The renewable energy sector faces growing challenges from global economic instability and expiring or diminished government support in the US and Europe, although the nuclear accident in Japan is a positive development for the industry, according to two new reports.
Renewable energy asset financing rebounded in the second quarter of 2011 to almost $14 billion from below $5 billion in the first quarter, says a report from Netherlands-based Rabobank International. The average deal value increased to $212 million compared to $64 million over the previous six quarters, partly reflecting an increase in the number of utility-scale offshore wind transactions, the report found.
But the “somewhat bleak” fiscal forecast for the US and Europe presents a major challenge for the renewable energy sector, according to a report by Standard & Poor's (S&P) Ratings Services.
“The vast majority of investors have been European banks and European banks we know are in trouble,” said S&P senior director Swami Venkataraman. “If sovereign defaults happen, they wipe out the capital of European banks. They will pull back on all lending and renewables are going to get hurt badly.”
The current environment of budget austerity and sovereign debt crises forces fiscal choices that may make it difficult to sustain subsidies for renewable energy, which are still required despite improving economics, the S&P report said. For example, the prospects are considered dim for either an extension of the US Department of Energy’s Section 1705 loan guarantee programme which expires at the end of September, or the Section 1603 Treasury grant programme, which sunsets at the end of the year.
Another problem for the sector is that demand has not responded to declining prices, Venkataraman said. Wind turbines have declined to about $1,000 per kilowatt (kW) from $1,500-$2,000/kW in recent years. Solar panel prices are decreasing so quickly that a price of $1 per watt will likely be reached by the end of 2011, instead of 2015 as previously projected, but there will likely be less solar installed this year compared to last, he said.
Several factors are driving this lack of demand, including the inability of utility-scale projects to respond quickly to declining prices because of time-consuming permitting processes and negotiations for power purchase agreements, Venkataraman said. In addition, many utilities, particularly in the West, have already reached their short- to mid-term Renewable Portfolio Standard requirements, he said.
“There are all these uncertainties that have nothing to do with expiring tax credits which are purely business oriented,” Venkataraman said.
But a key question is whether these price declines are sustainable, he said. Chinese manufacturers have been maintaining capacity utilisation at 100%, but the inventory is piling up, Venkataraman noted. Most Chinese solar panel manufacturers are not even profitable and are being sustained by zero-cost, state-directed, Chinese bank loans.
“This is purely a bubble,” he said. “It’s rational to expect that banks are going to start pulling back at some point.”
On the positive side, the Fukushima nuclear accident has created tremendous potential for renewables in both Japan and Germany. Japan just passed a law requiring 20% of its energy to come from renewables by 2020, which is expected to create ongoing demand of 3GW per year, compared with a current installed capacity of about 5GW, according to the S&P report.
The German government’s decision to completely phase out the use of nuclear power over the next 11 years also offers strong momentum to renewable energy, particularly offshore wind, to partly replace those assets, according to the Rabobank report.
China is expected to continue its unparalled growth of its wind sector, but meeting and exceeding its ambitious goals will require colossal investment, only a small amount of which will come from foreign banks because of high entry barriers, the Rabobank report said.
China’s 12th Five-Year Plan –announced earlier this year – featured a target of 100GW of installed and grid-connected wind capacity by 2015 and 160GW by 2020. But China could surpass that goal and install 171GW – and even up to 250GW – as a result of strong and continued government support, declining turbine prices and growing electricity demand, although that would require investments in the range of €73 billion ($100 billion) to €187 billion over the next 10 years, the Rabobank report found.
By. Gloria Gonzalez