The global renewable energy market is a fascinating sector. For a technology that is essentially fairly simple relative to other sources of electricity generation, the growth in solar power generation globally has been phenomenal.
The solar market in the UK, Europe and Asia Pacific has begun to mature, leading to a secondary market for new investments as these assets change hands. At the same time, new installations are on the rise in Africa, South America and the Indian subcontinent.
The large-scale ground mounted solar market did not start in earnest until the mid-2000s with significant installations in Europe and Asia Pacific – with Germany, Italy and Spain being early adopters. China followed this trend and, while the African renewable energy market still represents a small percentage globally, the growth has started.
The Frankfurt School — UN Environment Programme Collaborating Centre for Climate and Sustainable Energy Finance — produces an annual report, Global Trends in Renewable Energy Investment. Its latest report found that renewable energy set new records in 2015 for dollar investment, the amount of new capacity added and the relative importance of developing countries in that growth.
The report found that the amount of money committed to renewables (excluding large hydro-electric projects) rose 5% to $285.9bn in 2015, exceeding the previous record of $278.5bn achieved in 2011.
This record was achieved despite exchange rate shifts that depressed the dollar value of investments in other currency zones and despite sharp falls in oil, coal and gas prices that protected the competitive position of fossil fuel generation.
Another finding was that overall, renewables (excluding large hydro) made up 53.6% of the gigawatt (GW) capacity of all technologies installed in 2015, the first time it has represented a majority. From just 50GW of installed solar capacity in 2010 there is about 300GW installed solar capacity today.
This growth has been facilitated by two key factors. First, political support in the form of feed-in tariffs and long-term subsidies in Europe; subsidisation in the UK; and auction schemes such as the Renewable Energy Independent Power Producer Procurement Programme in SA.
The second key factor that has given legs to the solar boom is the reduction in installation costs, where installation, manufacturing and raw material prices have fallen sharply allowing for greater economies of scale. The growth in new investment into solar — directly, or via investment funds — has tracked the growth in solar installation over this period. And the reasons for this are sound.
First, it is an investment into one of the most reliable and predictable of renewables infrastructures and it relies on solar radiation — the one thing we can be fairly certain of is that the sun will rise each day. The annual variability of solar radiation levels is just 4% (in the UK), lower than wind variability.
Second, cash flows from solar investments are predictable. In the UK market,
for example, revenues come from subsidies (where operators know how much they will get for each MW/hour generated) and sale of the power generated (which have instruments to fix values). Third, the investment offers long-term stable cash flows – solar plants rely on a mature, well-proven technology and the life span of solar panels is generally accepted as 25 years, but could last up to 40 years if properly maintained.
And finally, as an alternative asset class, solar funds offer returns that are not correlated with the equity markets — their dividend yields provide an interesting investment product in times of high market volatility.
As an investor and operator in the solar market, Foresight Solar Fund is excited about the future upside of the sector. While our primary market is in the UK, and our immediate growth pipeline is all UK-based, we have chosen SA to explore a secondary listing.
SA has a developed capital market, the JSE is highly ranked in terms of security and the success of the programme has created a sophisticated understanding of renewable energy and solar assets in SA. We see further opportunities for upside in the sector. Battery storage is the holy grail of renewable energy. Advances in storage technology could help cut the intermittency of solar output and allow solar assets to produce during peak electricity pricing periods.
In addition, and this would be an exciting development in the transformation of energy markets, storage technology could allow renewable energy to compete with baseload energy producers. Most baseload energy comes from large power plants with expensive, transmission infrastructure to get the electricity to its intended destination.
Advances in storage technology would allow smaller renewable energy plants to be installed closer to where it is needed leading to a distribution-level power generation.
The current, fragmented nature of the solar market offers future consolidation opportunities. We have seen this happening in the maturing European and UK markets.
Although in SA the solar market is only a few years old, secondary investment activity is already starting out and will gather momentum as the market matures. SA is an extremely interesting country. In terms of pure solar power generation, solar sites in the Western Cape, for example, receive three times the amount of solar radiation that their UK counterparts receive.
And the programme has so far has brought billions of rands into the country and created an entirely new sector. South Africans, whether power producers, asset managers or private investors, have a whole new asset class to consider.
The transition to a low-carbon economy has gathered pace and governments are looking at creating level playing fields for clean energy investment. While new, clean technologies accounted for just over 10% of world electricity in 2015, according to the Frankfurt School report, this prevented the emission of about 1.5 gigatonnes of CO² during that year.
The drivers of investment in renewables, including climate change policies and improving cost-competitiveness, will continue to enable renewables to keep growing their share of world electricity generation.
Piñeiro is a partner and head of UK Solar at the Foresight Group.