In 1997, Ernst & Young predicted global investment in renewable energy would reach US$70 billion by 2006. At the time, this figure was considered ambitious, but, in fact, investment in the renewable and clean energy sector reached just over $100 billion in 2006 and could rise to over $750 billion by 2016 at current rates of growth. Jonathan Johns presents his company’s latest country attractiveness index.Demand for renewable energy is growing at unprecedented rates, requiring significant investment throughout the supply chain and driven by competing government incentive mechanisms. The US has a ‘20 in 10’ target, China has a 10% target for renewables by 2020, India has a 10% target by 2012, and EU countries have recently signed up to a 20% mandatory target for energy consumption from renewable sources. This latter target is particularly significant given the relative immaturity of renewable heat and transport markets, as the onus will be on renewable power to make up any shortfall (some commentators argue that the true target for renewable power is closer to 30%). Indeed, Germany’s announcement that it is looking at increasing its 2020 target for renewable power generation from 20% to 27% and implementing a 45% target for 2030 is evidence that some countries recognize the challenging nature of the EU mandatory target.
In 1997, Ernst & Young predicted global investment in renewable energy would reach US$70 billion by 2006. At the time, this figure was considered ambitious, but investment in the renewable and clean energy sector actually reached just over $100 billion in 2006 and could rise to over $750 billion by 2016 at current rates of growth.
Competition for assets is intense. Trade players are battling for supply chain presence. Significant deals in the last five years include: GE’s $325 million acquisition of Enron Wind in May 2002; Siemens’ acquisition of Bonus Energy in December 2004; Siemens AG’s $1.5 billion acquisition of gearbox manufacturer Flender Holdings GmbH in March 2005; Suzlon’s €460 million acquisition of Hansen Transmissions in March 2006 and its acquisition of REpower in June 2007, valued at €1.35 billion; and, more recently, Alstom’s acquisition of Ecotecnia in Spain for €350 million. Further takeover speculation has fuelled share price rises in the last six months.
Given current rates of industry growth of 20%-30% and manufacturers’ focus on profitability, supply chain constraints are likely to continue in the medium term notwithstanding new future entrants from China, South Korea, India and, possibly, Japan. As a consequence, mergers and acquisition activity is likely to filter down the supply chain, placing a premium on key players such as gearbox and bearing manufacturers.
In the solar sector, activity is no less intense. Share prices have been equally buoyant for many players in the supply chain. Renewable Energy Corporation, in particular, has shown strong growth over the last 12 months, owing to its presence in polysilicon manufacturing – a key bottleneck in the supply chain – as Q-Cells increased its shareholding in a bid to secure supply for its own factories. Interest in thin film PV, which uses less silicon than conventional PV, has also proved a popular way of skirting the silicon supply bottleneck. First Solar, the world’s largest thin film PV producer, has consequently seen its share price rise rapidly compared with other solar producers.
However, certain pinch points within the supply chain may not be so easily overcome. Solar companies compete with the semiconductor industry for raw materials, and turbine manufacturers compete with other users of steel, aluminium and metals. Tight supply encourages technological advances, pursued through investment in R&D, such as bigger, more efficient wind turbines, advances in thin film solar PV, and hydrogen-based technologies. New developments like these could cut through supply difficulties and ultimately alter the balance of power among supply chain participants.
Critical mass is becoming an imperative. Very significant buyers are emerging in the renewable energy industry, with companies such as Iberdrola, Acciona and BP, and infrastructure funds, acting on a global basis. The ability to quickly acquire and commercialize new technologies, enter new markets and diversify across the industry requires a strong balance sheet, a track record of raising finance for new acquisitions, and a dynamic approach to the market. The biomass industry lags in this respect and is perhaps ripe for consolidation.
For governments, one of the key issues is to continue supporting projects through financial incentives such as tariffs and tax incentives. But to focus on this alone is short-sighted. The most successful markets for growth, such as India, China and the US (for new technologies) are placing equal emphasis on supporting the supply chain. Without this investment, growth in generating capacity is continuously under threat from a lack of supply, putting a market’s ability to reap the rewards from renewable energy at risk. The next five to 10 years will be just as much about supply chain as policy.Global highlights
All renewables index
The US retains top position following a quarter of high legislative activity at federal and state level (see Table 1). India and Spain are joined by the UK in second place following the release of two important white papers, a move that demotes Germany to fifth. Germany’s position may well improve if it drives through its new renewable energy targets.
