REGlobal presents an extract from the Global Summary Power & Renewables by Fitch Solutions which highlights the offshore wind potential of the Black Sea, challenges in expanding South Africa’s power capacity, improving growth prospects for solar power in Malaysia and continued momentum in Chile’s renewables sector.
Global: Potential for offshore wind to progress in the Black Sea
While the Black Sea has some of the world’s best offshore wind resource potential, there has so far been limited project development with only one Romanian-led project under development. A report from International Finance Corporation (IFC) and World Bank outlined that the Black Sea holds over 500GW of potential offshore wind capacity. While this estimate does not factor in the many complex issues surrounding offshore wind planning and development, it does indicate that the region holds significant investor opportunity. The Black Sea is bordered by Greece, Bulgaria, Romania, Ukraine, Russia, Georgia and Turkey, many of whom have the engineering and infrastructure development capabilities to deliver such complex projects. While development has thus far been sluggish, there could be significant momentum with the EU’s Modernisation Fund which offers support for the development of offshore renewable energy in Bulgaria and Romania.
We currently do not expect any offshore wind developments to be realised in the Black Sea in our forecast period of 2021 to 2030. Within our key projects database, there is only one offshore wind farm in the planning phase within the region – a 600MW offshore wind project being targeted by Romanian power utility Hidroelectrica. However, given the project’s complexity and the quality of the existing infrastructure in place in Romania, the project’s success remains in question. That said, Romania has developed a large number of non-hydro renewable projects in the past and has the capability onshore. We note that 2010 saw the start of Romania’s renewable growth, with wind power capacity rising from 0GW to 3.2GW in 2020 and solar capacity expanding from 0GW to 1.5GW over the same time period. Many of these projects had established European or global partners with good development experience. We currently expect this onshore progress to lead to a rise in capacity of an additional 0.8GW of wind and just under 1GW of solar by the end of the decade with upside risks developing in both sectors.
For the offshore project, there is strong support from the Romanian government. Among these we note that over Q420 the senate approving a bill formalising the processes for licensing and regulating offshore wind operations. The bill also formalises the subsidy process which will follow a Contracts for Difference (CfD) format. The offshore project is said to be partly financed by Hidroelectrica itself and via European Union funding, which brings in an element of project de-risking and a new level of scrutiny. Furthermore, Hidroelectrica have stated that they might wish to partner by teaming up with industry players from other countries and develop projects co-funded by EU schemes. If they bring in an established entity to take on a part of the process, which has happened in many onshore wind farm cases, it would increase the chance that it could be realized by the end of the decade – creating stronger upside risks to our forecasts.
Limited progress from other regional markets
Other regional markets, including Turkey and the Ukraine, have been looking to tap into the offshore sector but have seen limited levels of progress so far. Turkey launched a 1.2GW offshore wind tender in 2018 – with the Black Sea as one potential area for development – although it ultimately was indefinitely suspended because of low interest. Over Q419 it was reported that levels of cooperative development between Denmark and Turkey were taking place. Seven leading Danish wind supply chain companies held discussions business development meetings with Turkish companies to develop a route to cooperative partnerships. However, we note that a significant deteriorating shift in EU-Turkish relationships over the past year has and will continue to weigh on the opportunities for cooperation.
That said, Turkey’s non-hydro renewables sector will grow robustly over the decade, with the wind and solar sectors set to lead growth. We forecast that total non-hydropower renewables capacity will more than double from 17.9GW in end-2020 to 39.8GW in 2030, with non-hydro renewables generation set to reach 90.7TWh by the end of the decade. Our strong growth outlook is supported by a growing project pipeline, continued government support for developing the sector and increasing domestic manufacturing capacity. This rapidly sector maturity and increasing drive for renewables will continue to lend support to the development of the offshore segment.
