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The race to renewables: it’s not over til it’s over

22 April 2016 in

A couple of leaders in the renewables race have tripped up lately. Two titans are in trouble due to the billions of debt they piled on after buying or building big renewable projects across multiple continents that didn’t pan out. SunEdison is widely reported to likely file for Chapter 11 while the U.S. arm of Spanish diversified energy company Abengoa filed for bankruptcy in March.

Experts say “yield cos” are much to blame for the mess. Both companies had yield cos, or subsidiaries that bought projects from the parent to help them fuel growth and free up cash. Meanwhile, yield cos promised its shareholders hefty dividend yields. But depressed oil prices shook up capital markets making it tough to raise money and investors didn’t get their promised payouts. So are renewables in trouble when two of its biggest players are raising flags?

Depends on who you talk to. Some experts say renewables are a long way from being competitive. Others say not everyone will do well in a growing industry and these growing pains should transcend the structural shifts we’re seeing in our energy future towards low carbon.

Renewables by the numbers
If you only look at the recent aggregate data on renewable energy, the story looks rosy.

Falling oil prices in 2015 didn’t sink global investments in renewables which drew a record $286 billion. Investments were up 3 percent from the previous record set in 2011. In the U.S., $56 billion flowed to renewables, up 8 percent from 2014, the best showing since the green policies of 2011.[1]

Solar, wind and other replenish-able energy sources are generating more of the world’s electricity, about 10 percent in 2015, up from 9 percent in 2014.[2] This ratio is slightly behind U.S. figures (see chart 1) which, over the years, has generally seen small upticks.

Additionally, more than 50 percent of all new U.S. power generation capacity since 2014 has come from sources like wind and solar.[3] Today, renewables — excluding large hydro plants — is about one-sixth of the world’s power capacity[4] and after coal, is the second-largest generator of electricity, and should overtake coal by the early 2030s.[5]

In the five-year run-up to 2020, solar and wind will likely add more to the global energy supply than U.S. shale oil production did from 2010 to 2015.[6]

Eyes on policy
These bullish projections don’t key into government policies which can make or break this sector. Yet mandates and regulations are what’s key to drawing funding and lowering costs for a capital-intensive sector.

After years of renewable-friendly policies, Germany, for instance, now sees little cost difference between conventional and renewable energy sources.[7] On the other hand, German renewable investments declined last year because of reduced subsidies and uncertainty over an auction system.[8]

The U.S., meanwhile, rode to record renewable investment in 2011 on the back of the Production Tax Credit (PTC) incentives package. In 2012, however, uncertainty over whether PTC would be extended felled the wind economy. Installations fell 92 percent in 2013, costing the sector $23 billion and 30,000 jobs.[9]

While U.S. wind and solar energy prices have fallen 43 and 80 percent respectively since 2008,[10] economics dictate that most of us will use fossil fuel energy to heat our homes and drive our cars. That said, wind energy prices are now competitive with fossil fuel-generated energy in a few states like Iowa and Texas, two of the country’s top wind energy producers and where wind energy is cheaper than energy produced by coal or natural gas.[11]

The PTC has been extended until 2020 and there’s now a comprehensive energy bill in Congress that is – no surprise – the subject of political wrangling. Today, 29 states incentivize renewable energy through a program called Renewable Portfolio Standards which require state utilities to purchase a certain amount of renewable energy.

Looking at the Cleantech Everwhere motif performance since its inception in the first quarter of 2012, its best days were in 2014, peaking in March of that year. However, since July 1 2015, the motif has underperformed the S&P500, and the motif’s wind and solar segments were among the worst-performing sectors based on one-year performance.

Fossil fuel will still stick
For renewables to win the energy race, fossil fuel consumption has to shrink. But let’s not kid ourselves, even in the age of plentiful wind and solar farms, most of the world’s energy is still being produced from the remains of dead animals and plants.

First, renewables are facing down incumbent fossil fuel power plants which have long operational lives. Then there are the subsidies. Tax preferences are given to U.S. fossil fuel producers worth $4.7 billion.[18] Globally, fossil-fuel consumption subsidies registered $493 billion in 2014, which if added to production subsidies, would be worth several times renewal subsidies.[19] No surprise, these subsidies are a drag on wind and solar energy sectors.[20]

But what do investors think of fossil fuel? The Black Gold motif has been under pressure from soft oil prices, down 19 percent on the year and underperforming the broad market about two months after its creation in January 2012.

In some sense, the race to renewables has just started as structural shifts in the energy market are favoring renewables while the climate accord signed last year mandating a 2 Celcius limit on the earth’s warming which is another win for renewables. There are half dozen bills with state lawmakers around the country to boost investments in sun and solar energy, and SunEdison will likely face an overhaul to make it more competitive, bankruptcy or not, experts say.

Regardless of SunEdison’s fate, it’s not stopping other players from putting their muscle behind solar and wind. This week MidAmerican Energy said it would invest $3.6 billion to build a wind project in Iowa.

How long do you think it will take for most of the world to transition to an energy future that is powered by renewables?

U.S. renewable electricity generation as % of total
* Click image to enlarge

renewables1
Table 1: Electricity generated from renewable sources in rising trend. National Renewable Energy Laboratory.

Net electricity generation from renewable sources, 2006 – 2015: Thousand megawatt hours
* Click image to enlarge
renewables2
Table 2: Generation at Utility Scale Facilities, U.S. Energy Information Administration

* Click image to enlarge
renewables3
Wind forecast to grow as source of U.S. electricity supply, according to U.S. Department of Energy via Yahoo News

[1] UN Environment Programme (UNEP), Frankfurt School-UNEP, Bloomberg New Energy Finance, Global Trends in Renewable Energy Investment 2016.

[2] UN Environment Programme (UNEP), Frankfurt School-UNEP, Bloomberg New Energy Finance, Global Trends in Renewable Energy Investment 2016.

[3] FERC, Office of Energy Projects Energy Infrastructure, via U.S. PREF

[4] UN Environment Programme (UNEP), Frankfurt School-UNEP, Bloomberg New Energy Finance, Global Trends in Renewable Energy Investment 2016

[5]  IEA’s World Energy Outlook 2015 report.

[6] Goldman Sachs, The Low Carbon Economy.

[7] Climate Policy Initiative, Policy and Investment in German renewable energy

[8] Bloomberg New Energy Finance

Bloomberg New Energy Finance

[10] Acore.org

[11] Factcheck.org

[12] UN Environment Programme (UNEP), Frankfurt School-UNEP, Bloomberg New Energy Finance, Global Trends in Renewable Energy Investment 2016.

[13] Climatenexus.org

[14] Forbes

[15] Bloomberg

[16] Nrel.com

[17] Reuters

[18] United States Progress Report on Fossil Fuel Subsidies

[19] International Energy Agency (IEA)

[20] Global Subsidies Initiatives

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