The last three months have seen unprecedented change in the inancial markets and acknowledgement that for many economies, recession is a reality with growth in the BRIC
countries (Brazil, Russia, India, China) at best severely diminished.
Oil has dropped US$100 a barrel and the Wilderhill New Energy Index has fallen by 64% during 2008. Our own indices have also seen major score reductions.
Governments have reafirmed their commitment to climate change with many seeing green jobs as a way of pulling individual economies out of recession. However, some countries, such as
those in Eastern Europe, are questioning the cost of dealing with climate change when resources are scarce. What does this mean for renewables?
Policy support
Just as cash is king, feed-in tariffs are favored by investors and in particular project inance banks. GC regimes can still be attractive; however, the impact of falling oil prices and restrictions in capital is likely to slow development in those markets and alter market competitive forces. In the UK, for example, utilities with relatively strong balance sheets and a need to buy GCs are likely, in the short-term, to be the dominant players.
In the United States (US), there are very signiicant issues with the Production Tax Credit (PTC). The inancial services industry was by far the biggest consumer of credits and recent events have resulted in a large number of buyers being out of the game. With the exception of oil and gas players and a few utilities for whom the business model still works, there are very few players able to take advantage of the recent extensions for solar and wind tax credits. As a consequence, return requirements have risen to 9%
to 11%. If the recession continues for any length of time, both PTC and GC regions are likely to face major challenges and legislation may have to be rewritten to favor a more Keynesian approach if capacity build is not to slow signiicantly. At the time of writing, Congress has a number of proposals before it to radically overhaul the PTC regime. Some other jurisdictions are less willing to face up to the challenges the new inancial landscape poses.
The short to medium-term outlook is likely to be one of project cancellation and delays, as players adopt a wait and see attitude in relation to regulatory issues and, more importantly, supply chain cost reductions. The price of wind turbines, for example, is starting to fall and many utilities will wait to see the impact of falling steel and commodity prices lowing through to project costs before proceeding. In the US, the story is of one of widespread cancellation.
In Europe, the offshore wind industry is reaching a nexus, with many projects uneconomic unless governments respond by increasing returns, with some signiicant players exiting the game.
For the UK to achieve its target for offshore wind, for example, it is likely that the ROC certiicate level will need to rise to deal with
falling electricity wholesale prices and the impact of the decline in sterling on manufacturing costs. Otherwise, only the very best projects will move forward.
As the market is asking for additional help, legislatures are increasingly more likely to focus on value per carbon tonne which is likely to place renewed emphasis on the silent renewable, the energy-eficiency sector, particularly as investment in that sector
is likely to facilitate job creation.
In addition, some technologies which have historically been less to the fore, such as geothermal and concentrated solar power, will
be more attractive as their value in terms of carbon tonnes saved becomes more appreciated. We have, for the irst time, published a separate geothermal index on page 14.
Life after the recession
Notwithstanding short-term concerns, in the longer term the outlook for renewables remains strong.
Major economies are likely to come out of the recession more carbon focused. It is also likely that falling oil price will have brought forward the oil supply crunch as many new oil and gas developments are likely to be put on hold as uneconomic; furthermore, the assistance requested by the automobile industry is likely to have brought forward the day when electricity becomes
a signiicant transport fuel, further increasing the demand for renewables. Very few utilities have planned the capacity to fulill this demand, and yet in a recent survey conducted by ourselves, 40% thought it was likely to have a signiicant impact by 2020.
The short-term advantage will be with the capital rich; those able to be opportunistic with their investment policy or engage with larger players looking to operate by way of joint venture (or in
conjunction with sovereign wealth funds) to diversify risk will be able to increase market share.
As ever, the path followed by the US is critical and measures announced by the impending Obama presidency will be watched keenly. At present, worldwide growth of renewables is likely to
continue, albeit at reduced levels. If the US were to stall, however, this could mean signiicant reverberations for the global industry
and manufacturing industry in particular, perhaps to the benefit of technology providers based in India, China and Japan.
In all probability, post recession, the renewables map will have signiicantly changed and countries who do not anticipate change and respond now will be left behind.
Jonathan Johns
Ernst & Young Renewable Energy Group, Exeter, UK
Author: Ernst & Young
