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COVID-19 has drawn increased attention to climate policy in Europe and is playing a role in the U.S. elections.
We believe the global growth outlook for renewables generally remains intact, even if stimulus plans will likely prioritize employment and direct support measures to the economy over green growth--especially in China and emerging markets.
Key risks for the sector are reductions in direct subsidies and tax credits as observed in China, Europe, and the U.S.; permitting; and a cloudier outlook for long-term prices.
On the other hand, continued strong investor appetite and declining costs are allowing renewables to compete increasingly at grid-parity prices, but with lower returns and rising market risks.
As a result, larger renewables players, with strong balance sheets and vertical integration to mitigate merchant risks, may be better positioned and could move to consolidate the industry.
In the U.S., the presidential elections in November 2020 could portend an increase in renewables growth in the next few years in case former Vice President Joe Biden wins, subject to Congressional support, as his plan includes $2 trillion in clean energy spending, while targeting a carbon-free power sector by 2035.
In Europe, COVID-19 has accelerated policy support, with one-third of the Recovery Fund allocated to green investments, combined with ambitious 2030 objectives for green hydrogen.
China's COVID-19-induced stimulus plans imply some headwinds for renewables because restrictions on new coal plants have been relaxed to support employment and the local economy. Moreover, the economy's trend to lower energy intensity has stalled (see "China's Energy Transition Stalls Post-COVID," published on Sept. 22, 2020). The country's next five-year plan (unveiled in March 2021) will reveal whether the country's energy policies this year are a blip, or signal something more permanent. The heightened focus on energy security could imply more support to abundant domestic coal, but we still would expect the government to support the continued of renewables in China's energy mix, especially now that China has recently committed to achieve carbon neutrality by 2060. A supportive factor is the strong 2021-2022 pipeline of now subsidy-free renewable projects.
Finally, India's renewables sector, a key growth market, has taken the biggest hit from COVID-19, due to reduced construction activity. Total renewables additions are down 40% so far in 2020 year on year. India's renewables industry, meanwhile, had already been facing more structural constraints, ranging from slowing growth in power demand, high counterparty risks, and transmission bottlenecks.
This is a market view from Bruno Brunetti, Head of Global Power Planning, S&P Global Platts Analytics. S&P Global Platts is a separate and independent division of S&P Global, as is S&P Global Ratings. Therefore, what follows are the sole views of S&P Global Platts, subject to its citation policy, available upon request.
Despite delays to new-build activity tied to coronavirus pandemic-induced lockdowns, S&P Global Platts Analytics estimates that global renewables additions have been generally resilient so far this year and will be in the longer term. With more sizable downward revisions to fossil fuel demand, renewables are expected to have a larger market share compared to our pre-COVID outlook.
Solar PV capacity additions are expected to slightly decline year on year in 2020, but wind capacity additions could be up over 10%. The renewables industry continues to face some roadblocks to scaling up globally, but more constructive market and policy developments have been emerging in recent months that are signaling upsides to renewables investments in the years to come.
Even in the face of growing uncertainties about power demand recovery and prices, players continue to show robust commitments to invest in renewables across the globe as costs decline. Declining costs, combined with more renewables-friendly policies should offer support in a number of markets. The pipeline of renewables projects have remained generally stable over the past year, suggesting that COVID-19 will only marginally reduce the outlook for the industry.
China between green and black: While domestic power demand has moved back above 2019's levels, China has announced a large number of solar PV and wind grid-parity projects in recent months. The country currently accounts for over one-third of annual global wind and solar additions, and these recent announcements suggest it will continue to be a key area for renewables investments, even as the country's coal newbuild policy has recently been relaxed and more coal plants are being brought online.
Europe's green mantra: Policy support for clean energy and decarbonization is leading to significant upside to renewables additions in Europe. The European Commission's Hydrogen Strategy of July 10, 2020, clearly states that "the priority for the EU is to develop renewable hydrogen, produced using mainly wind and solar energy," which would require by 2030 "to scale up and directly connect 80-120 GW of solar and wind energy production capacity to the electrolysers to provide the necessary electricity." To put things in perspective, the EU-27 added in 2019 about 11 GW of wind, while added solar PV capacity was almost 14 GW in the same year. These policy ambitions have been announced as the power sector closes large amounts of conventional capacity, with S&P Global Platts Analytics projecting almost 45 GW of coal/lignite capacity and 18 GW of nuclear coming offline within the next five years across Western Europe.
