Sector Analysis: Renewable energy markets

Renewable energy technologies present the opportunity to reduce carbon emissions, improve energy security and spur sustainable economic development. In recent years the adverse effects of climate change and the peaking of world oil production have induced further global investment into renewable energy technologies. Renewable electricity is sourced from natural flows of energy – solar, wind, hydro, biomass, geothermal and ocean energy. As the global disposition leans towards sustainable energy futures, renewable energy markets are becoming more significant.

Expanding global renewable energy markets
In 2007 an estimated US$71-billion was invested in new alternative energy capacity worldwide, up from US$55-billion in 2006 and US$40-billion in 2005. This investment surge was mainly attributed to increased investment in solar photovoltaic (PV) and wind power. ‘Technology shares of the $US71 billion annual investment were wind power (47%), solar PV (30%), and solar hot water (9%), followed by smaller shares of small hydropower, biomass power and heat, and geothermal power and heat’¹.

The world’s leading alternative energy growth market sector is grid-connected solar PV – the direct conversion of sunlight into electricity by photovoltaic effect. ‘With 50% annual increases in cumulative installed capacity in both 2006 and 2007, to an estimated 7.7GW, this translates into 1.5-million homes with rooftop solar PV feeding into the grid worldwide. Rooftop solar heat collectors provide hot water to nearly 50 million households worldwide, and space heating to a growing number of homes’².

Figure 1: Annual investments in renewable energy capacity, 1995-2007
(Source: www.ren21.net)

As illustrated in Figure 1, various renewable energy technologies have been consistently growing at annual rates of 20-60%, capturing the interest of the largest global companies. Consequently, private investors and multilateral agencies are noted for mainstreaming renewable energy in their portfolios³.

The largest institutional investors and global banks have been commissioning finance for renewable energy over the past several years. Today finance and investment for renewable energy can be sourced from a diverse range of private and public institutions. ‘From private sources, both mainstream and venture capital investment is accelerating, for both proven and developing technologies’⁴.

Emerging renewable energy markets
Beyond the implicit environmental benefits of renewable energy, the additional benefits for developing countries to invest in sustainable energy futures include:
· Providing sustainable solutions to growing energy demand propelled by urbanisation and industrialisation
· Constructing a built-in capacity for energy supply self-reliance – thereby reducing exposure to external shocks (i.e. from high oil prices and droughts).

Although a dominant portion of investment in renewable energy technologies is secured by Europe, China and the United States, ‘emerging markets are capturing increasing shares of investment in new capacity, manufacturing facilities, and R&D, notably Brazil and India’⁵.

Financing for renewable energy technologies in emerging market economies has grown with the participation of many public and private domestic banks, government funds, and rural microcredit lenders. ‘India’s Renewable Energy Development Agency (IREDA)⁶ is a good example of a national public source of funds. Brazil’s PROINFA programme⁷, which started in 2002, saw major investments come on-line during 2006/2007, mostly from domestic banks’⁸.

New wind energy projects in the Caribbean and Latin America, are receiving private finance. In Thailand small renewable power producers were funded from public funds, mostly biomass and biogas projects. China is joining a silicon solar cell manufacturing boom, helping to lower the price of the alternative technology in order to service marginalized rural communities. Furthermore, expanding renewable energy markets also present further opportunities for south-south cooperation and foreign direct investment (FDI).

African renewable energy markets
The expansion of African economies has incited increasing concerns pertaining to energy supply and access challenges. In addition, the potential of alternative energy to address Africa’s energy challenges have remained largely underdeveloped. ‘A larger land mass than China, India, Western Europe, and the United States together, with thousands of miles coastline and only 14% of the global population, Africa has vast, latent potential for wind and solar generation’⁹.

It is estimated that only 7% of hydroelectricity and less than 1% of geothermal potentials in Africa have been explored. Based on the assumption that energy markets can realistically deliver on energy challenges in emerging market economies, there are existing opportunities for African countries to capitalise from the growth of renewable energy markets. However, challenges (i.e. regulation, financing, skills shortages) facing emerging renewable energy markets must be holistically addressed in order to stimulate the market-based dissemination of renewable energy technologies in Africa.

