|Solar panels for sale at a market in New Delhi, India. |
Source: Associated Press
In Latin American capitals like Santiago, Lima and Buenos Aires, Enel SpA can "see the energy transition coming," Francesco Starace, CEO of the Italian energy giant, told investors in late November.
"Our customers are demanding both renewable energy and new services," Starace said at the company's capital markets day in Milan. "In two, three years there will be no more 'renewables' in generation," he added later in the meeting. "There will be generation, which will be renewables with some thermal ... to balance off."
Fortunes are being spent building renewable power plants and upgrading infrastructure in emerging markets, where a potent mix of rising electricity demand and falling technology costs have created a new group of leaders in "a global clean power transition," market researcher BloombergNEF, or BNEF, said Nov. 27 in its Climatescope report. In 2017, emerging economies accounted for the majority of clean energy capacity additions and new funds deployed globally, the firm said.
But storm clouds may be gathering. Through the second half of 2018, concerns grew about a potential emerging economy crisis after U.S. steel and aluminum tariffs sent "shockwaves" across developing countries, leaving traders "generally pessimistic" and feeding fears of a market rout, BNEF said.
Jay Wintrob, CEO of investment manager Oaktree Capital Group LLC, said on a recent earnings call that many emerging markets are showing signs of "late-cycle behavior," including large debt loads, contractions in gross domestic product, a loss of confidence in local currencies and inflationary price spikes.
For the clean energy industry, "the fear is that a broader retreat from emerging markets could siphon credit from renewable energy projects, compounding difficulties facing developers trying to secure financing in countries already perceived as vulnerable," BNEF said. "Furthermore, falling exchange rates complicate the task of paying obligations denominated in hard currencies."
Mikkel Tørud, CFO of Norway-based Scatec Solar ASA, acknowledged the mounting pressure, saying on the company's most recent earnings call that there has been "quite a lot of focus on emerging markets risk over the last few months."
|Engineers fix solar panels at a plant in Soroti, Uganda. |
Source: Associated Press
Unlike developed countries, where companies often raise money through public exchanges, emerging markets rely on asset financing for 95% of clean energy investment, according to BNEF. Much of that comes from local sources, largely due to the outsize role of domestic development banks and credit agencies in China and Brazil, which together accounted for nearly three-quarters of the $137 billion of asset financing that went to clean energy projects in emerging economies in 2017, the firm said.
However, foreign direct investment in clean energy has been rising, hitting an all-time high of $21.4 billion last year, BNEF said. Over the past decade, Enel has been the top international investor in renewable energy projects, excluding hydropower, in developing countries, with much of its investment flowing to Latin America.
The company, which plans to decarbonize its power generating portfolio by mid-century, acquired Brazilian electric utility Eletropaulo Metropolitana Eletricidade de São Paulo SA in June. The deal expanded Enel's footprint in Latin America, where its business now extends to a handful of cities that together are expected to be home to about 90 million people by 2025, Starace told investors in November.
"The urgency of addressing global electricity demand with decarbonized sources is materializing, first and foremost, in the [world's] largest cities," Starace said. "These are places where just to have electricity was a priority. Now, to have the right quality is becoming more and more important. As renewable penetration rises, the provision of new flexibility services becomes a top priority for the energy ecosystem."
While there is an enormous business opportunity in emerging markets, financing is still a fundamental challenge in some areas, said Lawrence Jones, vice president of international programs at the Edison Electric Institute, which represents U.S. investor-owned utilities.
"There is no lack of [electricity] demand in Africa," he said Dec. 12 at the Center for Strategic and International Studies in Washington, D.C. "The problem is the structures are not in place to allow investors to come."
China's One Belt, One Road foreign investment program has attracted considerable attention, but its impact on clean energy development has been somewhat muted, BNEF said, in part because the initiative has been directed toward large infrastructure projects such as coal and hydropower plants rather than smaller wind and solar farms.
The country also slipped in BNEF's ranking of the most conducive countries for clean energy investment and deployment due to restrictions the central government placed on solar project development in mid-2018.
International solar companies are also jockeying for position in India, where reverse auctions have created intense pricing competition between project developers despite a new round of import tariffs.
"The momentum remains extremely strong in India, given that solar is the lowest cost ... resource," Inderpreet Singh Wadhwa, chairman and CEO of New Delhi-based Azure Power Global Ltd., said on a Nov. 14 earnings call.
India is one of a handful of emerging markets where Canada-based Brookfield Renewable Partners LP plans to invest up to 30% of its capital, Sachin Shah, CEO of Brookfield's service provider, BRP Energy Group LP, said on an earnings call in October. Brookfield has been building up its liquidity position in anticipation of turbulence in financial markets that could create investment opportunities for well-funded companies.
"In the emerging markets, significant volatility driven by weak public equity market valuations, reductions in subsidies [in China] ... and continued demand for electricity is driving the need for long-term capital," Shah said. "Investors with strong operating expertise, patient capital and a long-term outlook should benefit in this environment."