Spain and Italy’s sovereign credit crises have continued to drag them further down the index, while the UK’s plethora of policy announcements this quarter have garnered little clarity for investors.
Welcome to the 2012 global economy. Growth in many countries is faltering and unemployment rates are stagnating. Even the rapid growth countries are showing signs of slowdown. Some five years after the start of the financial crisis, economies are yet to recover and fiscal deficits continue to ricochet across borders.
In the West, such economic difficulties-together with a resurgence of cheap gas-have yet to translate into bold policy announcements. With voters weary of recession and squeezed by ever-increasing demands on their finances, policy-makers have yet to demonstrate the appetite to make long-term investment decisions that would necessitate short-term cost increases.
In Asia by contrast, green job creation schemes have surged to the forefront of debate, with countries competing to set out the most ambitious plans. This theme of Asian innovation plays out in this edition of our Country Attractiveness Indices (CAI), where China has reinforced its top spot position in our league table.
Having quadrupled its solar capacity target to 50GW by 2020, Chinese policy-makers are also addressing the oversupply of panels through accelerated domestic installations, which may help it weather the storm of import duties raining down from across the Pacific.
The US, however, has lost points in the index this quarter and now has to share second place with Germany. The contrast between these two markets couldn’t be starker. While the upcoming November elections have led to policy gridlock in the US, Germany is pushing ahead with its ambitious renewables agenda, including the introduction of a new mid-size rooftop PV tariff (despite cuts elsewhere) and compensating for losses caused by offshore grid connection delays.
Elsewhere, Spain and Italy’s sovereign credit crises have continued to drag them further down the index, while the UK’s plethora of policy announcements this quarter have garnered little clarity for investors.
The continued development of emerging markets, by contrast, offer most hope for the sector. South Africa’s US$8.8b (€7b) tender program could open doors for the rest of sub- Saharan Africa, and Saudi Arabia’s US$109b (€87b) solar plan could signal a new green dawn for the Middle East.
South America, led by Brazil, is already showing great potential, and Japan has reinvigorated renewable development following a highly attractive new tariff scheme.
How do we score countries?
The Ernst & Young CAI scores and ranks 40 countries in respect of their national energy policy, renewable energy infrastructure and the growth potential of individual technologies. The indices provide scores out of 100 and are updated on a quarterly basis.
The CAI take a generic view and different sponsor or financier requirements will clearly affect how countries are rated. Ernst & Young’s renewable energy advisors can provide detailed studies to meet specific corporate objectives.
Forward-looking indices
The ARI and technology-specific indices are forward looking and take a long-term view (up to five-years). This time period forms the basis of both quantitative and qualitative analysis.
All renewables index
This index provides an overall score for all renewable energy technologies. It combines individual technology indices as follows:
- Wind index — 55% (comprising onshore wind index (80%) and offshore wind index (20%))
- Solar index — 32%(comprising solar photovoltaic (PV) index (85%) and concentrated solar power (CSP) index(15%))
- Biomass and other resources index — 13%
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%
Renewables infrastructure index
This provides an assessment, by country, of the general regulatory infrastructure for renewable energy. On a weighted basis, the index covers:
- Electricity market regulatoary and political risk – 29%
- Planning and grid connection issues – 42%
- Access to finance – 29%
Technology factors
These comprise six indices providing resource-specific assessments for each country, covering:
- Onshore wind index
- Offshore wind index
- Solar PV index
- Solar CSP index
- Geothermal index
- Biomass and other resources index
These technology assessments consider the following parameters:
- Power offtake attractivness
- Tax climate
- Grant or soft loan availability
- Market growth potential
- Current installed growth
- Resource quality
- Project size
China remains at the same level in this issue. While the trade war with the US may impact China’s export market, it is not yet clear whether the import duties will impact RES generation in the country or not. A recent report by the IEA suggests that China could contribute around 40% of the total increase in global RES capacity over the next five years. Further, while the country is still challenged by oversupply of wind turbines and solar panels, there are signs that the country is taking action to address the grid transmission issues.
The US has fallen a point and a half in the ARI due to ongoing uncertainty over the country’s long-term RES strategy and political wrangling that is likely to make the development of a cohesive energy policy difficult. A lack of signaling on the likelihood of an extension to the critical PTC for wind projects, and a series of solar sector setbacks have exacerbated this policy limbo.
Germany has increased a point in the ARI and is now level with the US in joint 2nd place. This quarter demonstrated the Government proactively addressing barriers to offshore wind development and establishing some sense of stability in the solar sector.