South Africa’s renewable energy market: A potential growth sector
The South African energy market and socio-economic development nexus is complex – energy policy in South Africa is a key component of the socio-economic development policy framework designed to address the historical imbalances of apartheid. The energy market is driven by a state-owned enterprise, Eskom, dominating the electricity sector as generator, distributor and owner of the national network. South Africa’s current energy crisis presents challenges and opportunities. In the short term government has adopted an immediate demand side management strategy (energy efficiency).¹⁰  Arguably, from a supply side perspective, as the energy crisis deepens the rollout of viable clean energy alternatives will be imperative.

Due to the dependency on the cheap (and abundant supply) of low-grade coal and high capital costs of renewable energy technologies, there is a lack of incentive for the commercial uptake of large-scale renewable energy projects in South Africa. But, ‘if the price is right’ there is potential for the commercialisation of appropriate renewable energy technologies. Other than biofuels and in concurrence with global market trends, the most commercially viable renewable energy technology in South Africa is probably solar PV (i.e. solar water heaters for households).¹¹  Wind power generation could play a role, but there are still several barriers constraining the development of this technology.

Director of the Energy Research Centre at the University of Cape Town Professor Kevin Bennett comments on the potential of renewable energy technologies in South Africa: ‘Renewable energy is something that I don’t think developing countries will be able to afford for a long time. However, the area where it is particular obvious that potential does exist, is in solar water heating, as a significant percentage of domestic household energy consumption is used for heating water. And in a country like South Africa with electricity in short supply, this sort of renewable energy technology makes complete economic sense.’

Conclusion
Globally renewable energy markets possess latent growth potential. And theoretically as renewable energy technologies become commercially viable in emerging market economies, new opportunities will arise. Arguably, there is qualified reason to expect a growing investment interest from domestic and foreign players (i.e. public and private institutions) towards emerging renewable energy markets. Evidence of this is trend is highlighted in the most recent announcement by South African financial services group Investec, expressing their willingness to invest directly into both renewable and conventional power generation projects in South Africa.¹² 

Investec has already taken direct equity in renewable-energy projects in Australia, Greece and North America. However, Investec stipulated that in order to facilitate such investments in South Africa, we need a more transparent pricing formula with clear market rules for independent power producers (IPPs). In this regard Investec Capital Markets project and infrastructure finance head Michael Meeser stated that, ‘We believe there are real opportunities emerging in the domestic energy market, but there are still a number of obstacles in the way of truly unlocking the potential for private power. Processes have to be streamlined and clarified, and Eskom, as the single buyer, has to be allowed to pass through these higher prices to the consumer, or it is simply not going to be viable.’ Although, government has certain subsidy schemes in place (i.e. subsidy for solar water heaters installation) renewable energy markets will only become more attractive in South Africa when the regulatory environment and incentives structures change to facilitate more growth.

Notes
1-5 www.ren21.net
6    http://www.ireda.in/homepage1.asp?parent_category=1&category=6
7    http://www.scidev.net/dossiers/index.cfm?fuseaction=policybrief&policy=88§ion=582&dossier=4
8    www.ren21.net
9    Schultz, 2007
10  http://www.dme.gov.za/energy/efficiency_sectors.stm
11  http://www.sessa.org.za/products/photovoltaics/
12  http://www.engineeringnews.co.za/article.php?a_id=129119

Useful Links
· http://www.dme.gov.za/   
· http://www.ren21.net/
· http://www.cef.org.za/
· http://www.sessa.org.za/
 
Sources
· Hendler, Holliday, Ratcliffe and Wakeford. 2007. Current global challenges and alternative energy futures for South Africa. Energy Bulletin. 
· Market survey South Africa – opportunities for the Dutch clean technology sector. Embassy of the Netherlands (South Africa), January 2007.
· Martens, JW, de Lange TJ, Cloin J, Szewczuk S, Morris R and Zak J. 2001. Accelerating the Market Penetration of Renewable Energy Technologies in South Africa.
· Renewables 2007 Global Status Report. Downloaded from www.ren21.net.
· Schultz, R. 2007. Africa’s Energy Crisis Worsens: Viable Clean Energy Alternatives Are Imperative.
· Winkler, H, Mukheibir, P, Mwakasonda, S, Garg, A and Halsnaes, K. 2007. Electricity Supply Options, Sustainable Development and Climate Change Priorities Case Studies for South Africa. UNEP Risoe Centre on Energy, Climate and Sustainable Development, Roskilde, Denmark.