China continues to increase its score and reduce the gap with the top five countries.
(Note: The bunching of countries in the Indices indicates the strong competition between jurisdictions for renewables. We anticipate rebasing the Indices, giving more emphasis to biomass and solar, may increase stratification as not all countries have comprehensive renewable energy policies.)
Near-term wind index
China moves to fourth above Germany and the UK as market analysts revise near-term build forecasts in China, while the UK’s white papers are not expected to have a significant impact in the near term.
Market activity, Q2 2007
Iberdrola, the major renewable energy company and Spanish utility, has announced its intention to list 20% of its renewables business, to take place later in 2007. The decision comes as the group also announces further expansion in the US through its proposed acquisition of US utility Energy East for €3.4 billion. The deal, approved by the Energy East board but subject to shareholder approval, is expected to complete in 2008.
Consolidation of the supply chain continues this quarter. Indian wind turbine manufacturer Suzlon has out-bid French nuclear group Areva to acquire German wind turbine manufacturer REpower for €150 per share, an investment totalling €1.35 billion. New entrant to the wind market Alstom announced its acquisition of Ecotecnia for €350 million, demonstrating the high demand for wind turbine manufacturing businesses.
Babcock & Brown Wind Partners refinanced its approximately 1.6 GW global wind farm portfolio with a €1 billion package from Bank of Scotland, Millennium BCP, Dexia Credit Local and Espirito Santo Investment.
HgCapital has acquired a majority stake in UK wind farm developer Ridgewind, which has an onshore wind development portfolio of over 200 MW. This increases HgCapital’s wind portfolio to 120 MW under construction and operation, and 700 MW in development.
China has a 10% target for renewables by 2020 nordex
Acciona Energy has acquired development rights to 1300MW of wind assets in Illinois, Wisconsin and Iowa in the US from EcoEnergy LLC. Acciona also began construction of a 350 MW turbine manufacturing plant in Iowa to supply these and other sites throughout North America.
Englefield Capital has sold its 33.3% stake in Zephyr Investments for £154 million ($308 million). Buyers were Infracapital Partners and JP Morgan Asset Management, each taking 50% of the shares. Zephyr comprises 391 MW of UK wind assets, including the 90 MW Barrow offshore wind farm.
Abengoa is securing finance for €450 million from Banco Santander, Caja Madrid, Calyon, Natixis and Société Générale for the construction of two 50 MW solar facilities in southern Spain. Abengoa has also won the contract to construct a €469 million thermal solar power station in Morocco.
PV Crystalox Solar listed on the London Stock Exchange at 130 pence ($2.6) per share, valuing the company at £542 million ($1 billion) and raising approximately £50 million ($100 million) of new equity. This is the largest IPO a renewable company has achieved to date on the UK markets. PV Crystalox Solar intends to use IPO proceeds to finance a new polysilicon manufacturing plant in Germany. Solarie Energia SA, a Spanish solar manufacturer, also listed on the Madrid exchange during Q2 2007, entering the Spanish market at €9.50 per share, valuing the company at €961 million.
Morgan Stanley has invested $60 million in Bull Moose Energy to finance a new generation of biomass plants, designed to be sited near urban centres. Bull Moose Energy’s first project will be a 20 MW green waste facility near San Diego. San Diego Gas & Electric has agreed a Power Purchase Agreement, to help it meet California’s directive of 20% renewable energy from biomass sources.
The US holds on to first place in the All Renewables Index as further state Renewable Portfolio Standards (RPSs) are announced, although not all states are accepting proposals in legislation in this area.
India and Spain are joined by the UK in second place, following the release of the UK’s energy white paper (see Commentary – High-scoring Countries, below). China gains an index point but retains its overall position, following the issue of a national climate change plan outlining China’s continued support for renewable energy, including a national RPS mandating that power companies in China must source 5% of capacity from renewable sources by 2010 and 10% by 2020. Italy retains its position following a new 20-year, feed-in solar tariff, giving 1-3 kW systems a €400-490/MWh tariff, 3-20 kW systems a €380-460/MWh tariff and 20 kW-plus systems a €360-€440/MWh tariff.
