Gas is no longer the bad guy of the UK energy investment market, according to PA Consulting Group’s Energy Investment Map. The map compares the potential rates of return and risks across technologies and according to the latest results, the business case for investing in gas is improving, which may seem surprising to some given the poor operating margins for gas-fired generation in recent years.
The newest edition of the map compares the potential rates of return and risks across technologies and countries and shows the changing energy landscape in 31 countries across Europe, Asia Pacific, the Gulf, BRICS and the US. The UK ranks sixth in the map’s renewable energy index and tenth in the map’s conventional energy index.
UK investment opportunities in renewables
According to the map, renewable technologies look highly attractive, but uncertainty around the overall extent of subsidy allowed by government means this is unlikely to continue indefinitely. This is partly a question of available funding (that is ultimately paid for by consumers), but also reflects the industry’s calls for the level of carbon price support to be frozen and acknowledges the ultimate need for EU approval under State Aid regulations.
The map’s solar index score has dropped significantly since last year’s analysis as subsidies for solar generation are decreasing, in part to reflect lower costs as solar technologies mature. Onshore and offshore wind generation scores remain steady as strong UK policy support for wind continues, albeit with less certainty over financial outcomes and greater public debate over the extent of onshore wind development and the high cost of offshore wind.
UK investment opportunities in conventional generation
The UK ranks tenth in the map’s conventional technology index and is up two places since the last analysis. Prospects for gas-fired generation remain uncertain in the short term until support levels in the capacity market are made clearer. Economics for gas are also expected to improve once coal-fired generation reduces and existing nuclear plants reach the end of their life.
PA Consulting Group said: “The UK has the potential to deliver excellent opportunities for investors in the coming years, but a big question remains around what they should invest in. As Electricity Market Reform, which aims to attract investment to replace the UK’s ageing energy infrastructure, has now passed into law, 2014 promises to give investors a greater level of clarity and certainty. The results from PA’s map indicate that gas could be the one to watch over the coming years.”
Global highlights in renewable energy 2014
With the development of new offshore capacities progressing rapidly, Denmark has taken the lead from China and is expected to generate 50 per cent of electricity from wind by 2020. Although China has dropped to third, the country remains a highly promising market for renewables, due to government support that provides attractive pricing.
The Philippines’ potential for new capacities and a robust market environment with feed-in tariffs for hydro, biomass, wind and solar projects, mean it has risen to second place in the index (from fifth) and is a key target for renewable energy investors.
Other countries appearing at the top of PA’s ranking are Austria, Sweden and the United Kingdom. Renewable projects are becoming more attractive in several European countries due to the improving economic and financial situation, allowing room for fiscal policies to support the renewables sector.
Global highlights in conventional energy 2014
Poland tops the rank with vast coal and gas reserves, and has significant shale gas resources soon to be exploited, as well as a clear energy strategy though to 2030. India, which previously ranked first, now ranks second but continues to have increasing demand due to the country’s economic growth. Ireland (3) and Turkey (4) are pushed up the ranking as demand for new conventional power capacities drives investment potential.
The biggest change is the Czech Republic, which ranks sixth compared to 18 in the last analysis. The country has completely phased-out renewable energy subsidies and plans to focus on coal, gas and nuclear power generation; creating opportunities for investments in conventional power.
Olaf Remmler, energy expert, PA Consulting Group says: “Investors in energy generation must contend with significant uncertainty, complex market and regulatory conditions and the rapid advance of renewable technologies. To make the right decisions, they need to understand the regulatory and economic factors affecting their projects and investments.”
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Notes to editors
About PA Consulting Group
We are an employee-owned firm of over 2,500 people, operating globally from offices across North America, Europe, the Nordics, the Gulf and Asia Pacific. We are experts in energy, financial services, life sciences and healthcare, manufacturing, government and public services, defence and security, telecommunications, transport and logistics. Our deep industry knowledge together with skills in management consulting, technology and innovation allows us to challenge conventional thinking and deliver exceptional results with lasting impact.
About the Energy Investment Map
Our analysis for this report took place between November and December 2013. We plan to update across all countries annually with interim adjustments as required for individual countries to capture changes in the regulatory, financial and political environment as they happen.
PA’s Energy Investment Map currently covers the following countries:
European countries: Austria, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Poland, Spain, Sweden, Switzerland, Turkey, UK*
* We have separated Scotland from the UK due to its no nuclear policy.
