Navigant Research Blog

Is There Room for Independent Developers in a Solar-Led Renewable Energy Sector?

— May 9, 2016

clean energy backgroundUntil now, most of the growth in large renewable energy installations has been carried out by independent developers. The typical developer business model is based on capturing the yield arbitrage between early stage projects and operating assets (or a middle point in the development process) due to different risk profiles. However, the collapse of SunEdison seems like the final nail in the coffin for this business plan.

In the last 15 years, developers have benefited from a significant reduction in development risks: wind and solar technologies and their respective supply chains matured, standardized procedures and contracts appeared, and capital became easily accessible. At the same time, government policies designed to support a high-risk industry (such as feed-in tariffs [FITs] and guaranteed grid access) remained in place. This increased the yield arbitrage between the development stages.

Most of the initial renewables development has happened in the wind sector. Areas suitable for wind development are limited, and resources need to be verified with local wind speed data for at least a year or two to be able to get financing for the project. In addition, wind turbines are distributed in large patches of land that are sometimes owned by different organizations and under different local authorities. Wind installations are also relatively complex to build, limiting the number of engineering performance contractors (EPCs) with the skills needed to build them. These barriers increase costs but also protect developers that are early to enter the market; they also make good wind projects relatively scarce.

Solar costs have reached a point where solar PV can now compete with wind deployments, and solar developments do not face the same barriers as wind. In solar, resource variability within the same region is not significant; projects can be deployed following land ownership or local authority limits, and their build complexity is low. All this means that a significant number of developments can quickly arise in the same market simultaneously. The first victims of solar were FITs; when solar costs were low enough to benefit from the tariffs, projects boomed. Governments tried to respond by lowering the FITs, but by then the costs of solar were even lower. The only way to stop the spiraling cost created by FITs was to eliminate them.

The Rise of Renewable Energy Tenders

In an attempt to reduce costs while continuing to support the renewable energy sector, several governments have implemented a tender system in which projects have to compete for a guaranteed long-term contract. For some time, large developers with strong links to financial markets were competitive, but in the latest tenders they have been outbid by large energy corporations like Enel Green Power and ENGIE or manufacturers like SunPower (backed by Total), Jinko, and Recurrent Energy (backed by Canadian Solar).

The reason for this switch is that markets got flooded with projects fighting for the same contracts, all using the same technology and based in the same region. Therefore, those with the lowest capital cost structure or with access to cheaper PV modules or with better electricity yields have an advantage. In this area, independent developers that rely on expensive project finance cannot beat large corporations with capital costs close to that of their home countries or manufacturers with access to the lowest cost or most efficient modules.

Independent developers can try to sell their projects to the corporations, but while some wind projects with excellent resources can be attractive, run-of-the-mill solar and wind projects will struggle to make a significant margin.


2015 Wind Installations Show Two Markets: China and Everybody Else

— May 2, 2016

Der Rotor wird angesetztThe figures for 2015 wind installations are in and they show two major trends. First, wind capacity continues to be installed at a major rate globally. Second, there are effectively two wind markets: China and the rest of the world.

In 2015, 63,135 MW of wind power capacity was added globally, a 23.2% increase from the 51,230 MW installed in 2014. On a cumulative basis, global wind power capacity grew to 434,109 MW from 372,381 MW in the prior year. This is according to the most recent and 21st annual global installation figures compiled in Navigant Research’s World Wind Energy Market Update 2016 report.

Markets New and Old

Growth occurred in almost every wind market, from the long-established European countries to new markets in Latin America, Asia, Africa, and elsewhere. North America and Latin America combined installed 14.5 GW in 2015, representing 23.0% of global capacity and just slightly overtaking Europe by a percentage point. The United States led with 8,598 MW of new wind capacity added in 2015 thanks to a building boom sustained by reinstated tax credits. Brazil followed with the most capacity in the Americas; its reverse auction system to award wind power purchase price contracts has proven very effective at supporting gigawatt-level installations on a yearly basis at competitively low contract prices.

Europe represented 22.1% of new global capacity with 13.9 GW in 2015, up from 12.1 GW in 2014. Germany saw the greatest increase, driven by major offshore wind capacity additions of 2.4 GW and a rush for developers to install onshore projects before incentives shifted to a more limited system in 2016. Record installations were seen in Poland, followed by substantial new capacity in France, the United Kingdom, Turkey, and over a dozen other countries.

China in the Lead

The degree to which the Asian markets—and China in particular—are driving wind demand cannot be overstated. The combined markets of South and East Asia represented 52.6% of global wind power capacity in 2015, up from 50.6% in 2014. Almost all of this annual record was driven by China, which installed a remarkable 30,293 MW, up from a record 23,300 MW in 2014, which itself was an incredible achievement. However, this increase has not improved China’s wind curtailment challenge, which worsened from approximately 9% wind curtailed in 2014 to around 15% curtailed in 2015.

China provides its wind developers and wind plant owners with feed-in tariffs (FITs), which are set prices per kilowatt-hour produced and levels varying according to wind speed location. The huge build in 2015 was partly driven by a minor adjustment downward of the rates beginning January 1, 2016, so wind developers rushed to bring capacity online before the rate adjustment. However, the rate drop is minor, so annual capacity installations above 20 GW are expected again for 2016 and in the near term.

Another notable market dynamic driven by China is that there is effectively a two-part global wind market splitting China and the rest of the world. This is not only in total capacity installed in a given year but in the underlying wind turbine supplier dynamics. China sourced 97% of its turbines from more than 23 Chinese wind turbine OEMs, shutting out all but a few Western turbine OEMs. Conversely, all installations throughout the rest of the world were around 97% supplied by over 18 Western and Indian wind turbine companies, and almost no Chinese suppliers.

This shows China’s overwhelming preference for its domestic vendors. Markets and developers outside of China have responded in kind by sourcing very few turbines from Chinese suppliers. Expect this dynamic to slowly shift as some of China’s more proven suppliers seek international diversification to offset a Chinese market slowdown and wind turbine manufacturing overcapacity in the country.


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