Are renewables subsidies on their way out?
Declining government support and price competition are forcing the renewables industry off subsidies, according to a new report.
Ernst & Young’s Renewable Energy Country Attractiveness Index, out today, ranks the attractiveness of countries around the world to investors in renewable energy.
In the 10 years since the firm first started its country-by-country analysis, it says the investment and deployment landscape for the renewables industry looks “almost unrecognisable”. While financial incentives were one of the top measures of attractiveness a few years ago, more mainstream factors like countries’ wider economic stability and renewables’ cost competitiveness alongside other energy sources in the market are now more influential factors in deciding the ranking.
Says the report’s chief editor, Ben Warren:
“The global renewable sector today is much more aligned to energy market and general economic fundamentals, rather than being wholly reliant on fiscal support regimes that have proven to be vulnerable to both economic health and politics.”
According to the report, the increasing importance of energy security and diversification, as well as the sector’s potential to create jobs and growth have arguably “put the renewables sector on much more solid foundations”.
So where is the most attractive market to invest in renewables? The US is back on top this year, relegating China to second place. Ernst & Young cites higher barriers to entry for new companies in China as the main reason for the switch. But it notes that high energy demand and consistent government support mean China is still an attractive prospect to investors.
The UK has climbed to fifth place – but the report says uncertainty about the UK’s renewables investment regime is hurting the UK’s position as a destination for investment in the sector. It cites delays to the UK’s forthcoming energy bill, as well as tax breaks for shale gas as some of the elements giving mixed policy signals to renewables investors.
Subsidy dependency
While the report says regulatory certainty is a good thing for renewables, but says subsidies – which have been present in the industry since its very beginning – haven’t necessarily been helpful. It says:
“It could be argued that the generously subsidised solar and wind markets in Europe did not create the right environment for driving down cost and resulted in the industry being criticised for pushing up energy bills”.
Compare this to Asia’s “ruthless approach to cost reduction”, the report says – with investment being ploughed into local manufacture of renewables technologies. The EU and US markets have been left reeling by a flood of cheap new solar panels from China. China has been accused of dumping cheap solar panels in competitor countries while keeping its own doors closed to foreign companies. But most see cheap solar as a good thing, significantly increasing the technology’s competitiveness on the global scale.
The increase in renewables manufacturing in emerging economies has been spurred spurred by energy security concerns, growth in energy demand and concerns about climate change and air quality. China is the obvious example, but other fast-growing economies – including India and South Africa -have ambitious manufacturing and deployment plans, the report says.
While renewables sectors in the EU and US , they’re also having to adapt to significant cuts in government support as austere times continue. Romania is the latest country to cut support to the renewables industry, and political wrangling over support to renewables in the US and Germany has also spooked investors.
Renewables in the future
The sector is having to adapt quickly. According to the report, global competition and austerity measures have “accelerated the timeframe in which the sector needs to wean itself off subsidy dependency”. But there’s a good chance other technologies could follow onshore wind and solar PVs in becoming cost competitive with fossil fuels.
That’s not to say renewables won’t need subsidies for a while yet, especially when it comes to emerging technologies – but the report says it expects their “journey to maturity” to be much faster as long as more mature technologies don’t try to “cannibalise” support. But innovation is also coming in the form of changes in the way we consume energy, through efficiency programmes, smart grids and new forms of energy storage – meaning consumers are becoming an important force in deciding the future of energy.
While established renewables may be able to shake off subsidies in future, the report makes clear that governments have work to do if new technologies are to take the next big step and “compete with fossil fuels on a global scale”. The report says it will be very difficult to create a “true” low carbon economy without more substantive international agreement on emissions targets and carbon-cutting mechanisms.
But despite the challenges, a lot has changed in 10 years. As costs come down and competition increases, according to Ernst & Young, the renewables sector is fast becoming a ‘normal’ industry.