LONDON -- Global investment in renewable power and fuels increased 17% to a new record of $257 billion in 2011, with developing economies making up more than a third of this total. So concludes The Global Trends in Renewable Energy Investment Report (GTR) for 2012.

This comprehensive analysis from the Frankfurt School of Finance & Management finds that while the US closed in on China in the race to be the leading renewable energy investor, with a 57% leap in outlay to $51 billion, India displayed the fastest expansion rate, with its 62% increase to $12 billion.

Noting that one of the dominant features of 2011 was technology costs, the report concludes that with falling PV module and wind turbine prices – close to 50% and 10% respectively – the two leading renewable power technologies consequently came closer to competitiveness with fossil-fuel alternatives. However, the other key feature was a weakening in policy support in many developed countries, reflecting austerity pressures, particularly in Europe, and legislative deadlock in the US.

The percentage increase in investment between 2010 and 2011 was smaller than the 37% rise seen between 2009 and 2010, but it took place at a time when the cost of renewable power equipment was falling fast, the analysis records, suggesting that the growth in dollar investment would have been significantly larger in 2011 if it had not been for the price deflation for PV and wind.

Nonetheless, in 2011, total investment in solar power jumped 52% to $147 billion, reaching a figure almost twice as high as that in wind energy, at $84 billion, which was down 12%. This marked the first time that solar has opened up an appreciable investment gap over wind, the report notes, adding that the performance of solar owed most to booming rooftop PV installations in Germany and Italy as property owners moved to take advantage of falling panel prices, and a spurt in the financing of large-scale solar thermal electricity generation projects in Spain and the US.

Economic Challenges

Although the renewable energy sector has continued to grow, wider economic problems have had an impact since 2008, and they remain a threat, the report says.

Share prices in the renewable energy sector had a dismal 2011, in the face of overcapacity in the solar and wind manufacturing chains and investor unease about the direction of support policies in both Europe and North America.

Citing the WilderHill New Energy Global Innovation Index (NEX) – which tracks the movements of 98 clean energy shares worldwide and fell 40% in 2011, clawing back just 7% in the first quarter of 2012 as world stock markets rebounded – the document argues this severe under-performance by clean energy shares acted as a major dampener on public market financing of companies in the sector.

The sovereign debt crisis in Europe in late 2011 hit the ability of banks to provide their usual flow of project finance, which increased the focus on possible, alternative sources of investment for renewable energy – such as pension funds and other long-term institutional investors. In early 2012, an $850 million bond issue for a PV project owned by Warren Buffett's MidAmerican Holdings underlined the potential of green bonds as an instrument for financing renewable power projects, the authors note.

More generally, the fact that consumers have found their finances under pressure has made governments more reluctant to wave through measures that would put up energy prices. In the US, support in Congress for clean energy and putting a price on carbon has ebbed, in the face of low natural gas prices that have made gas-fired generation look a cost-effective alternative, and new concerns about the cost of renewable energy support. The outlook for gas supply has changed dramatically, with the technological advances in fracking. Furthermore, the report adds, complaints about the cost of subsidies for renewables have gathered strength after the scandal over the bankruptcy of Solyndra, which had received Federal loan guarantees.

Turning to Europe, the report says that governments struggled to adjust feed-in tariff subsidies for solar power quickly enough – in the face of rapid reductions in the cost of the technology. These cost reductions resulted in greater-than-intended returns for PV project developers, and booms in installation, especially in Italy and Germany, both of which saw more than 7 GW installed in 2011. Inevitably, governments in Europe and elsewhere have responded by cutting subsidies sharply – and in the case of Spain, barring subsidies for any new renewable power project not so far approved.

Indeed, investment in renewable energy was subdued in the first three months of 2012, in the face of uncertainty over future policy support in Europe and the US, the analysis continues, stating that although there have been signs that governments are trying to clarify specific issues for investors, there is not yet any evidence that investment levels will accelerate in the subsequent quarters of 2012.

Figures from Bloomberg New Energy Finance show that asset finance of utility-scale renewable energy projects in the first quarter of 2012 was $23.3 billion, down 36% from the fourth quarter of 2011 and 14% below the figure for the first quarter of last year.

In fact, 2012 was the weakest first quarter for renewable energy asset finance since 2009, in the depths of the financial crisis, the report notes.

There were still some big projects financed however – including the 396 MW Marena Wind Portfolio in Mexico for $961 million, the 100 MW KVK Chinnu solar thermal plant in India for approximately $400 million, and the 201 MW Post Rock Wind farm in Kansas, US, for an estimated $376 million.

The largest projects financed in Europe in the first part of 2012 – in the face of a difficult market for bank lending – were the 150 MW Monsson Pantelina wind farm in Romania at $317 million, and the 60.4 MW SunEdison Karadzhalovo solar PV plant in Bulgaria at $248 million.

Venture capital and private equity investment in renewable energy companies was resilient, at $1.4 billion worldwide in the first quarter, up from $1.1 billion in the previous quarter and $1.2 billion in the equivalent quarter of 2011. Solar and biofuels were the two dominant sectors for equity-raisings.

Public markets investment was just $473 million, down 46% from the end of 2011 and 87% from the equivalent period in 2011. This was not surprising given the poor performance of clean energy shares over the last few quarters, the authors conclude.

Breaking Investment

Different types of investment displayed very different fortunes during the year – venture capital investment, for instance, rose 5% to $2.5 billion, but government-funded and corporate research and development both fell back.

Government R&D slipped 13% to $4.6 billion as the effect of green stimulus packages faded; corporate R&D weakened 19% to $3.7 billion as companies responded to pressure on their own finances.

