Investment risks rise as feed-in tariffs vanish

Will Asia’s renewables boom continue?

More countries are abandoning the popular feed-in-tariff (FiT) scheme and favouring more market-driven practices as renewable energy sources approach grid parity, a report by Fitch Ratings revealed.

Changes include FiT cuts, adoption of auctions, and promotion of direct sales to users. This suggests greater price and volume risk for new projects. 

These market-oriented pricing practices are being introduced by governments to reduce subsidy burdens and accelerate cost reduction towards grid parity.

“An increasing proportion of electricity sold through direct sales may lead to lower weighted-average tariffs with power-purchase contracts of shorter duration. Counterparty risk may also rise, although the impact is likely to be limited in the near term as generators still have the option to select high-quality customers,” the report said.

Larger and more experienced developers which are able to manage execution risks and secure low-cost financing in a rising-interest-rate environment are better placed under these trends, which should lead to some industry consolidation.

“This trend suggests greater price and volume risk for new projects; together with a rising cost of capital, this is likely to lead to some consolidation in the fragmented solar and wind industry, with the technology and cost leaders gaining market share,” said the report.