All renewables index at August 2012
In India, severe blackouts have resulted in speculation that the country has attracted insufficient private investment to modernize its power infrastructure and that renewable energy investment may suffer amid wider power system reforms. This quarter saw few RES project announcements, reinforcing the current period of uncertainty following the expiry of key wind incentives and delays under the National Solar Mission program. Further, it is reported that Indian banks are close to reaching the 15% cap on domestic advances to the power industry, leaving limited scope to boost lending to solar projects. As a result, India has fallen a point in the ARI.
The UK has risen to fifth place in the ARI as a result of Italy’s fall in the rankings, but has experienced a score decrease overall. While a number of policy and subsidy announcements were made this quarter with the aim of establishing “transparency, longevity and certainty” for the country’s RES sector, the general consensus appears to be that the Draft Energy Bill, ROC bandings and decarbonization strategy announcements have fallen short of this objective and, to an extent, even created greater uncertainty.
France has fallen a point in the ARI due to ongoing investigations into the validity of certain wind and solar tariffs, which could impact the attractiveness of the country’s subsidy schemes, at a time when the government’s medium-to long-term plan for renewables remains unclear. The fall of Italy in the rankings results in France moving up to sixth place, despite the score decrease.
Italy has fallen a place in the ARI to take joint sixth position with France, due to worsening economic conditions putting pressure on access to finance for clean energy infrastructure projects, and confirmation of solar FIT cuts and installation caps in early July.
Japan has climbed further to ninth place in the ARI following confirmation of the generous FIT rates proposed earlier in the year in respect of wind, solar, biomass and geothermal projects. The new tariffs came into effect on 1 July and are expected to be the catalyst for significant growth across the country’s RES sector.
Brazil has fallen to tenth place in the ARI, mainly due to the withdrawal of funding by the national development bank (BNDES) in respect of projects utilizing turbines supplied by companies who have failed the bank’s local content requirements.
Australia has increased a point in the ARI following the introduction of a AU$10b (€8b) CEFC, providing loans, guarantees and equity investments for cleantech and renewable energy projects. The shift to a low carbon economy under the country’s new carbon trading scheme should also complement the RET.
Spain has fallen in the ARI, due to worsening economic conditions, as reflected by a Standard & Poor credit rating downgrade to BBB+ from A and worsening default credit swaps. Q2 also saw government proposals for a major hike in the electricity tax rate, likely to hit both RES and non-RES projects.
Poland has gained a point in the ARI following the latest draft of the Renewable Energy Act (REA), which sets out technology-differentiated GC coefficients alongside other revised provisions. The specific subsidies are expected to boost investment in RES, particularly in offshore wind, large-scale hydro and solar PV, which receive more than 1.5 GCs/MWh.
South Africa approved 19 RES projects totaling more than 1GW of capacity as part of its second round Renewable Energy IPP program. The 19 projects, worth an estimated US$3.4b (€2.7b), comprised nine solar PV projects with a total capacity of 417MW; seven wind power projects totaling 562MW; two small hydro projects totaling 14MW; and one CSP project of 50MW. This brings total investment under the auctions to around US$8.8b (€7.1b).
Denmark’s ambitious new targets to generate 35% of energy from renewable sources by 2020, increasing to 100% by 2050, has increased its score in the ARI.
Morocco has risen a point in the ARI as a result of strong market activity throughout Q2, including CSP project financing and wind tender submissions.
Turkey has increased a point in the ARI thanks to significant solar activity in the quarter, and a commitment by the European Investment Bank for €150m of loans to finance renewable energy and energy efficiency projects as well as exports.
Bulgaria has fallen a point in the ARI following the announcement that renewable energy FITs would be slashed from 1 July to ease pressure on electricity prices and adapt to lower technology costs. Alongside the FIT cuts, the energy regulator has also increased end-user electricity prices by 13% and approved a 34% hike in transmission grid tariffs.
Chile has gained a point in the ARI due to strong signs of increasing market activity through Q2 across the wind and solar sectors, including the announcement of an upcoming CSP project tender.
Argentina, while not dropping a full point in the ARI, has fallen in the infrastructure index following the nationalization of oil company, YPF SA, raising concerns this could undermine the country’s goal of diversifying its power supply and could push up the cost of loans for infrastructure projects as banks seek to offset risk. Further, the move has caused speculation over the fate of electricity companies who are potentially already on the brink of collapse following a decade of frozen electricity tariffs.
The Czech Republic has fallen again in the ARI following confirmation that generous RES subsidies are to be abandoned from 2014 and the announcement of the Government’s intention to extend its own tax on solar power beyond 2013.
