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Reported by Ernst & Young on 7 November 2018

EY renewable energy index: Uncertainty over Brexit takes the wind out of UK’s sails and leads to a decline in clean energy investment

  • China and US hold top positions on renewables index as trade disputes play out
  • Brexit apprehension sees UK fall one position as market moves into retrograde
  • Argentina reaches top 10 for first time as less mature markets make bold moves

(Courtesy of Ernst & Young Global Limited)

The UK has slipped down one position to 8th in the latest EY Renewable energy country attractiveness index (RECAI), following a marked slowdown in clean energy investment ahead of the planned departure from the EU.

Now in its 16th year, the bi-annual RECAI report ranks 40 countries on the attractiveness of their renewable energy investment and deployment opportunities.

UK market uncertainty over a ‘no deal’ Brexit

There are concerns from many in the renewable energy industry that a failure to secure a Brexit deal could lead to an increase in uncertainty for the power sector.

Ben Warren, EY Global Power & Utilities Corporate Finance Leader and RECAI Chief Editor, says: “An uncertain world market has characterised the latest Index, with some of the majors waiting to see how geopolitical fortunes play out – including Brexit and ongoing trade hostility. In China, this has been exacerbated by decreased demand and moves to slow renewables growth, which creates a surplus of low-price solar panels. But while leading markets are reluctant to make decisive moves in this climate, the inertia will likely be temporary as the renewable energy sector continues to mature.”

And in the UK, Q3 renewables investment fell 46% year-on-year amid speculation around how the outcome of Brexit will impact power exports to the EU and price of imported equipment. There are few positives to draw from the latest Budget as the current government seems to be committed to significant spending on new roads, whereas there was little to encourage investment in renewables or low carbon transport.

Global landscape

Geopolitical instability, including ongoing trade turbulence, sees little change across the top 10 of the RECAI, as leading markets bide their time. China and the US remain at 1st and 2nd positions respectively on the top 40 ranking.

Trade tensions between China and the US, including the US Government’s introduction of 30% tariffs on solar panel imports, see the two markets in a holding pattern. Little movement among the top 10 RECAI markets also reflects this trend. Although India climbs one place to 3rd position, progress toward the country’s 100GW solar target has been hampered recently by trade uncertainty, including a 25% tariff on solar cell imports. And in the UK, Q3 renewables investment fell 46% year-on-year amid speculation around how the outcome of Brexit will impact power exports to the EU and the price of imported equipment.

Warren says: “An uncertain political climate – particularly the continuing trade disputes between the US and China among others – compounded by the increasing scarcity of subsidies, presents a challenging backdrop to the maturity of the renewables sector. However, oversupply will provide a short- to medium-term boost to the price competitiveness of renewables, while also likely to drive some consolidation upstream. In the longer-term, increasing demand for power from the mobility and heating sectors provides something other than trade disputes for policymakers to focus on.”

Conversely, the latest RECAI indicates that less mature markets are more comfortable making bolder changes. Argentina enters the top 10 for the first time, with the government demonstrating political support for renewable energy; Egypt climbs five places to 15, with total wind capacity expected to expand by 3.3GW by 2027; and Greece rises from 34 to 28th position, as the government aims to reach its target of 18% renewables by 2020. Meanwhile, Sweden falls victim to its own success and concedes 10 places to 32nd position, as large amounts of onshore wind cause future prices in power and green certificates to decline.

Sector hedging its bets on Electric Vehicles

The Index further highlights how renewables technology, and the rise of electric vehicles (EVs) in particular, is playing into market caution. With EVs set to reach price and performance parity with internal combustion engine vehicles from 2025 according to EY research, some investors are hedging their bets on new technology. However, this has given rise to considerable uncertainty, not only regarding how quickly EVs will displace internal combustion engine vehicles, but also how usage of charging infrastructure will evolve.

Warren says: “The promise of an all-electric future presents new opportunities and challenges, particularly in relation to charging infrastructure. Investors are responding to the risk that over-investment could lead to heavy losses if utilisation falls short of expectations – or if the market changes direction, leaving investments stranded. Those players who take steps to mitigate the risks and test the value hypothesis of new business models, will be on the front foot.”

Support for UK EV market

One of the main barriers to EV uptake in the UK is the coverage offered by current EV charging infrastructure. Some good news from the Chancellor’s Budget, the last before Brexit, was that the charge points capital allowance scheme – which gives companies that install charging stations a first-year tax allowance of up to 100% of the cost of the equipment – has been extended until 2023.

While the Chancellor announced £420m of spending to fix UK’s pot holes and an extra £30bn of investment in road infrastructure, there would have been many in the industry hoping EV infrastructure would have secured a share of this budget – unfortunately there was no such commitment.

For the complete top 40 ranking and insights on why energy capacity growth could undermine its own economic viability, as well as in-depth analysis of the sector in Sub-Saharan Africa, Colombia and Peru, visit ey.com/recai.

References

[1]

Ernst & Young Global Limited. Press release - EY renewable energy index: Uncertainty over Brexit takes the wind out of UK’s sails and leads to a decline in clean energy investment. URL: https://www.ey.com/uk/en/newsroom/news-releases/18-11-07-ey-renewable-energy-ind.... [Date Accessed: 08/11/2018].

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