By Fitch Solutions
At the mid-point of the year we assess the performance of our key themes for 2021, as outlined in December 2020. Owing to the global impacts of the ongoing Covid-19 pandemic the subject features heavily in our analysis, as does the different rates of investment recovery and the energy transition.
|Offshore Wind Expansion Into New Markets||The share of offshore wind projects in the global wind power market will increase as there is an increase in offshore wind investments outside of Western Europe.||Tenders/auctions, policy and project announcements||Yes|
|Global Capacity Resurgence From Covid-19 Recovery||Projects that were delayed across 2020 will be accelerated in 2021, particularly for those with tight commercial operation deadlines. Ongoing fiscal stimulus support for infrastructure will further support growth. We expect non-hydro renewables to be the key outperforming subsector, and lead the global capacity resurgence.||Installed capacity, tender launches, subscription rates, stimulus announcements||Yes|
|Short Term Access To Capital To Cause Power Sector Growth Divergence Between DMs and EMs||We expect to see a split in capacity growth to develop between emerging and developed over 2021 as markets with access to capital look to stimulate power sector growth. At the same time we expect to see an increasing reliance on the private sector in liberalised markets with strong industrial enterprise.||Forecast revisions, macro economic indicators, capacity growth trajectory||Yes|
|US Policy Shift Back To Global Climate Stage||The return of the US to the global stage for action on climate change under president-elect Joe Biden’s administration will boost non-hydro renewables development and increase pressure on carbon-intensive thermal power project developments, such as coal-fired power plants. The impacts of a more stringent regulatory landscape will impact the US power sector, while increased focus on international climate action will impact power markets around the world, beginning in 2021.||Policy and funding announcements related to climate change and international power project developments||Yes|
|Green And Blue Hydrogen Investment To Accelerate||The emerging low-carbon hydrogen industry will attract increasing investment over 2021, as markets seek energy sector diversity in line with increasingly stringent emissions restrictions. Falling renewables costs and investment into new carbon capture and storage initiatives will enable commercially viable green and blue hydrogen production, which we expect will drive an increase in such hydrogen production projects announced over 2021.||New green and blue hydrogen project announcements||Yes|
|SOURCE: FITCH SOLUTIONS|
Offshore Wind Expansion Into New Markets
In our Key Themes piece for 2021, we highlighted that offshore wind will gain a greater share of the global wind power market. As can be seen from the chart below, we compare the when comparing data from our Key Projects Database (KPD) in December 2020 to that of our KPD in July 2021, the share of offshore wind capacity in global wind power projects has grown from 41% to over 51%.
The three largest markets in our KPD for offshore wind development, both in terms of projects under construction and in pre-construction phases, are:
- United Kingdom – 34.1GW
- South Korea – 21.8GW
- United States – 21.5GW
In particular we highlight the US, for which we have made upward revisions to our forecasts as we have a more bullish view on the market’s offshore wind power segment. We further highlight that increasing support for the sector at the federal level under the Biden administration leads us to expect that sizeable upward revisions to our forecasts are likely over the coming years, as the government plans to boost the country’s offshore wind power capacity to 30GW by 2030.
Although our KPD data does under represent projects in markets such as China, the KPD still highlights the increased global share of offshore wind power going forward. We forecast that China’s total wind power capacity will grow by 323GW over the next decade, which is larger than the rest of the world’s wind growth forecast combined and we highlight upside risks given the potential unlocking of under-utilised generation and development of the offshore sub-sector.
Offshore Share Of Global Wind Power Sector Growing
Global Capacity Resurgence From Covid-19 Recovery
In line with our initial expectations, we have seen a broad recovery across most markets globally and construction momentum for power projects have started to pick up. These projects will likely continue to be accelerated over the coming quarters, to prevent extensive delays and weighing on financial returns. We have also seen several markets raise their public infrastructure spending budgets during the first half of 2021, with renewable projects being featured as a key investment area. For example, as part of the United State’s American Jobs Plan announced in March 2021, USD100bn has been earmarked for power infrastructure, with a particular focus for climate-related projects. Most states across the European Union (EU) have also submitted their Recovery and Resilience Plans, with a heavy feature for renewables development as part of the EU’s recovery fund.
That said, we remain cautious about the extent of economic recovery in certain markets relative to our initial expectations, especially in Asia. Many economies in Asia – including markets that had previously managed to contain the outbreak relatively well – have seen at least one resurgence of Covid-19 infections over recent months, with renewed containment measures weighing on economic activity. These recent surges have been driven largely by the Delta variant, first discovered in India, which is more infectious and deadly. Many markets have also registered slow progress with their vaccination programs, especially emerging markets that are dependent on the COVAX scheme for vaccine supply. These could pose persistent near-term headwinds to power sector investment. In particular, projects that are state-funded will remain under heavy pressure as the government is likely to face strained fiscal capacities, especially if they have to reallocate funds away for healthcare again. While we have yet to see an outright disruption to power projects, unlike last year, we note that these developments will pose downside risks to our outlook for the second half of this year.
Renewables Leading Economic & Sector Recovery
Short Term Access To Capital To Cause Power Sector Growth Divergence Between DMs and EMs
Our country research team’s macro-economic research has shown that the public debt-to-GDP ratio in emerging markets (EMs) has risen significantly over the past 1.5 years in response to the covid-19 pandemic. This indicates that the level of borrowing in these markets has become more strained, as countries look to take on higher debt burdens. While we expect borrowing will continue to increase in developed markets (DMs), the burden to their economies will be less extreme or sudden than that of EMs. This assessment plays into our original views for key themes in 2021, where we expected developed markets to struggle with rising debt loads.
