Although the world remains largely dependent upon fossil fuels for power generation, a gradual transition towards renewable sources has been taking place since the 1990s, underpinned by multilateral deals such as the Kyoto Protocol, the Doha Amendment and, more recently, the Paris Agreement. Investment and development in renewable technologies has historically been led by developed countries, however, in recent years the renewable energy industry has expanded in emerging markets. In 2018 these markets accounted for nearly 70% of new global investment in renewables.
Taking the Lead
Emerging markets exceeded developed economies in terms of onshore wind and solar photovoltaics (PV) capacity in 2013 and 2016, respectively. While China is the main emerging market driving the rapid growth in renewable energy usage, other countries have also made a considerable contribution. The five countries with the highest renewable energy investment as a percentage of GDP are all emerging or developing economies, according to the multi-stakeholder Renewable Energy Policy Network for the 21st Century: Marshall Islands, Rwanda, Solomon Islands, Guinea-Bissau and Serbia. Going forward, sub-Saharan Africa constitutes the world’s largest untapped market for electrification, and consequently represents a huge opportunity for renewable energy. The International Energy Agency (IEA) estimates that by 2028 the majority of regions without electricity will gain access through decentralised solar PV systems and micro-grids.
Technological innovation, proactive climate change policies, heightened consumer awareness and stronger corporate commitment have all helped to position renewable energy as a viable replacement for fossil fuels. However, perhaps the most important factor driving emerging markets towards developing renewable energy is its decreasing cost. A report published by the International Renewable Energy Agency (IRENA) indicates that a number of renewable technologies are now cost-competitive with traditional, fossil fuel power plants. In 2017 the global weighted average price of electricity from hydropower sources was $0.05 per KWh and the cost of on-shore wind was $0.06/KWh, while the cost of bioenergy and geothermal was $0.07/KWh. This is compared to a cost range for fossil fuel-fired power generation for G20 countries of between $0.05/KWh and $0.17/KWh.
Solar power is expected to see stronger growth than wind in emerging markets. By the end of 2019, credit ratings agency Moody’s expects emerging markets to possess 353 GW of solar power capacity, which would be 2.6 times the 2015 level and 349 GW of wind capacity, 1.5 times the 2015 level. While solar PV is not yet competitive with fossil fuels, with a current average cost of $0.10/KWh, the cost of this source has fallen by 73% since 2010. Moreover, IRENA expects that all renewable technologies, including solar PV, will fall within the fossil fuel cost range by the end of 2020, with most being at the lower end. Solar PV saw record low prices in Dubai, Abu Dhabi, Saudi Arabia, Chile, Mexico and Peru in recent years. In Mexico, a total of three long-term energy auctions were held between 2015 and 2017, with the average bid price for solar PV falling 54% from $44.90/MWh in the first auction held in March 2016, to $20.53/MWh at the third in November 2017. A fourth auction had been scheduled to take place in November 2018 but this was cancelled due to “administrative changes in the entities involved”.
In Mexico clean energy certificates (CELs) were created as a measure of the country’s clean energy progress and deemed to be a major factor in these considerable price cuts. Energy suppliers receive a CEL for every MWh of electricity produced from clean technology. Large consumers of electricity are required to consume clean energy, with requirements increasing from 5% at their inception in 2018 to 35% by 2024. They must then purchase the necessary CELs from qualified service providers and submit the CELs to the Energy Regulatory Committee to avoid sanctions. Beyond certificates, IRENA has identified a range of key factors that should promote low auction prices, among them a favourable regulatory and institutional framework; low off-take and country risks; a strong local civil engineering base; a favourable tax regime; low project development costs; and a wealth of natural and manufacturing resources.
Efforts are being made to promote green debt instruments to finance clean energy projects. For example, the Association of South-East Asian Nations (ASEAN) has agreed to a set of voluntary guidelines intended to enhance the transparency, consistency and uniformity of ASEAN green bonds, while reducing due diligence costs and informing investor decision-making, with the hope of boosting confidence in the green asset class and channelling investments towards clean energy to help meet rising regional demand. “Standardisation creates more visibility and more recognition for the product. If the ASEAN Green Bond becomes a benchmark for such issuances, then more parties may use these standards,” Seth Tan Keng Hwee, executive director of Singapore-based Infrastructure Asia, told OBG.
This investment trend is set to continue, prompted by global and regional agreements with ambitious climate goals. The most recent and wide-reaching of these deals, the Paris Agreement, aims to keep the global increase in temperature below 2°C above pre-industrial levels. As of March 2019 some 184 out of 195 (194 states plus the EU) signatories had ratified the deal, including all the countries covered by OBG. Under this agreement each party is responsible for setting its own targets and deadlines. For example, the EU’s 2030 Climate and Energy Framework stipulates that renewables must supply at least 27% of EU energy consumption by 2030, up from 16.4% in 2015.
