Winds (and Solar) of Change

The time is now for renewables in emerging markets

The world is moving away from using traditional energy sources in favour of renewables. In 2017, the latest International Energy Outlook by the US Energy Information Administration revealed that total global energy consumption will grow by 28 per cent between 2015 and 2040. Within the energy industry, renewables are anticipated to be the fastest-growing energy source over the next ten to twenty years.

The rising popularity of renewables is largely thanks to innovative technology which has made renewable energy more accessible by lowering the costs of both installation and ongoing maintenance for operators. As a result, the price per gigawatt of a solar or wind powered system today is cheaper than ever and in many regions already cheaper than fossil fuels.

Renewables are becoming particularly attractive in regions like the Caribbean and Latin America where solar and wind resources are abundant and the cost of conventional energy is extremely high.

An Ideal Match – Renewables in the Caribbean

The Caribbean islands are a great example of an area poised to take on renewable energy, with a real need for renewables infrastructure in a time where the generation costs are dropping.

The region is rich in natural resources which enables renewable energy technology to generate electricity at similar or cheaper price than conventional power plants. Solar PV technology, for instance, is a real alternative for the smaller islands in the Caribbean. Solar PV, when deployed as part of an integrated energy solution and combined with storage, can replace diesel power generators, which will only be needed as backup. Furthermore, many remote regions in the Caribbean have weak or no grid infrastructure and require off-grid solutions. Here distributed solar PV installations play a key role in supplying affordable energy in the decentralized future of power generation.

Yet, according to the World Bank, less than 10% of electricity production in the Caribbean comes from renewables. The islands are still largely dependent on imported fossil fuels such as diesel and have some of the highest electricity prices in the world.

The challenge here, as with many emerging markets looking to move towards renewables, is infrastructure and the regulatory environment. The majority of emerging market countries lack the required grid infrastructure. Understanding the potential value in moving towards renewables, local governments have committed to providing incentives and regulatory environment for renewable energy projects. In this regard, Jamaica is clearly on the forefront of successfully integrating renewable energy into its power generation mix and a long-term commitment to renewables.

Declining Prices Offer Significant Rewards

For investors and developers, there is a significant opportunity to partner with local governments in emerging markets as they aim to reach their renewable goals.

Emerging markets are offering attractive risk-adjusted returns on investments in renewables. In comparison, developed markets like Europe are likely to provide 5-8% equity IRR, while often still relying on government subsidies. And countries such as Spain, Italy, Poland or Romania have shown in the past that the wind for renewables can turn, when renewables rely on such subsidies.

Renewable energy infrastructure can produce a steady yield over a long period of time with typically inflation-adjusted revenues and limited correlation to other asset classes.

Looking Ahead

The operational costs of solar and wind parks will further continue to decline over the next 10 years due to a number of reasons. The UK’s offshore wind auction, for example, saw prices go down by 50 per cent within two years, while the Dutch government announced plans for an offshore wind project with zero subsidy in March this year.

However, the first critical voices are raising questions about the long-term success and sustainability of such auction price levels. Various lenders, which are critical for the success of the renewables industry, have already communicated their concerns that such auction prices might not lead to “bankable” projects (at least not in the previous limited recourse structures). This would limit the group of sponsors to large utilities and independent power producers with low refinancing costs of their their balance sheets.

To combat this, governments must ensure that such processes provide planning certainty to developers and investors and do not become a speculative game. Otherwise, the desired renewable energy installations might never be realized to generate green energy.

There is a real responsibility to ensure renewables energy progress is made the right way as its growth continues to advance globally. Regions where energy efficiency challenges have been persistent over decades can look to renewable energy projects as a solution. Renewables offer reliability, affordability, and accessibility to clean energy.

About the author:

Martin Vogt is Managing Director at MPC Renewable Energies and responsible for renewable energy project origination.