By Fitch Solutions
- We expect the offshore wind power market will increase its share within the wind sector following increased investments and expansion into new markets in 2021.
- While we anticipate a surge in global capacity growth as the sector begins to recover from the Covid-19 pandemic, we expect to see a split between emerging and developed markets over 2021 as markets with access to capital look to stimulate power sector growth.
- We also believe that the return of the US to the global stage for action on climate change, in combination with a more stringent regulatory landscape within the US, will impact the power sector – both domestically and abroad. The non-hydro renewables sector is set to get a boost while the thermal-fired power sector, particularly coal, will face increased pressures.
- Finally, we expect to see a growing number of investments in hydrogen production in 2021, particularly in blue and green hydrogen projects, as climate-related targets drive plans to develop commercial-scale capacity.
Power and renewables – Key themes 2021
|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||Renewables Developers, Wind Turbine Manufacturers||Thermal Power Operators|
|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||Power Developers, Non-Hydro Renewables Developers, Equipment Providers and Manufacturers||Markets without access to vaccine, or are unable to control the outbreak|
|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||Power sectors in markets with access to capital, Private sector developers||Power sector in markets with limited access to capital|
|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||Non-hydro renewables developers, emerging markets- particularly in Central and South America||Coal-fired power sector|
|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 CCS 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||Industrial and commercial hydrogen consumers, non-hydropower renewables investors, electrolyser manufacturers, gas-handling infrastructure and logistics industries||Hydrocarbon fuel suppliers, grey hydrogen industry|
Offshore wind expansion into new markets
Offshore wind projects will gain a greater share of the total wind power market globally in 2021, driven by investments into markets where the industry is still in its early stages. Of the 161.9GW of wind power capacity recorded (either in the pre-construction phase or under construction) in our Key Projects Database (KPD), over 66GW is from offshore wind projects. While the Western Europe region will remain the largest market for offshore wind, we expect that countries outside of the region will help drive growth from 2021 onwards. Markets that stand out in this regard in our KPD are the United States (9.1GW), Taiwan (5GW), South Korea (3.4GW) and Poland (2.5GW).
In the Asia region, we highlight Japan as a key market to watch. While only having a project pipeline of 1.4GW in our KPD, in November 2020 the Japanese government launched an auction for offshore wind projects which points to strong growth potential for the sector in the country.
Outside of Asia, Brazil is another key market to watch, as there has been growing momentum for the development of the country’s offshore sector. Major oil & gas firms present in the country such as Shell, Equinor and Repsol, are already involved in offshore wind power projects in other markets and we expect them to look toward making similar investments in Brazil. As of end-2020, Brazil has over 16GW of offshore capacity planned.
Global Capacity Resurgence From Covid-19 Recovery
We expect to see a strong resurgence in power capacity and generation growth across 2021, as markets gradually recover from the Covid-19 pandemic. Across 2020, supply chain disruptions, financial headwinds and the interruption of business activity has resulted in significant delays across many projects. These projects will likely be accelerated over the coming quarters, and feed into our growth outlook for 2021, particularly for those with commercial operation deadlines that will affect the amount of subsidies received. While most markets have granted some form of deadline extension, many developers have claimed that it is insufficient to overcome the challenges their projects face, particularly for projects that relied heavily on international supply chains and foreign labour. As such, we expect many projects to be fast-tracked as economies gradually open. This is also supported by ongoing fiscal stimulus efforts across many governments to use infrastructure growth as a way to stimulate economic recovery from the pandemic. In addition, expansionary monetary policies and the era of lower interest rates could also stimulate more infrastructure financing from private investors due to cheap and available credit.
In particular, we expect the non-hydro renewables sector to outperform, as the pandemic has increased focus around sustainability and concerns about climate change. Several markets are explicitly focused on a ‘green recovery’, and will look to renewables development as a key strategy to support their economies going forward. For example, the European Union’s Green Deal and various funding mechanisms are set to support the green, low-carbon transition in the power sector, with a strong focus for renewables growth in the bloc. We note that the non-hydro renewables sector has also remained largely resilient across 2020, with an estimated net capacity addition of over 135GW globally. This is significantly higher than any other fuel type, which is testament to the positive fundamentals of the sector.
Short Term Access To Capital To Cause Power Sector Growth Divergence Between DMs and EMs
We expect to see growing divergence between the ability of markets to invest in power sector capacity growth over the coming year as a result of the ongoing economic impacts of the Covid-19 pandemic, which has led to increased levels of public borrowing and widening government debt. Markets with access to capital will be able to progress with development plans or provide fiscal stimulus to the sector, while those without will see more muted capacity growth plans in the near term.
Deteriorating economic conditions across markets will negatively impact power sector investment over the short-to-medium term. This is visible in the rising national debt levels as state borrowing and spending will most likely be prioritised in the sectors directly dealing with the Covid-19 pandemic such as healthcare and social security. The weaker fiscal position of emerging markets poses a significant downside risk to the completion of government-funded projects. In contrast, in developed markets with more access to capital, there will be fiscal stimulus boosting the power sector (with a particular focus on the economic benefits from established technologies).
We expect that the private sector will take a more leading role in delivering power sector growth while also becoming the driving force behind renewables development. Public-private sector partnerships will play a key role in realising power sector plans plans, particularly in markets with a suitable open and competitive landscape compared to those with a highly-centralised, government-led power sector. This, however, will also likely compound the split between developed and emerging markets.