Some targets in emerging markets are considerably higher than those of the EU. Kenya, for example, aims to raise the current rate of 70% renewables to 100% by 2020. Nigeria is one of the continent’s largest hydrocarbons producers, yet has targeted deriving 30% of its electricity from renewables by 2030. Nigeria also hopes to increase the share of the population with electricity access from 57.7% in 2018 to 90% in 2030.
In the Asia-Pacific region, Sri Lanka aims to derive 60% of its energy from renewables – primarily wind – by 2030. Thailand was an early pioneer of solar deployment in the region, but recently announced a five-year moratorium on new solar and wind procurement, citing upward pressure on wholesale electricity prices. Nevertheless, some companies remain focused on developing rooftop solar and power distribution channels that blur the distinction between producer and consumer. Papua New Guinea aims to reach 32% by 2030 and 100% by 2050, with several hydropower projects and the Lae biomass venture already in the development phase.
“If we look at it from a commercial perspective, energy production by individuals and businesses is very attractive for all parties,” Bundit Sapianchai, president and CEO of BCPG, told OBG. “As individual producers sell to the national grid they will also reduce demand, as they depend to some extent on their own energy source. This structure therefore reduces the government’s need to invest in building large-scale power plants to meet the growing demand for electricity.”
Other countries could look towards Latin America for strategies that may help meet their ambitious targets. For example, 65% of Colombia’s power comes hydro, and other renewables account for 6%. The country has set a 30% target for these non-hydro renewables by 2030. As part of efforts to reach this, Colombia hosted its first auction in February 2019, with the aim of adding some 1 GW of renewable power capacity. However, the auction ended with no winning bidders, as the “competition standards had not been met”. A new auction is expected to be held before June 30, 2019.
Meanwhile, Mexico aims to increase the share of renewables from 21% in 2018 to 35% by 2024 and 50% by 2050. To do so, Mexico introduced a differentiated auction system for energy, capacity and CELs that aims to capture relative values of different technologies by location and production profile, while 15- to 20-year contracts offer stability to investors.
Powering Job Creation
Growth in renewables has also helped to drive job creation. IRENA found that some 10.3m people around the world worked directly or indirectly in renewables in 2017, up 5.3% from 2016. While 43% of this employment is in China, a growing number of emerging markets are starting to derive socio-economic benefits from renewables.
Saudi Arabia, like Nigeria, is one of the world’s largest oil producers, yet it aims to meet 10% of its power requirements via renewables by 2023. The Kingdom plans to invest $7bn over the 2018-19 period to build 4000 MW of renewable capacity. In addition to diversifying its economy and power supply, Saudi Arabia’s strategy is to prioritise local industry and job creation. The unemployment rate among Saudi nationals was 12.7% at the end of 2018, and around 25% among people aged 15-24. “If we are able to move down the supply chain by manufacturing solar generation components, including PV panels and inverters, rather than simply building power plants using equipment from China or India, then that approach will definitely create job opportunities for young Saudi men and women,” Anwar Al Itani, vice-chairman of the Renewable Energy Committee of the Riyadh Chamber, told OBG.
This focus was clear during the tender process for the 300-MW Sakaka PV project in the Al Jouf region. The project was awarded to a consortium led by local power company ACWA, despite a bid by a consortium of UAE’s Masdar and France’s EDF Energies Nouvelles that was 24% lower. It required a minimum of 30% of expenditure to be allocated to domestic suppliers, and this portion is expected to increase.
Turkey’s solar PV sector has expanded with the implementation of new local content rules. IRENA estimates that solar PV employs 33,400 people, with a further 16,600 people in solar heating and cooling. Altogether, IRENA puts the total number of people working in renewable energy in the country at 84,000.
Despite deriving only 2% of its power from renewables, Malaysia has developed a thriving solar PV manufacturing industry with the help of foreign direct investment and the Malaysian Investment Development Authority. The Sustainable Energy Development Authority estimates that some 250 companies provide about 40,300 jobs, accounting for nearly half of the 87,100 people employed in renewable energy jobs. The Philippines, meanwhile, reports having 34,000 employees in solar PV, 33,000 in small hydro and 14,000 in wind, while IRENA estimates that 30,000 are engaged in biofuels.
