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January 28, 2019

Investment – and investor interest – in the UK’s renewable energy sector is set to remain strong in the next 12 months despite uncertainty as regulations continues to evolve rapidly in line with the drive towards a low carbon economy.

2019 is expected to be the ninth consecutive year where global investment volumes remain firmly above the US$200 billion mark, despite a combination of headwinds including the prospect of further withdrawals of renewable energy subsidies and increasing dependence upon market prices, not to mention global trade tariff disputes and Brexit.

Change – both regulatory and technological – is on the horizon this year, says Dane Wilkins, Head of Energy and Infrastructure at JLL.

“We do not see any slowdown in the amount of capital targeting renewable energy,” says Wilkins. “But on the back of an eventful 2018 on the regulatory front, investors, developers and users have much to consider as we enter 2019 and move closer to the type of low carbon, decentralised and digital economy envisaged by economist Dieter Helm.”

Here are six key areas to watch in the renewable energy sector in 2019:

Global renewable energy capacity to grow by 200GW

Continued investment in utility-scale solar energy and an expanding offshore wind sector will drive momentum in the transition to renewables. The growth of renewable energy in both mature and emerging markets, Wilkins says, will take overall renewable energy capacity to over 200GW this year.

More Asia investors enter the market

M&A activity in European offshore wind will continue, driven mainly by Asian investors who are keen to gain access to experience in the sector.

“Asian investors are fully aware of Europe’s leading position in offshore wind generation,” says Wilkins. “The region provides them with valuable insight which they need back home. Aggressive decarbonisation in Asia, with Japan leading the way, makes the more mature European market a major draw.”

As well as Asian investors, at least one more major oil company is expected to enter the offshore renewable energy market in 2019, further proof of the sector’s appeal.

Investors adapt to a post-subsidy world

The renewable energy sector’s move away from government subsidies will continue. Typically, investors have coped with the fact that subsidies have stopped by “either living with merchant risk and lower returns or moving on to countries where these subsidies are still in play,” Wilkins says. “Renewable energy is now getting closer to the point where government subsidies are simply no longer required.”

That said, mature markets with such support mechanisms, which provide greater revenue certainty, remain in high demand. The UK government’s Contract for Difference (CfD) auctions are likely to attract a number of bidders keen to take advantage of the top-up mechanism. Over 6GW of offshore wind sites are chasing the security of the CfDs, which would underpin any loss of revenue from energy for 15 years. “At a time of lower returns and increased competition, we will undoubtedly see strong bidding competition for the UK’s CfDs,” says Wilkins.

With the next auction planned for May, further CfD auctions are expected to run well into the next decade, as the UK aims to double its offshore wind capacity from its current level of 7GW.

The Capacity Market mechanism makes a comeback

Reinstatement of the UK Capacity Market mechanism, which guarantees the lights are kept on, is likely in 2019, after a surprise EU court ruling in late 2018 resulted in its suspension. As a result of its return, transaction levels for flexible energy generation and storage are expected to rebound strongly.

“The reversal of this ban – which we expect at some point in 2019 should unlock more than £500 million of committed capital from energy investors and developers with investment decisions currently on hold,” says Wilkins.

Investors look to diversify

Diversification of energy portfolios in the UK will continue to be an important theme for investors in 2019, Wilkins says, driven by spreads between clean energy and gas prices.

“We envisage increased price volatility and a continuation of the cannibalization effect where one energy source outprices another,” he says. “So there’s strong merit in diversifying energy portfolios.”

Electric vehicle growth accelerates

The UK is set for increased activity in electric vehicle charging in 2019, with the launch year of a £400 million government-backed EV charging fund driving momentum in 2019. Wilkins expects at least five capital raises for funds targeting EV infrastructure in the year, which will provide a big boost for the nascent sector. This in turn will support rising plug-in EV sales in the UK, expected to reach 10,000 a month this year in line with JLL predictions.

Looking ahead

Amid a growing appetite for renewable energy, continued investment in Europe – despite the withdrawal of subsidies – will ensure the region reaches its 20 percent target by 2020, says Wilkins.

“We’re definitely seeing signs that the market is evolving with a greater understanding of regulatory and merchant risk,” concludes Wilkins.

“We’re building momentum in the transition to zero-subsidy renewables; in 2019 we anticipate over 2GW of projects will come online without subsidies in Europe alone.”

Click to read how real estate finance is going green.

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Dane Wilkins

Head of Energy and Infrastructure at JLL.

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