Germany has proposed new rules to help offshore grid connection, limiting grid operators’ financial liability for delayed offshore connections at €100m, whereupon the Government will step in. Other grid announcements this quarter, such as a subsea connection with Norway, will also ease wind power transmission links.
India’s Tamil Nadu state government is to provide five-year interest-free loans to companies looking to develop the 14GW of untapped wind potential in the state. However, the combination of a currency slide and the end of wind-specific tax incentives is threatening to make the wind projects unviable by pushing up the cost of imported components.
France’s wind tariffs are currently being assessed by the country’s Supreme Court on the basis of state aid; a negative outcome could mean the cancelation of FITs for the wind sector. France has also fallen a point in the offshore index amid concerns that the Government will delay the second round of the offshore tender and jeopardize the country’s ability to achieve it’s ambitious 2020 offshore wind target.
Poland’s offshore wind sector received a boost this quarter following the award of five offshore wind permits totaling 4.5GW. Further, while the revised draft of the REA reduced support for onshore to 0.9GC/MWh, this was an improvement from the 0.75GC/MWh announced in the December 2011 draft.
Brazil has fallen a point in the wind index following the decision by BNDES to refuse wind developers loans covering some 2GW of turbines that were to be procured from five high-profile manufactures that, according to BNDES, have failed to meet 40% local content requirements. Further, government power auctions, in which wind was expected to feature heavily, have been delayed until October amid concerns about dwindling demand for new projects.
Denmark increased a point in the wind index with a predicted 1.8GW of additional onshore wind capacity by 2020 under the ambitious new energy targets, and government plans for two major offshore wind tenders covering at least 1GW of capacity.
Morocco received 16 submissions for a tender starting this year, targeting 2GW of wind by 2020. The submissions included a joint proposal by EDP and Goldwind for a huge 850MW wind farm. The quarter also saw the announcement of a 150MW project to be developed jointly by Mitsui and EDF, with at least 30% of the construction reported to be undertaken by Moroccan companies.
Chile’s largest wind farm secured US$245m (€197m) in project financing in Q2. Construction has already begun on the 115MW project, which will utilize turbines supplied by Siemens, and is expected to achieve commercial operations in 2014.
Bulgaria falls a point in the onshore wind index due to the 23.1% reduction in the country’s above-market FIT rates for large-scale wind projects to BGN0.133 (€0.068)/kWh.
This issue of the CAI also includes a technology feature which looks at global trends in the wind sector. The graph below illustrates the anticipated global picture through to 2020.
Global wind installations and annual growth forecast by region, 2011–20e (GW)
Source: BNEF
The US has fallen a point in the solar index as a result of the ongoing controversy over the future of the loan guarantee support given to the solar sector in particular, exacerbated by a series of bankruptcies of solar companies. Notwithstanding the import duties imposed on China’s solar sector, the US manufacturing market continues to struggle with falling panel prices, with General Electric having announced in Q2 its plan to delay construction of a new manufacturing plant.
China remains level in this issue’s solar index. While the Government has, for the second time this year, cut the FIT awarded to projects under its Golden Sun program by 21% from CYN7.0 (€0.9) to CYN5.5 (€0.7) per watt, this has, to an extent, been offset by the Q2 announcement of increased domestic capacity targets for solar. The country aims to have 21GW of solar capacity on line by 2015 and 50GW by 2020, an increase from the previous target of 15GW and 20GW respectively.
Germany has confirmed solar FIT cuts and spending caps, including a new mid-size category (10kW–40kW) receiving €0.185/kWh — higher than would otherwise be received for such projects — giving some certainty to the sector.
In early July, Italy confirmed solar FIT cuts averaging 39%–43% in its fifth Conto Energia, due to come into force from 27 August. Overall outlay of installations will also be limited by a budget to be set every six months; €140m will be available for the first half year, reducing to €120m and then €80m.
Spain continues to see an increasing number of solar project proposals that do not require subsidies, indicating a move toward ‘grid parity’. While this does not outweigh Spain’s current economic situation and the proposed electricity tax hikes in the current solar index, it does bode well for longer-term growth in the sector.
In Q2, France announced the results of its First Solar tender, approving 214 projects totaling 514MW and representing an investment of around €1b. It is hoped that the large number of projects will be the catalyst for accelerated growth in the country’s solar sector. However, Q2 also saw confirmation that FITs relating to integrated power plants installed on certain buildings will be canceled due to eligibility, assessments having incorrectly been based on the utilization of the building.
Morocco received approval for €246.8m of funding from the African Development Bank to finance the country’s largest CSP project, comprising a €168m and a €78.7m Clean Technology Fund concessionary loan to part-finance the first phase of the 500MW Ouarzazate project.