As of early 2019 renewables employment data remains limited in Africa. Egypt estimates it has around 3000 people working in solar PV. The largest project currently under way is the Benban Solar complex, one of the biggest PV installations in the world. The complex is expected to provide between 1.6 and 2 GW upon its completion in mid-2019, with the aim of supplying around 20% of the nation’s total power by 2020. Africa’s largest solar PV project to date is the 155-MW Nzema plant in Ghana, which created an estimated 500 jobs during construction, 200 direct jobs and over 2100 indirect jobs in sub-contracting. The highest level of employment is found in South Africa, where legislation has generated close to 35,000 renewable energy jobs.
Connectivity to the Grid
Renewable energy is also an increasingly viable solution for connecting people to electricity in emerging markets. Papua New Guinea plans to increase the share of the population with access to electricity from less than 20% in 2018 to 70% by 2030. PNG Power is implementing a pilot rooftop solar power project with the International Finance Corporation (IFC) in Port Moresby. This follows the IFC’s successful off-grid solar programme, Lighting PNG, which connected around 20% of the population to basic lighting and mobile phone charging services for the first time. The IFC is now working with Origin Energy PNG to roll out a pay-as-you-go model, allowing customers to make monthly payments for solar systems, giving them access to light, radio and cell phone charging from a rooftop panel. In sub-Saharan Africa, companies such as M-Kopa are trying to increase accessibility by deploying similar models in Kenya and Uganda.
With support from the World Bank, the Nigerian government has launched a five-year, $350m project to help finance rural electrification. Regulation has also been updated to facilitate licensing and registration for mini-grid developers. “Mini-grid regulation, eligible customer regulation and rural grid regulations have emerged in the past few years, substantially increasing opportunities for alternative off-grid energy solutions. The sector has attracted both local and international companies,” David Umezurike, CEO of renewable energy services supplier Solar Force, told OBG. Indeed, the African Development Bank has estimated that in order to expand access to electricity to the 600m people who presently lack it, roughly 40% of all the continent’s new connections will need to come from off-grid solutions.
To this end, 2018 saw the creation of the Africa Minigrid Developers Association, which aims to completely electrify Africa by 2030. It plans to establish a resultsbased financing fund to help mini-grids scale up. In August 2018 Odyssey Energy Solutions, a software platform connecting investors with mini-grid developers, announced that it had amassed a pipeline of over 550 projects seeking investment of more than $500m.
Fossil Fuels & Other Challenges
Cheaper, conventional sources such as coal or gas are still appealing since they can ramp up generation capacity to meet growing demand. Indonesia aims to derive 23% of its power from renewables by 2025, but this is expected to slip back to 20.4% in 2027, as new coal-fired and gasfired plants come on-line. Moreover, in March 2018 the government capped the price of domestic coal at $70 per tonne for two years to keep electricity tariffs level and ensure that the population has access to affordable electricity. Similarly, Vietnam aims to generate 21% of its power with renewables by 2030, but is nonetheless planning to commission several new coal-fired plants. As a result, the share of power generated by coal is expected to jump from 33% in 2018 to 43% in 2030.
Elsewhere, the development of renewables can be impeded by limited talent or financing. Ghana, for example, has considerable potential and has set itself a target of deriving 10% of its energy from renewables by 2020. However, the financing terms and conditions for renewable energy projects make it difficult for local companies with relatively weak balance sheets to find the capital to invest. In an attempt to address such issues, Côte d’Ivoire ratified the establishment of the Africa Finance Corporation (AFC) in November 2018. This ratification will convey more benefits from the AFC’s transaction structuring and project development expertise, open access to AFC funds and enable more investment in energy infrastructure. However, access to a sufficiently large and skilled workforce is still an issue.
Even Mexico, which the IEA has lauded as having implemented “one of the most ambitious, comprehensive and well-developed reforms undertaken in the world since the 1990s”, faces its own challenges. “To be competitive, Mexican companies need scale, cash balance and risk appetite,” Adrian Katzew, CEO of Zuma Energía, told OBG. “Commercial banks are more likely to get involved now, having confirmed how previous projects, which were mostly supported by development banks, have mitigated risks.”
In Peru, meanwhile, where most electricity comes from hydropower and natural gas, challenges are of a different order. “At present, self-generated energy cannot be sold back to the national grid,” Rik de Buyserie, CEO and country manager of ENGIE Peru, told OBG. “We are confident that changing the regulation of distributed generation will promote conditions for fair competition and foster autonomous green energy production in isolated and remote areas.”
Despite issues related to regulatory and skills gaps, not to mention the lingering temptation of fossil fuels, the prospects for the expansion of renewable sources in the energy mixes of emerging markets are bright. As the costs of renewables continue to fall and climate pressures build, investments in clean energy innovation and deployment increasingly make commercial and ecological sense for governments aiming to meet rising demand from their rapidly developing economies.
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