The Ukraine has seen a lot of renewable energy project activity recently, with about 2GW’s of onshore wind in the market’s project pipeline which is significant for the region. That said, we have not seen much support for offshore wind development in Ukraine outside of interest before the Crimea crisis with Vindkraft Ukraina LLC aiming to build an 18MW offshore wind pilot project in 2012/2013. We believe that there could be an elevated risk to offshore wind development in the Ukrainian waters owing to the Crimea conflict, although large-scale open aggression outside the conflict zone remains unlikely. However, our Country Risk team has flagged that we have also seen tensions in recent years between Russia and Ukraine in the Kerch Strait, around the Crimean peninsula. The team has also noted that there is a fair amount of semi-dormant tensions in the Black Sea region. Notably, Crimea remains unresolved. Furthermore, while Russia and Turkey have reasonably good relations, they have supported opposite sides in a number of regional proxy conflicts and are geopolitical competitors. It is important to note that the Turkish Straits are supposed to abide by the 1936 Montreux Convention, but Turkey has the right to close the Straits in times of conflict. Given the limited access to the sea and the undeveloped nature of offshore wind facilities/operations having access via the strait is of absolute importance.
Africa: South Africa power capacity to underperform due to government policy delays
We expect that South Africa’s installed electricity capacity will continue to underperform over our 10-year forecast period as a result of policy implementation delays. With delays in the approval of regulations allowing municipalities to purchase power from independent power producers (IPPs) and firms to self-generate, power security will remain an issue as state-owned utility Eskom’s already-strained capacity remains the primary source of electricity in the market. Following the annual ‘State of The Nation’ (SONA) 2020 address in February, we wrote that the new stated government measures hold significant upside to growth in non-hydropower renewables in the country, particularly for private sector developers. However, given a lack of progress later that year we wrote that policy uncertainty will start to weigh on investor confidence. Our view has been underlined by the SONA 2021 address, which essentially restated the goals outlined the year before.
In the SONA 2020 address, the following goals were laid out for the South African power sector:
- Implementing the Integrated Resource Plan (IRP) 2019, which entails the development of additional power capacity from virtually all technologies, especially procuring electricity from projects that can supply power within three to 12 months of being approved.
- Private companies will be allowed to generate their own electricity, no longer being limited to a 1MW cap.
- Launching the Risk Management Independent Power Producer Procurement Programme (RMIPPPP) to purchase emergency power from projects (of any technology type) that can start operations within 12 months of being approved.
- A new bidding window for IPPs under the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
- Allowing municipalities to purchase their own electricity supply from IPPs.
- The continuation of load shedding in order for Eskom to be able to undertake maintenance on its existing capacity.
At the time of writing, there has been little progress on these goals. According to news reports in February, since the release of the IRP in 2019, the South African government has not procured any new electricity capacity. While the Department of Mineral Resources and Energy (DMRE) indicated that it would launch the new bidding window for the REIPPPP in December 2020, the new rounds remain unopened. Similarly, plans to lift the self-generation cap and allowing municipalities to purchase electricity directly from IPPs are still not implemented.
In February 2021, the CEO of Eskom stated that he supports the plan to lift the generation cap and open up avenues for distributed generation in order to reduce the burden on the utility itself as it could potentially unlock up to 5GW of new capacity. This will be done through distributed generation, with multiple private generators connecting to the grid and engaging in offtake agreements with other companies, mines, farms or smelters. We expect that load shedding will remain a feature of the South African power sector over at least the medium-term if government policy implementation remains delayed. This is because it will limit the amount of new capacity being brought online while Eskom undertakes maintenance on its existing power capacity.
While South Africa still boasts the largest installed electricity capacity in the SSA region by far and has relatively lower Industry Risks, we expect that there will be increasing wariness from investors looking to enter the South African power sector. With previous delays to signing IPP contracts as well as strong pushback by unions, we expect that the DMRE’s slow implementation of policy goals will decrease risk appetite for investors. The plan for Eskom to procure 6.8GW of electricity from IPPs through the REIPPPP, as well as a further 2GW through the RMIPPPP, does pose an upside risk to our outlook. However, our forecasts remain bearish for new growth and we expect South Africa to remain largely reliant on coal-fired power given repeated delays in signing contracts and pushing through and enforcing regulations.
Asia: Growth prospects for solar power in Malaysia improving
We have revised up our solar forecasts for Malaysia, as we continue to see an increase in already significant investor interest and project announcements. While we expect some near-term headwinds to weigh on growth in 2020, stemming from the Covid-19 pandemic and ongoing political uncertainties, we expect the sector to recover from 2021 and to see stronger growth over the coming years. We now expect solar capacity to reach over 4GW by 2030, from an estimated 996MW as of end-2020.