U.S. green strategy on balance: On the other side of the Atlantic, the U.S. has not provided any support for green initiatives in stimulus measures to date. State mandates, tax incentives, and ESG corporate initiatives continue to be key drivers of U.S. installations so far, but the outcome of the November elections will be clearly an important driver of further development. While the Trump administration has not signaled an intention to support of green power initiatives, the Biden platform has promised $2 trillion in clean energy spending in its first term, while targeting a carbon-free power sector by 2035. These measures will, however, require congressional legislative approval.
Curtailments: The increasing role of renewables during hours of lower power demand further underscores the risks of curtailments. The increasing role of renewables in the power mix further underscores the risks of curtailments. At the same time, as more conventional generating capacity is retired, especially in the U.S. and Europe, more batteries will be needed to boost flexibility needs and supplement renewables for peaking capacity.
While California-ISO faced severe power shortages this summer during an intense heat wave, with a combination of high demand, limited import availability, low wind output, and unplanned outages, leading to rolling blackouts, it’s interesting that an expansion of the Moss Landing battery energy storage system has been recently approved, which would make it the largest battery project currently in development globally. The project would include up to 4 x 300 MW/1200 MWh systems to be constructed over a five-year period. Combined with the 300 MW already under construction at the site, the project would boost capacity and energy storage to 1,500 MW and 6,000 MWh, respectively. While it’s not clear if this project will be fully built, storage will play a major role in replacing retiring gas and nuclear units in California. As more conventional generating capacity is retired, especially in the U.S. and Europe, more batteries will be needed to boost flexibility and supplement renewables for peaking capacity.
Global emergence of offshore wind: While solar PV will remain the major technology in annual additions, S&P Global Platts Analytics expects a growing role for offshore wind facilities, especially in Europe, where they will account for almost 40% of total wind additions by 2025 versus only 22% in 2019. China's offshore wind capacity is trending higher, as we expect 4 GW commissioned every year, and while offshore development is in much earlier stages in the U.S. and is starting to ramp up. Offshore wind is emerging as a more viable option also in northeast Asia.
The prices and assumptions that S&P Global Ratings uses, for the purposes of its ratings analysis, may differ from those that S&P Global Platts reports. Data that S&P Global Platts uses includes independent and verifiable data collected from actual market participants. Any user of the data should not rely on any information and/or assessment therein in making any investment, trading, risk management, or other decision.
An acceleration of the renewables market may depend on presidential elections, as a Biden win could spark the next boost: State mandates, tax incentives, and corporate initiatives continue to be key drivers of U.S. installations so far. With a phaseout for wind credits in 2021 and step-downs for solar Investment Tax Credits (ITC), we do expect a decline in installations. However, a Biden win along with a democratic sweep in Congress (the House and Senate) could accelerate renewables policies and uptake demand in the U.S. Nevertheless, with a phaseout for wind credits in 2021 and step-downs for the solar ITC, we do expect a decline in installations. By contrast, the Trump administration has not signaled any support for green power initiatives.
Renewable tax credits outweigh COVID impacts. Renewables installations in the U.S. have historically been very shaped by federal tax credit policy, COVID-19 notwithstanding. The sharp increase in renewables in 2020--especially wind installations-- is unsurprising as the Production Tax Credit (PTC) incentive (and ITC in lieu of the PTC) has increased from 40% to 60% of the full credit amount (and from a 12% ITC to 18%) for qualified wind projects commencing construction in 2020 rather than 2019. This "step up" in tax credit eligibility created a market dynamic pushing for higher installation in 2020. The importance of timing highlighted concerns that COVID-19 risks to supply chains could delay the delivery of the renewable pipeline. Work stoppages have most affected the relatively smaller distributed solar segment, which includes residential and commercial installations. To be sure, we expect the U.S. distributed generation segment will experience a 30% decline in 2020 compared with 2019. While that's not the case for utility-scale solar, the pandemic has tempered growth projections and has created uncertainty for projects under development.
However, new guidelines in the wake of COVID-19 have assuaged concerns. They allow onshore wind projects that began construction in 2016 and 2017 to have an additional year (five years instead of four) to finish construction and still receive PTC benefits. Similarly, solar developers will be allowed to retain ITC eligibility on equipment bought in 2019 to be delivered into October 2020.
