Renewables: Financing is up but uncertainty remains
Financing is flooding back into the renewable-energy sector, boosted by falling equipment prices
Limited progress towards a global climate pact and the possibility that increased natural gas use may be viewed as a better way to cut emissions in the short term are clouding the sector’s outlook.
New investment in clean-energy projects – including asset finance, equity raised on public markets, venture capital and private-equity funds – totalled $45.4 billion in the third quarter, a rise of 9% over the previous quarter and up by 16% on the previous year’s third quarter, according to Bloomberg New Energy Finance (BNEF).
Funding has been driven by sharp falls in equipment costs in the solar and wind industries, and a gradual return to economic growth in industrialised countries. The average price of solar PV modules has fallen by a third since late 2010 and by 70% since mid-2008; while wind-turbine prices are 20% cheaper than they were in 2009, says BNEF.
But the market remains fragile, with an excess of supply over demand keeping margins, and prices, down. That has weakened the balance sheets of firms across the renewable energy sector, sparking a bout of increased mergers and acquisitions (M&A) activity. BNEF says M&A – including corporate and project acquisitions and refinancings – totalled $25.9 billion in the third quarter, up by 31% from the second quarter and by 59% from the third quarter of 2010.
Despite falling costs, most renewable energy is uncompetitive with fossil fuels and dependent on public subsidy and other financial incentives. That means the industry is hoping for a strong signal from this month’s global climate change talks in Durban that a comprehensive carbon emissions reductions agreement, with renewable energy investment at its heart, will be forthcoming in the near future.
That looks increasingly unlikely, so renewables firms may need to rely on regional and domestic initiatives to support their investment strategies.
On the face of it, a draft of an upcoming European Commission document on the EU 2050 Energy Roadmap, leaked to Reuters in October, offers good news from the region that acts as a demand driver for renewable-energy manufacturers and project developers globally. The draft document – a finalised version is due for publication by year-end – reaffirms the Commission’s view that a dramatic shift from fossil fuels to renewables is essential if the bloc is to meet its target of reducing GHG emissions by 80% from 1990 levels before 2050.
Soaring electricity prices
But the draft also notes that such a shift will lead to soaring electricity prices and it says gas will have an important role to play as a bridging fuel until more renewable-energy capacity – and the infrastructure needed to employ it efficiently – are in place.
The draft looks at the effect of a number of different methods the EU can use to reduce the carbon intensity of its power sector, including energy efficiency, renewable generation, nuclear power, and carbon capture and storage. While electricity prices would rise in any situation, strategies focusing on greater renewable energy use would result in some of the largest increases – perhaps a doubling in prices over the next 20 years – before costs flatten out.
According to Kash Burchett, European energy analyst at consultancy IHS Energy, the document "represents one of the first official analyses that recognises the contradictions inherent in the EU’s goals on security, sustainability and competition – a circle that has become all the more difficult to square as a result of the global recession."
Dash for gas 2
If the EU decides it must reduce emissions as quickly as possible, while keeping energy prices down, the role of gas as a favoured power feedstock could become entrenched, possibly displacing renewable energy development in the near term, as well as coal.
The Commission’s draft document suggests gas could play an important role as a bridging fuel until the 2030s, while workable, regional renewable networks are developed. Gas is plentiful and could become even more so, if Europe and the rest of the world pushes ahead with the development of shale-gas reserves (see p46). Crucially, in terms of climate-change benefits, combined-cycle gas-turbine (CCGT) power stations produce around half the carbon emissions of many coal-fired power stations.
The economics of gas will look persuasive to cash-strapped governments and consumers. The levelised cost of power from CCGT stands at around €50 a megawatt-hour ($66.85/MWh) in Europe, compared with offshore wind – likely to comprise most of the EU’s extra renewable capacity in future – at around €160-170/MWh, and solar photovoltaic and concentrated solar power, both at around €275/ MWh, says IHS.
A greater focus on gas could result in part of Europe’s planned renewables investments being deferred for many years. "Funding it all in one go is much harder than gradually over several decades," Burchett said.
That could signal bad news for renewable energy firms seeking greater public support in the near term, but it could alleviate a number of problems weighing on EU countries.
Besides the reduced financial burden, spreading out further renewables developments over a longer period would also alleviate likely technical problems caused by the rapid introduction of intermittent power sources to European grids not yet fully equipped to deal with them at present. The dash to build heavily subsidised solar plants in Germany and Spain in recent years has caused headaches for power distributors struggling to deal with the complexities of incorporating so much intermittent power into grids not yet optimised to cope with it.
But the long-term outlook for investment remains broadly positive, even if the pace of change remains uncertain. According to Reuters, the Commission’s draft report suggests renewable energy use in the EU would rise to more than half of energy consumption by 2050, compared with around 10% now, whichever outlook considered by the authors is used – and that could rise to 95% in the high renewable-use prediction.