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 been expanding in emerging markets. In 2017 these markets accounted for 63% of new global investment in renewables.
Taking the Lead
Emerging markets exceeded developed economies in terms of onshore wind capacity growth for the first time in 2013, and in terms of solar photovoltaics (PV) growth in 2016. Total installed wind and solar capacity in emerging markets is set to overtake that of developed markets: the credit rating agency Moody’s estimated that, by the end of 2018, emerging economies would have total installed wind and solar capacity of 307 GW and 272 GW, respectively, accounting for 51% and 53% of global capacity.
Moreover, 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-Buissau; 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 over the next 20 years the majority of regions without electricity will gain access through decentralised solar PV systems and micro-grids.
Declining Costs
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/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 Moody’s expects emerging markets to possess 353 GW of solar power capacity (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 2016 and 2017. 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. 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 leading to these considerable price cuts. Energy suppliers receive a CEL for every MWh of electricity produced from clean technology. Large consumers of electricity, meanwhile, have been required to consume 5% clean energy since their inception in 2018, with this rising to 35% by 2024. They must then purchase the necessary CELs from a qualified service provider.
Going 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.
In tandem with declining costs, efforts are being made to promote the use of green debt instruments to finance the development of clean energy projects. For example, the Association of South-East Asian Nations (ASEAN) has agreed a set of ASEAN Green Bond Standards, a set of voluntary guidelines intended to enhance the transparency, consistency and uniformity of ASEAN green bonds, while reducing due diligence cost and helping investors make informed decisions. The hope is that standardisation will boost confidence in the asset class and channel investments towards clean energy projects to help meet rising demand across the region.
Global Goals
This trend of increased investment in renewable energy is set to continue, prompted by a number of global and regional agreements with ambitious climate change goals. The most recent and wide-reaching of these, the Paris Agreement, aims to keep the global increase in temperature to below 2⁰C above pre-industrial levels. As of end-2018 some 184 parties to the original convention had ratified the agreement out of 197 (196 states plus the EU), including all the countries covered by OBG. Under this agreement each country or region is responsible for setting its own targets and deadlines. For example, the EU’s 2030 Climate and Energy Framework stipulates that renewables must represent at least 27% of EU energy consumption by 2030 (up from approximately 16.4% in 2015). Similar or more ambitious plans are to be found in emerging markets.
Across Africa and the Asia-Pacific region, for example, targets exist that are considerably higher than those of the EU. Standout targets in Africa include Kenya, which aims to raise the current rate of 70% renewables to 100% by 2020. Nigeria is one of the continent’s largest producers of oil and gas, yet has set itself the target of deriving 30% of its electricity from renewables by 2030. By this time Nigeria also hopes to have increased the percentage of the population with access to electricity from 57.7% in 2018 to 90%.
In Asia Pacific, Sri Lanka aims to derive 60% of its energy needs from renewables – primarily wind – by 2030. Thailand was an early pioneer of solar deployment in South-east Asia, but more recently it announced a five-year moratorium on new solar and wind procurement, citing upward pressure on wholesale electricity prices. Nevertheless, some Thai private companies remain focused on the proliferation of rooftop solar and the promotion of innovative power distribution channels that merge producer and consumer into one.
Papua New Guinea, for its part, aims to reach 32% by 2030, rising to 100% by 2050. A number of hydropower projects – such as Karimui, Ramu 2 and Edevu – and the Lae biomass project are already in the development phase, and these projects are set to help meet targets.
In South America, Colombia’s power comes largely from hydro sources, at 65%, with other renewables accounting for a more modest 6%. The country has set a 30% target for these alternative renewable sources by 2030. To achieve this target, Colombia will host its first auction in January 2019, offering 10-year power purchase agreements with the overall aim of adding some 1 GW of renewable power capacity.
The state of affairs in Mexico is of particular interest. The country aims to increase renewables from 21%of its mix in 2018 to 35% by 2024 and 50% by 2050. To meet these targets Mexico introduced a differentiated auction system for energy, capacity and clean energy certificates that aims to capture relative values of different technologies by both location and production profile. Moreover, contracts are offered for a 15- to 20-year period to provide investors with stability.
Connectivity to the Grid
Renewable energy is an increasingly viable solution for connecting more people to electricity supply in emerging markets across the world. PNG plans to increase electricity access significantly, from less than 20% of the population in 2018 to 70% by 2030. As part of this objective, PNG Power is implementing a pilot rooftop solar power project with the International Finance Corporation (IFC) in Port Moresby, which aims to use rooftop solar to generate 2% of peak demand for electricity in the capital. This follows IFC’s successful off-grid solar programme, Lighting PNG, which enabled around 20% of the population to gain access to basic lighting and mobile phone charging services for the first time. IFC is now working with Origin Energy PNG to roll out a pay-as-you-go model that will allow customers to pay for solar systems on a monthly basis, giving them access to light, radio and cell phone charging from a rooftop panel. Similar strategies are being rolled out in sub-Saharan Africa, with companies such as M-Kopa increasing accessibility via pay-asyou-go models in Kenya and Uganda.
In Nigeria the government, supported by the World Bank, has launched a five-year, $350m Nigeria Electrification Project to help finance electrification solutions for rural populations. Regulation has also been updated to facilitate licensing and registration for mini-grid developers. Such measures have helped accelerate the development of the off-grid market. Indeed, given that more than 600m people do not have access to electricity in sub-Saharan Africa, off-grid renewable energy has huge potential. The African Development Bank has estimated that in order to achieve universal access to electricity, 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 Mini-grid Developers Association, the aim of which is to achieve 100% electrification of Africa by 2030. It plans to establish a results-based financing fund to help mini-grids scale up. Market appetite for mini-grid is growing, in part thanks to Odyssey Energy Solutions, a software platform connecting investors with minigrid developers. In August 2018 it announced that it had amassed a pipeline of over 550 projects seeking an estimated total investment of more than $500m.
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