Emerging markets have been playing an increasingly important role in the growth of the global wind industry, a trend that is expected to continue as both demand for power in general and the competitiveness of wind energy increases, making wind an attractive option in many developing economies.
The market share of emerging regions in cumulative global wind capacity rose from 5.99% in 2012 to 8.19% in 2014, according to figures from FTI Consulting. Brazil and Turkey stood out with their 1.6% and 1.2% respective contributions to the wind total last year. FTI expects emerging markets to grow to represent 12.35% of global wind capacity by 2019.
Alongside Brazil — where prospects remain strong in addition to roughly 6GW already commissioned by this spring — Mexico, Chile, Uruguay and other Latin-American markets are a focus. In Asia, where China dominates the global wind rankings with more than 100GW of installed capacity, and India comes fifth for installations, the hunt is on for new opportunities.
The same is true in Africa, where South Africa's market took off last year. Potential for growth would appear huge. The 2015 Africa Progress Panel Report notes that 621 million people in sub-Saharan Africa - or two out of three individuals — have no access to electricity. It argues policies should aim for a ten-fold increase in power generation capacity and universal access to electricity by 2030, focusing on growth in renewables to allow for low-carbon development.
"In emerging markets there's an endemic shortage of power," says Eduardo Bozo, a director in the energy team at emerging markets specialist investor Actis. "The cost of renewables has also come down enormously in the last five to seven years, making renewable-power prices competitive with thermal power without subsidies in most of these markets."
Inigo Sabater Eizaguirre, vice-president of global business development at Vestas, points to a paradox in the way the wind market first became established and its expansion in developing markets today.
"The wind industry started in Europe and the US, the markets where electricity is cheapest, and this required some support policies to develop the industry. This was effective in making us competitive. And now, when we go to developing markets where electricity tends to be more costly, wind looks extremely attractive," he says.
"Emerging countries can take advantage of technology leaps, allowing them to have tariff levels for new renewable (plants) at or below existing generation costs. Plus, they can profit from a whole universe of tested regulatory schemes to deploy the hybrid mix of instruments best suiting their financial needs," says Kai Buntrock, chief financial officer at developer Sowitec.
Sowitec conducts an in-depth internal analysis of socio-economic, political and legal indicators, resource abundance and electricity demand growth before entering a new market, where a lead time of a half-dozen years may be necessary before the first wind project is ready for construction. The developer recently set up an Asia-Pacific regional development office in Thailand, fast-tracking its entry in that country with the acquisition of two brownfield projects. It is screening east African markets and plans to enter the continent in the next 18 months.
Developing projects in emerging markets can be a painstaking process. Buntrock says potential difficulties include - but are by no means limited to - a lack of trained and experienced personnel, an incomplete regulatory and legal framework, inexperienced permitting bodies, and questionable development strategies that could impede the bankability of a project.
Actis focuses on markets "that are receptive to private investors and have a track record for treating investors in a good way", says Bozo. It is no accident that the group's latest energy fund, which has concentrated on renewable energy as the overall market moves that way, is also heavily weighted towards Latin America. "There are opportunities in places like Chile, Mexico and Brazil, and a good investment backdrop. Latin America liberalised its power market over 20 years ago, so it has an instant track record of private-sector investment. They are used to foreign investors coming in and operating on their market."
Private investors are looking to invest in emerging markets where suitable wind regimes, appropriate returns and supportive and stable governments exist, says Robert Clover, a director in FTI Consulting's clean energy practice. He adds that the desire of Chinese original equipment manufacturers (OEMs) and utilities to internationalise is also helping to open up emerging markets, especially when Chinese state-backed finance can be deployed. Other major wind OEMs are also seeking new growth areas as key markets in the EU and US mature, further pushing the trend.
As Vestas turns to emerging markets, partnerships are key to its strategy, stresses Sabater Eizaguirre. The Danish manufacturer forges close relationships with local developers, utilities, political institutions, export credit agencies and multilateral banks to minimise risk and help structure the layers of guarantees that may be needed for wind-energy projects to be built in some emerging markets, he says. This was essential, for example, in bringing the 310MW Lake Turkana wind project in Kenya to the construction stage. As well as the project being equipped with 365 Vestas 850kW turbines, Vestas also took a minority shareholding in the project to help attract other investors. UK-based Aldwych International is the lead member of the Lake Turkana Wind Power consortium and will also oversee construction and operate the plant, which represents about 20% of Kenya's current installed power capacity.
The European Investment Bank (EIB), the African Development Bank, Danish export credit agency EKF and US government development finance institution the Overseas Private Investment Corporation (OPIC) are among the long list of financing institutions supporting the project. The African Development Bank provided a partial risk guarantee of EUR20 million for the transmission link needed for the project, known for its excellent wind resources but sited in a remote location.
Some small markets may not represent interesting investment opportunities for industrial or financial players, despite being essential for the country itself.
Vestas applies proportionality, says Sabater Eizaguirre, pointing out that it sold turbines in 31 markets last year. "In larger markets, we have a more substantial presence, whereas we aggregate demand for several smaller markets, treating them in clusters."
Actis focuses on regions or countries depending on the depth of the market, as building up businesses to a certain scale is necessary for exiting its investments in what is normally a fourto five-year timeframe, says Bozo. "In Brazil there's a deep market with lots of developers to partner with or acquire, so you can build a Brazil-only platform that is scalable. In Africa you need a regional approach if you want to get a certain scale," he says.
Meanwhile, there can be no guarantee that promising emerging wind markets will come close to meeting potential. Anything from war to unfeasible local content requirements and a wavering commitment to renewables targets can scare off investors.
In Russia, a weak regulatory framework and strict local content requirements - seen as particularly unworkable given current prospects for the development of a sizeable, sustainable market - has held back wind investment. This may improve as the government looks to simplify the process for wind development and reduce local content requirements.
And while Latin America as a region is booming, wind-rich Argentina is one country that is lagging. Investor-unfriendly policies, political uncertainty and concerns about state utility Enersa's ability to honour power purchase agreements are limiting the market.
Yet should measures be taken in these and other underperforming wind markets to boost confidence, investors are sure to come around as they continue to search for the next big emerging market opportunity.