Middle East: Qatar, Saudi Arabia, United Arab Emirates
Asia Pacific: Australia (Western & Eastern), Indonesia, Malaysia, New Zealand, Philippines, Singapore
BRICS: Brazil, Russia, India, China, South Africa
North America: United States (not including Alaska)**
**For more detailed analysis of investment potential in specific US electricity regions, see PA’s US Energy Investment Map. www.paconsulting.com/USenergyinvestmentmap
Our analysis includes seven renewable technologies: solar PV (photovoltaic), solar CSP (concentrated solar power), onshore wind, offshore wind, hydro, geothermal and biomass as well as four conventional technologies: nuclear*, combined cycle gas turbine (CCGT), gas turbine (GT) and coal.
Our review considers investments ‘today’ in new power generating plants. Our business case calculations award a maximum score of 90 points, which is calculated based on the expected internal rate of return (IRR). The higher the IRR, the more points are awarded, up to a maximum of 90 points for each technology in all 31 countries. The IRR takes into account the factors that influence the financial performance of an energy project.
•operation and maintenance (O&M) costs
•revenues – capacity factors, incentives, market price forecasts and revenues from combined heat and power (CHP)
•fuel costs – heat rates and fuel price forecasts
•CO2 emissions – emissions per MWh and CO2 price forecasts.
Our risk assessment is also based on a score of a maximum 90 points, which is weighted across all risk factors for each technology.
•country risk – specifically, credit default and financing risk
•market risk – revenue risk and market potential
•project risk – technology availability and grid access
•operational risk – sourcing and fuel risk, labour availability and O&M expertise.
Together, the business case and risk assessment scores give a total score out of 180 for each technology in each country. We interpret the score as follows:
•150–180 points: Relatively high IRR due to excellent market, regulatory and infrastructure conditions, high demand for new capacities and very low levels of country, financing, project, technology and operational risk
•120–150 points: Moderate to relatively high IRR due to good market, regulatory and infrastructure conditions, moderate to high demand for new capacities and low levels of country, financing, project, technology and operational risk
•90–120 points: Relatively low to moderate IRR due to poor to moderate market, regulatory and infrastructure conditions, low to moderate demand for new capacities, and moderate levels of country, financing, project, technology and operational risk
•90 points: Comparatively low or negative IRR due to poor market, regulatory and infrastructure conditions, relatively low demand for new capacities and high levels of country, financing, project, technology and operational risk.
Along with calculations and assumptions based on PA proprietary databases gathered in numerous projects, PA used data from:
National and International statistical offices: US Energy Administration Database, US Energy Information Administration, IMF (International Monetary Fund), World Energy Outlook 2013 (published by International Energy Agency), Eurostat, Destatis.
National energy departments: New Zealand Electricity Authority; South Africa Ministry of Energy; Energiekamer van de Nederlandse Mededingsautoriteit, Netherlands; Operador Nacional do Sistema Electrico, Brazil; Ministry of Energy and Mining, Brazil; Energy Market Regulatory Authority, Turkey; Ministry of Energy, Russia; Department of Energy and Climate Change, UK; Federal Ministry for Environment, Nature Conservation and Nuclear Safety, Germany; Department of Energy, Communications and Natural Resources, Ireland; Ministry of Ecology, Sustainable Development and Energy, France; Ministry for Climate and Energy, Denmark; Ministry of Economy, Poland; Ministry of the Environment, Czech Republic; Federal Ministry of Economy, Family and Youth, Energy and Mining, Austria; Ministry of the Environment, and Ministry of Enterprise, Energy and Communications, Sweden; Ministry of Employment and the Economy, Finland.
Authorities, operators or agencies: Database of State Incentives for Renewable & Efficiency, US; National Renewable Energy Laboratory, US; Singapore Energy Market Authority; New Zealand Ministry of Business; Australian Stock Exchange; Energy Regulator of Australia; Philippines Energy Regulatory Commission; Suruhanjaya tenaga, Malaysia; South Africa Energy Regulator; India Energy Exchange; Central Electricity Authority, India; Tennet TSO für Netzinformationen, Netherlands; Agentschap nl für alle feed ins, Netherlands; Brazilian Intercontinental Exchange, BOTAS, National Energy Commission, China Electricity Council, Oxford Energy Institute, European Commission, RES-Legal.com, German Energy Agency, Danish Energy Agency, Danish Energy Regulatory Authority, Agency for Renewable Energy and Energy Efficiency of Switzerland, Swedish Energy Agency, Stattnet, Energinet, Energy market regulator of Spain, Gestore Servizi Energetici of Italy, European Central Bank, UNStats.