Our forecast revision stems largely from the continuation and success of solar tenders in Malaysia. As we initially expected, the latest round of solar auctions, launched in May 2020, still managed to attract interest despite the Covid-19 pandemic. As of March 2021, the government has now shortlisted 30 winning bidders, with a total combined capacity of 823MW. These projects are expected to enter into commercial operations in 2022 and 2023. Winning bid prices have also continued to register a slight decline from the previous auction and ranged from as low as MYR0.1850/kWh for 10-30MW projects and MYR0.1768/kWh to MYR0.1970/kWh for 30-50MW projects. These prices are already competitive with gas-fired power in Malaysia. Given that these tenders have continued to register ongoing success, we believe that the government will continue to launch more solar tenders over the coming years, possibly with larger target capacities, particularly as it seeks to revitalise the economy following the effects of the pandemic.
Beyond solar tenders, the Sultan of Malaysia’s Johor State has also announced the development of a 450MW Sultan Ibrahim Solar Park in Pengerang, which will be the largest in the region upon fruition. The ground-breaking ceremony for the project is expected to be held on March 23 2021, and is targeted to be commissioned in 2023. The project will support the 2030 Johor Sustainable Development Plan, and mark its first investment into large-scale renewable energy. We are optimistic on this project given the direct support of the Sultan and ongoing project progress and have also included it into our forecasts to come online in 2023.
Stronger regulatory support and improved financing into the sector further underlines our view. The Malaysian government’s commitment to the domestic renewables sector has strengthened in recent years and a number of regulations and financing incentives have been put in place to encourage investment into the sector. As part of the Budget for 2021, the Green Investment Tax Allowance and Green Income Tax Exemption incentives will be extended to 2025, based on the expanded qualifying list of green assets from last year. Concurrently, the Green Technology Financing Scheme 3.0 will be guaranteed by Danajamin at MYR2bn (USD485mn).
The government is also looking to enhance green energy trading with the private sector while planning to launch a Renewable Energy Transition Roadmap 2035. This forms part of the government’s aim to boost the country’s share of renewables in the power mix to 20% by 2025. This is in line with its Generation Development Plan 2020-2030, where they intend to build more renewables capacity to replace retiring thermal power plants. We believe that the roadmap will contain provisions and more specific actions to accelerate renewables growth and may include strategies such as peer-to-peer electricity trading or transitioning towards a mandatory renewable energy certificate market.
Latin America: Continued momentum in Chile’s renewables sector
We maintain a strong long-term outlook for Chile’s non-hydro renewables sector, with the wind and solar power sub- sectors set to drive growth. Chile continues to rank as one of the most rapidly expanding non-hydropower renewables markets in Latin America, in which we forecast the market to add 11.9 gigawatts (GW) of new renewables capacity between 2021 and 2030. Simultaniously, non-hydro renewables generation is forecast to grow 132.4% to reach 47 terawatt hours (TWh) in 2030 – accounting for nearly half of Chile’s total electricity generation mix by the beginning of the next decade. The wind and solar power sectors are set to drive growth with 5.2GW and 6.6GW in capacity additions over our 10-year forecast period respectively.
Supporting our outlook, we highlight a number of factors which will persist over the coming years and continue to encourage growth. In addition to Chile’s abundant untapped wind and solar resources, our bullish forecast for electricity demand growth through 2030, and expectations for further declines in renewables project development, we highlight:
- Favourable energy policy for renewables development: Chile’s energy policy landscape remains highly favourable towards the development of non-hydro renewables projects. Most notably is the Chilean government’s plan to phase out coal- fired power by 2040, which provides long-term transparency to the market and boost the non-hydro renewables outlook. The phase-out continues to progress with two of the Chile’s remaining coal power producers announcing in December 2020 early closures on three generating units with a cumulative capacity amounting to nearly 470MW. Enel permanently retired the 128MW first unit at its Bocamina coal-fired power station as of December 31st, 2020. This came just two days after AES Gener announced its plan to permanently and immediately close the 120MW Ventas unit 1, with the 220MW Ventas unit 2 scheduled for retirement in 2022 – two years ahead of its previous planned retirement in 2024. Furthermore, while we note elevated risks within the country in relation to the upcoming convention to rewrite the constitution, we continue to expect that the risk remains low for any major changes in policy towards the renewables sector.