Tariff ranges are dependent on the level of integration with the grid. Optimism following this new tariff is high. Industry analysts believe solar PV installation rates could double each year until the tariff cap of 1200 MW is reached. Japan moves from 21st to 20th place and New Zealand moves from 22nd to 21st, displacing Brazil, whose score has fallen following recent statements by Brazilian President Lula da Silva that hydro power, nuclear, diesel or gas-fired plants are preferable to wind and solar in Brazil’s energy mix. The latest Brazilian auction for power purchase contracts saw no new wind projects gain licences, whereas licences were awarded for 542 MW of biomass and 97 MW of hydro.
A four-year extension to the Production Tax Credit (PTC), continuing federal support to the end of 2012, was passed by the House Committee on Ways and Means (H.R.2776) in June 2007. The bill will now go to the House floor for final passage. A similar bill presented at the Senate in May 2007 (S.1291), which proposed extending the PTC to the end of 2012, was referred to the Committee on Finance as it failed to achieve the crucial 60 votes needed to pass.
RPS activity continued at state level during Q2 2007, despite a proposed national RPS bill, proposed in the House of Representatives in February 2007 (H.R. 969), which was then referred to the Committee on Energy and Commerce and is due to be voted on by the House floor in July 2007. Oregon’s RPS bill, for 5% by 2011 rising to 25% by 2025, was signed by Governor Ted Kulonosk and written into law. New Hampshire’s state Senate and Governor approved an RPS requiring state utilities to source 16% of power from renewable sources by 2016, building up to 24% by 2025. Arizona’s Attorney General approved an RPS mandating that 15% of electricity must come from renewable sources by 2025, and that 30% of this must be derived from distributed generators, a requirement which is likely to involve significant levels of new solar PV installations.
However, Arizona as yet has no net metering laws, which, unless changed, could hold back this market in the near term. Illinois’s House of Representatives has approved an RPS bill requiring 2% of electricity to be generated from renewable sources by 2008, 5% by 2010, 10% by 2015 and 25% by 2025. The bill must now be approved by the state Senate and Governor before becoming law.
Wind activity saw Mesa Power in the preliminary phase of planning for a 4 GW wind farm in Texas, estimated to cost $6 billion if it goes ahead. The largest wind farm in the US is the 736 MW Horse Hollow farm in Texas. Solar energy was boosted when Acciona Energy opened a 64 MW parabolic thermal plant in Nevada, having taken 16 months to build it at a cost of about $250 million.
Retailer Wal-Mart has appointed BP Solar to install 4.3 MW of solar systems for seven stores in California. Meanwhile, department store Macy’s has agreed a deal with PowerLight to install 8 MW worth of rooftop solar systems which will, together with planned energy efficiencies, save 24,000 MWh of electricity.
Geothermal power developer Calpine has announced drilling and repowering plans for its 19 geothermal power plants in California. The cost of this project is expected to be $200 million over five years and is planned to add 80 MW to an existing 725 MW geothermal portfolio.
The Indian government continued to stimulate growth in the renewable energy sector with the announcement in April that the energy-from-waste sector would receive fast-track financial assistance of up to 50% of project cost for projects producing refuse-derived fuel from municipal solid waste. State authorities are also being incentivized to speed up the delivery of such projects.
Continuing a trend of Indian states setting target levels for renewable energy, the state of Maharashtra has announced a five-year plan to increase energy from renewable sources. This includes increasing wind capacity by 600 MW per annum to reach 3 GW of installed capacity by 2012.
Project activity remains high as wind turbine manufacturer Suzlon announced a 630 MW turbine order from US-based Edison Mission Group for delivery over the next two years.
Tata Power Limited has secured funding of $79 million for a 100 MW onshore wind facility in the region. Australian developer Roaring 40s has announced a $66 million 50 MW onshore wind project in the state of Maharashtra, with generation expected to come online by 2011.
NTPC Limited, the Indian state utility, plans to invest $1.5 billion over the next 10 years to establish a renewable energy generation capacity of over 1000 MW. Investment will primarily be focused on the onshore wind sector, with hydropower, geothermal, biomass and solar projects also under consideration.
