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The global renewable energy industry is at a tipping point, as developed markets are starting to close the door on generous subsidy programs and emerging markets are developing cost strategies to compete with fossil fuels, finds a new study released by Ernst & Young LLP.

Renewable energy continues to thrive in emerging markets, many of which have opted for capacity tenders rather than government subsidies.

"Current global macro-economic drivers are reinforcing the role of emerging markets in the future global energy mix," says Gil Forer, Ernst & Young's global cleantech leader. “As renewable energy technologies become more cost-competitive, the importance of government subsidies is set to decrease to create a sustainable growth platform for both developed and emerging markets, as well as for manufacturers.”

In the third quarter of this year, China continued to lead Ernst & Young’s All Renewables Index but dropped a point, as its solar sector continued the consolidation process in an effort to boost domestic installation and rationalize government support, which could slow growth in the more immediate term, the firm says. In recent months, China has also seen a large outflow of Chinese investment in favor of markets in Africa and South America.

The quarter also saw Germany surpass the U.S. in the renewable energy attractiveness index, as the U.S. dropped 1.5 points. Although the German government recently increased the country’s renewable energy target to 40% by 2020 and is proactively implementing policy measures to create sustainable growth, the downgraded score reflects the more immediate changes around possible subsidy caps for solar, wind and biomass.

Within the U.S., the uncertainty about long-term energy policy, concerns over the extension of key renewable energy incentives, and the availability of low-priced natural gas are likely to continue slowing the growth in the sector in the short to medium term, particularly in the wind energy sector.

However, Forer remains optimistic that things will turn around.

“Now that the U.S. elections are behind us, we can likely expect new long-term momentum behind cleantech-related regulations, such as [Environmental Protection Agency] greenhouse-gas regulations, as well as Department of Energy and Department of Defense energy-efficiency initiatives,” he says.

Investment uncertainty
Global clean energy investment fell 5% in the third quarter to $56.6 billion, as investor enthusiasm was dampened by skepticism over policymakers’ renewable energy commitments. However, the drop also reflects a decrease in the costs for wind and solar technology.

New investment levels have varied globally, with investment in Europe, the Middle East and Africa rising 7% to $21 billion in the quarter, which was mainly driven by solar thermal and wind project financings in Morocco. However, in the same period, investment in the Americas and the Asia Pacific slipped by 25% and 3%, to $10.4 billion and $25.2 billion, respectively.

“Political and regulatory uncertainty, working in tandem with constrained capital markets, continue to put the brakes on investment and deal volumes,” says
Ben Warren, energy and environment finance leader at Ernst & Young. “Looking forward, market restructuring and the emerging secondary infrastructure financing market are likely to provide the momentum for future investment.”

Emerging markets
Having taken note of the lessons learned across markets in Europe and the U.S., where high levels of subsidization have been the key driver of growth in the sector, governments in emerging markets are driving business models that work without direct subsidies or grants that could potentially compete head-on with conventional fossil-fuel sources, Ernst & Young says.

The latest indices include Saudi Arabia and United Arab Emirates (UAE) for the first time, reflecting the growing presence of the Middle East within the clean energy market, with the UAE ranked 35th in the index, two places above Saudi Arabia. The rollout of solar initiatives places the UAE over Saudi Arabia in the solar index, while the reverse is true in the wind index based on natural resources.

“While the reliance on government subsidies is decreasing, it should not be forgotten that until grid parity is reached in more regions, financing will still depend on the timing and nature of individual countries’ incentives and support regimes, a commitment to invest in grid infrastructure and connectivity, and the ability of projects to seek multiple partnerships and investors,” Forer concludes.

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