Private equity expansion capital investment dropped 15% to $2.5 billion. Equity-raising by renewable energy companies on the public markets also fell back last year, down 10% to $10.1 billion, as investors shied away from heavy share price falls.

The two types of new investment that did see significant growth in 2011 were asset finance of utility-scale (1 MW-plus) renewable power plants and biofuel refineries; and small-scale distributed capacity, notably rooftop solar. Asset finance was up 18% to $164.4 billion, while small-scale projects saw $75.8 billion invested, up 25% on the previous year. Both were record figures, the report notes.

Merger and acquisition activity totalled $68.4 billion in 2011, up 5% on the previous year. Within M&A, corporate acquisitions were up 34% at a record $28.4 billion, as buyers took advantage of lower valuations for target companies. Project acquisitions and refinancings were down 1% at $36.5 billion.

Investment increased in both developed and developing countries in 2011. It rose in developed economies by 21% to $168 billion, and in developing economies by 11% to $89 billion.

In asset finance of utility-scale projects, developing countries out-invested developed economies in 2010, by $70 billion to $69 billion, but this was reversed in 2011, with developed economies investing $86 billion and developing countries $79 billion.

Although overall 2011 was dominated by solar's record year and a setback for wind (in terms of dollar investment), there were intriguing changes at a more detailed level, and among the other technologies.

The report shows, for example, biomass and waste-to-power was the third largest sector for total renewable energy investment last year, even though its share fell 12% to $10.6 billion. Biofuels, which was the second-largest sector for investment after wind in 2006, came fourth in 2011 with a total of $6.8 billion. This was down 20% on 2010 but there were signs, in the financing by venture capital, private equity and public market investors of companies producing second-generation biofuel (not based on food oils or grains), of a warming in sentiment towards this sector after some tough years.

Other renewable energy sectors showed more modest investment – small hydropower projects of less than 50 MW, and the companies involved in them, attracted 59% more capital last year, taking their tally to $5.8 billion; geothermal investment was down 5% at $2.9 billion; and wave and tidal was down 5% at just $246 million. A large (254 MW) South Korean tidal barrage project started full operations in 2011, but it had been financed several years earlier.

Solar was the leading sector in venture capital and private equity provision of renewable energy, with $2.4 billion. As a relatively mature technology, wind has tended to lag behind solar in terms of venture capital and private equity (VC/PE) investment, and in 2011 it came fourth with just $520 million committed, down 66%. Ahead of it were biomass and waste-to-power, with $1 billion of VC/PE money secured, nearly three times the previous figure, and biofuels with $804 million secured, up 9%.

Moving onto public markets investment, wind and solar vied for first place in terms of the value of new equity-raisings, the report says, noting raisings of $4.5 billion and $4.2 billion respectively, down 2% and 23% on their 2010 totals. Biofuels and geothermal obtained $654 million and $406 million respectively, up 37% and 360%.

In asset finance of utility scale projects wind retained a lead over solar, with $82.4 billion committed, down 11%, against the latter's $62.1 billion, but the latter was up no less than 147% compared with figures from 2010. Looking one level of detail further down, the major renewable power sources showed some interesting technological trends also. The two have historically been dominated by onshore wind and PV respectively, but last year offshore wind loomed large and contributed $12.5 billion to the total value of wind assets financed, while solar thermal accounted for $20 billion of the total solar figure – in both cases, the highest on record.

Total capacity investment, which brings together small-scale projects with the utility-scale developments, saw solar dominate in 2011, with $137.8 billion invested, up 61% on 2010 – thanks in greatest part to the expansion of rooftop PV in Europe and elsewhere.

On the total capacity investment measure, wind was the second-largest sector with $82.4 billion, biomass and waste-to-power in third place came in with $8.8 billion (down 16%), small hydro attracted the fourth largest capacity investments with $5.4 billion, and biofuels came in fifth with $3.5 billion (down 36%).

Outlook

The policy hiatus, coming ironically at a time when fully competitive renewable power is starting to be a realistic possibility in a few years' time, is posing a threat to continued growth in investment in the sector in 2012 and beyond.

That in turn puts into jeopardy hopes that investment in clean energy will reach sufficient levels to start to reduce global carbon emissions before 2020.

Last year's increase in investment took place at a time of uncertainty over economic growth and policy priorities in developed economies – and those issues continue to pose a serious threat in 2012 to the low-carbon transition and hopes of progress towards a green economy.

The resilient growth of renewable energy investment since 2004, with expansion continuing through the recession of 2008-2009 and the subsequent, disappointing recovery in developed economies, has been accompanied by a significant rise in the job creation, and overall economic contribution, of the renewable energy sector – and that looks likely to continue to 2020 as the world seeks to curb emissions from its energy system.

However, one of the key messages of this report is that while progress towards the expansion in renewable energy capacity was once again impressive in 2011, its smooth continuation in 2012, 2013 and after is far from guaranteed. Risks of an interruption have increased. If a serious setback were to beset investment in renewables, the vision of a green economy could recede into the distance.

With PV solar and onshore wind equipment prices falling rapidly, there is a 'promised land' in sight in which these technologies will not require any subsidy. Rooftop solar is already competitive with retail electricity in a number of locations, and some estimates have it that the average onshore wind project will be competitive with gas-fired generation by 2016.

The danger however is that hastily made cuts in support might make a serious dent in investment in developed economies in 2012-2014 – before wind and solar can reach that goal of competitiveness.

That would be a damaging blow not just for businesses in those industries but also for hope of limiting carbon emissions and climate change, and ultimately for all those working in the emerging green economy.