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This guide includes contributions from some of the most active renewables lawyers in the sector across the globe. What it shows is that the renewables industry remains in a period of major transition. However, the transition itself has changed.
Previously this transition was seen as an ongoing metamorphosis from being an immature, fast-developing sector to being a more mature and stable sector. It was about gaining political and social support for decentralised technologies that were seen as costly and unreliable. It was about technologies that were seen as having fringe impacts on the total capacity of most power sectors. It was also about primarily developed economies catalysing, funding and supporting a nascent industry through subsidies.
Even in the past two years the debate has drastically changed. While the renewables sector remains in transition, the conversation is now about whether countries are developing a sufficiently long and sizeable pipeline of projects to feed the almost insatiable desire of banks, investors and developers to deploy capital and debt in the sector. Bloomberg expects global investment in new renewable energy capacity to reach a staggering US$2.6 trillion by the end of this year. The transition is less about facilitating the sector and more about removing the political and structural barriers to deployment, such as cumbersome consenting processes or moratoria on particular technologies. As renewables rapidly rise to become the most economic way to add new generation capacity in many jurisdictions around the world, the transition even becomes a focus for existing and planned thermal capacity operators, who may seek additional comfort that they will not become stranded assets in an increasingly decarbonised electricity sector.
With the price of renewables being now not only at, but at times, below grid parity (i.e. the wholesale price of power) in many countries, the question of whether the wholesale price of power remains relevant for investment decisions has risen up the agenda. Many electricity markets are struggling to send a sufficient, stable and transparent price signal to allow prudent investment decisions in the desired technologies to be taken. Further, with the electricity sector considered the engine for driving ‘net zero’ ambitions in currently non-decarbonised parts of the wider economy, such as transport and heating, the transition is not about whether renewables are fringe technologies, but whether the renewables ambition is large enough to meet these additional challenges. With renewables targets having been adopted in 168 countries as at the start of 2019, and deployment in developing economies having outstripped that in developed economies since 2015, the sector is transitioning to becoming a truly global industry.
The Global Context
Paris: Jusqu'ici tout va bien?
On 12 December 2015, the language of the Paris Agreement was adopted by consensus, requiring its signatories to hold global average temperatures to well below 2°C above pre-industrial levels. The message of the Paris Agreement was that it is the shared responsibility of the global community to mitigate the impact of climate change, and those with the broadest shoulders should take on the largest burden. The development of renewable sources of energy remains crucial to achieving that goal, and the potential transformative impact of technology was recorded in Article 10 of the agreement.
Governments across the globe have subsequently been reviewing and implementing energy strategies that balance economic growth with sustainable development. For example, Peru has been implementing a series of policies that seek to achieve “clean growth by recognising the relationship between environmental requirements and the development of renewable energy. The UAE’s Energy Plan 2050 aims to cut CO2 emissions by 70% and expects an investment of USD$ 160bn to achieve its goals. Even in Albania, where around 97% of domestically generated electricity comes from hydropower, government programmes have been launched for investment in new solar and other renewable projects.
Although the installed capacity of renewable electricity has continued to grow globally, to around 2.4TW in 2018, scientists report that there is still much work to be done and in particular, United in Science recently reported that by their calculations, commitments to cut greenhouse gas emissions must be at least tripled and increased by up to fivefold if the world is to meet the Paris climate change goals. Jusqu'ici tout va bien - so far, so good for Paris. But lots more to do.
China: Rise of the sleeping giant
China has become the world’s largest renewable energy market, with an incredible 200GW of installed wind capacity. While its investment in coal projects gets a lot of press attention, China has been significantly cutting its coal dependence in recent years. In addition, as has often proven to be the case with developing economies, China has been able to grasp the opportunities of new technologies more quickly than some other countries with longstanding and older infrastructure. When considered holistically as the leading provider of equipment to the sector, the value of the renewables transformation is huge for China.
Renewable energy is also central to Chinese government policy to help solve the challenges of energy security, climate change and severe air and water pollution. By the end of 2016, the total hydropower capacity of the country reached 330m kW, feed-in wind power capacity of 149m kW and generated a total of 241bn kWh electricity, solar thermal utilisation area exceeded 400m m2 and generated more than 60bn kWh of electric power. In the future, China has ambitions to increase cooperation with other countries on energy technology, equipment, engineering services, and capacity development by encouraging Chinese companies to participate in foreign electricity projects.
EU: More rules and packages
Hailed as a major step towards completing the “Energy Union”, in May 2019 the European Council formally adopted the remaining elements of the Clean Energy Package (originally presented by the European Commission in 2016). At over 1,000 pages, the long, rambling, repetitive and at times (even to lawyers) unclear provisions of the Clean Energy Package represent a new and supposedly comprehensive policy framework to build on the energy transition and deliver on the EU’s Paris Agreement commitments.
