The Clean Energy Opportunity

In spite of the current slow-down in the global renewable energy market due to global economic uncertainty, we continue to see renewable energy capacity and demand increase. However, the nature of the demand for particular renewable energy types has changed and rather than all technologies being pursued equally it is now clear that some technologies will prevail over others. This is primarily a result of the nature of the technologies in question. For example, we feel that renewable energy technologies such as solar that have strong applications in distributed generation will expand at a greater rate than technologies requiring large upfront capital investments and which sell power on wholesale markets.

In addition, the drivers for renewable energy implementation are changing. Four years ago there was much more of a push for carbon reduction from renewable energy projects and so subsidies for these types of projects were formulated with this in mind. Even in emerging markets where concern about carbon emissions is lower, it was still possible to sell carbon credits derived in these markets in Europe and that helped to drive renewable project development. This incentive has decreased as the price of carbon in global markets has collapsed due to the global recession.

The development of shale gas in the United States has completely changed the energy cost equation. For example, the share of coal fired capacity relative to total generating capacity in the United States has fallen to a record low of 34% while electricity generated from natural gas now comprises in excess of 30% of the market. The low price and availability of natural gas accounts for a substantial portion of the increase in power generated from natural gas, but gas also has advantages that coal does not, such as low upfront installation cost, lower emissions, and the ability of gas fired turbine facilities to be dispatched on short notice to meet changes in electric demand - which incidentally fits well with the intermittent generation nature of certain renewable technologies.

It is difficult to overestimate the impact that natural gas is having on the changing energy generation equation both in the United States and abroad. Natural gas along with decreasing costs of other renewable energy generation technologies will transform the way we produce and utilize energy globally.

The magnitude of the change is enormous. According to the 2013 International Energy Outlook (IEO2013), world energy consumption will grow by 56 percent between 2010 and 2040. Total world energy use is expected to rise from 524 quadrillion British thermal units (Btu) in 2010 to 630 quadrillion Btu in 2020 and to 820 quadrillion Btu in 2040.

A study by the National Renewable Energy Laboratory found that in order for the United States to derive 80% of its electricity from renewable energy sources by 2050 the United States would need to install 20,000 megawatts of renewable energy generating capacity every year for 20 years, after which 40,000 megawatts would need to be installed annually until 2050. This is nothing short of a total recasting of how electrical energy will be produced in the United States. On a relative basis other countries would need similar ramp ups of clean electricity generation to meet their clean energy generation goals. It is clear that the amount of investment needed is huge and will continue to remain so for an extended period of time. This, in essence comprises the core of the investment opportunity in the sector, a coupling of future demand with the need to generate electricity in a cleaner more sustainable way.

Subsidies in the renewable energy sector have attracted widespread comment from politicians and others intent on making the case that subsidies create uneconomic aberrations in the electric market. To a certain extent these comments have had some validity, especially in the early days of the roll out of renewable energy based technologies, but this is changing. An article in the Journal of Environmental Studies and Sciences indicated that coal generated power costs 3 cents a kilowatt hour; new gas plants cost 6.2 cents a kilowatt hour; electricity generated from wind costs 8 cents; and power generated from solar photovoltaic's costs 13.3 cents per kilowatt hour. However, costs have changed in recent years as technological advances in wind turbines and declines in solar panel production costs have come into play. When the hidden costs from pollution or C02 emissions mitigation are added in, the costs of generating from renewable energy sources becomes much more compelling. Installing pollution controls at existing coal fired plants to meet new EPA mandated mercury and carbon emissions adds a minimum of 6 cents per kilowatt to the cost of coal generation, putting the actual generating cost closer to 9 cents per kilowatt hour, and the price of generating with natural gas goes up 1.3 cents to 7.5 cents per kilowatt hour. That compares favorably to existing wind generating capacity at 8 cents and new wind capacity at 4 cents per kilowatt hour. The true cost of building new coal plants is currently about 13.2 cents per kilowatt hour which compares favorably to solar photovoltaics at 13.3 cents. (See September 23rd 2013 Wall Street Journal entitled, Six Myths about Renewable Energy)

