Famous for its rich history and its role as one of Europe’s financial centres, the UK is equally known for its grey and often damp weather. Yet in recent years, the country has become an unlikely leader for solar energy innovation in Europe.
The UK government’s pledge that 15% of the country’s energy needs will be met through renewable energy sources by 2020 led it to launch the Feed-in Tariff (FIT) in 2010. Intended to encourage more households to produce their own electricity by installing solar photovoltaic panels, utility companies paid households according to the amount of energy that they generated. In turn, the government subsidised these companies’ costs through the FIT. As a result, solar energy generation increased in the UK and according to HM Revenue & Customs, solar energy generation grew by 67% between the second quarters of 2012 and 2014.
“If 10 years ago someone in the UK had said that their solar market would be one of the biggest in the world, you would have laughed,” said Ken Durose, director of the University of Liverpool's Stephenson Institute for Renewable Energy. “Yet that is the case today, and people realise that it can work here now.” While prolonged spells of sunshine are not common in the UK outside the summer months, Mr Durose says that government support has resulted in the creation of highly sophisticated solar panels which do not need direct sunlight to work, and which can generate some electricity on overcast days.
The development of the UK’s solar energy industry has been part of an expansion in the sector across Europe, as a result of the EU’s Renewable Energy Directive of 2001, which encouraged member states to derive 20% of their energy from renewable sources by 2020. As governments implemented subsidies to make this possible, investors followed and FDI flowed into a host of projects across the EU.
Data from greenfield investment monitor fDi Markets shows that greenfield FDI into renewable energy increased from 41 projects globally, worth $6.6bn in 2003, to 332 projects worth $84bn by 2009. While the US was the leading recipient for FDI in terms of project numbers, countries in the EU dominated the top 10 FDI recipients. Spain ranked second, followed by the UK, France and Bulgaria.
According to Mr Durose, government subsidies such as the UK’s FIT have been central to attracting FDI by lowering the risk profile of such projects, thereby promoting clean energy production and boosting local employment. “The FIT created many jobs and it created a big industry,” says Mr Durose.
Yet slow economic recovery across the EU, coupled with further oil and gas discoveries including the recent finding of 300 million barrels of crude oil off Western Australia's coast, has caused FDI into this sector to decline. European governments, unable to balance their budgets amid sluggish growth, have begun cutting subsidies it provides to keep a lid on spending. The UK government cut its FIT subsidy by half in 2012, and in June Germany moved to limit the amount of subsidies to the wind and biomass industries. fDi Markets data shows that capital expenditure on projects globally fell sharply to $45bn by 2010, and although FDI flows briefly recovered to $56bn in 2013, they have yet to surpass their 2009 peak of $84bn.
However, EY environmental finance leader Ben Warren argues that declining government support has not dented investor confidence. Instead, he maintains that the slowdown is a positive indication of a maturing sector that is better understood by investors. As their knowledge grows, they become selective in their investment choices, and FDI is increasingly targeted at select yet profitable projects with long-term benefits.
“Many mature markets are witnessing significant reductions in [government] subsidies,” says Mr Warren. “Yet part of this is because renewable energy technologies are becoming competitive. So from an investor perspective, I do not see any tapering in interest from companies.”
As the production of renewable energy technologies grew over the past decade, innovation brought down their notoriously high cost. This makes them more accessible to emerging markets. “Onshore wind and solar technologies are becoming competitive,” says Mr Warren. “For example, five years ago it cost about €6m to get one megawatt of capacity from solar panels. Today it costs 15% of that amount.”
Consequently, investors have started eyeing opportunities in developing countries. China is a popular target because of the country's pollution crisis caused by rapid industrialisation. According to Greenpeace, China could save $875m just by improving air quality in Beijing, Shanghai, Guangzhou and Xi’an. Brazil’s efforts to create sustainable infrastructure to support greater energy demand as it hosts the 2016 Olympic Games, and the Indian government’s decision to build 455 gigawatts of renewable energy capacity by 2050, has led EY to highlight these countries as hotspots.
According to EY's Renewable Energy Country Attractiveness Index, China was ranked as the most attractive global destination for renewable energy, followed by the US, India, the UK and Brazil. Data from fDi Markets reveals that in terms of capital expenditure alone, Chile, Mexico and Pakistan were among the top 10 investment destinations for renewable energy between 2003 and 2014.
“The primary driver of investment in emerging markets is that they are all seeking low-cost energy,” says Mr Warren. “The technologies that we deployed most aggressively are wind and solar photovoltaic panels, which are the most affordable. An interesting dynamic, particularly in Africa, Latin America and south-east Asia, is that they are home to significantly large rural communities. Hence renewable energy is highly cost-effective when it comes to rural electrification as it is often the quickest way to satisfy widespread energy demand.”
Ben Christie, business development manager of UK-based clean technology specialist Firefly Solar, says that while investors will maintain a keen appetite for renewable energy projects, they will become highly discerning in their choice of country, as they look to opportunities in fast-growing emerging economies. Highlighting his company’s decision to expand into Kenya, he points out that emerging markets will play a vital role in this sector’s development. “This sector has become very well understood by investors,” says Mr Christie. “While external fluctuations will have temporary influences, renewable energy will grow, and its growth will endure over the long term.”