Investors: Renewables Growth is Slower but Steady

by Stephen Lacey, Podcast Producer
Published: July 5, 2010

New York, New York

In just one year, the story line for the renewable energy industry has been flipped on its head. Last summer, as investors tried to figure out the stimulus package, there was a lack of capital and a pent up demand for projects. This summer, there are far fewer projects being developed, but more willingness to lend from financiers.

Because the sluggish economy has made some renewables less competitive, there's a “flight to quality” in the space, according to investors at this year's Renewable Energy Finance Forum in New York City.

“The capital is there..but having a project that can be financed is difficult. I think the developers are struggling. So we have not been as busy as we've been in the past,” said Kevin Walsh, managing director of renewable energy at GE Energy Financial Services.

The combination of low fossil energy prices and lower demand for power has stymied growth in some sectors, particularly wind. In the U.S., wind installations are expected to fall by 40% this year. In Europe, installations will likely fall flat.

Solar PV will be the fastest growing industry, as it is less capital intensive, is faster to build out and does not face many of the same regulatory challenges as wind, geothermal and concentrating solar power. GE, which has been heavily involved in the wind space, is now looking to invest in large scale solar PV plants.

“We really like what we see in solar right now. That's going to be a greater focus for us as well,” said Walsh.

Over the last 18 months, companies like GE have changed up their investment strategies. In 2008, tax equity was the project financing option of choice. Those were the days when tax equity players owed enough money in taxes to take advantage of the credits. Then the financial crisis hit, reducing the tax appetite of investors. The problem was particularly bad in the wind industry. Today, because of the grant program created by the stimulus package, the tool of choice is debt.

Last year, over $5 billion was invested in wind energy projects in the U.S. Only $1.8 billion of that was in the form of tax equity.

Many developers are borrowing against the cash grant to raise money for construction, then handing the payment over to the construction lender when the project is completed. The program has already helped bring about 4,200 MW of projects online.

Unfortunately, fewer developers are now able to take advantage of the grant program because there is less demand for their energy. Even so, it's been a lifeline for the industry in the last 12 months.

Keith Martin, an attorney with Chadbourne and Parke, said that investors are very comfortable with the grant program. The big unknown is what will happen when the grant program expires at the end of this year. Most people in the industry are calling for an extension of the program until 2012, saying that the industry will shrink without it.

“The levers of public policy in Washington are broken. I just don't know if something will happen this year,” said Martin. “[investors] have to be savvy about this. You have to look at parts of the market that can stand on their own...without the support of public policy.”

That's pretty much every technology.

According to figures from the International Energy Agency released earlier this month, fossil energies got about $550 billion in subsidies in 2008, compared to $50 billion for renewables. With such heavy support for fossil energies, renewables will continue to be dependent on public policy.

Investors are watching the (seemingly always) uncertain policy debate in Washington, wondering how it will impact their current strategies. Without the grant program, a national target or a price on carbon, renewables may look less attractive to investors. The large shale gas finds in the U.S. – which will likely keep natural gas prices low for many years to come – are also going to impact the economics of renewable energy projects.

Michael Liebreich, CEO of Bloomberg New Energy Finance, said that these are all factors that the industry must deal with. They are creating the “New Normal,” where renewables grow at a more subdued and sustainable pace.

“We're neither in the depth of a trough, nor are we in an overheated stage. So this is a kind of normal year in the development of an industry,” Liebreich said.

For a comprehensive overview of the financial health of the industry, take a listen to this week's podcast, linked above. We've got interviews with Kevin Walsh of GE; Michael Liebreich of Bloomberg New Energy Finance; Fintan Whelan of Mainstream Renewable Power; Keith Martin of Chadbourne and Parke; and Ken Westrick of 3TIER.

Comment
1 of 15 windation July 5, 2010
The Grants must not expire
if the ration to renewable is about 11x less than fossil fuels how can it ever become the major source of energy ?

Comment
2 of 15 cessgene July 5, 2010
But now the europe market is crazy. After October , I think the solar market will have great change !

Nanjing Cessgene Group Limited
Rick Kim
www.cessgene.com
sales@cessgene.com

Comment
3 of 15 Anonymous July 5, 2010

In a particularly erroneous comment the author writes: "According to figures from the International Energy Agency released earlier this month, fossil energies get about $550 billion in subsidies each year world-wide, compared to $50 billion for renewables. With such heavy support for fossil energies, renewables will continue to be dependent on public policy."

