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  • Renewables: The Climate for Investment 2020
Articles:

Renewables: The Climate for Investment 2020

11 March 2020

Original content provided by BDO

Bert Lopes , National Head of Advisory and
Managing Partner – Johannesburg
|

The renewable energy sector requires new ways of thinking about energy generation, new ways of working and new approaches to resource consumption. As climate change becomes an increasingly bigger issue, governments and industry bodies are responding with new policies and incentives. These however are constantly changing. This report is aimed to provide a high-level understanding of what the climate for investment is across 10 key countries for 2020. Those include Argentina, Australia, Brazil, Canada, China, France, Germany, India, UK and the US.

Below we highlight part of the report which includes the challenges and opportunities each of the countries face in developing renewables into the energy mix.
 

ARGENTINA

Economic instability, high interest and inflation rates do not encourage investors to finance the energy sector in Argentina. At the same time, corruption schemes discovered in 2018 made the government discontinue the investment program for public work development under the public-private partnership (PPP) model in December 2018. Therefore, the situation has impacted the projects for extension of the national power grid that are highly important for further expansion of the energy generation. The PPP investment program has already been re-launched to support extremely important large-scale projects.

On one hand, the environment in the country may still be considered as risky, however, on the other hand, Argentina has very favourablegeographic and climatic conditions for the development of solar and wind energy projects as well as biogas, biomass, biofuel and small water projects.

 

AUSTRALIA

Investors may be concerned by the transition to a renewables-based grid and changes of feed-in tariffs. Difficulties of obtaining permits are likely to cause troubles to offshore investors.
Lack of grid capacity is one of the biggest obstacles for implementing new renewable energy schemes. Therefore, development of renewable energy hubs and transmission infrastructure within regions are critical network developments for the Australian market and for further renewable investment projects. The situation is expected to be improved as state governments willingly cooperate with transmission operators.

Reaching the renewable energy targets may lead to the termination of subsidies from government to wind, solar and hydro power projects. Whilst the Australian government policies are foreseen to remain favorable to investors, they still need to be more transparent.

 

BRAZIL

Despite the advantageous geographical and climatic conditions for offshore wind power generation, there are still many barriers for developing wind power plants. These include nascent specialisedtechnical support, difficulties in the transportation of wind turbine components, high project cost, and possible interferences with oil and gas exploration and production, or sea routes.
Poorly developed infrastructure is creating obstacles for the progress of renewable power generation onshore, attributed to long distances between energy consumers and energy producers leading to staggering transmission and integration costs.  Also Brazil’s tax system is one of the world’s most complex due to federal state and municipal taxes which tend to be changed rather often.

With that said, one of the distinctive features of the energy sector in Brazil is that it mainly relies on hydropower, but Brazil is preparing to double its non-hydro renewable energy capacity, which will see an explosion of solar, and less so onshore wind to 2030.

CANADA

One of the main challenges which could reduce the willingness to invest in renewable energy projects is the lack of infrastructure necessary to support the technologies.

At the same time, the regulatory, political, and economical environment in Canada is considered as supportive for investments. The government is working on regulations and measures to move away from coal towards clean sources of electricity.

 

CHINA

The lack of infrastructure development led to grid systems overstretched as wind and solar PV deployment increased significantly. Thus, curtailment of the surplus of wind and solar output has reached high levels depending on the location and its connectivity to the grid.

In June 2019, the World Bank’s Board of Executive Directors approved a 300 Mn USD loan for the China Renewable Energy and Battery Storage Promotion Project to increase the integration and utilisationof renewable energy by deploying battery storage systems. This project might help address technical constraints in the transmission networks and gaps in the regulatory framework for electricity trade between provinces.
Another significant advantage for investors is that the cost of installations for solar and wind farms is falling and they appear to be much more attractive for financing.

As the direct usage of renewables in end-user sectors is increased via bioenergy in industry, solar thermal for heating and biofuels for transport, renewable energy sector has favorable perspectives.
By 2040, electricity is projected to become the leading source of final energy consumption in China, overtaking coal in the late 2020s, and oil shortly thereafter.

 

FRANCE

Although there are rather favorable and stable economic conditions, potential investors still may have concerns about profitability of renewables financing.

Nuclear energy is the second least expensive type of energy after hydropower and takes the biggest share in the energy mix of the country. Due to the lack of incentives for end-consumers to procure renewable energy, it may be difficult for renewables producers to compete with nuclear energy, even though the strategy of nuclear energy supply reduction was announced.

Complicated administrative procedures may lead to long administrative processes, which may cause additional concerns for investors.

The grid also needs to be further developed to successfully accommodate renewable energy sources.
Overall, the country’s environment is more than supportive for investments in renewables and further incentives could be expected due to the ambitious renewable power targets.

 

GERMANY

The wind power sector may be the most vulnerable in Germany. Missing land for wind energy installations as well as repeated legal action against wind energy projects have caused a decline in new onshore wind farms. Receiving project’s permissions have become one of the main problems because of complex procedures and slow application processing. In many cases by the time the pending application is reviewed, and the installation of new wind turbines is approved, the registered technology is already outdated.

Bid levels for new solar PV and PV power reached the lowest level during recent years. The enforcement to cut costs and tough competition due to the current tendering scheme may demotivate potential investors.

One of the biggest challenges for renewable targets fulfillment by Germany is the transmission grid expansion. In 2019, less than a half of planned transmission lines have been completed, which creates significant risks to ensuring sufficient generation capacity of the network.

Although the German energy market poses various barriers for investing in renewables, the economic environment of the country is stable and advantageous for investors.

 

INDIA

Renewable energy industry in India has matured and expanded significantly within recent years. However, it still has several barriers for its further development.
Albeit, national and state policies can have favorable impact on renewables individually, they may not be fully coordinated.

Declining tariffs, low prices from tenders and high investment costs can impel investors to abandon projects.
Although the government has established an RPO regime, the implementation of the regime by the states is not often consistent and several state distribution utilities have failed to honourtheir RPOs. Moreover, the REC market is also evolving.

Another challenge faced by developers is the lack of infrastructure and high curtailment rate ranging from 10% to 25%, which also leads losse to potential losses.

India can be considered an attractive place for investors as the government sets ambitious renewable power targets, encourages foreign investments and aims to provide cheaper energy access.

 

UK

Shifting climate policies negatively affect investors’ activity.During recent years, the government of the UK has reversed several low-carbon policies. Removal or reduction in renewable energy incentives had an unsatisfactory effecton investors’ confidence.

The sector of renewable power storage continues to make significant investments to match the expansion of renewable power generation.

Although the renewable energy sector in the UK is moving away from subsidies and return on investment is decreasing, investors are still interested in using the advantages of participating in the UK government’s CfD auctions and investing in the renewables sector.

 

USA

The support schemes of Production Tax credit and Investment Tax Credit, which were key drivers and incentives for investors, expired on 1 January 2020. Investment Tax Credit stepdown, which started at the beginning of 2020, may potentially reduce investments in the US solar energy sector.

The Production Tax Credit for new wind facilities was extended at the rate of 60% for an additional year providing opportunities for investors in wind energy.

The falling cost of building and operating wind and solar stations due to technological innovation makes these energy sectors more attractive even without additional government subsidies.

Investment environment for renewables is likely to be favourableas major states and cities continue to establish challenging Renewable Power Targets. Corporate power purchase agreements and state-level policies contribute to growth of renewables. Wind farm developers will have the opportunity to gain benefits from federal tax incentives extension for 2020.

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