Renewables continue to grow, supported also by ESG and declining costs. Despite COVID-19, we expect wind installations to nearly double in 2020 to nearly 19 GW from just over 9 GW in 2019 (total installed capacity being 105 GW). We expect residential solar installations to slow some, but still expect utility-scale solar at the same pace as 2019 to add 12 GW (from a 90 GW base). The proportion of energy produced by renewables as a whole had increased to nearly 16% in terms of terawatts (or 25% when including hydro generation). ESG and sustainability initiatives are giving renewables an extra push. In addition, with overnight capital costs projected to decline to $1,050/KW and $825/KW in 2025 from $1,250/KW and $1,150/KW in 2020 for wind and solar, respectively, we expect renewables deployment to continue to accelerate in the medium term. Even as natural gas-fired generation spikes in 2020, the fuel itself is unlikely to challenge renewables growth. We do not see a case to justify longer-term gas-fired power sector investment and think the very strong jump seen in 2020 will represent peak natural gas-fired electric generation as a share of total power generation.
Lower returns and more risks lie ahead. While renewable growth has been strong, returns on the investments have not been as impressive over the past two to three years--as developers are focusing on obtaining scale. At the same time, according to S&P Global Market Intelligence data, roughly 50% of U.S. wind PPAs set to start in 2020 have terms of 15 years or shorter, whereas that proportion was less than a quarter on average in the past decade. A similar trend toward shorter PPAs has also emerged for solar PV. Given the importance of tax credits, financing also typically consists of tax equity in the capital structure. A combination of aggressive resource availability and merchant price assumptions has resulted in single-digit returns for developers in the PPA period, leaving significant market risks during the merchant tails.
We also expect lenders to be more selective. As global financial markets struggle to cope with COVID-19, financing, in general, has become more risk averse. As such, traditional debt lenders may view a renewable energy project in 2020 as riskier than other financing opportunities. This will likely make debt financing more expensive in the near term and restrict the availability of finance for new market entrants. The risk of supply and construction delays has also slowed tax equity, and financing generally, for projects other than those already in the pipeline or new projects from tried and tested developers and sponsors. Thus, for projects expected to enter the finance market in the coming months, the outlook remains somewhat uncertain.
Policy support for clean energy and decarbonization is leading to significant upside to renewables additions in Europe. The latest major step in Europe toward an energy transition dates from just before the pandemic, with the European Green Deal of December 2019 setting out a growth strategy for a more sustainable economy targeting carbon neutrality by 2050. This would notably stem from a gradual exit from coal, oil, and natural gas; a significant increase in renewables; but also from a comprehensive restructuring of sectors like construction, transport, and agriculture. It implied more of a redirecting of funds, as new monies into renewables were limited to €7.5 billion. The COVID-19 policy response has added teeth to the transition, as it contemplates €225 billion for green investments out of the total €750 billion recovery fund, called the Next Generation Plan. This will prove positive for European utilities, although we recognize implementation of support mechanisms will take time to materialize.
Hydrogen as a potential future booster: COVID-19 political responses also focus on energy independence. Several multibillion budget allocations to develop a European green hydrogen industry since the beginning of the year (with hydrogen produced with renewable power) will further promote the growth of renewables over the coming decade. As a storage solution, hydrogen could notably help address challenges from renewables' intermittency and seasonality (complementing batteries) and increase demand for decarbonized energy from sectors such as heavy vehicle transport and heavy industries.
Investment plans in renewables are growing larger, but risk-adjusted returns are shrinking, driven by investor appetite, green financing and persistent low cost of capital. Almost all European utilities aim to boost their investments in renewables, while European oil and gas majors are embracing the energy transition and increasing their renewables ambitions. In addition, the draft European taxonomy will offer incentives to European institutional investors and banks to support green and sustainable investments. The only negative development may come from households, which may delay or cancel their plans to build rooftop solar PVs. At the same time, the low cost of capital (a key part of overall costs) continues to support the competitive position of renewables: remuneration sank to a record low of €11/Mh at the latest Portuguese auctions. The resulting effect of increased competition and expectations of lower costs is a likely squeeze in returns, which may affect future performance for renewables investors.
