THE BATTLE FOR CAPITAL: FAST-GROWING ECONOMIES MUST DOUBLE THEIR INVESTMENTS OVER THE NEXT 25 YEARS TO SATISFY INCREASING ENERGY DEMAND

Bain & Company identifies eight themes aimed at helping non-OECD countries attract much needed investments to their respective power markets

Davos – January 19, 2016 – During the period 2000-2014, fast growing, non-OECD markets invested $4 trillion in conventional power generation, renewable energy, transmission & distribution (T&D), and efficiency improvements – on par with OECD country investments. But, that is poised to change.

Through 2040, non-OECD countries will have to double their investments in electricity from about $240 billion annually to $495 billion annually to satisfy growing demand and meet energy policy objectives, outspending OECD countries by 2 to 1. At the same time, the nature of competition is shifting considerably from importing fossil fuel resources to importing the capital necessary to invest in renewables and energy efficiency. Yet, power markets in large, fast-growing economies will need to access private investment as well as government funding if they are to increase access to electricity and support continued economic growth. These are the findings from the second Future of Electricity report, Attracting investment to provide affordable, accessible and sustainable power – a continuation of last year's report – which was released today in Davos by the World Economic Forum and Bain & Company.

According to Bain, fast-growing economies will drive most of the demand for new electricity generation over the next few decades, which results in a shift from the traditional model where the world's wealthiest economies dominated new investment and development in electricity generation and T&D. Traditionally, these fast-growing markets have emphasized reliability and affordability, both of which are essential to economic development and achieving social goals such as universal access to electricity. Environmental sustainability is also becoming increasingly important in these countries, and the declining cost of renewable generation technologies offers more options than ever before. However, the combined effect of growth, increasing consumption and investment in renewables is demanding unprecedented levels of investment.

"Within the next 25 years, we expect the world's emerging markets to deploy more renewable generating capacity than their developed counterparts," said Julian Critchlow, who leads the Utilities and Alternative Energy Sector within Bain's Industrial Goods & Services Practice.  "Historically, the public sector has supplied about 70 percent of electricity investment in non-OECD countries, but the game has changed. These governments could fall well short of supplying the necessary funds to meet growing energy demands."

In response, fast-growing economies are turning to domestic and international investors to finance their growing appetite for electricity and close the power gap with developed markets. However, most of these countries have a mixed record of attracting private investors, who are often wary of volatile or lackluster returns and opaque policies and regulations.

Bain has identified eight key ‘best practice' themes aimed at helping fast-growing economies make their power markets more attractive to investors:

Policymakers

• Pursue the most efficient pathways to policy objectives. Policymakers need to develop long-term roadmaps to ensure the right balance between renewable and conventional, centralized and distributed generation, while remaining as technology agnostic as possible.

• Develop integrated policies that ensure parallel development of the power value chain. Policies need to be integrated across the power value chain to ensure that the upstream fuel supply, generation assets, and T&D develop in parallel.

• Take advantage of declining technology cost curves. Policymakers should capitalize on the declining technology cost curve, driven by the rapid rate of global deployment, and avoid the urge to promote unique technologies that will likely remain at high cost due to a lack of scale.

Regulators

• Provide a level playing field for technologies, reflecting carbon abatement and security of supply appropriately. Regulators should structure power markets in ways that recognize the full value and costs of technologies, including carbon pricing. Regulators should also be technology agnostic, taking into account issues including flexibility, reliability, carbon-abatement properties, land use, and the cost of securing fuel supply.

• Ensure technically and financially viable operations across the value chain by keeping it clear of financial obstacles. Regulators need to work with suppliers to reduce losses from non-metered supply and ensure that tariff subsidies are fully funded.

Business & Investors

• Create effective public-private partnerships to attract private sector capital. The private sector should engage with policymakers and regulators to make regulations around public-private partners transparent and independent to ease investors' concerns about committing long-term capital.

• Nurture favorable investment environment. The public and private sector should put measures in place to reduce risk and decrease the cost of capital, allocating residual risks to the most appropriate market participants.

• Invest in education and R&D to close knowledge and human capital gaps.  The public and private sector should work together to foster the development of universities and research institutes that produce the talent that will innovate, develop and manage the power sector in the decades ahead.

"What was once a global battle for commodities has become the battle for global capital," said Critchlow. "As large countries realize they need more capital to grow their power markets, they will face increasing competition for scarce funds – both from other emerging markets and OECD countries. Only the most disciplined markets will attract the investment required to deliver on their renewable energy policies."

Editor's Note: For a copy of the report or to schedule an interview with Julian Critchlow, contact: Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

# # #