporations, are becoming more empowered to take control of their own energy supply and demand. As a result, investors are also becoming increasingly motivated and empowered. This is not only driving the democratisation of energy, but is also channeling significant volumes of capital to where they are most needed.

“Looking forward, advancements in technology, changes in policy, and continuous reduction in cost will enhance the new energy landscape and drive affordable, reliable and low carbon energy in more areas around the globe.”

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