Turkey’s energy regulator announced in Q2 that bids would be invited in June next year for capacity licenses totaling 600MW through to 2015. This is compared with the current 10MW of capacity. Separately, China’s Sinovel and Turkey’s Agaoglu Group have agreed to develop a US$1b (€0.8b) wind farm project with 600MW of generating capacity.
Bulgaria falls a point in the solar index due to the 55.1% reduction in the country’s above-market FIT rates for PV projects greater than 200kW to BGN0.237 (€0.121)/kWh.
Chilean construction company, Sigdo Koppers, has signed an agreement with China’s Sky Solar to build more than 300MW of solar capacity in the country. The Chinese company will invest around US$900m (€725m) in the project.
In other solar news, the Government announced a tender for the construction of a 50MW CSP plant that will receive financing support from the Clean Technology Fund, the Inter-American Development Bank and the International Finance Corporation, as well as a US$20m (€16m) government grant.
Policy
Q2 has seen an increased focus on China’s domestic energy strategy, in response to an excess supply of solar panels and significant wind power curtailment resulting from insufficient grid-connected turbines. In a bid to address China’s chronic grid access problem, and increase the amount of renewable energy generated and consumed, the National Energy Bureau has proposed a quota system, which will require power companies generating more than 5GW to attribute 11% of their installed capacity to RES, and 6.5% of gross power generation must be RES — generated electricity.
Grid companies will also have to buy a specified percentage of electricity from RES by 2015, ranging between 3.2% and 15% across the different grid companies. As yet, there is no active market in China to trade renewable energy quotas, but it is hoped that the new policy will discourage grid companies from wasting wind power. The new system is expected to be finalized later this year and implemented in 2013.
This quota proposal may also be complemented by the construction of China’s third ultra-high voltage direct current power transmission project, which has seen State Grid Corp of China investing $3.79b (€3.05b) in another west-to-east transmission line in a bid to solve the country’s grid challenges.
Notwithstanding the challenges faced by China in developing its infrastructure to support its shift in focus toward domestic RES capacity, a recent report released by the IEA indicates that China will account for 40% of the additional 710GW of new global renewable electricity capacity by 2017.
Solar targets increased but US trade war continues
| Ranking | Issue 34 | Issue 33 |
| All renewables index | 1 | 1 |
| Wind Index | 1 | 1 |
| Solar Index | 3 | 3 |
Source: Ernst & Young analysis
Wind
In the short term, China is continuing to curb construction of new onshore wind capacity in a bid to allow the grid infrastructure to catch up with the rapid growth of installations in recent years. As such, it is anticipated that China will experience its first year of slower growth for almost a decade. BNEF estimates that developers will install 18.6GW of new capacity, down 7% from last year.
This is exacerbated by the slow progress of offshore wind development to date, with work yet to begin on four commercial offshore projects awarded in the first auction in 2010. According to the Chinese Wind Energy Association, this is a result of the State Oceanic Administration and other government departments disputing the original locations of the projects awarded by the National Energy Administration.
However, in Q2, Shanghai Donghai Wind Power Co., announced its intention to invest about CYN1.9b (€0.24b) in a 100MW offshore facility next year. The project, which is the second phase of the East China Sea Bridge facility, is awaiting government approval and expects to start construction in the first quarter of 2013, if granted.
In late July, the US imposed tariffs of as much as 73% on wind towers imported from China, following a complaint by the Wind Tower Trade Coalition in December 2011.
Solar
Following the imposition of preliminary anti-subsidy tariffs on Chinese solar panels in March, the US Department of Commerce (DoC) also introduced preliminary anti-dumping tariffs of 31%–250% in May. These rates were higher than expected and, together with the duties of approximately 3%–4% imposed in March, could make Chinese models 27% more expensive in the US market compared with other international manufacturers, according to BNEF. A final decision on the issue is due in October this year.
On 19 July, a month after reports that Chinese firms had filed trade complaints with the Ministry of Commerce, China’s Ministry of Commerce announced its own investigation into solar products imported from the US; specifically, whether US producers had been selling polysilicon below cost price and whether US firms have been unfairly advantaged by government subsidies.
However, China could end up fighting its battle on multiple fronts. A group of European manufacturers, led by Germany’s Solarworld, has also lodged an anti-dumping complaint against China. While any resulting import duties may be lower than those imposed in the US, the move would make it difficult for Chinese suppliers to avoid the duties given the size of the European market.