The Indian solar thermal sector is likely to expand significantly in 2007 due to beneficial weather and strong central and local government support. The Indian Ministry for New and Renewable Energy requires that all new public and commercial buildings with hot water systems must have an auxiliary solar-assisted water heating system.
Waste2Energy Holdings Limited has received approval from the government of Punjab for a 550,000 tonnes/year energy-from-waste plant using advanced conversion technologies.
Small hydropower is being developed by French Velcan Energy, which has been granted two 25 MW hydropower concessions in Orissa state.
Q2 2007 saw Royal decree 661/2007 passed into law, approving a revised wind feed-in tariff. Wind farm operators may opt for a fixed tariff of €73/MWh during the first 20 years and €61/MWh thereafter. Alternatively, onshore wind operators may receive the market rate (for wholesale electricity) plus a €29/MWh supplement. The market supplement option is subject to a floor of €71/MWh and a cap of €85/MWh. Onshore wind farms in operation by 31 December 2007 may remain on the previous tariff until the end of 2012. The decree also revises the solar PV tariff to €440/MWh for systems with less than 100 kW, €417/MWh for 100 kW to 10 MW capacity plants and €230/MWh for 10 MW to 50 MW systems. The tariff is available for 25 years, after which payments continue at 80% of the feed-in tariff. The national cap for solar PV has been revised from 400 MW to 371 MW, as 29 MW is now allocated for solar PV on new energy-efficient buildings.
With such an attractive solar tariff, the 371 MW cap is expected to be met quickly. For example, PowerLight is partnering Solarpack Corporacion Tecnologica to develop three solar projects in Spain with a total capacity of 17 MW.
Acciona Energy and Ente Regional de la Energia de Castilla y León plan to build a 15 MW biomass plant in Navarre, Northern Spain, costing €40 million ($54 million), which will burn straw.
Enert-T Global with Grupo Enhol have announced construction of two 50 MW solar parabolic trough thermal plants at an estimated cost of $809 million. The joint venture expects the first facility to come online in 2009.
The Valencian regional government has transferred rights to develop wind farms in the Spanish province to Acciona Energía and Enerfin. Plans are to develop 318 MW of onshore wind capacity between 2007 and 2010. TIRME, majority owned by Endesa, signed a €590 million project financing agreement with BBVA, Caja Madrid and Royal Bank of Scotland. Finance will be used to expand current capacity at its EfW incineration plant in Majorca, Spain, to 72 MW, handling 690,000 tonnes of solid waste per annum.
The UK renewable energy sector could be set to blossom under new proposals by the UK government set out in two new white papers released in Q2 2007.
The Energy White Paper, which puts renewables firmly at the centre of future energy policy, proposes significant changes to the UK primary financial support mechanism, the Renewables Obligation, through ‘banding’ specific renewable energy technologies according to their relative maturity and economics. In particular, the award of 1.5 ROCs per MWh of offshore wind capacity makes such projects much more economic, which is particularly welcome given recent cost rises in the industry. The retention of 1 ROC per MWh of onshore wind should enable momentum in this important market to be maintained. Two ROCs per MWh of emerging technologies such as wave and tidal, biomass CHP, biomass from energy crops, and energy from waste using advanced conversion technologies (ACT), as well as solar PV and geothermal, will undoubtedly unlock the door to many projects which have, until now, been marginal.
The white paper did not raise the UK’s 2020 20% renewable electricity target, despite the EU 20% energy target for 2020, in which power projects are expected to make up any shortfall in other energy sectors. The Energy White Paper’s consultation period ends in early September 2007.
Meanwhile, the new planning white paper, Planning for a Sustainable Future, proposes reforms to infrastructure planning, including the establishment of an independent commission to speed up the consenting process for large power projects (including wind and energy from waste) of over 50 MW onshore and over 100 MW offshore. If these proposed changes are given parliamentary approval, industry analysts expect the banding effects to increase renewable plant deployment by 25% between 2009 and 2015 (compared with current expected deployment levels) and generate an extra 8 TWh by 2015. Project activity continues as Airtricity reached financial close on the 30 MW Dalswinton wind farm in southern Scotland, and Eco.2 received planning consent on its 36.8 MW Mynydd y Betws wind farm in Wales.
