Emerging solar markets offering better returns for developers, report finds

Solar developers eager for higher returns on their investments should head to new and emerging markets, finds a report published this week by U.S. energy investment firm Mercatus.

According to the findings, the average rate of return per solar project in the Middle East is 10.4%, compared to returns of just 4% in Europe. African solar projects offer returns of 10.3% on average, while many parts of the Asian market will see returns of 8.4%. Contrast this with the North American market’s 6.4% average rate of return, and the trend is clear – where there is greater risk, there is greater return.

A causal correlation with these figures plays out in project size, with the thriving South American market leading the way: a typical solar installation in this region is 64 MW, thanks largely to an abundance of available land, high levels of solar irradiation, and ambitious government-backed policies that favor large-scale investors.

The Mercatus report finds that the average size of a solar installation in Africa is 45 MW, while for the Middle East and Asia it is 34 MW and 22 MW respectively. In Europe, that figure falls to just 3 MW as the market there continues its transition from ground-mount projects to rooftop installation for the residential and commercial sectors.

A similar trend can be observed in North America, too, where the average size of a new solar project is 11 MW, which is less than half the 25 MW size of average solar projects being added in the much smaller and land-constrained Central American region.

This data confirms what many in the industry already know: when markets are young, think big and the rewards will be greater. In more mature markets, fierce competition and less generous subsidies serves to keep returns lower, as can be seen in Europe and, increasingly, the U.S.

Emerging markets are often stymied by a multitude of offtaker and political risks, which can make potential projects less attractive to some developers. Hence, returns for those that do take the plunge tend to be higher.

"Maintaining a clear picture of ongoing business risks in emerging markets contexts becomes imperative,” said the report, “but can be challenging given increasingly complex operations dispersed across geography and technology."