In other solar news, as a result of falling costs for solar panel components, the Government has, for the second time this year, reduced the subsidy awarded to solar projects approved under the Golden Sun program in the current year. The incentive has been reduced by approximately 21% from CYN7.0 (€0.89)/MWh to CYN5.5 (€0.70)/MWh.
Notwithstanding the ongoing trade row with the US, China is starting to see high levels of domestic project activity following a government announcement in Q2 urging an accelerated pace of domestic solar installations. The Government has increased its 2020 target from 20GW to 50GW, and its 2015 target from 15GW to 21GW, compared with approximately 3.1GW of installed solar capacity at the end of 2011. The focus on domestic installations has been spurred by the need to absorb an excess supply of panels, as a result of increasing difficulties in exporting products due to falling demand in Europe and US import duties.
Policy
The pending November elections and ongoing trade wars with China make it increasingly unlikely that a cohesive long-term renewable energy strategy will emerge out of the US any time soon. The extension of key stimulus programs remains uncertain and political wrangling will almost certainly delay any silver linings that do appear.
Finance
Two US senators have introduced legislation that would allow renewable energy projects to benefit from tax incentives currently available only to fossil fuel projects. The proposed act would amend the federal tax code to allow wind and solar schemes to fall under the attractive Master Limited Partnerships business structure and thereby be taxed as a partnership with access to capital at a lower cost. It is perhaps unlikely that such a bill will be passed so late in an election year, but it may herald a new vision of renewables financing in the US.
RES policy uncertainty lingers on
| Ranking | Issue 34 | Issue 33 |
| All renewables index | 2 | 2 |
| Wind Index | 3 | 3 |
| Solar Index | 1 | 1 |
Source: Ernst & Young analysis
Wind
The imposition of duties of 73% and 60% on wind towers imported from China and Vietnam, respectively, may provide some relief to US wind manufacturers in the short-term. However, it is likely to bring few benefits in the long term, should Congress fail to extend the PTC for wind projects, due to expire at the end of this year. While activity in the sector has been strong in the year to date, as developers scramble to finish projects before
December, with an estimated 2GW of projects financed in Q2 alone, BNEF predicts that 2013 will see new build capacity of only 1GW–2GW compared with around 11GW this year. This figure could increase to 4GW–6GW should Congress extend the PTC beyond the end of this year, even if this decision comes at the eleventh hour after the November 2012 elections.
However, last minute decisions will do little to ease wind sector tensions and the inability of investors to make long-term plans. Corporate giants Microsoft and Sprint are the latest to join the battle over the PTC, claiming that failure to extend the tax credit would tax corporate’s that purchase significant amounts of renewable energy and damage financial performance during a period of economic turmoil.
Solar
US solar manufacturers may also receive some respite as a result of the anti-subsidy and anti-dumping tariffs imposed on Chinese solar imports, although the impact of China’s own investigation into US practices is yet to be assessed. The US may find itself facing unintended consequences, given that China imports a large amount of raw materials and equipment from the US to produce its solar panels.
The US solar sector is also currently at the center of a debate over the Department of Energy’s (DoE) loan guarantee program. A Republican-led bill that proposes more transparency on loans for renewable energy projects and proposes the phase-out of the program, has passed through the House Energy and Commerce Committee’s energy and power sub-committee and now proceeds to the Senate. Dubbed the “No More Solyndras” bill, the legislation action was sparked by the collapse of Solyndra two years after receiving a US$535m (€431m) loan guarantee.
While not expected by some to pass through the Senate, the recently announced bankruptcy of Abound Solar, a US manufacturer awarded a US$400m (€322m) loan guarantee (against which US$70m (€56m) was borrowed), does little to weaken the Republicans’ case. Should the bill be successful, it could bar the DoE from granting loan guarantees to any company that filed its application after 31 December 2011 for part of its remaining US$34b (€27b) loan budget.
Signs of woe in the solar sector continued as the slide in solar panel prices forced General Electric to announce in July that it would suspend construction of its solar panel manufacturing plant in Colorado by at least 18 months. The thin film factory was slated to be the biggest in the country.
More positive solar news came in the form of an announcement by the US Interior Department that it has identified 17 solar deployment zones across six states, which will be regarded as “priority areas” for solar projects and will benefit from faster permitting procedures. It is estimated that the sites may eventually be used to support 23.7GW of generating capacity.
Q2 also saw the 100MW milestone being reached by the Aqua Caliente project in Arizona. Once complete, the 290MW project will be the largest solar PV power plant in the world.
Geothermal
EnergySource recently commissioned its 49.9MW power plant in California’s Salton Sea geothermal field. It comes at a time when many are reconsidering the role geothermal plays in the national energy mix, considering its reliable and consistent output, relatively low cost and significant resource.