The package is undoubtedly positive for the energy transition in its direction of travel for the European Union. It deals among other things with:
- Energy efficiency including focusing on the energy performance of buildings.
- A higher target of 32% renewable energy by 2030.
- A requirement for National Energy and Climate Plans (NECPs) by each Member State for 2021-2030.
- Facilitating prosumers by making it easier for individuals to produce, store or sell their own energy.
- Rules to help integrate renewables into the grid, improve security of supply and improve cross-border co-operation.
Climate Action Summit 2019, New York
The New York summit will probably be best remembered for Greta Thunberg’s emotional address. She didn’t shy away from using her global high-profile platform to tell UN leaders directly, “We will never forgive you”. Beyond the press and counter-reaction her address generated, the focus at the largest summit since Paris was on dramatically reducing emissions to reach net zero. More than 60 countries made climate pledges to cut emissions to net zero by 2050 – but, as was noted, not the biggest emitters, such as the US, India or China.
Key other messages from the summit included mobilising public and private sources of finance to drive decarbonisation of all priority sectors, advancing energy resilience, accelerating the shift away from fossil fuels and towards renewable energy, as well as making significant gains in energy efficiency and transforming industries such as oil and gas, chemicals and information technology.
Government policies facilitating renewables
With renewable energy becoming increasingly cost-competitive and a key driver of decarbonisation, many countries are taking on new commitments to deliver sustained renewable policies and targets. This political debate is happening against the backdrop of continued increases in overall energy demand in large parts of the world. Energy demand in Brazil, for example, is expected to grow at an average annual rate of 2.2% until 2040, as compared to just 1.2% globally. The disruptive power of renewables has been significantly enhanced by falling life-cycle costs. There has been dramatic drops in the cost of equipment and in the supply chain, sustained low interest rates from lending banks have facilitated economic project financing structures, and the huge interest from pension and infrastructure funds has brought low cost of capital into the sector. Governments are, among other things, considering how such value can be shared with electricity customers.
Policy commitments and developments continue to be announced on a regular basis. In Serbia, despite a long-delayed start, the renewable energy market is undergoing significant development and investment. In Hungary, renewable generation is still a growing sector with developers recently looking to other technologies, besides biomass, such as solar and geothermal to further renewable generation deployment. Following the presidential elections in Mexico, which saw significant uncertainty over the renewables long term auctions that were planned and concluded, the new administration highlighted strengthening the Energy Regulatory Commission as a key priority. The Austrian government has also adopted a climate and energy plan mission 2030 to increase its overall share of renewables to an impressive 45-50% by 2030.
Government policies hindering renewables
The story is not uniformly positive for the sector, of course. For example, the UK government introduced policy changes (such as to the consenting regime) which the industry contends give an effective “local community veto” against new onshore wind farms. Environmental challenges also ramp up depending on the technology. With increasing concentrations of, for instance, wind projects in particular areas, the cumulative impacts on local fauna will become greater challenges to developments. In Croatia for example, most of its hydropower potential could be challenged by potentially adverse biodiversity impacts, since almost all Croatian rivers are planned for inclusion in the EU’s Natura 2000 system of protected habitats. Finally, the lack of policy frameworks is also an issue in many countries. In Romania, the legislative framework has not evolved quick enough to keep pace with the accelerated transition to renewable energy, causing projects and investors to stall due to the uncertainty.
Bankable Revenue Streams
Subsidies – swaying in the wind
Although the demise of subsidies for the renewables sector has been anticipated many times, subsidy schemes have not entirely gone away. To some extent perhaps they cannot entirely fall away until a fix is found for the inherent (and perhaps increasing) volatility in wholesale power prices across the world.
Also, with respect to reductions in subsidies, what works in one corner of the globe with one renewables technology has not made that solution automatically universal. Subsidies have remained relevant to kickstart sectors in countries that have perhaps been slower off the mark. Yet, most subsidy regimes have moved away from feed in tariff structures and in favour of regimes like the auctioning of sites with baked-in PPAs or UK-style model of offering competitively priced contracts for differences.
Authors of this guide found plenty of examples to demonstrate the variety of subsidy structures. In Romania the government is consulting on a new CFD scheme based on the UK model. In Slovenia subsidies and co-financing mechanisms with a focus on solar were announced to catalyse further investment in renewables. Similarly, in Switzerland, subsidy schemes have been announced to aid with the construction and production costs of solar and wind energy. From a more market driven perspective, countries are considering mechanisms such as market platforms and quotes. Examples of this include the Angolan government considering subsidised tariffs for renewable projects by 2025 and the consultation by the Italian government on the creation of a market platform as an alternative to the current incentive scheme, On the same theme, in Ukraine, there has been a switch from tariffs to an auction quota system for solar and wind technologies.