To begin, the report does not use the word EACH; indeed, it states that CONSUMPTION (a critical modifier the author left out) subsidies increased from $342 billion in 2007 to $557 billion in 2008 according to their methodology. A consumption subsidy occurs when a nation keeps the price of a fossil fuel artificially low to allow its population to meet basis needs, such as when gasoline prices in oil producing nations are kept artificially low within their own borders. Iran leads the list this year at over $100 billion, followed by Russia, Saudi Arabia, China, and India. Values for the US and the European Union are both 0 in this category. In short, these are not the usual subsidies people like to rant about as preventing entry of renewables into the market.

The IEA also estimates the more usual types of subsides (tax code, R&D, etc.) for various energy generation schemes, but their methodology is pretty weak; for renewables they merely use a figure of 5 cents per kWh of non-hydro renewable generation. On a per kWh basis subsidies for renewables dwarf those for fossil fuels--even without estimating the value of RPS requirements, 20 year guaranteed pricing FITs, etc. Of course, the issue is largely moot as changing the subsidy environment is no substitute for technological innovation leading to competitive prices.
Steven

Comment
4 of 15 StephenLacey July 6, 2010
Steven -- thanks for the correction on the "each" word choice. It was $342 billion the previous year. I appreciate the correction.

On your comment about consumption subsidies -- Earlier this month, the IEA's Chief Economist said that ending such subsidies would be critical to making an energy transition. The phase out of consumption subsidies could cut oil use by about 6 million barrels a day:

"This is the only single policy item that could make such a major change in the global energy and climate-change game," he said.

While these may not directly compete with the type of subsidies we usually think of, last year's report requested by Congress shows that about $120 billion in external costs are not factored into the price of energy. Surely that is a type of consumption subsidy keeping energy artificially low.

With that said, I think the call is getting stronger to factor in the external costs of fossil energies, strip away other subsidies and let fossils and renewables compete head to head.

As one of my favorite journalists, Vijay Vaitheeswaran of the Economist says:

"Free trade beats state aid."

Comment
5 of 15 Anonymous July 6, 2010
Stephen,
I agree--a cut in consumption subsidies would dramatically reduce oil consumption and improve economic activity, but this is unlikely to occur. Totalitarian regimes use state control of the economy and inefficient subsidies to the poor as a way of maintaining their control. Even if, Iran, for instance, eliminated its fuel consumption subsidies they would not likely spend any money on biofuels. We should not be holding out hope of major innovations in the energy sector coming out of OPEC or much of the rest of the third world economies.

The problem with arguments pointing to massive "savings" from reduced external costs is that such savings don't readily translate into improved economic activity. Better air quality, reduced asthma rates and other health benefits, less damage to the environment, etc., are going to be seen as modest benefits in the developing world compared to the advantages of electricity and heat in the winter.

As for your statement that: "I think the call is getting stronger to factor in the external costs of fossil energies, strip away other subsidies and let fossils and renewables compete head to head," I think the situation is quite the reverse. RPS policies and other government mandates--if they prove to be enforceable--will force much of the new energy facilities constructed in the US and Europe to be from renewable technologies and may even lead to idling extant production facilities before their rated lifetimes are exceeded. Sum such shift may be required by climate change concerns, but this certainly isn't head-to-head competition.
Steven

Comment
6 of 15 StephenLacey July 6, 2010
Steven --
Well, I suppose you are right that such benefits in the developing world might not be as attractive in the short term as a robust supply of electricity and fuel. Unfortunately, one need only to look at China's air and water quality to realize that such "benefits" have serious consequences.

In many areas of the developing world, distributed renewables can be deployed faster and more reliably than a large scale build-out of infrastructure. While the external environmental and health consequences are incredibly important, the simple efficiency of deploying distributed energy is a very compelling selling point.

On the external costs issue, I also agree -- I think the trend is toward more subsidies, not less. But I also hear many more calls among people in the energy community to simply strip away subsidies for both energies. Whether or not it has traction, that's another story.

Comment
7 of 15 rod-adams-151678 July 7, 2010
Steven:

I would be all for head to head competition between all energy sources. Of course, in your article and in the comments that follow, there appears to be a rather large competitor left out of the discussion - nuclear fission.