Although the PTC’s fate is still uncertain and currently is set to expire at the end of 2013 for geothermal plants, leaving a less substantial 10% ITC, in the short term, the industry appears poised for rapid expansion. The Geothermal Energy Association recently announced that 2GW of geothermal capacity is currently under development nationwide, of which 950MW is in advanced stages. This could have quite an impact, given that technology currently accounts for only 3.1GW of domestic output.
Policy
Q2 saw Germany reinforce its withdrawal from nuclear power, with proposed resolutions on key areas of uncertainty that have plagued the renewable energy sector in recent months. Specifically, confirmation of subsidy changes for PV and the introduction of compensation rules for offshore wind grid connection. However, the replacement in May of pro-renewables Environment Minister, Norbert Rottgen by less well-known Peter Altmaier, has possibly re-introduced some mixed signals for the sector.
While fully supporting the shift away from nuclear, Altmaier has, in recent interviews, cast doubt on whether the country’s 2020 targets are achievable and said his priority is to make sure that electricity prices do not rise too much. Notwithstanding, in the first six months of the year, Germany sourced a record 25% of power from renewable sources.
Solar FIT cuts confirmed and offshore grid compensation given some certainty
| Ranking | Issue 34 | Issue 33 |
| All renewables index | 2 | 3 |
| Wind Index | 2 | 2 |
| Solar Index | 4 | 4 |
Source: Ernst & Young analysis
Solar
Following the release of our last CAI, which set out the solar PV FIT amendments proposed by Chancellor Merkel’s Government, the German Parliament’s upper house voted to suspend the FIT cuts and send the proposed bill to arbitration. Following negotiations with federal state representatives, the Government won agreement on the cuts in June and, while the majority of the original bill survived unchanged, there were some revisions that were welcomed by the sector.
- A new category of higher than expected subsidies for mid-size rooftop systems of 10kW–40kW has been introduced at a rate of €18.5/MWh, higher than would otherwise have been received. All other sized systems will be subject to the previously announced cuts from 1 April 2012.
- Previous plans to introduce a 90% limit on subsidies for plants larger than 10kW have been suspended, and will now come into effect in 2014.
- Incentives will decline in smaller monthly steps rather than in large annual or semi-annual chunks as previously.
- A total solar PV capacity cap of 52GW has been set, after which no subsidies will be paid. Given Germany’s current installed capacity of approximately 28GW, analysts predict the upper limit could be reached in as little as five years.
- A “growth corridor” of 2.5GW–3.5GW per annum up to 2020 will be applied.
The federal regulator revealed that 2.3GW of capacity was installed in the first four months of the year, more than three times the 812MW in the same period last year. This is likely to be mainly be driven by developers seeking to avoid the subsidy cuts in April. At the same time, First Solar has announced that it will delay the close of a German plant until the end of this year to meet unexpected strong demand in Europe. The company still intends to scale back production in the fourth quarter.
This positive solar news was partially offset by a series of bankruptcy filings in the quarter, most notably Q-Cells. While the company is attempting to continue trading, it is a stark reminder that industry giants are not immune to the sectors’ woes.
Offshore wind
The Government has started to address TenneT’s current challenges in complying with its obligations to build the German offshore grid by agreeing on key pieces of legislation, including:
- Coordination between construction and grid connection by means of a binding offshore grid development plan, which will officially stipulate the time of completion, the location and capacity of future grid connection points to allow for better coordination with the onshore grid expansion.
- A liability regime to compensate for losses caused by grid connection delays. Key elements include 90% compensation of lost FITS and a liability cap (€100m per case of damage) on the grid operator for unintentional material damage, whereupon the Government will step in.
The draft law is expected to come into force within 2012. While these provisions will not completely resolve the challenges faced in respect of the offshore grid, they should go some way toward whetting infrastructure investors’ appetite for co-investments in the offshore grid. However, the sector still faces significant challenges. Despite a host of projects in the planning and construction stages, operational capacity remains low and, to reach the stated target of 25GW by 2030, will require an increase of more than 12,000% on 2011 levels.
Grid
In other grid news, Germany and Norway have agreed plans for a 1.4GW subsea cable linking the renewable energy assets of both countries. A cooperation agreement is expected to be signed in September 2012 and it is hoped the infrastructure project will help mitigate lost power potential from lack of RES storage capacity. This is particularly important for Germany, where wind power can often not be shipped to customers in the south, resulting in turbines being shut down in times of surplus production.
