Global investment in renewable power and fuels increased 17% to a new record of $257 billion in 2011, with developing economies making up more than a third of this total. So concludes The Global Trends in Renewable Energy Investment Report (GTR) for 2012.

This comprehensive analysis from the Frankfurt School of Finance & Management finds that while the US closed in on China in the race to be the leading renewable energy investor, with a 57% leap in outlay to $51 billion, India displayed the fastest expansion rate, with its 62% increase to $12 billion.

Noting that one of the dominant features of 2011 was technology costs, the report concludes that with falling PV module and wind turbine prices – close to 50% and 10% respectively – the two leading renewable power technologies consequently came closer to competitiveness with fossil-fuel alternatives. However, the other key feature was a weakening in policy support in many developed countries, reflecting austerity pressures, particularly in Europe, and legislative deadlock in the US.

The percentage increase in investment between 2010 and 2011 was smaller than the 37% rise seen between 2009 and 2010, but it took place at a time when the cost of renewable power equipment was falling fast, the analysis records, suggesting that the growth in dollar investment would have been significantly larger in 2011 if it had not been for the price deflation for PV and wind.

Nonetheless, in 2011, total investment in solar power jumped 52% to $147 billion, reaching a figure almost twice as high as that in wind energy, at $84 billion, which was down 12%. This marked the first time that solar has opened up an appreciable investment gap over wind, the report notes, adding that the performance of solar owed most to booming rooftop PV installations in Germany and Italy as property owners moved to take advantage of falling panel prices, and a spurt in the financing of large-scale solar thermal electricity generation projects in Spain and the US.

Economic Challenges

Although the renewable energy sector has continued to grow, wider economic problems have had an impact since 2008, and they remain a threat, the report says.

Share prices in the renewable energy sector had a dismal 2011, in the face of overcapacity in the solar and wind manufacturing chains and investor unease about the direction of support policies in both Europe and North America.

Citing the WilderHill New Energy Global Innovation Index (NEX) – which tracks the movements of 98 clean energy shares worldwide and fell 40% in 2011, clawing back just 7% in the first quarter of 2012 as world stock markets rebounded – the document argues this severe under-performance by clean energy shares acted as a major dampener on public market financing of companies in the sector.

The sovereign debt crisis in Europe in late 2011 hit the ability of banks to provide their usual flow of project finance, which increased the focus on possible, alternative sources of investment for renewable energy – such as pension funds and other long-term institutional investors. In early 2012, an $850 million bond issue for a PV project owned by Warren Buffett's MidAmerican Holdings underlined the potential of green bonds as an instrument for financing renewable power projects, the authors note.

More generally, the fact that consumers have found their finances under pressure has made governments more reluctant to wave through measures that would put up energy prices. In the US, support in Congress for clean energy and putting a price on carbon has ebbed, in the face of low natural gas prices that have made gas-fired generation look a cost-effective alternative, and new concerns about the cost of renewable energy support. The outlook for gas supply has changed dramatically, with the technological advances in fracking. Furthermore, the report adds, complaints about the cost of subsidies for renewables have gathered strength after the scandal over the bankruptcy of Solyndra, which had received Federal loan guarantees.

Turning to Europe, the report says that governments struggled to adjust feed-in tariff subsidies for solar power quickly enough – in the face of rapid reductions in the cost of the technology. These cost reductions resulted in greater-than-intended returns for PV project developers, and booms in installation, especially in Italy and Germany, both of which saw more than 7 GW installed in 2011. Inevitably, governments in Europe and elsewhere have responded by cutting subsidies sharply – and in the case of Spain, barring subsidies for any new renewable power project not so far approved.

Indeed, investment in renewable energy was subdued in the first three months of 2012, in the face of uncertainty over future policy support in Europe and the US, the analysis continues, stating that although there have been signs that governments are trying to clarify specific issues for investors, there is not yet any evidence that investment levels will accelerate in the subsequent quarters of 2012.

Figures from Bloomberg New Energy Finance show that asset finance of utility-scale renewable energy projects in the first quarter of 2012 was $23.3 billion, down 36% from the fourth quarter of 2011 and 14% below the figure for the first quarter of last year.

In fact, 2012 was the weakest first quarter for renewable energy asset finance since 2009, in the depths of the financial crisis, the report notes.

There were still some big projects financed however – including the 396 MW Marena Wind Portfolio in Mexico for $961 million, the 100 MW KVK Chinnu solar thermal plant in India for approximately $400 million, and the 201 MW Post Rock Wind farm in Kansas, US, for an estimated $376 million.

The largest projects financed in Europe in the first part of 2012 – in the face of a difficult market for bank lending – were the 150 MW Monsson Pantelina wind farm in Romania at $317 million, and the 60.4 MW SunEdison Karadzhalovo solar PV plant in Bulgaria at $248 million.

Venture capital and private equity investment in renewable energy companies was resilient, at $1.4 billion worldwide in the first quarter, up from $1.1 billion in the previous quarter and $1.2 billion in the equivalent quarter of 2011. Solar and biofuels were the two dominant sectors for equity-raisings.

Public markets investment was just $473 million, down 46% from the end of 2011 and 87% from the equivalent period in 2011. This was not surprising given the poor performance of clean energy shares over the last few quarters, the authors conclude.