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Liebreich: Running on Deep Sand in 2012 – What We Got Right, and What We Got Wrong
By Michael Liebreich
Bloomberg New Energy Finance
2012 has been a very difficult year. The clean energy sector has had to contend with economic austerity in Europe, policy uncertainty on both sides of the Atlantic, US natural gas prices hitting lows of around $1.70 per MMBtu in the spring, and acute over-capacity in the wind and solar supply chains. Perhaps the best metaphor for this year is trying to run uphill on deep sand.
In this month’s column, with the assistance of Bloomberg New Energy Finance chief editor Angus McCrone, I report back on how we did with the predictions for 2012 which we published in January. As ever, I will be giving us (scrupulously fair) marks out of 10.
First of all, the overall theme for the year: in January this year, we wrote that the clean energy sector should “expect 2012 to beat rock-bottom expectations”. In general, this has been right. The widely-feared collapse in PV demand did not happen, and overall new investment in clean energy worldwide is likely to be around quarter of a trillion dollars, for the third successive year – down around 10% on 2011, but not disastrously so.
Meanwhile two of the underpinnings for clean energy investment strengthened during the year. Technology costs continued to fall, particularly in PV, where the “China” price of a multicrystalline module in December was $0.78 per Watt, compared to $0.93 in January. And data points on climate change accumulated – for example with Arctic Sea ice reaching its lowest ever volume in September, and the US having its warmest January-November ever, according to the National Climatic Data Center. Such is the nature of good news this year in our sector.
However, underpinnings are not the same as actual investment. Our first prediction for 2012 was “dollar investment flat, installed MW increases”. With a couple of weeks to go of the year, it looks as if 2012 will produce investment of around $250bn – although we will not know with full confidence until our analysts finish crunching the numbers. At the time of writing our predictions in January this year, we had estimated investment in 2011 at $260bn, so our current best guess for this year of $250bn is as near flat as makes no difference. However, in June we revised the 2011 figures up to $280bn – to reflect fresh information on the financing of projects in that year. So it looks like investment will be down some 10% on last year, but up a smidgin on 2010’s $247bn, and still nearly five times the 2004 figure.
As for the forecast of an increase in installed megawatts, there appears to be a good chance of this working out. Our latest estimate is that wind installations will hit a record in 2012 (more on this below), and although money invested in solar capacity fell, the continuing fast decline in PV module costs has meant that the actual MW constructed has held high – very close to 2011’s 28.7GW. We can only score this one tentatively, until the definitive numbers come in, but here goes:
Prediction number two was that big players in clean energy would “catch the M&A wave”. We wrote that after the bankruptcies of Evergreen Solar, Solyndra and Solar Millennium – among others – in 2011, and the takeovers of Iberdrola Renovables and EDF Energies Nouvelles, there would be more significant consolidation during 2012.
Well, sort of. In fact, the year has seen more in the way of distressed sales than of eye-catching M&A deals. The Bloomberg New Energy Finance Industry Intelligence deal database (see http://www.bnef.com/MA/search) shows that the largest pure-play takeover of the year so far has been the $529m acquisition of Brazilian wind farm owner BVP by CPFL Energias Renovaveis. Hardly big enough to set the pulses racing in investment banks’ corporate finance departments.
Overall, corporate M&A transactions in clean energy totalled a modest $9.8bn in the first three quarters of 2012, down from $26.8bn in the same period of last year. If you widen the net to include companies with partial exposure to clean energy, there are a couple of big’uns – such as Eaton Corporation’s purchase of Texas based-electrical component maker Cooper Industries for $13.6bn – but in general it has been a quiet year for big M&A.
Not so on bankruptcies: US battery maker A123 Holdings, its rival Ener1, German solar manufacturer Centrotherm, US module maker Abound Solar, US thin-film panel maker Konarka, and German PV pioneer Q-Cells were among those to spend time in bankruptcy proceedings in 2012. Some of these, including Q-Cells, saw their assets snapped up by buyers. A few points gained on bankruptcies help to offset those lost on big takeover deals.
CLEAN ENERGY STOCKS
Our third prediction concerned that long-running horror story, clean energy share prices. We predicted a superior performance to 2011, when stocks fell 40% in the sector, and – more adventurously – suggested that public market activity could “tick back to life”.
Amazingly, we were too hopeful once again on this. The WilderHill New Energy Global Innovation Index, or NEX, did not do as badly as it did in 2011, but before you reach for the Champagne, its performance was still miserable. Between January and 13 December, the NEX fell by a further 8% to 116.97, while in the same period the S&P500; index added 12.9%. At its low on 25 July this year, the NEX was down a massive 78% on its peak value at the end of 2007. That is almost exactly the same size of fall as the Nasdaq Composite showed in the 31 months after the dotcom bubble burst in March 2000.
