Renewable Energy Projects in Emerging Market Yielding 28 Percent Higher Returns Than North America and Europe

For investors, renewable energy projects in emerging markets represent potential returns that are substantially higher than in the developed world, according to Mercatus, a solutions developer aimed at digitally transforming the way global energy producers invest. Taken in aggregate, IRRs (internal rates of return) for renewable energy projects in the developing world are 28 percent higher than those in Europe and North America.

"It may be time to re-think J. Paul Getty's famous formula for success: rise early, work hard, strike oil," said Haresh Patel, CEO of Mercatus. "For energy investors today, a more successful formula might revolve around renewable energy projects-particularly in emerging markets. If there was an exchange-traded fund (ETF) for these developing world projects, I think discerning investors would seriously consider buying stock."

The findings are part of a larger picture in which emerging markets are driving growth in advanced energy even as fossil-fuel prices continue their tumble. The findings are captured in the recently released Mercatus Global Advanced Energy Insights Report. Other key findings include:

• Investment in advanced energy in emerging markets matched that of developed countries for the first time in 2015.
• Advanced energy projects were bigger on average in emerging countries than in North American and European markets.
• The type of growth in emerging markets differed from that in developed regions, presenting more opportunities for utility-scale projects than North America and Europe.

Larger-Scale Projects in Emerging Markets

Emerging countries are supplying a growing hunger for electricity with a mix of large, utility-scale renewable energy projects and distributed generation-think solar panels on rooftops. In South America, the average project size was 64MWdc (megawatts direct current), while Africa averaged 45MWdc and the Middle East averaged 34MWdc. Average project sizes in Europe (3MWdc) and North America (11MWdc) were distinctly smaller, according to the report. Over the next four years, a growing share of new capacity across the globe-including new solar capacity-will go online in emerging markets.

Energy Transformation

Contrary to assumptions that declining oil and gas prices would dampen investments in clean energy, we see no correlation between these trends. What we do see, with US$12 trillion flooding into the market, is the onset of energy transformation. Most of the growth is in developing regions, so that's where energy producers are investing more heavily. There's a real opportunity for these markets to leapfrog fossil-fuel dependence, similar to how Africa's mobile phone revolution skipped the landline era.

"Low oil prices have actually created an opportunity for our company," said Sanjeev Kumar, senior vice president of project development at GlassPoint Solar. "When oil was $100 a barrel, oil and gas companies had no incentive to save on costs; they were focused on extracting as much oil as possible. Now that industry represents an incredible growth opportunity for renewables."