Permitting hurdles, system costs, and subsidy-affordability may slow down the pace. Permitting remains a major bottleneck for the development of renewables in Europe now: Local opposition, which stands in contrast with Europe's ambitions, consists mainly of "not in my backyard" concerns in generally dense territories. The Green Deal also intends to address this by simplifying and shortening permitting processes, while repowering opportunities on existing sites may also offer historical players further growth opportunities. Yet, this is still to be designed and implemented. Similarly, transmission and interconnection projects face concerns about permitting and system costs. Massive investment in such projects is needed in order to transport power from windy onshore and offshore areas to remote to high consumption areas, as well as to cope and manage the higher penetration of renewables (as interconnectivity materially reduces intermittency risks). Last but not least, COVID-19 may add to concerns about the already high cost burden stemming from various subsidy schemes for renewables. Tariff deficits could become more to the front, as weaker economic demand for power and lower prices confront growing renewables output.
Merchant risk remains a hurdle, as the PPA market is not taking off rapidly. The market expects PPA to replace fading subsidy schemes, provide long-term earnings visibility and support project financing. Yet, the lack of contractual standards and diverse legal systems have so far limited PPAs' growth potential in Europe. In addition, the economic uncertainty induced by COVID-19 may further limit players' willingness to lock in long-term prices or take on long-term counterparty risk. Existing fixed-price auctions provide the long-term visibility needed to keep capital costs low. Acting as floating to fixed swaps, auction prices do not necessarily imply "subsidized" tariffs, as competitive forces have driven prices down. Moreover, we believe that merchant risk remains hard to assess, even more in the current power and carbon price environment. In our view, renewable projects exposed to such risks are only financeable if backed by either by PPAs or minimum floor price protection. In an environment of less subsidized or fixed prices, we believe large, solid, and established players will be the main beneficiaries, as they enjoy in-house (integrated) supply and trading activities as well as vertical integration. It may help them consolidate their respective market positions. Doing so is, however, not just the space of utilities, as Europe's oil and gas majors are making inroads too (see "Write-Downs, While Eye-Catching, Are Not The Largest Issue Facing Oil And Gas Supermajors," published on RatingsDirect on Aug. 3, 2020).
We continue to see China as a key growth area for renewables investments, bolstered by its just announced commitment to achieve carbon neutrality by 2060, even as coal new-build policies have recently been relaxed. As a result of COVID-19, more coal power projects were approved in the first half by local governments to stabilize demand and employment. Increased support for abundant domestic coal (also in view of less predictable geopolitics) and rising industrial energy use amid the COVID-19 stimulus for infrastructure and heavy sectors could bring China's declining energy intensity into reverse (see "China's Energy Transition Stalls Post-COVID," published on RatingsDirect on Sept. 22, 2020). We will only learn whether China is executing an energy U-turn after the next five-year plan for 2021-2025 is published in March next year. Still, we still would expect the government to remain steadfast in its support of the rise of renewables in China's energy mix, as evidenced by President Xi’s recently statement that China intends to become carbon neutral by 2060.
Renewables' project pipeline remains supportive, despite the end to subsidies. Despite COVID-19 causing some project delays and fewer capacity additions in the first half of 2020, we believe the rush for commissioning subsidized capacity in the run-up to grid parity is the main driver of China's renewable energy growth in 2020. A successful transition to subsidy-free projects assumes that technology-induced costs decline further, allowing renewable energy to compete at on-grid tariffs (that is, the reference coal power prices). Still, renewable projects will continue to be granted for other preferences, such as prioritized access to grids and enhanced transmission capacities for renewables. A positive signal has been the announcement of a growing number of solar PV and wind grid-parity projects in recent months, supporting capacity growth in 2021 and 2022. Up to August 2020, 15.9GW in wind and 47.8GW in solar power capacity has been approved for the grid-parity pilot program and required to be commissioned by the end of 2021 (for solar) and 2022 (for wind), although execution wobbles cannot be ruled out.
Increasing state-owned entrants are changing the landscape of China's renewable energy sector. Under both the economic and political push for energy transition, state-owned conventional energy companies are actively growing their clean energy portfolio. By leveraging their advantages in funding, resources, and technology, they are adding new capacity in wind and solar power aggressively through both new builds and acquisitions. They are also the key developers of offshore wind, and the winners when grid parity and merchant projects are coming on stream.
Key challenges include climbing costs, and competition from coal and curtailments. Unchanged deadlines set for subsidized projects commissioning this year are posing headaches for the developers, given supply chain disruptions and construction delays due to the COVID-19 outbreak. The rise in construction costs caused by strong demand may undermine project returns and potentially delay the commission of some grid-parity projects. Moreover, the enhanced competitiveness of coal power due to declining fuel prices and intensifying market competition may reduce the returns of grid-parity projects or delay them. Finally, intermittent and outsized supply of renewable energy threatens the stability of grid networks and worsens possible curtailments. Some provinces start to require battery storage in place to meet up to 15%-20% of the capacity of new wind power projects. China's energy regulators are also seeking comment on bundling the energy storage system with all of the wind, solar and coal power (or hydropower) projects in progress. This may also help reduce the need for building excessive coal power as peaking capacity. In our view, the key to success may include sorting out a low-cost and viable business model for the battery storage solution.