- Large renewables project pipeline: Chile’s renewables project pipeline continues to expand and progress. Recently in February 2021, Grupo Ibereólica Renovables submitted an environmental impact study for a 1.2GW integrated solar pv and wind power project in the Antofagasta region. Investors in a number of other large-scale renewables projects submitted environmental impact statements for evaluation by the environmental evaluation service since November 2020, including Engie Energía Chile, Ibereolica, Activos en Renta Grupo Corporativo, Generadora y Distribuidora de Energía Oxum. With more than 3GW in capacity between these projects alone, we note that these developments support our bullish outlook on the country’s continuing renewables sector growth over the next decade.
- Government ambitions to become green hydrogen exporter: In November 2020, Chile’s Ministry of Energy released its National Green Hydrogen Strategy Report that foresees the market ramping up domestic green hydrogen production by 2025 and becoming a global exporter of the clean fuel from 2030 onwards. A robust growth outlook in non-hydro renewables capacity and generation, in combination with expected cost declines, will be key for the government to achieve its plans. As such, we expect that the green hydrogen industry will open opportunities for wind and solar power project development beyond what can be utilitised to meet electricity demand and electricity exports. Companies which are currently exploring green hydrogen projects in Chile include renewables developers Enel Green Power and Engie, Chilean power company AME, Chilean blasting technology firm Enaex, and mining research organization Mining3. We also note the formation of a handful of relationships between Chile and other nations in regard to the development and trade of green hydrogen. On February 15, 2021, Chile signed a memorandum of understanding (MoU) with Singapore over cooperation on green hydrogen, including financing and supply chain development. Also in February, it was reported that Chile plans to sign a similar MoU with the Gulf Cooperation Council.
- Improving transmission and distribution infrastructure: The Chilean government continues to work on improving the market’s transmission and distribution infrastructure in order to reduce oversupply challenges in certain parts of the grid as well as decrease risks for future bottlenecks from the significant renewables development. In January 2021, Chile’s National Grid Coordinator CEN released its Transmission Expansion Proposal 2021 Report which identifies 15 projects for the national transmission system SEN and 113 smaller regional projects, totalling USD717mn in investments, which should be the primary focus this year. Furthermore, a tender for the USD1.3bn 1,500km HVDC Kimal-Lo Aguirre transmission line was launched in October 2020 and is expected to be completed this year. The project will connect the Antofagasta region in northern Chile, a key development region for non-hydro renewables projects, to demand nodes near Santiago in the centre of the country, further improving the market’s north-south interconnections which will be key to supporting robust renewables growth.
We also highlight the market’s upcoming power supply auction, which presents upside risks to our wind and solar power forecasts. In December 2020 Chile’s National Energy Commission CNE published rules for its 2020 tender which has been postponed twice. Final bidding will take place in May 2021, with the aim to award 2,310GWh in electricity supply through 15-year power purchase agreements scheduled to begin in 2026. The terms of these contracts make provision for suppliers to voluntarily extend the supply contract period by up to three years in the event that the base supply amount is not met within the standard 15 years, improving income security for suppliers. The contract also allows for suppliers to benefit from any future changes in standard CNE contract terms at auction, in the event that they are eligible under said auction conditions. While Chile’s power auction structure is officially technology-neutral, it often ends up favouring solar and wind technology. Finally, the supply auction also allows for the inclusion of storage-based electricity supply not paired directly to its own generation source, encouraging investment in utility-scale storage.
While these fundamental supportive factors have resulted in the country’s renewables project pipeline advancing even amidst the ongoing coronavirus pandemic, we note that risks for delays and political uncertainty will persist over the coming quarters. There are a number of highly consequential events on the Chilean political calendar in H221 – namely a convention to re-write Chile’s constitution opening in June 2021 and a presidential election on November 21 – which will continue to result in elevated uncertainty over the future policy direction in what has traditionally been viewed as Latin America’s most business-friendly market. That said, our core view remains that the constitutional overhaul will not result in a sharp departure from Chile’s current model of free-market capitalism and representative democracy, and we continue to expect that the risk remains low for any major changes in policy towards the renewables sector. We also expect that risks for project delays will begin to decline over the coming quarters as our Country Risk team expects that the Chilean economy will rebound in the quarters ahead due to loosened public health restrictions and the rollout of a Covid-19 vaccine in H121.