Policy
This quarter saw significant policy activity in the UK, from the release of the draft Energy Bill and the ROC banding review to the shock news that gas is higher up the Government’s agenda than previously thought. The lack of clarity and detail across the various policy announcements, and the ambiguous messages coming out of the Treasury and the Department of Energy and Climate Change (DECC), have been frustrating for the renewable sector. The ongoing uncertainty risks delaying the development of the sector, and in particular, the achievement of the UK’s 2020 target.
Policy announcements leave RES sector in limbo
| Ranking | Issue 34 | Issue 33 |
| All renewables index | 5 | 6 |
| Wind Index | 3 | 5 |
| Solar Index | 20 | 19 |
Source: Ernst & Young analysis
Draft Energy Bill
The draft Energy Bill released in May represents the legislation that will support the Government’s Electricity Market Reform package. The bill includes provision for the new “contract for difference” FIT scheme to replace the current ROC banding scheme, and a capacity market to ensure adequate back-up power for renewables.
However, the bill has been criticized for containing few decisions on the new FIT and being light on detail with no concrete plans set out. The omissions have concerned some industry players and the bill has done little to dispel the fear that its provisions, including the proposed carbon floor price, could prompt a “dash for gas” by favoring gas and nuclear over renewables.
Decarbonization
One of the most obvious omissions from the draft bill was a binding commitment to decarbonize the UK’s electricity supply by 2030 in line with the Committee on Climate Change’s recommendations. It has, over recent months, become much more likely that the Government, driven by Chancellor George Osborne, is planning to establish the UK as a “gas hub” and will prioritize decarbonization of the energy sector “in the 2030s,” a decade later than planned.
This has caused concern throughout the clean energy sector, that the Government’s new carbon goals will come at the expense of commitment and long-term investment in renewable energy.
ROC banding review
Other significant policy announcements this quarter covered the results of the ROC banding review undertaken by DECC. Support for onshore wind will be reduced by 10% from 1 April 2013 to 0.9ROCS/MWh for the period of 2013 to 17 as expected, despite a call by the Chancellor for a 25% cut. However, the announcement included a provision to review onshore wind costs later this year, allowing the possibility of additional cuts in 2014. Offshore wind retains 2ROCs/MWh until April 2015, when support will be cut by 5%, with a further reduction in the following year.
A series of tariffs for different levels of biomass co-firing has been introduced, ranging between 0.3ROCs/MWh and 0.9ROCs/MWh. The support level for conversion of coal-fired plants to biomass was confirmed at 1ROC/MWh, while dedicated biomass plants will continue to receive 1.5 ROCs/MWh until 31 March 2016, before falling to 1.4ROCs/MWh thereafter.
Wave and tidal projects received a boost from the increase of support from 2ROCs/MWh to 5ROCs/MWh, subject to a 30MW limit. There was no change to the support offered to large-scale solar projects, but a further consultation later this year is planned to determine the reduced level of support of the technology which, the Government says, should be at a much lower level consistent with FITs for small-scale solar projects. Investors have indicated that this further delay for a decision on solar support continues to leave them in limbo and unable to commit to projects beyond March 2013. Q2 did see some clarification of support for small-scale solar projects, ending months of uncertainty.
The new rate of £0.16 (€0.20)/kWh (down from £0.21 (€0.26)/kWh took effect on 1 August and will be available for a 20-year period instead of a 25-year period. A degression mechanism will reduce support, depending on the capacity installed in previous periods. At the same time, DECC almost halved its forecast for the industry to deliver 22GW by 2020 and now expects to reach 11.9GW by 2020. Changes to FITs for small-scale wind, hydro and biomass plants will take effect from 1 December 2012.
Offshore wind
In other news, there were positive developments for the UK’s offshore wind sector this quarter. The Government gave approval to 1.1GW of capacity, giving a boost to the country’s offshore wind pipeline. DECC gave the go-ahead to Centrica’s 580MW Race Bank project and Warwick Energy’s £1.5b (€1.88b) 560MW Dudgeon development. In mid-July, Centrica and Dong submitted initial proposals for a giant 2.2GW offshore wind farm in the Irish Sea between Anglesey and the Isle of Man.
In a bid to identify and overcome barriers to offshore wind development, the government’s Offshore Wind Cost Reduction Task Force has set out a number of key actions and specific recommendations that must be implemented to try to cut the cost of generating electricity in the sector to £100 (€125)/MWh by 2020 from around £140 (€176)/MWh today.
However, these positive developments were partially offset by the announcement that Danish wind turbine manufacturer, Vestas has canceled plans to build a factory in the UK to produce its 7MW offshore turbines, leading to speculation that foreign investors remain skeptical about the Government’s commitment to the offshore wind sector.
