With an estimated US$12 trillion required for new clean energy by 2040, driven primarily by climate considerations and especially the outcomes of the COP 21 conference in Paris in December 2015, such a sum won’t be achieved without significant support from private investors.
However, the question for such investors is where can they gain the highest returns. And for the first time, this is now shown to be found in the world’s emerging markets, according to solutions developer Mercatus in its latest Global Advanced Energy Insights Report.
Taken in aggregate, the IRRs (internal rates of return) for renewable energy projects in the developing world are 28% higher than those in Europe and North America, the company has found.
The Report is based on data consolidated on energy projects in various stages of development managed in Mercatus’ Energy Investment Management (EIM) platform in 2015.
The renewables opportunity
“There are big, lucrative markets out there for renewables,” Mercatus CEO Haresh Patel told Engerati in an exclusive interview. “Traditionally North America and Europe have been the main markets but now others such as Japan, China and India are clearly rivalling them, even individually, in terms of size.”
This shift is supported by another finding of the study that investment in advanced energy in emerging markets matched that of developed countries for the first time in 2015. Further, the advanced energy projects in emerging countries were bigger on average than in the North American and European markets.
Patel cautions that it is necessary to bear in mind that the returns vary by the market and its drivers. “For example, in Japan the main driver is the pain of the nuclear disaster while in China it is the tremendous pollution problems that have led to a social groundswell for action. India has a prime minister who has made solar wildly successful and also has a strong developmental agenda.”
Following these are countries in South America and South Africa, which will be the next “big markets.”
Notably these developing markets are found also to be presenting more opportunities for utility-scale projects than North America and Europe, reflecting a differing type of growth than in the developed regions.
Opportunities for European developers
Patel says that these findings should be of particular interest to European renewable developers who have been looking for new opportunities outside the region.
These companies also come with a significant competitive advantage, in that they have the backing of a massive brand, he continues.
“Especially in the Asian market, brands carry a lot of value and power. Consider the concept of the microgrid. Much like the cellphone revolution, which bypassed landline telephony, with this technology these companies can help the countries leapfrog and bring more people into the middle class.”
Patel adds that some early results from a current Mercatus company financial analysis indicates that companies that invest more in renewables show better stock performance and profitability than those that remain more traditionally focused.
“When companies have the right brand and the right technology, and combine and invest in the two, they have the potential to accelerate their own profitability and health.”
Taking the market
When it comes to technologies for the emerging markets, Patel says that while it will depend on the resources available in individual countries, at a broad level the needs are primarily for solar, wind and storage. The next most prominent technologies, small hydro, biofuels and geothermal, are “up and coming” but aren’t likely to constitute more than a third of all installations into the foreseeable future.
When approaching a market, he comments that while it will vary from country to country, a proven successful strategy is to send out a team of “early ex-pat pioneers” to start up the project or business. Local hires should be made as soon as possible, and in some markets, a local joint venture can accelerate the business.
“A combination of international and local businesses adds more value in the sense of 1 plus 1 being more than 2,” says Patel, warning that it is crucial that the “local nuances” are well understood.
“Even in countries that require electrification, there is an infrastructure in place. For example for people to buy kerosene or diesel, and there will be cartels wanting to protect it.”
Project support is another important consideration for investors. Patel suggests an exchange-traded fund (ETF) for developing world projects would attract discerning investors, given the 28% premium on the return. “This is a very capital intensive business – just in the last year the US$12 trillion requirement for the renewables transition was upped from US$7-8 trillion by Bloomberg – and all options must be considered.”
The energy transformation
In conclusion Patel comments that the findings clearly indicate the onset of the energy transformation, contrary to assumptions that declining oil and gas prices would dampen investments in clean energy.
“We see no correlation between these trends, and there’s a real opportunity for the developing markets to leapfrog fossil-fuel dependence.”