Delayed subsidy payments, evolving policy risks, and the lack of a PPA market weigh on funding. Prolonged subsidy payment delays have eroded cash flow and returns and heightened liquidity risk, especially for private developers with little access to funding. By the end of 2019, only 56% of wind power and 23% of solar power PPA awarded received subsidy premiums, and national subsidy deficits keep widening. New policies issued in early 2020 allow some projects commissioned after March 2016 to apply for subsidies, subject to a stringent verification process. However, without significant increases in budget sources, more projects qualifying for subsidies may dilute the payments to earlier projects currently receiving them. Recently, the industry association proposed state-owned grid companies to issue government-backed bonds to settle the arrears of receivables, but there is no official statement on the likelihood and progress of such a proposal. While earlier projects have been able to securitize subsidy receivables, the policy and cash flow uncertainty and lack of a PPA market have meant that project finance or securitization are not options for more recent projects. Financial lease and bank loans are two major funding channels for renewable projects in China. Banks usually provide loans pledged with power generation revenue after commissioning. More costly, financial leases can bridge funding needs at least at the construction stage.
This is a market view by Bruno Brunetti, Head of Global Power Planning, S&P Global Platts Analytics. S&P Global Platts is a separate and independent division of S&P Global, as is S&P Global Ratings. Therefore, what follows are the sole views of S&P Global Platts, subject to its citation policy, available upon request.
COVID-19 is having the biggest impact on renewables new builds in India, with total renewables additions of only 4.3 GW in 2020 at the end of August, a decline of almost 40% year over year. Solar PV capacity reached over 35.3 GW at end-August and is moving closer to wind capacity, which stands at 37.9 GW. However, India's solar PV development has been facing several logistical challenges, with imports of solar panels from China disrupted earlier this year, while labor shortages due to lockdowns slowed construction activity in the second and third quarters. In addition, a lack of clarity about the extension of customs duties on imported solar PV cells and modules has also been cited as a cause of delays. India's wind deployment is also decelerating, with only 0.7 GW of wind connected to the grid so far in 2020, compared with 2.4 GW in 2019.
A robust pipeline of projects with PPAs competitive against fossil fuel and power grid costs. The slowdown in installations is occurring as the pipeline of projects backed by PPAs remains large. Since the pandemic has been undermining construction activity, deadline extensions have been granted. Also, the pipeline of utility-scale solar PV projects in development stands at over 42 GW, while solar PV projects for a total of 17 GW have been awarded in auctions held in the first half of 2020, up 7 GW year on year. Remuneration in recent solar PV auctions has ranged between Indian rupees 2.3- 2.9/kWh ($33-$41/MWh). This price is well below the current prevailing PPAs covering coal and gas plants and below the benchmark grid costs for power, APPC, as determined by the Central Electricity Regulatory Commission.
Structural factors have also been constraining India's renewables scaling. COVID-19 has unfolded as the renewables industry in India was facing more structural constraints in the process of scaling. Power demand growth has already slowed in the second half of 2019 and, despite a recent recovery for grid-connected loads in the third quarter, power demand remains below historical trends. A more uncertain power demand outlook could further undermine distribution companies and off-takers' appetite to lock into long-term PPAs, while counterparty risks and receivable delays remain a concern for renewable developers. While a growing number of hybrid projects combining solar PV with wind and batteries are being developed, land scarcity and grid bottlenecks could represent a drag on future investments.
S&P Global Platts Analytics assumes solar PV additions will rebound over the remainder of the year. We assume total renewables for the 2020-2025 period will increase an average 14 GW/year, down 14% from our pre-COVID-19 view. Despite great solar and wind potential, India's renewables industry will require further strong policy action to overcome the current difficulties.
The prices and assumptions that S&P Global Ratings uses, for the purposes of its ratings analysis, may differ from those that S&P Global Platts reports. Data that S&P Global Platts uses includes independent and verifiable data collected from actual market participants. Any user of the data should not rely on any information and/or assessment therein in making any investment, trading, risk management, or other decision.
This report does not constitute a rating action.