The election victory of Francois Hollande in May 2012 is potentially good news for France’s RES sector. Contrary to his predecessor, Hollande has pledged to scale back France’s reliance on nuclear power, reducing the current 75% of electricity output from nuclear to just 50%. The gap, he claims, will be met by an increase in renewable energy.
However, the Government’s short-term strategy is not yet clear and two ‘think tanks’ have been created to produce proposals on the development of France’s wind and solar sectors, for consideration at September’s International Conference on Biodiversity & Sustainable Energy and Development. Further, the French nuclear lobby is likely to make any transition to renewables slow and painful, and the phasing out of nuclear will heavily depend on the extent to which renewable energy is capable of filling the gap given Frances’s relatively slow progress toward meeting its 2020 target.
Wind and solar FITs embroiled in legal reviews
| Ranking | Issue 34 | Issue 33 |
| All renewables index | 6 | 7 |
| Wind Index | 7 | 7 |
| Solar Index | 9 | 8 |
Source: Ernst & Young analysis
Wind
The validity of the 2008 wind power FIT Order has been challenged before the Conseil d’Etat, the French administrative Supreme Court, on the grounds that the FIT qualifies as state aid and should therefore have been presented to the EC (which it was not). The FIT is financed by a special contribution tax paid by consumers. On 15 May 2012, the Conseil d’Etat decided to suspend the case and filed a preliminary ruling referring the question of state aid to the Court of Justice of the European Union (CJEU).
If the CJEU ruling, which is likely to take at least a year, confirms that the FIT does qualify as state aid, the Conseli d’Etat may have no choice but to cancel the 2008 FIT, which could be a significant blow to the wind sector. However, it is noted that the Conseil d’Etat has not challenged the FIT amount so far, and it therefore remains valid.
Notwithstanding this, the French Government could issue a new FIT Order and notify it to the EC at any time, or, in the event that the CJEU does qualify the FIT as state aid, decide to review the FIT level. The challenge over the validity of the wind FIT has caused some nervousness across the renewable energy sector as a whole, that any qualification by the CJEU could be used to challenge the validity of the other renewable FITs that are also financed via the electricity special contribution tax.
In response to the anxiety caused by these judicial events, the newly appointed Minister of Environment has affirmed her support for France’s onshore wind sector and indicated that the Government will ensure that PPAs entered into under the 2008 FIT Order will not be jeopardized.
In offshore wind news, notwithstanding the award in April of four wind farm contracts worth approximately €2b and totaling approximately 2GW of capacity, a report from Electricité de France SA (EDF) published by the French Senate in July indicates France will fail to meet its target of 6GW of offshore wind capacity by 2020. The report forecasts it will have 3.9GW of capacity installed, but only half of this will start generating electricity by 2020. There are also concerns that the Government’s second offshore tender looks likely to be delayed until early 2013.
Solar
The solar sector has also been the subject of legal controversy this quarter. In a decision dated 12 April 2012, the Conseil d’Etat declared null and void some of the provisions of the solar FIT Orders from 12 January 2010 and 16 March 2010 relating to the utilization of the building for integrated solar installations.
The annulment has been determined on the grounds that distinguishing the kind of buildings that qualify for the solar FIT is not justified, with the Conseil d’Etat stating that the only criteria that should be taken into account should be: (i) the project’s anticipated costs to benefit ratio, and (ii) contribution to the country’s energy independence and security objectives.
As a result, the €0.58/kWh tariff has been canceled for integrated power plants installed on residential buildings or buildings used for health or educational purposes. This decision does not affect PPAs that have been concluded on the basis of the original Orders; however, there is a concern that it could make the FIT Order of 4 March 2011 legally fragile, as it is also based on a building utilization criteria.
In other solar news, in the first of its two competitive tenders, the Government approved 214 solar projects worth approximately €1b. Of the total 541MW awarded, 95% related to projects with capacity exceeding 250kW. According to the regulator, ground-mounted project bids offered an average purchase price of €188/MWh while rooftop projects averaged €210/MWh.
Significantly, the total capacity awarded exceeds the 450MW limit planned for large-scale tenders under the previous Government. Details for the next solar tender will be announced following the distribution of a policy recommendations report due on 13 September.
Marine
The French Government is continuing to support the development of ocean energy technologies actively, in addition to offshore wind. The national authorities have disclosed a road map for tidal energy, including an objective of installing 2.5GW and a possible tender in 2014. GDF Suez is studying the possibility of installing turbines at two sites, including plans to install a pilot plant of three to six turbines from 2015, with a capacity of 3MW–12MW, in the Raz Blanchard area.