As far as public market fund raising activity is concerned, 2012 has been an annus horribilis. The largest pure-play equity-raisings have been by Canadian developer Brookfield Renewable Energy Partners and Chinese solar water heater maker Jiangsu Sunrain Solar Energy, at $346m and $340m respectively. Overall public market investment in clean energy in the first three quarters of 2012 was just $3.9bn, little more than a third of the total for the same period of 2011.
The NEX may have avoided plumbing new lows for the past four months, but there is no sign yet of any concerted upswing. December did see the $92m IPO of Solar City – at a reduced price and after being postponed in the final straight. Given it is heavily loss-making, despite serving a sun-drenched market with robust subsidies and a market price twice that of Germany, SolarCity’s IPO could be a sign of better times to come, or of another road crash ahead.
Our fourth prediction for 2012 was that in solar, there would be “more pain for manufacturers, but gain in new markets”. You might say that the first half of this was a pretty obvious call. However, we are not too proud to accept a few marks for it. Over the year, the distress of manufacturers was manifest in a further slide in the BNEF NYSE Solar Index, from 615 at the end of 2011, to 422 at the time of writing.
In the text, we said that we thought that PV demand would be “flat-to-down” – a comment that probably made us among the most optimistic observers at the start of the year.
As the months have rolled on, our solar team has gradually edged up its projections for 2012, and is now estimating that the year could see a tiny rise in capacity installed, to just over 30GW. This reflects the fact that the German market will, yet again, surprise on the upside, with 7-8GW of new installations, that the US, Japan and China will all see healthy growth, and that some new markets – from Peru to Korea, and South Africa to Israel – started to see some big projects financed.
Our prediction also mentioned solar thermal electricity generation, suggesting that while 2011’s crop of financings would move forward to construction, mooted new projects could end up switching to PV. The pipeline of new projects has indeed narrowed dramatically – the few financed in 2012 included the Ouarzazate 160MW project in Morocco, and a couple of smaller ones in South Africa and Chile.
Prediction number five was that, in the wind sector, it would be a case of “party like it’s 2012”. We predicted a new record for wind installation worldwide, at around 46GW, with a large slice of that in the US as the Production Tax Credit approached scheduled expiry on 31 December, other hotspots in Sweden, Turkey and Romania, and some more financings in offshore wind in the North Sea.
Most of that proved to be correct. Our Q4 Wind Market Outlook, published a month ago, was showing 44.8GW of installations this year, a little below the start-of-year forecast but still enough to surpass 2011 and set a new record. Some hotspots were warm rather than scalding, Sweden was held back by low green certificate prices and Turkey by uncertainty over policy; offshore wind was mixed, with two big projects financed, Lincs and Northwind, in UK and Belgian waters, but German projects were held back by grid connection delays.
Our headline from January contained a not-so-subtle hint that what followed in 2013 might not be quite as jolly as 2012 for wind farm builders. But we will write more on that next month.
Our sixth prediction was a bit of a leap. It sported the headline, “Future finally arrives for next-generation biofuels”. Sensibly we tacked the word “maybe” onto the end, but even so it was an optimistic call about a sub-sector that specialises in promising a bright future.
In the end, next-gen bioenergy has had a decent year, making three steps forward and one back, but not doing enough to trumpet the arrival of the future. Venture capital and private equity investment has continued flowing at an increasing rate – it amounted to $857m in the first three quarters of 2012, compared to $788m in the whole of 2011 and $626m in 2010 – as more companies move from lab to pilot and then commercial scale. Among the bigger deals were $104m in July for Illinois-based Elevance Renewable Sciences and $32m in May for EdeniQ, a US-based technology developer of “yield-enhanced” biofuels. Fulcrum BioEnergy said at the end of November that it had “secured commitments” for $175m of financing for its waste-to-fuel business.
The first small commercial-scale next-gen production plant, by Beta Renewables in Crescentino, Italy, remained on course to open before the end of this year. Its aim is ultimately to produce 60,000 tonnes of ethanol per annum from non-food sources. Perhaps the biggest setback for the sector was BP’s decision in late October to cancel plans for a $300m cellulosic ethanol plant in Florida, and switch its strategy in the US back to technology development.
Prediction seven was “Asian smart grid boots up”. Mostly, we were on the money here – China is roaring ahead with smart meters, Japan has momentum despite policy uncertainty. The hoped-for take-off in South Korea has been held up by financing issues. On the estimates of our energy-smart technologies team, the Chinese smart grid market was worth $4.1bn in 2012, up from $3.3bn, and Japan’s $900m, up from $600m. This has helped to offset a small decline in the US.