Yet, subsidies are distortions in competitive wholesale markets. And so there are also moves in the other direction. For example, the Egyptian government started a scheme to gradually liberalise electricity prices and achieve the full removal of electricity subsidies by 2022.
Other incentives for renewables
Taxes continue to be an alternative way to encourage green investment. For example, in Colombia, individuals and entities subject to income tax who invest in the investigation, development, production and consumption of renewable energy are eligible for annual income tax reduction up to 50% of the total investment value within the next 5 fiscal years after the investment is made. A similar arrangement is in place in Morocco via the Investment Charter 1995 (due to be renewed soon) whereby any new industrial business in the renewables sector can be entitled to a total exemption from corporate tax. Moreover, Luxembourg’s income tax law provides for a special depreciation method to encourage investments in assets contributing to energy efficiency in buildings, some exemptions from income tax (e.g. for the sale of electricity generated from PV sources) or tax deduction (e.g. for biofuel). Wider still, the 45Q tax credit regime in the US has been instrumental in increasing deployment of carbon capture usage and storage (CCUS) projects.
White Knights?: Direct purchase by corporates
In the world post steady subsidies, corporate PPAs are an attractive route to market as agreements can provide developers with longer term financial certainty and businesses with “green kudos”. Corporate PPAs are not as well established in the European market compared to the US and UK. However, there is growing interest in the corporate PPA route as an alternative way to secure financing for onshore projects in Poland and continued development of corporate PPA segment in Spain and other jurisdictions.
Additionally, despite previous difficulties in the model, we may see community funding re-emerge as a significant option. For example, crowdfunding of energy projects is developing in France. The local dimension – with the financing community being the local community and the beneficiaries being local citizens, small companies, and municipalities – can also help with other local consenting and opposition issues to projects.
Falling costs but falling prices too
The International Renewable Energy Agency (IRENA) has recently stated that onshore wind and solar PV are set by 2020 to consistently offer a less expensive source of new electricity than the least-cost fossil-fuel alternative without financial assistance. The global weighted average cost of electricity generated by concentrated solar power fell by 26% last year from a year earlier, data compiled by the agency showed. Bioenergy fell by 14%, solar PV and onshore wind by 13%, hydropower by 12% and geothermal and offshore wind by 1%. Alongside the fall in upfront capital costs, other costs are also falling. For example, the costs of equity, of debt and of operation and maintenance have all fallen considerably over the past few years.
Tomorrow’s world: Peering over the horizon
Even more new players in the sector
As the renewables market matures, we are seeing the stratification of the sector. Subsectors are emerging with their own language, contract forms, regulatory framework, supply chains, investors and developers. In addition, the geographical expansion of the sector introduces new players exploring established markets in which activity is still increasing, while at the same time pulling in experienced international players into projects in less established markets. Further, there is also a stratification of players in individual projects over the project lifecycle.
There are some companies that like to be involved in projects from cradle to grave. However, with increasing pressure on achieving rates of return in increasingly competitive markets, we are seeing more M&A activity. Strategic players continue to source projects but lean strategists may handover to developers with larger balance sheets to develop the projects, who in turn will look to enhance rates of return by selling down at a premium to their development capital at key stages in the project. Banks and institutional investors are also often happy for such strategists to exit the project at the operational stage while maintaining the O&M role with such assets then being collected together in mixed portfolios that meet the investment requirement of funds or so-called ‘funds of funds’.
Challenging the new incumbents
Wind and solar are the most common renewable technologies deployed and central to most governments’ renewables policies. These days, we hear less about tidal, wave, tidal lagoons and other technologies that were once much lauded as potential cornerstone technologies. While, they remain part of the overall picture, developers of other technologies complain that they are getting too little focus given the dominance of wind and solar.
For example, in Portugal and Russia, the uptake of renewable energy policy is focussed largely on accelerating the wind and solar industries. Offshore wind development continues to be a principal driver of anticipated capacity increases in its key markets, namely the UK, Denmark, Germany and Belgium.
There is still lots of untapped potential and opportunities for development in specific regions such as wind on the Peruvian coast and in Brazil and Serbia, solar in Croatia and Turkey and smaller rooftop solar in the Czech Republic, biomass in Ukraine and Slovakia and hydropower in Colombia and Albania.
With increasing cost pressures and the need to innovate, we may see more creativity in the sector and also see an upsurge in interest in mixed-technology developments. For example, in Oman, Japan’s JGC Corporation, the winning bidder of Sharqiyah IWP, proposed the use of a captive solar PV plant to reduce the electricity consumption required from Oman’s grid. Ørsted has also commenced a UK funded “gigastack” project in Denmark to commercialise hydrogen production from offshore wind to help deal with the increasing issue of system flexibility as offshore wind capacities increase.
