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 estimates that, by the end of 2018, emerging economies will boast total installed wind and solar capacity of 307 GW and 272 GW, respectively, accounting for 51% and 53% of global capacity.
While China is the primary driving force behind the rapid growth of emerging markets’ use of renewable energy, the contribution of other countries is considerable. 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 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 2016-17. 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. Mexico uses long-term energy auctions to attract investment and encourage competitiveness and efficiency in the market. Mexico’s 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. 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 to make informed decisions. The hope is that standardisation will boost confidence in the green finance asset class and channel investments towards clean energy projects to help meet rising demand across the region. “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.
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 agreements, the Paris Agreement, aims to keep the global increase in temperature to below 2⁰C above pre-industrial levels. As of November 2018 some 184 parties to the original convention have 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. Stand-out 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%.
With regards to the Asia-Pacific region, 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 sector companies remain focused on the development of rooftop solar and the promotion of innovative power distribution channels that blur the distinction between producer and consumer.
“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 instance, 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.
Powering Job Creation
The increased role of renewables can also drive job creation. IRENA’s “Renewable Energy and Jobs – Annual Review 2018” found that in 2017 some 10.3m people around the world work directly or indirectly in the renewable energy sector, a 5.3% increase on the previous year. While employment remains concentrated in China, which has 43% of total jobs, 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 some 4000 MW of renewable capacity. In addition to diversifying its economy and power supply, Saudi Arabia’s strategy is to prioritise local industry and the generation of local jobs. The unemployment rate among Saudi nationals rose to 12.9% in the first quarter of 2018, and around 25% among people aged 15-24. The kingdom hopes that by creating an entirely new solar power sector, and establishing itself as a leader within it, new domestic jobs will be created. “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 intention to advance local industry was made very 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 there having been a 24% lower bid made by a consortium of UAE’s Masdar and France’s EDF Énergies Nouvelles. It required a minimum of 30% of expenditure to be allocated to domestic suppliers, and this percentage is expected to increase.
As of 2018 renewables employment remains limited in Africa, with data available for only a few countries. Egypt estimates it now has 3000 people working in solar PV, following a record year for investment in the sector: the European Bank for Reconstruction and Development estimates a total of $2bn was invested in Egyptian solar projects in 2017, primarily for the development of the 1.8-GW Benban Solar complex.
Africa’s largest solar PV project to date was the 155-MW Nzema plant in Ghana, which created an estimated 500 jobs during construction, 200 permanent operations jobs and over 2100 indirect jobs, through sub-contracting and demand for goods and services. The highest level of employment is found in South Africa, which with the help of local 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 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. IFC is also 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-as-you-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, according to David Umezurike, CEO of renewable energy services supplier Solar Force. “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,” Umezurike told OBG. 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.
Fossil Fuels & Other Challenges
Cheaper conventional energy sources such as coal or gas are still appealing to numerous countries, since they ramp up power generation capacity and thereby meet growing demand. Indonesia is one such country. It aims to derive 23% of its power needs from renewables by 2025, but this is then expected to slip back to 20.4% in 2027, as new coal-fired and gas-fired generation capacity comes on-stream. With annual production levels of around 485m tonnes, Indonesia is one of the world’s largest producers of coal. The Indonesian government has stated that the cost of renewables remains too high and supply is insufficiently reliable relative to coal. Indeed, in March 2018 the government capped the price of domestic coal at $70/tonne for two years to maintain electricity tariffs at the same level and ensure that the population has access to affordable electricity.
Skill Gaps
Elsewhere, the development of renewables can be impeded by limited homegrown talent or financing. Ghana, for example, has considerable renewables potential and has set itself a target of deriving 10% of its energy needs from renewables by 2020. However, the financing terms and conditions available in the country for renewable energy projects make it difficult for local companies with relatively weak balance sheets to find the capital to invest. In a bid to address such issues, neighbouring country Côte d’ Ivoire adopted a decree in November 2018 ratifying the establishment of the Africa Finance Corporation (AFC). This ratification will enable Côte d’Ivoire to derive more benefits from the AFC’s transaction structuring and project development expertise, and will open access to AFC funds, which will in turn enable more investment in infrastructure, most notably in the energy sector.
In Peru, meanwhile, where most electricity production comes from hydro and natural gas sources, the challenges differ. “The change for a greener future should be triggered by the regulation of distributed generation. As present, self-generated energy cannot be sold back to the national grid. We are confident that this regulation will promote conditions for fair competition and would foster autonomous green energy production in isolated and remote areas, which are to date not connected to the national grid,” Rik de Buyserie, CEO and country manager of ENGIE Peru, told OBG.
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