Market Insight

Market Setting

Recent years have sparked new interest in the potential return on investment from the renewable energy markets. The implementation of the Kyoto Protocol in an environment of sustained high oil prices and global concerns over energy security, combined with growing public drive towards the use of renewable energy has motivated much investor interest. An increasing number of private equity investment Companies are focusing on the sector, and a growing base of institutional investors have set aside allocations in such Companies as part of their alternative asset strategies.

Renewable energy is an important component for diversification of the overall energy mix, and is now a fundamental requirement for any nation’s energy portfolio. The drivers for renewable energy’s ascendance are long and likely to be enduring: short-term national and international policy environments are supportive; there is growing interest from consumers, lawmakers and the capital markets; the technology in many sectors is well developed; the world is experiencing accelerating energy demand; many governments have concerns about energy security and trade balances; and changes to long term energy prices mean that some renewable energy technologies are becoming cost-competitive with traditional energy in some markets, even without regulatory support.

Key clean energy market drivers include:

• Environmental quality
• Climate change issue – CDM
• Energy access and security
• Untapped agro-industrial resources
• Government regulations/incentives
• Co-investment with local project sponsors
• Favorable local debt finance
• Commercial returns

The same drivers exist to support high growth rates for the renewable energy sector in emerging markets. There is no question that growth in energy demand, fears of the environmental impact of fossil fuels and growing cost pressures are set to see the governments of emerging markets also commit to the development of renewable energy generation capacity.

It is clear that the renewable energy sector in emerging markets is still a nascent yet evolving sector and the right combination of country, technology and asset class is still required to generate significant returns. However, it is precisely this type of environment that allows for investment strategies in clean energy projects and local developers, which identify the most attractive country, sector and type of investment to yield favorable returns and help catalyze the renewable energy market for future growth.