CCUS: moving forward at a geological pace
Described by the UK Government’s Committee on Climate Change as a “necessity not an option” CCUS is seen as essential in meeting net zero targets globally. CCUS is also seen as a key to unlocking the potential decarbonisation of the industrial and heat sectors by developing a hydrogen economy. In countries such as Germany and the UK which are heavily reliant on natural gas for heating, hydrogen is seen as a clean alternative fuel and, if done via methane reformation, a partner for the CCUS sector.
The scale of the challenge to develop CCUS projects at scale and quickly is highlighted by the forecasts. To achieve net zero, around 10,000 CCUS projects would be required by 2070. Many countries such as the UK, China, France, Germany and Saudi Arabia acknowledge an essential role for CCUS in their climate target strategies. It is required to speed the decarbonisation of industry, for generation of low carbon electricity and for development of new technologies such as bioenergy, negative emission technologies and ‘direct air’ carbon capture. And yet the technology has currently only been deployed on a large scale in North America, as an adjunct to existing industries such as tar sands developments.
In light of the vast potential CCUS has to offer, the UK government has set a target of up to 40GW of new low-carbon baseload comprising new nuclear and power stations fitted with CCUS and has been developing new business models for developing CCUS projects across the UK. With potential growing to transport CO2 across borders, the commercial barriers for CCUS may soon be a thing of the past.
The hydrogen sonata
My daughter loves to tell me the joke: “Why can you never trust atoms?” The answer: “Because they make up practically everything”. The joke could be true of hydrogen, which makes up approximately 75% of all mass in the universe and burns clean and carbon free to produce only water as a byproduct (if produced by electrolysis). Hydrogen should be a dream solution for achieving a decarbonised energy sector. Yet despite its ubiquity, it remains elusive.
Many governments and companies worldwide are exploring the potential hydrogen can offer to the energy transition. The Hydrogen Council identifies multiple sectors which hydrogen can help to significantly decarbonise, such as: transport, heating, renewable integration and energy distribution. Moreover, it envisages that when deployed at scale, hydrogen could account for almost one-fifth of total final energy consumed by 2050 which would reduce annual CO2 emissions by roughly 6 gigatons compared to today’s levels. The Netherlands has seen ample investment into hydrogen research initiatives, such as ‘Hystock’, which looks at the production of hydrogen generated with solar energy through electrolysis.
The electric vehicle juggernaut
According to Bloomberg New Energy Finance, by 2040 more than half of all new cars worldwide will be electric. Evidently, the electrification of transport is pivotal to meeting net zero. China’s focus on improving air quality and reducing oil imports makes it the world’s largest market for electric vehicles. However, the industry is not without its speed bumps – whilst sales of electric vehicles grew by around 90% in Q1 2019, this was half the level of growth witnessed between 2017 and 2018, partly due to issues around vehicle choice and waiting times.
Many countries are yet to deliver the level of charging infrastructure required to increase consumer confidence and therefore uptake. But, some jurisdictions, such as, Slovenia, report sufficient charging infrastructure for electric vehicles given the level of registrations. Bulgaria is expected to draw up legislation that will include obligations for electricity distribution companies to develop charging stations for electric cars. Moreover, many jurisdictions are grappling with the additional electricity capacity and increased network utilisation challenges that the further penetration of EVs may present. Despite these short-term issues, the long-term outlook for electric vehicles is positive and is largely encouraged by technological advances to cut costs and the introduction of favourable government policies that continue to drive the electrification of transport worldwide. For example, the Chilean government recently entered into an agreement with manufacturer Albermarle Corp to grant access to cheaper lithium resources to encourage EV battery manufacturing in Chile.
The development in EV technology is encouraging research in vehicle to grid / building (V2G/X) technology which it is expected will both change the way in which individuals and businesses consume electricity and unlock the potential of V2G/X to ease the significant pressures on local grid systems, as well as continue the societal shift in how consumers respond to greater democratisation of energy consumption and digitisation of the sector.
The pace of the renewables transition appears to be speeding up rather than slowing down. Spurred on by grassroots demand, typified by those like Greta Thunberg, and government goals like ‘net-zero’, there are new projects, products and ways of thinking that are changing the way many in the world regard renewables and their place in the future of the planet. Our renewables experts, each expert in their particular markets, are continuing to advise on and guide this global transition.
This guide, by its nature, provides a high-level overview on the sector in the covered jurisdictions. Our contributors remain at your disposal and would be delighted to discuss more specific details and developments.