In advanced transportation, perhaps the most striking headline of the year was the one in October revealing that the Toyota Prius hybrid had been the best-selling vehicle in California in the first nine months of the year, shipping 46,380 units. However pure electric vehicles made quieter – and slower – progress. Elon Musk’s Tesla launched its long-awaited Model S sedan, but then couldn’t manufacture fast enough to meet orders. Toyota shelved plans to launch its fully-electric eQ, and GM’s Volt plug-in hybrid outsold Renault Nissan’s fully electric Leaf.
Bloomberg New Energy Finance’s estimate in November was that just over 100,000 EVs would be sold worldwide in 2012, up from 51,350 in 2011, but well below the hopes of some manufacturers, and final figures will show we were very close.
Our eighth prediction was that water investors would “spray and pray in the market of the moment”. We mentioned desalination and wastewater treatment as two areas that would see strong investment in the year.
Those areas have indeed seen activity in 2012, with two of the biggest wastewater projects announced being El Caracol in Mexico and San Jose in Costa Rica, and desalination seeing large projects planned in India, at Dahej in Gujarat, and Mexico, at Tijuana and Rosarito Beach. Our news service has also been tracking a succession of initiatives in the Middle East, including a statement in early December from the head of the aptly-named Saline Water Conversion Corporation predicting that Saudi Arabia would sign $1bn of desalination contracts in the “next few weeks”.
We cannot in all fairness give ourselves top marks for this prediction because Bloomberg New Energy Finance’s project to crunch numbers for global investment in water – in the same way as we have been doing in clean energy since 2004 – is not yet complete. But it will be next year.
The ninth prediction concerned the big picture of international climate change politics. “Off-grid fizzes and climate frazzles while talks fizzle,” I wrote. Fittingly, my phrase incorporated a lot of z’s, and you could have slept through COP 18 at Doha – and many of us did – without missing much. Yes, there was agreement from the European Union, Australia and a few other countries on a second commitment period of Kyoto – but binding 15% of the world’s emitters to voluntary targets for 2020 is hardly inspiring stuff. More positive was the concession that the UNFCCC had to do more to spur bottom-up initiatives, and to compensate poorer developing countries for ever-more obvious climate “loss and damage”.
Earlier in the year, the Rio+20 conference saw the culmination of the work of the UN secretary general’s High Level Group on Sustainable Energy for All, on which I served. Nearly 60 countries signed up to the initiative’s goals in terms of energy access, renewable energy and energy efficiency, and over $50bn was pledged by the private sector. Elsewhere, the eight largest multilateral development banks said they would help drive $175bn of investment in public transport systems over the next decade. Contrast all this with an anaemic official statement on “The Future We Want”, and the talk was all about how these big set piece conferences were on the way out.
Meanwhile, the climate has indeed carried on frazzling. The International Energy Agency said in its World Energy Outlook 2012, published last month, that energy-related CO2 emissions are on track to rise from 31.2 gigatonnes in 2011 to 37Gt in 2035 – “pointing to a long-term average temperature increase of 3.6 degrees Centigrade”. And that is assuming fresh policies are adopted worldwide to try to deal with the problem. The Current Policies Scenario is even bleaker.
COAL & GAS
Finally, we predicted that coal would “come under pressure from gas”. Strangely, the headline was right but the logic was not. Our calculation was that demand for coal from India and China would push coal prices up, and make gas look highly competitive against it, but in fact what happened was the other way around – the flood of unconventional gas into the US energy market took away demand for coal in that country, forcing down coal prices internationally. Rotterdam front-month coal fell from $109.3 per tonne at the end of last year to $92 in early December 2012. We then saw the climate-unfriendly, and hopefully temporary, phenomenon of European generators increasing their coal combustion and reducing gas-firing to take advantage of wide clean-dark spreads.
The fact that EU Emission Trading System carbon prices weakened from the end of February onwards, in the face of weak economic trends, added to the temptation to burn coal in Europe. We would argue that, despite what happened in Europe in 2012, coal is facing huge medium-term pressure from both gas and renewables.
So there we have it. Our overall score for the year was 68% – close to, but not quite on a par, with 2011’s mark of 70%.
What of 2013? Well, assuming that Congress and President manage to stop the US from crashing over the “fiscal cliff” at the end of this year, I am going into the New Year in more optimistic mood than 12 months ago.
The re-election of President Barack Obama removes some uncertainty over the US’ commitment to a cleaner and more efficient energy future. Some specific impediments to investment in the sector should be cleared away in 2013 – from the grid connection issue with German offshore wind, to the contract-for-difference strike price for UK renewables, to the passage of legislation on renewable support banding in Poland. Yet more new markets will emerge, from Africa to South America and the Middle East.
We will be publishing a detailed set of “10 Predictions For 2013” in January. Meanwhile, Happy Holidays and a prosperous New Year to all!