The first wind turbine repowering in the UK has been proposed by Good Energy on the Delabole site in Cornwall, south-west England. The site’s 10 400 kW turbines would be replaced by five 2.5 MW or eight 1.3 MW turbines and could cost $24 million. E.ON UK has announced plans to build a 25 MW biomass plant in Sheffield, England, costing $110 million. The plant would use recycled wood and biomass crops such as willow and elephant grass.
Despite Germany’s fall in the All renewable index (from third place in February 2003 to fifth today), the outlook remains positive after a study commissioned by the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety in February 2007 proposed that 27% of Germany’s power could come from renewable energy by 2020 (compared with the current target of 20%) at current rates of expansion. Germany’s Environment Minister Sigmar Gabriel has stated that the results of the study mean that Germany can continue to phase out nuclear power and still meet its emissions reductions targets. Competition for German onshore wind assets has led wind developer EUPRON to sell 76 MW of onshore wind farms in Germany and France to HypoVereinsbank for €107 million.
In solar, silicon wafer manufacturer Solarworld AG has announced €1.5 billion of new long-term contracts to supply cell and module global manufacturers for the next 10 years. Meanwhile, Ersol has signed a €230 million agreement to supply PV cells to IBC Solar over the next 10 years and a €60 million contract to supply 3S Swiss Solar Systems with PV cells over the same period. Ersol has also announced the completion of its 40 MW production site in Erfurt. Aleo Solar has announced a 70 MW increase in manufacturing capacity at its Prenzlau solar module site. Biomass and biogas project announcements include NawaroBioEnergie, which began construction of a 20 MW anaerobic digestion biogas site in East Mecklenburg-Vorpommern. Wärtsila Corporation of Finland has secured a $135 million deal to supply six wood burning power plants in Germany with a combined capacity of 34 MW.
This article by Jonathan Johns is based on the Q2 2007 Country Attractiveness Index from Ernst & Young.
Ernst & Young Country Attractiveness Indices provide scores for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies. The indices are updated on a regular basis.
For further information on Ernst & Young’s Renewable Energy Group, or for future copies of the Indices, please contact Jonathan Johns, Andrew Perkins, or Ben Warren.
Tel: +44 1392 284 300
Overview of indices
The Ernst & Young Country Attractiveness Indices provide scores for national renewable energy markets and renewable energy infrastructures, and their suitability for individual technologies. The Indices provide scores out of 100 and are updated on a regular basis.
The main Indices (All renewables and Long-term wind) are referred to as the ‘Long-term Indices’. The Near-term wind index takes a two-year view with slightly different parameters and weightings (see below).
The Country Attractiveness Indices take a generic view, and different sponsor/financier requirements will clearly affect how countries are rated. Ernst & Young’s Renewable Energy Group can provide tailor-made studies to meet specific corporate objectives.Long-term indices
The Long-term Indices are forward looking and take a long-term view, hence the UK’s high ranking in the wind index, which is explained by the large amount of unexploited wind resource, strong offshore regime and attractive tariffs available under the ROCs system. Conversely, although Denmark has the highest proportion of installed wind capacity to population level, it scores relatively low because of its restricted grid capacity and reduced tariff incentives.All renewables index
This index provides an overall score for all renewable energy technologies. It combines individual technology indices as follows:
- Wind index – 85% (comprising Onshore wind index and Offshore wind index)
- Solar index – 5%
- Biomass and other resource index – 10%
Note that in Q3 2007, these weightings are to be revised to reflect greater capacity installed in technologies other than wind.Individual technology indices
These indices are derived from scoring:
- General country specific parameters (the Renewables infrastructure index), accounting for 35%
- Technology specific parameters (the Technology factors), accounting for 65%.
An assessment by country of the general regulatory infrastructure for renewable energy.Technology factors
These provide resource-specific assessments for each country.Long-term wind index
These indices are derived from scoring:
- The Onshore wind index – 70%
- The Offshore wind index – 30%
The Near-term wind index takes a forward-looking, two-year view based on the parameters of most concern to a typical investor looking to make an investment in the near term. The index gives scores for onshore and offshore separately.