Renewable Energy Trends 2011: 'Green Gold' Loses Its Glitter

In its first annual report charting trends and developments in the sector it says fresh challenges are likely in 2011 and the role of renewable energy in the development of a low-carbon economy should be remembered, it says.

Prior to the economic crisis, renewable energy, or 'green gold' was developing against a backdrop of very high oil prices, with large wind farms being installed across Europe, the US, China and many other developed and emerging nations, says Deloitte. Solar power was soaring with supply bottlenecks across the different technologies, but now things have changed. Credit lines remain tight and what funding is available now comes with more onerous terms. Meanwhile M&A activity has seen renewables becoming more of a buyers' market, despite the ongoing presence of occasionally unrealistic pricing points, says Deloitte.

Government, Tax and Regulators

As governments begin to rebound, regulatory and fiscal uncertainty is a term still heard in boardrooms, says Deloitte. And as some economies begin evaluating their positions, others are contemplating wholesale policy overhauls, which says the report, will make the environment more difficult for investors.

Governments face the challenge of creating incentives that offer good returns during early stage development, to encourage activity in the sector, but can be reined back later. For example Chile, Poland, the Czech Republic, South Africa and South Korea are attracting early interest from a wide range of overseas investors. Crucial to the success of the sector as a whole and to projects is that early-day incentives remain in place over project lifespans, it says.

Recent decisions in several important renewable energy markets have made the playing field unstable for companies with renewable energy portfolios, finds Deloitte: 'The recent financial crisis has left many government balance sheets under pressure, which is coming through in reduced tax and regulatory incentives.' Meanwhile 'the mitigation of carbon emissions is also starting to focus towards other areas such as energy efficiency,' it adds.

Recent feed-in tariff changes in Spain has curtailed investment while the ongoing review of the UK's FiT scheme is ruffling feathers there. The report also expects near-term regulatory changes to take place in many major markets. China's energy stimulus plans appear to have been delayed, it said, while the situation remains unclear in Australia following last year's federal elections there.

Reasonable assurances on incentives and the grandfathering of them is crucial to maintain investor confidence in the sector, it says. 'Governments and regulators should focus on delivering incentives which not only give the political sound bites, but are easy to understand and evaluate,' Deloitte says.

The bottom line for renewables is that it remains a sector underpinned by government tax credits and subsidies. 'Continued investment in renewable energy requires clear and concise regulations that remain over the life of the project, stability of incentives and taxes, as well as long-term certainty in the price of carbon.' But the report adds that, 'pressure on government finances, shifting views on energy security and uncertainty over longer-term commodity prices is unlikely to ease in the near-term, leading to questions around the creation and use of renewable energy incentives.'

Does Anyone Have Any Cash?

The availability of funding has been a key issue for all business in recent years and renewable energy is no different, says Deloitte. The sector has attracted its fair share of equity through venture capital, private equity, and sovereign wealth fund investment, as steadier oil prices and the need to cut greenhouse gas emissions put the spotlight on renewable energy sources. The 'traditional' renewable energy sectors — wind, solar, and biofuels — will continue to see investments, while areas such as marine, geothermal are maturing to become viable options for green private equity and venture capital investors over the next five years, says Deloitte.

Scale remains a key concern for would-be renewable energy investors, it says. For some, RE projects are still too small-scale, particularly when they compete for investment committee attention with much larger, existing energy infrastructure projects. The bottom line on funding, says the report, is that as market conditions continue to show signs of improvement and that new IPO issues and project finance rounds may take longer than usual to close and pricing will be tougher. 'Given that it is not yet clear where all the future funding for renewable energy investment will come from, these conditions are likely persist for some time,' it says.

Elsewhere the report draws several conclusions. Very-large scale projects will always face challenges but by heeding lessons from other industries, renewable energy firms can reduce risks and control delivery costs. On skills and job creation, it says the notion of green jobs has been debated to justify a wide array of initiatives, policies and investments, but that investment is now needed in training and retraining for a new generation of skilled workers.

The outlook for renewable energy remains strong with several issues set to prove fundamental for the health of the sector. These include the relative cost of other competing forms of low carbon generation such as nuclear and gas; China, which influences the industry outside its borders by driving down costs, by investing in projects and by supplying key components; the extent and shape of the global recovery, which will determine the outlook for commodity prices, government finances and incentives, and in turn drive the appetite for renewable energy investment.

While some of these issues could realign RE drivers, it remains a 'very exciting time' to be in a sector which the report predicts will continue to grow for some time to come, concluding 'it is hard to think of a more interesting part of the energy chain to be in'.