Emerging Markets To See Greater Wight Of Public Borrowing
As markets look to spend public funding on healthcare programs and internal welfare in response to the pandemic, large scale borrowing to finance power sector projects will remain a challenge. What we have observed in the power sector is a partial alignment with our initial views that net power sector capacity would uniformly drop over 2020 and recover over 2021, with DMs far outperforming.
What we have seen is that DMs saw a softer decline in power sector investment over 2020 against our previous outlook, followed by a sharper than expected recovery over 2021. We expect DMs with more access to capital will see a surge in growth over the remainder of 2021, owing to fiscal stimulus and project backlogs boosting power sector growth. In contrast EMs saw strong growth over 2020 followed by a more gradual decline expected over 2021. We highlight that this goes against our initial expectations for the year, and that these trends could be attributed to a delayed reaction to covid-19 in EMs.
DMs To Recover Faster Than Previously Thought From Covid-19-Induced Capacity Growth Reductions
We highlight that the UK in particular has seen extremely high levels of borrowing with one of the worst real GDP growth rates for a developed economy at -10% over 2020, although we expect a recovery to 6% year-on-year growth over 2021. Furthermore, the UK has committed to ambitions decarbonisation targets, and will therefore seek to support the renewables segment. As such, the private sector has become heavily involved in delivering the energy transition as we have previously outlined. However, we highlight that the UK has the ability to do so, with a highly competitive and liberal power sector with access to financing.
US Policy Shift Back To Global Climate Stage
Since taking office on January 20 2021, President Joseph Biden has taken significant steps towards re-establishing the US as a global leader for action on climate change, including through rejoining the Paris Agreement and hosting a Leaders Summit on Climate where he announced a new US commitment to reduce economy-wide net greenhouse gas (GHG) pollution by 50-52% from 2005 levels in 2030. Additionally, we highlight that on January 27 2021 President Biden signed the Executive Order (EO) on Tackling the Climate Crisis at Home and Abroad. While this EO establises a task force that aims to improve the government’s sustainability efforts and create a plan to achieve a carbon-pollution free electricity sector within the US by no later than 2035, it also includes actions aimed at curbing financing for carbon-intensive power projects such as coal, oil, and natural gas abroad. In particular, the order called for the government to develop a climate finance plan in regards to international funding. The US International Climate Finance Plan was released in April 2021, and includes scaling up of international climate financing for mitigation and adaptation projects as well as a scaling back in funding for carbon-intensive fossil fuel-based energy projects. These actions support our view that Biden will prioritise policies aimed at accelerating the reduction of GHG both domestically and abroad over the coming years, with international financing changes posing risks to thermal-fired power projects abroad and presenting opportunities within the non-hydro renewables sectors.
Commitment Implies Rapid Acceleration Of Emissions Reduction
Domestically, while we note that energy policy in the US is largely driven by state and local governments, added regulatory and administrative support for renewables development at the federal level provides significant upside risks to our non-hydro renewables forecasts. We highlight notable upside risk within the offshore wind sector, as the government announced in March 2021 a goal of deploying 30GW of offshore wind in the US by 2030 – a significant ramp up from the 42MW of offshore wind capacity in operation as of July 2021. Within the onshore wind and solar power sectors, we highlight interests by the government towards creating expanded direct-pay tax credits for wind, solar, and energy storage projects, which we expect will provide a significant boost to our forecasts should these be passed into law later in 2021. In contrast, the thermal-fired power sector faces increased pressure and elevated downside risks as a result of the ongoing shift in policies towards the power sector.
Green And Blue Hydrogen Investment To Accelerate
In December 2020 we highlighted our view that in 2021, we would see a marked uptake in plans to invest in the development of new hydrogen production capacity. We specifically highlighted green and blue hydrogen, expecting to see an increase in the number of projects under development in our Hydrogen Projects Database over the year. As of July 2021, this view has been confirmed, with a significant number of new projects being announced across the world.
Hydrogen Projects Nearly Triple Over H1 2021
The data in the chart above reinforces our bullish view on the industry’s planned uptake, confirming our projections outlined in our original Power and Renewables Global Key Themes for 2021 article published in December 2020. More than 100 new hydrogen projects have been announced over the past six months, and we expect this to maintain an upward trend throughout the remainder of the year. Notably, we highlight Europe as the global outperformer for both the overall number of projects in the pipeline (99), as the number of new projects announced so far in 2021 (65). The regions of Asia and North America have also stood out in this regard, with new projects also being announced in MENA and LatAm.
Further confirming our views, we note that the disproportionate growth in green hydrogen projects highlights more concentrated investment into sustainable power and hydrogen sources outlined in our original article. In the past six months, the number of green hydrogen projects has grown by 94, nearly trippling from 58 in December 2020 to 152 by July 2021. Meanwhile, 18 new blue hydrogen projects were added to the database, up from just two in December 2020. The dominance of green hydrogen projects is also reflected in total production capacity, with green hydrogen projects having the cumulative capacity to produce over 9.5 million tonnes per year, compared to the 1.5 million tonnes per year in blue hydrogen production capacity. Given its reliance on renewable electricity, we expect this significant growth in green hydrogen production capacity will drive continued growth in renewables capacity over the coming years.
This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.
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