China is mentioned as having experienced the air quality issues and other environmental challenges associated with rapid economic development based on coal, but no one in this conversation has mentioned that the solution that the country is implementing with due haste is a massive build out of new nuclear power plants. Sure, you can find lots of articles about their large renewables energy business, but about 95% of their wind and solar production is aimed at the export market where there are massive government subsidies to be captured.

In contrast, China only has one small export market for its growing nuclear component manufacturing base (Pakistan). It is keeping all of the rest of that production at home with a goal of building about 120 GWe of nuclear capacity by 2020. They might miss that target by a year or two, but that nuclear capacity will be quite a bit different from renewables capacity of the same magnitude because it will run at full power about 80-90% of the time and produce massive quantities of cheap, emission free electricity.

Having a nation like China with cheap, clean electricity will make it very difficult for the rest of the world to compete for any industrial production at all, especially when you recognize that South Korea, Japan, and Vietnam are planning to follow the same path.

Here are the facts from the US about the production cost of electricity from various sources using 2009 numbers (cents per kilowatt-hour) based on FERC 1 form filings from utilities and models from non regulated power producers:

Nuclear - 2.03
Coal - 2.97
Natural Gas - 5.00
Petroleum - 12.37

Nuclear has most of the benefits of emission free renewables with one incredible advantage - it is reliable.

Comment
8 of 15 Anonymous July 7, 2010
In this article following is mentioned:

'Last year, over $5 billion was invested in renewable energy projects in the U.S. Only $1.8 billion of that was in the form of tax equity.'

But i've read many other reports which say that approx USD 18.6 Bn was invested in renewable energy projects in US in 2009 as against an investment of approx USD 35 Bn by China.

Comment
9 of 15 a-b-24958 July 7, 2010
" On a per kWh basis subsidies for renewables dwarf those for fossil fuels--even without estimating the value of RPS requirements, 20 year guaranteed pricing FITs, etc. "

Well in the USA, on a per dollar spent basis, fossil fuels subsidies dwarfs renewables. Enough said about this country's priorities, I guess . . .

http://www.renewableenergyworld.com/rea/news/article/2009/10/fossil-fuels-subsidies-more-than-doubles-those-for-renewables

Fossil Fuel Subsidies More Than Double Those for Renewables. More than half the subsidies for renewables—$16.8 billion—are attributable to corn-based ethanol. Of the fossil fuel subsidies, $70.2 billion went to traditional sources—such as coal and oil—and $2.3 billion went to carbon capture and storage.

*******
When one includes the very long list of externalized costs attributable to coal, nuclear and oil based consumer culture, including endless war, investment choices become clear. I add here that present day accounting principles are entirely appropriate for a culture that has learned to become sustainable by internalizing profits and externalizing costs. And concerning china as an alternative to this example, well nothing quite props up the bottom line like slave labor and no pollution/health/safety/quality controls...


Comment
10 of 15 a-b-24958 July 7, 2010
" Here are the facts from the US about the production cost of electricity from various sources using 2009 numbers (cents per kilowatt-hour) based on FERC 1 form filings from utilities and models from non regulated power producers:
Nuclear - 2.03 / Coal - 2.97 / Natural Gas - 5.00 / Petroleum - 12.37
"

Old already built NPP's in the USA are already written off, meaning their 20 years investment payback time is now expired, and they therefore can produce electricity at cheap rates, because the fuel is basically free.

Hereunder another example of prices for new built NPP's in Europe or the USA, lowest price is 9 cent per kWh in Europe, and 13 cents per kWh in the USA. And this are FACTS.

http://www.grist.org/article/2010-06-21-is-a-utility-only-cap-and-trade-bill-worth-passing/
From Sean Casten :

It is good to start examining the huge spread of prices paid for 'clean energy'. For everyone's edification, not one of the 260 energy recycling projects built by companies I have led have ever received more than 6.5 cents per kWh in external power sales. All of the approaches that use energy twice including Biomass CHP, gas fired CHP and recycling of industrial waste energy pencil at under the 9.9 cents per kWh.