US Return To Global Stage For Climate Change Action To Boost Renewables, Present Risks To Thermal Power Development
We expect significant shifts in federal government policy in the US related to the power sector under the administration of President-elect Joe Biden, with the non-hydro renewables sector set to receive a boost while the thermal-fired power sector will face increased pressure – both domestically and abroad. Reducing emissions within the power sector is set to be a key focus of Biden’s administration, particularly as acting on climate change will be a central pillar of policy. While any legislative proposals are likely to face considerable obstacles, we expect that the Biden administration will impact the power sector considerably beginning in 2021 – both in the US and globally – via changes in policy direction through executive orders and within federal departments, agencies, and international diplomacy.
In regards to the US power sector, actions will include restoring environmental protections undone by the Trump administration and enacting more stringent emissions regulations, expanding the lease for renewables on public lands and waters, and utilizing appointments of leadership to agencies to support a more climate-focused agenda. 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 is likely to result in a substantial boost to our non-hydro renewables outlook. While wind and solar will drive growth within the sector, we also highlight our expectation for increased opportunities in more nascent industries including offshore wind, hydrogen, and battery storage. This will benefit investors, developers, and manufacturers throughout the global non-hydro renewable sector’s supply chain. In contrast, a Biden presidency will result in a weakened policy environment and increased pressure for the thermal sector, with the coal-fired power sector set to be most greatly impacted.
The US is also set to re-enter the global stage for action on climate change, which we expect will begin to impact power sector development globally. President-elect Biden has pledged to rejoin the Paris Climate Agreement on Day 1 of his presidency, in January 2021, via executive action. Furthermore, the Biden administration aims to take global climate-related actions far beyond rejoining the Paris Agreement, which we expect will provide an added boost to global renewables growth while increasing pressure and presenting risks to thermal power growth around the world. Of the significant proposed international climate policy actions which could begin to impact power sector developments globally in 2021 and beyond, we highlight:
- Working with other nations to hold China accountable to high environmental standards in its Belt and Road Initiative, including curbing the financing of billions of dollars of thermal power projects in Asia and other regions.
- Ending the financing of carbon-intensive energy projects, primarily coal-fired power plants, within the Overseas Private Investment Corporation (OPIC), the Export-Import Bank, and the US International Development Finance Corporation.
We highlight that the regions of Central and South America are set to be a primary focus of US government efforts to boost non-hydro renewables and electricity transmission infrastructure abroad – presenting upside risks to our near- to medium-term forecasts. Joe Biden’s Climate Plan includes aims to strengthen collaboration in the Americas in order to achieve a higher level of clean energy integration and more robust transmission and distribution infrastructure. In particular, his plans express interest in promoting a more integrated energy grid, from Mexico through Central America and Colombia, as well as promoting transitions to clean energy in combination with climate change resilience strategies within the Northern Triangle and Caribbean regions. The two regions are particularly vulnerable to rising sea levels and more severe weather patterns including hurricanes and sustained droughts – which can impact energy security.
Green and blue hydrogen investment uptake
We expect to see growing investment in hydrogen production in 2021, with an increase in the number of hydrogen production projects announced over the year. Increasingly stringent emissions laws have driven plans to develop commercial-scale hydrogen production capacity. Overall, we expect to see a clear increase in the number of blue and green hydrogen projects in our key projects database over 2021.
Green Hydrogen: Green hydrogen is produced through the process of electrolysis using renewable power sources such as solar or wind, with net-zero carbon emissions. In past years, the vast amount of electricity required to produce hydrogen through electrolysis has made it prohibitively expensive, making up roughly 75% of total production costs. As a result, we highlight the downward trend in renewables costs as a key tenet of the hydrogen industry’s projected growth, strengthening the business case for investment in electrolyser facilities. The robust growth of non-hydropower renewables and announcement of plans to ban carbon-based automotive fuels in major metropolitan areas in Western Europe over recent years has also increased the scope for green hydrogen production in these regions. Added to that, electrolyses’ scalability and ease of deployment can allow for industrial hydrogen consumers to develop near-site green hydrogen production capacity with renewables PPAs, allowing for better hydrogen price control. Thus, we foresee a growing pipeline of green hydrogen projects emerging over 2021, traceable by the announcement of new electrolyser projects.
Blue Hydrogen: Blue hydrogen is produced from fossil fuels, the predominant source being natural gas. Blue hydrogen has two distinct advantages over green hydrogen, those being lower electricity demand and the inclusion of carbon capture and storage (CSS), which distinguishes blue (low carbon) hydrogen from grey hydrogen. While it eliminates the need for robust renewables growth as a pre-requisite; the high capital and operational costs, necessity for reliable natural gas supplies, and the relatively rare geological conditions necessary for CSS make blue hydrogen comparatively less accessible on a global scale than green hydrogen. Blue hydrogen is considered ‘low-emitting’ meaning that its production is not completely without carbon emissions, though it does fall well within emissions limits in most states globally. Added to that, its lower cost compared to green hydrogen may offer markets a way to control initial hydrogen costs as the industry grows to a point where economies of scale make green hydrogen more cost competitive. With this, we expect to see a rising number of blue hydrogen production projects announced over 2021, as the industry picks up momentum.
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. The original article can be accessed by clicking here