Strategic Analysis Renewable Energy

Strategic Analysis of Renewable Energy Industry

Strategic Analysis of Renewable Energy Industry

The renewable energy industry remains one of the most dynamic, fast-changing, and transformative sectors of the global economy. Technology improvements, cost declines, and the catalytic influence of new financing structures, have turned the sector into a driver of economic growth – both in the United States and around the world.  First and foremost, there is a growing global consensus that the world must deal with the threat of climate change in part through the deployment of clean energy technologies. The conclusion of the international climate agreement in Paris in December 2015 has provided new momentum for countries to promote policy incentives for clean energy development, which should drive investment in almost all markets. As the most tangible evidence of commitment under the agreement, countries have agreed to publicly outline their post-2020 climate actions, known as their Intended Nationally Determined Contributions (INDCs). The International Energy Agency predicts that the full implementation of these pledges will require $13.5 trillion in clean energy and energy efficiency technology deployment investments over the next 15 years. The agreement also included a collective goal of keeping temperature rise to well below 2 degrees Celsius – something that cannot be met by only delivering on the initial INDCs pledges. Nevertheless, the INDCs point the way to future opportunities for the sector. Furthermore, countries will also submit new INDCs on a regular, five-year cycle to take stock of progress and set new, stronger goals to reduce climate pollution. However, despite the widespread desire to deploy clean energy, most countries’ tendency to cheaply import fossil fuels pulls them in the opposite direction. Governments around the world must decide whether to incentivize a clean, sustainable growth path or whether to allow investments in traditional energy sources to continue or even increase. The choices they make will govern the industry through both the short and medium-term. For example, in the United States renewable energy manufacturing and deployment are getting a timely boost from the multiple-year extensions of the Business Energy Investment Tax Credit (ITC) and the Renewable Electricity Production Tax Credit (PTC), another development that came late in 2015. Building a stronger domestic market through the ITC and PTC will contribute to the international competitiveness of U.S. renewable energy solutions. In fact, because policy uncertainty in the U.S. domestic market has restricted growth at home, export markets offer many companies the important opportunity for sales abroad.

Market Size vs Market Share

        Since 2014, different market research on renewable energy has emphasized market size and market share in considering renewable energy export opportunities. If a market is large and U.S. exporters are likely to capture a significant market share, efforts should focus on making as many connections as possible. Exporters can feel good about their prospects, but may find other American competitors also having success in the market. Participation in trade missions, reverse trade missions, trade shows, and other “traditional” export promotion activities is encouraged in these markets. Canada is a prime example. Though it is expected to import about one-third as much as China over the next two years from the world, it ranks number one on ITA’s list of projected export markets through 2017, because of the significant market share enjoyed by U.S. suppliers (25.8 percent).

In markets that are large, but in which the United States captures only a tiny fraction of the import market, exporters should consider the reasons for the lack of U.S. competitiveness before pursuing export opportunities – particularly opportunities that include long lead times or require considerable resources. Perhaps importers are demanding products that are not often sold competitively by U.S. exporters, in which case a niche product might play well in the market. However, in certain markets, where U.S. market share is low because of a specific trade barrier, then exporters may want to prioritize other markets and alert U.S. Government entities, so that appropriate action can be taken to remove that barrier.

In markets that are small, but where U.S. exporters capture a large market share, exporters may find significant demand for their products and services – but accompanied by a small market or restrictive investment climate that stifles growth. Would-be exporters are encouraged to work with the U.S. Government to pursue market development activities in these locations, including through trade policy missions, technical capacity building, feasibility studies, and tendering assistance. Many Latin American markets fall into this category. In these countries, the share of the import market captured by U.S. technology is greater than the share captured globally – often substantially. Finally, some markets are neither large nor support significant U.S. market share. While some companies may find niche opportunities, most exporters would be wise to consider opportunities elsewhere.

Industry Overview

The renewable energy industry continues to grow steadily and show no sign of slowing down. Between 2005 and 2015, the world added over 1,000 GW of capacity total in the four subsectors geothermal, hydro, solar, and wind. Of these, the United States – which ranks second in the world for renewable energy capacity – has a mature hydro industry that is soon to be overtaken by wind power generation. While the capacity of U.S. geothermal power is small compared to the other three subsectors, the industry is actually far ahead of other countries in its deployment. In terms of renewable energy investment, the United States also ranked second for most additional capacity in 2015. Rapid growth in the solar subsector is almost entirely driven by utility-scale and commercial projects, although the residential solar segment will also see installations continue to increase at a steady pace. While The United States is unquestionably a leader with regards to innovation and deployment in the renewable energy sector, the export base varies for each of the subsectors. For the wind and solar industries, numerous new manufacturing facilities are under construction across the country. By comparison, the U.S. hydro subsector, which is dominated by European-owned manufacturing that targets Western Hemisphere markets, is not expanding actively except in the niche small-hydro subsector. Meanwhile U.S. companies in the geothermal sector face an industry dominated of a small number of companies, of which 40 percent are Japanese manufacturers. However, U.S. geothermal expertise is still highly regarded in project development, engineering, and resource exploration/drilling.

The Global Industry

Global clean energy investment, including renewable energy, totaled more than $329 billion in 2015. Because the cost of most renewable energy technologies continued its downward trend, the world’s investment supported an unprecedented deployment of new renewable energy projects despite the availability of extremely cheap fossil fuels. But growth is just beginning. According to ITA’s projections, 74 markets worldwide will install over 250 GW of new renewable energy capacity through 2017. To help meet this demand, the global import market in this sector is expected to reach $195 billion cumulatively in the 2016-2017 timeframe. China is expected to account for more than 40 percent of all capacity installations outside the United States over the next two years. Its renewable energy investment is expected to be split relatively evenly between solar, wind, and hydropower through 2017. Other key developers of new capacity will be Japan, India, Brazil, Turkey, and the European Union particularly, Germany and the United Kingdom.

What is more, the sector’s growth is now global in nature, escaping the traditional markets of Western Europe and strongly taking root in Asia, Latin America, and Africa. Over the remainder of the decade, this trend should continue with important consequences for U.S. export competitiveness. Unfortunately, U.S. exporters are relatively ill-positioned to benefit from rising demand globally. According to ITA’s projections, exporters will capture just 5.6 percent of the global import market through 2017. Although this is an improvement over last year’s projection of 3.2 percent, there are missed opportunities in certain key markets where renewable energy is growing rapidly enough to support substantial imports. In Japan, for example, where imports are expected to account for two-thirds of all solar products deployed in the market, U.S. exporters are expected to capture just 2.6 percent. In China, projected U.S. market share is less than half a percent for hydro imports; other subsectors fare slightly better, with 3 percent for solar, around 2 percent for wind, and an estimated 40 percent for the nascent geothermal market where China lacks domestic manufacturing.