Although we do not see subsidies for clean energy ending as a project implementation driver in the short term, we do see them decreasing as key renewable energy technologies continue to move down the cost curve. Projects will increasingly stand on their own merits. Renewable energy has entered into its adolescence where technologies are expected to be commercially viable with returns based on electric sales and not on payments from the taxpayer's pocket. It is important to note that incumbent electric generating players often forget that generation from coal and petroleum were both heavily subsidized in their early stages of development.

Renewable energy has been quietly expanding its share of the global electricity market. In the United States power generated from wind now comprises 50 GW, which is enough to supply 12 million homes, and larger than the total generating capacity of either Australia or Saudi Arabia, or the entire state of California (Source Recharge News August 24, 2012).

Solar at the retail level in the United States has now reached cost parity with other generation sources, especially in states where electric tariffs are high and solar radiation is good. Additionally, a number of innovative financing programs have been developed that do not require any upfront installation payments from the customer. Rather the customer pays the cost of the installation over a number of years as part of his monthly electric payment.

Europe has seen many changes in its renewable energy market over the past 24 months. The changes relate to two issues. First, artificially high tariffs historically provided for wind and solar installations by a number of European governments have caused imbalances in select electricity grids with the result that in order to maintain a balance between base load power and peak power not all higher cost solar or wind facilities are dispatched as often as originally envisioned. This has eroded the profitability of projects built with much higher dispatch assumptions. Second, the economic collapse in Europe has forced a number of governments to rethink the way they are pricing renewable energy, and to try and recapture some of the high tariffs awarded to developers by adding special surcharges on renewable power produced. Developers have also run into financing problems as banks have retrenched due to losses experienced in unrelated businesses as a result of the European debt crisis. This turmoil has created an opportunity for investors to purchase projects at discounts and/or advance money to unfinished projects and to receive high rates of return on investment. We have seen a number of projects that come under this category.

Contrary to popular belief, electricity consumption in many countries continues to expand, albeit at a slower pace than before. In several countries electricity shortages are still a problem. For example, India, which continues to have a shortage of power during peak demand periods and underinvestment in energy infrastructure, ended up having a power supply outage in July 2012 in three of its five electricity grids, leaving more than half of the 1.2 billion population without power. The blackouts continued for several days and were only ameliorated by the purchase of power from Bhutan.

The outages resulted in a political firestorm with the Times of India severely criticizing the authorities and key politicians, referring to them as powerless and clueless, and critics poked fun at leaders trying to present the nation as a rising superpower when it cannot even meet the basic power needs of its population. The outages have brought back into focus in India the need for additional power so as not to jeopardize economic growth.

Although India currently has about 1GW in new energy technologies installed, the National Solar Mission is targeting 20GW of new solar capacity by 2020 and the Government is also targeting a significant amount of new wind production as well. We will see if they can meet their goals, but there is no doubt that additional wind, solar and hydro capacity will form a significant part of the Indian power shortage solution.

China continues to deal with pollution problems relating to the burning of high sulfur coal at many of its power plants. Coal mined in China does not have the lower sulfur higher BTU content of the coal mined in the United States or Europe. Couple that with increased demand for power and the fact that pollution controls on coal fired power plants in China are much less onerous and you have the recipe for major pollution problems. The Chinese Government has taken note of this and has embarked on an extensive program to increase electric generation from renewable resources, especially wind and solar.

Overall, we continue to feel that the global drivers behind the increasing share of power generated by renewable energy continue to be in place. The cost curve for renewable energy technologies has been decreasing, government backing for expanded renewable energy generation remains in place in many markets and power demand continues to increase in many markets as standards of living increase. We may be experiencing a global policy respite on the CO2 emissions front, but issues of pollution control and energy diversification and independence remain as strong as ever over the longer term.