Industry Trend Analysis - Wind Investment Hotspots: Outperformers & Markets To Watch - DEC 2017


BMI View: We highlight India and the UK as attractive wind power investment destinations over the next decade , with the former aided by power sector reform and auctions and the latter maintaining its position as a notable growth outperformer for offshore wind powe r . Egypt is highlighted as a market to watch, as favourable wind conditions and pent-up power demand create strong market fundamentals for investors to capitalise on, particularly if regulatory risk subside.

Renewables Outperformers & Markets To Watch
Global Renewables Hotspots By Technology
Source: BMI

We have identified three wind power investment hotspots for this version of our Global Wind Power bi-annual report - focusing on two outperforming investment destinations and one key market to watch over the coming years.

Overview Of Investment Hotspots
Headline Forecasts And Rationale, By Country
*Near-term outlook = annual average growth between 2016 and 2018, long-term outlook = annual average between 2016 and 2026. f = BMI forecast. Source: EIA, BMI

Outperformers

We define outperformers as those wind power markets that have registered significant growth over recent years and will continue to do so over our 10-year forecast period to 2026.

Global Wind Power: Clear Outperformers
Wind Capacity By Country, MW (LHS) & y-o-y % Growth (RHS)
e/f = estimate/forecast. Source: EIA, BMI
  • India: Wind Power Growth Accelerating Under Auctioning Mechanism

We highlight India as one of our global wind sector growth outperformers over the coming decade. India's domestic wind expansion had previously been overshadowed by the solar sector and capacity growth was restricted to certain states; however, the implementation of wind energy auctions in India has boosted the prospect for the sector significantly. This has been accompanied by multiple favourable reforms targeting the wind segment. For example, the government has wavered transmission charges for renewables projects in order to stimulate inter-state electricity trading. This has in turn opened India's outperforming wind power states to more investment, as power supplies can be transmitted to other states. Furthermore, the implementation of non-solar renewable purchase obligations (RPO) on utilities means that developers are more likely to find a buyer for the wind power they generate, providing a guarantee that projects will not be left idle.

As a result, competitive auctions have harnessed substantial investor interest and ramped up Indian ambitions for the wind sector. We note that India's 1GW tender in August was oversubscribed by almost three times with bids going as low as USD52/MWh. This has triggered state-level governments to launch their own auctions, with the state of Gujarat announcing in November 2017 that it would launch a 500MW wind power auction. We further highlight that India aims to hold three 1.5GW auctions, in October and December in 2017, and February 2018, which will add further momentum to the sector. This informs our forecast for Indian wind capacity to expand from almost 29GW in 2016 to 68GW by 2026.

  • UK: To Maintain Offshore Wind Outperformer Status

We remain upbeat on the UK offshore wind power segment - despite the subsidy cuts implemented on the onshore wind, solar and biomass sectors since 2015. The sector will be a key source of power generation growth in the UK over the coming decade, as a hiatus in investment in the conventional power sector, coupled with nuclear closures, squeeze electricity margins in the country. Furthermore, capital intensive offshore wind projects will be key to attracting infrastructure investment post-Brexit, with companies such as Orsted (formerly Dong Energy) staying committed to the market.

Highlighting the continued government support for the sector, we stress that offshore wind is the only established technology included in the UK's contracts-for-difference (CfD) competitive tenders. The UK Department of Business and Energy and Industrial Strategy (BEIS) announced in September 2017 that it had awarded a total of 3,196MW to offshore wind projects in the country's second CfD auction. The winning bids outperformed cost reduction expectations - with the lowest submitted bid amounting to GBP57.5/MWh for project commissioning in 2022/23, substantially below the pre-determined GBP100/MWh bid ceiling. These cost dynamics will support continued growth in the segment and we therefore forecast total wind capacity in the UK to grow by an annual average of 7% between 2017 and 2026.

Market To Watch

Ones to watch are those markets with significant growth potential for wind power and where there is scope for the investment environment improving. As such, we expect an uptick in investor interest in the market and capacity deployment to increase, albeit from a low base and potentially outside of our 10-year forecast period.

Global Wind Power: Market To Watch
Egypt - Wind Power Capacity, MW (LHS) & y-o-y % Growth
f = BMI forecast. Source: EIA, BMI
  • Egypt: Risk Mitigation Key To Unlocking Substantial Potential

We highlight Egypt as a market to watch over the coming quarters, on the back of a number of MoUs signed with prominent wind power developers and the strong power sector fundamentals in the market - in the form of pent-up power demand and favourable wind conditions. That said, we remain cautious on Egypt fulfilling its potential in the near-to-medium term, due to a plethora of risks facing investors. For example, Egypt ruled that dispute arbitration would occur in domestic courts for the first stage of its feed-in-tariff scheme, which led developers to hold off developing their projects. Furthermore, wind turbine manufacturers such as Vestas, Siemens-Gamesa and General Electric have all been cautious to act on their MoUs in the wind sector. For example, Siemens offered to develop its 2GW of wind projects at a price of EUR53/MWh in May 2017, which the Ministry of Electricity deemed too expensive and therefore requested cost reductions from Siemens. We believe this decision stems from Toyota and Orascom's aim to deliver 250MW of wind capacity by the Gulf of Suez for EUR42/MWh under a 25-year power purchase agreement.

The gap between the expectations of project developers and the government will remain a pertinent hurdle for growth in the renewables sector picking up substantially, and highlights the country's unfavourable risk environment. We therefore only forecast wind capacity to make up about 3% of total installed capacity in Egypt by 2026. Regulatory certainty will be vital if Egypt is to accelerate this growth and tap into the wind power potential in the country, by extension converting investor interest into project development and capacity growth acceleration.