Developers and investors in renewable energy projects are increasingly flocking to emerging markets like Mexico, China and India, according to a report from Mercatus, an energy investment firm. In 2015, investment in developing nations matched the rest of the world for the first time.
The average size of solar projects in South America and Africa are 64 MW and 45MW, respectively, while the average size of solar projects in North America and Europe, by contrast are a measly 11MW and 3MW. Even Central America, where land can be more difficult to find than the Sahel, clocks in with an average solar project size of 25MW. In emerging markets, projects are utility scale; in developed nations, the focus remains on commercial projects.
The rates of return are better too. The average rate of return in Africa on a solar project is 10.3%. In the Middle East it hits 10.4%. Asian returns are 8.4%. Returns in North America came in at 6.4% while in Europe, due to the smaller project size and declining incentives, the unlevered rate of return drops to 4%. Still, returns on wind projects are larger in developed markets.
The market shift comes from a variety of factors. Electricity demand in the U.S. and Europe is beginning to hit a plateau and will decline in some markets. A substantial portion of new solar capacity in the future will be installed to replace retired fossil plants. By contrast, demand for power in emerging nations is on the rise. (An estimated 1.2 billion people in 2013 still did not have access to reliable electricity.)
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Many countries have also imposed somewhat high goals for renewables. China’s stated goal is to get 50% of its power from sources with zero operational emissions. Mexico is aiming at 40% by 2035. India’s Suzlon, a wind company, just snapped up five solar companies. Critics may carp that these goals will make their economies uncompetitive; many of these countries, however, have their own growing solar manufacturing and solar installation firms. (In the Middle East, sources have also told me that a billion cubic feet not used for air conditioning at home can be exported.)
Solar (and wind) resources are also great at the equator.
Emerging markets, however, are never easy. Corruption, shifts in policy, bureaucracy are invariably risks.
“Maintaining a clear picture of ongoing business risks in emerging markets contexts becomes imperative, but can be challenging given increasingly complex operations dispersed across geography and technology,” wrote Mercatus CEO Haresh Patel. “The most successful energy companies in 2016 will gain a competitive advantage by digitizing their business processes.”
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