Re nuclear, we repeat the assertion that all new nuclear will raise the current rates. Amortize $5,800 per kW over 25 years at 11% all in costs, assume the plant operates 8,000 full load hours per year, and you need 8.6 cents per kWh just for capital. Add labor, O&M, fuel, and reserves for decommissioning and spent fuel disposal and the owner will need 12 to 13 cents per kWh for the investment to pencil. I am not aware of any evidence that the $10,300 per kW estimate is high, and it is in the middle of the Vogtle Georgia NPP estimates.

Comment
11 of 15 rod-adams-151678 July 7, 2010
@a-b-24958

Wow, lots of commentary and data there. Please tell me how the high capital cost of nuclear is that much different from the high capital cost of renewables on a per unit energy produced basis?

The large projects that you are focusing on can certainly produce some scary numbers, but take a close look at the financing assumptions that you use. How many rooftop solar systems would be installed if the purchaser had to assume an interest rate of 11%? You only allow for a 25 year payment period, yet fully 60% of the nuclear plants operating in the US are already licensed to operate for 60 years and most of the rest will also receive license extensions. The NRC and DOE are already doing the materials research needed to evaluate if they can be licensed for safe operation beyond that 60 year period.

In contrast, how many of the wind turbines that were built during the 1970s boom period are still producing competitively priced electricity?

Finally, though I support the development of large nuclear installations where they make sense, I am far more excited by the potential uses of smaller nuclear facilities that can be built in modular fashion or deployed in a distributed fashion. These smaller facilities are also suitable for industrial cogeneration, desalination, or district heating to make use of the waste heat.

As I said in my initial comment - I would welcome the ability for nuclear energy to compete on a reasonably level playing field and do not ask for any subsidies - as long as the other sources of energy are willing to give up their subsidies, mandates, set-asides, and FITs.

Rod Adams
Publisher, Atomic Insights
Host and producer, The Atomic Show Podcast
Founder, Adams Atomic Engines, Inc.

Comment
12 of 15 StephenLacey July 7, 2010
Anonymous -- that 5 billion figure is for wind projects only, not all renewable energy projects.


Comment
13 of 15 phil-manke-79191 July 7, 2010

Steven, you said; "Solar PV will be the fastest growing industry, as it is less capital intensive, is faster to build out and does not face many of the same regulatory challenges as wind, geothermal and concentrating solar power."

This may be so in the utility or purchased power segment, but distributed solar thermal is far and away the most cost effective solar alternative energy. It is certainly less capital intensive than PV. The PV industry grows largely because of massive capitol investments of large industry and governments. The overall benefit to the economy would be in distributed solar thermal that anyone and everyone could tap into at lower costs up front. The financial institutions are also drawn to the large investments required by PV projects. This does not make them more efficient, only more workable on large scales. The facts remain that distributed solar thermal can produce more power at lower costs for the infrastructure without the massive link with the banks. But, it seems that no one (Solar Industry Advocate Org) in this country is willing to get solidly behind a beneficial public movement unless it can tow the parasitic wall street financieers along with it.


Comment
14 of 15 Anonymous July 7, 2010
In comment #9 a-b-24958 writes: "Well in the USA, on a per dollar spent basis, fossil fuels subsidies dwarfs renewables. Enough said about this country's priorities, I guess . . ."

This is a result of selective counting. Exxon Mobile paid no Federal taxes recently because their profits were taxed offshore and that is considered a tax subsidy yet when GE (a major wind turbine maker) also pays no Federal taxes using similar tax regulations no one counts that as a subsidy. The value of RPS requirements is huge for the renewable industry, but is usually not accounted for in renewable subsidy totals. The benefit of net metering is critical to household-scale PV but no one bothers to count that as a renewable subsidy. I could go on for pages.... Government intervention (at least in the US and the EU) into the market place overwhelmingly favors the renewables sector and the obvious metric for understanding how this affects market share is the dollar amount per unit of energy. Overall amounts--even when properly counted--are not good indicators of market trends.
Steven


Comment
15 of 15 StephenLacey July 7, 2010

Phil, you bring up an excellent point. In a lot of markets, the LCOE for solar hot water is around 6-8 cents. As Dell Jones of Regenesis Power likes to say, "utilities are stepping over dollars to pick up pennies."

But the growth in Solar PV can't be ignored. The growth of "wholesale distributed power" -- 5-20 MW projects -- is really pushing the cost curve for PV downward