By Michael Liebreich
Bloomberg New Energy Finance
So here we are in 2010. Last year finished with the disappointment of the much-hyped COP 15 meeting in Copenhagen, but we should not forget that we have seen a period of huge accomplishments for the clean energy industry. Here are my favourite milestones from the last decade:
1. World renewable energy generating capacity exceeds 280GW and outstrips the IEA’s 2003 forecast for 2020, by 2009;
2. The EU generates over 15% of its electricity from renewable sources, with Spain, Germany and Denmark leading the world (excluding hydro power);
3. Dramatic falls in the cost of all clean energy technologies, bringing many of them within spitting distance of fossil-based power;
4. Solar power becomes cheaper than kerosene and diesel for rural electrification, as witnessed by the success of Grameen Shakti, Selco and others;
5. Over half of the light-vehicle transportation fuel needs of Brazil, the world’s eighth largest economy, are met by biofuels;
6. Hybrid cars are commonplace on our streets, opening the way to the electrification of transportation;
7. The world’s first fully functioning large-scale carbon market, the EU-ETS, is successfully set up and has a measurable impact in reducing emissions;
8. Investment in clean energy grows by a factor of 10, to around $150bn per annum;
9. Investment in renewable generating capacity for the first time outstrips fossil fuel and nuclear generating capacity combined;
10. First Solar becomes the first clean energy company to break into the S&P 500.
But we are about to begin a new decade. One of the things the assembled thought-leaders of the clean energy and carbon markets will be doing during the forthcoming Bloomberg New Energy Finance Summit in London (17 to 19 March) is brainstorming about the expected, and unexpected, developments that will change the world by 2020. At this juncture I will make just one projection for the coming decade: that some of the trends that have seemed agonisingly slow until now – such as the penetration of solar power into the world’s energy mix – will gather momentum, and the world in 2020 will start to look markedly different from business-as-usual.
For now, however, I will stick to the “easier” job of making Bloomberg New Energy Finance’s 10 predictions for just one year ahead.
Overall, what sort of year will 2010 be for clean energy? This time last year we talked about “A Wave of Consolidation in a Sea of Hope”, with the sector torn between the turmoil of the financial crisis and powerful dreams of a bright future. This year, both of these monumental forces have moderated: the agony of the financial crisis has dulled to the pain of a deep recession, and the wild hopes for the sector, exemplified by President Barack Obama’s election rhetoric and the hype around Copenhagen, have been replaced by a sense of weary resignation.
All in all, 2010 looks like being a year of moderation. Energy prices are high enough to allow steady investment in clean energy, but not high enough to cause another frenzy. The flow of “green stimulus” cash is growing, but the recovery of the capital markets means it will not be the only game in town. Climategate and the IPCC’s errors over Himalayan glacial retreat have eroded the public’s confidence in the climate change consensus – but not demolished it. Debt costs are high, but becoming cheaper. Share prices are up from their lows, but nowhere near their highs. Consolidation will continue, but at moderate asset prices it won’t run unchecked.
There are, of course, risks to this attractively boring scenario. Public finances have not been in such bad shape since the immediate post-war years. Although the major economies of the world appear to be pulling out of recession, the recovery has not yet begun generating jobs, and there remain considerable imbalances in global trade, so protectionist pressures are high, not least between the US and China. Geopolitical tensions, in particular around Iran’s nuclear programme, are as high as ever.
These factors aside, 2010 looks set to be a Goldilocks year for clean energy: neither too hot, nor too cold. Not a bubble, but not a bust either. After a few years riding the roller-coaster of hype and disappointment, expectations and emotions, that will be no bad thing. Most of us could use a fairly dull year!
And so to our 10 detailed predictions. These have been drawn up with the help of my colleague Angus McCrone, chief editor, and our analyst teams covering all the key clean energy sectors and the carbon markets. Wish us luck!
1. Overall investment reaches new record
We expect overall new investment in clean energy to hit a new record of between $180 and $200 billion in 2010, up around a third compared to the $145bn invested worldwide in 2009 and the record $155 billion in 2008.
One element in the growth we expect in 2010 will be “green stimulus” spending. Major economies have promised some $177bn of extra spending on the sector since the financial crisis of autumn 2008, and we estimate that only $25bn – 14% of the total was actually disbursed by the end of 2009. Our estimates are that a much larger part, around $60bn, is likely to be disbursed in each of 2010 and 2011.
The second element will be the continued slow recovery of the debt markets. We expect the banks to raise their lending progressively throughout 2010, after the debt finance freeze of early 2009. We do not expect a return to the overheated lending market of 2007, and it will continue to take a long time to agree club deals for wind farms and solar parks. However our crystal ball shows banks under pressure to lend to projects in their home countries, clean energy companies participating increasingly in the bond markets and debt funds starting to play more of a role. Margins on project finance will continue to fall noticeably from their peak last summer of 300 basis points for European onshore wind.
2. Public markets open for business
Over the past few years we have consistently said that clean energy stocks offer the opportunity of above-average returns, but with above-average volatility. 2010 will be no exception to the rule. As usual, we will see the NEX over-react to the latest policy or climate news, cuts in feed-in-tariffs and so on, as well as to wider stock market influences such as economic news and interest rate expectations.
But even if the NEX has a disappointing quarter or two during 2010, we expect it to end the year comfortably above the 250 level where it started the year. It is still nearly 50% below its pre-crisis peak. Power storage and energy efficiency shares enjoyed an impressive rise in 2009 on the back of promised stimulus spending, and it remains to be seen if they can hold ground. However, we expect good progress to be made by renewable energy project developers, benefiting from falling hardware prices and improving availability of capital, even if equipment providers continue to fight for market share. Biofuel producers might even show some flickers of life after their near-death experience in recent years.
With this as background – and as long as there are no big macroeconomic or geopolitical shocks during 2010, and as long as Wall Street doesn’t end up in trench warfare with the Obama administration over regulation – then we could see a record year for clean energy IPO activity. This is a very brave statement, as 2007 saw no less than $14.4bn raised worldwide, but if the IPO worm-hole does open up in a big way, then there is no shortage of candidates waiting to slip through – led perhaps by Enel Green Power, Tesla, Solyndra, as well as secondary listings by China’s Goldwind and BYD, in which Warren Buffett holds a stake.
3. Not much COP 16
The failure of the Copenhagen conference to deliver anything meaningful last month was one of 2009’s big disappointments, and global climate negotiations are not going to produce any significant good news in 2010.
The global economic recovery looks too weak to bring unemployment down any time soon in developed countries. China, for its part, is beginning to worry about inflation as domestic consumption soars and exports resume, while over-capacity in Chinese industries continues to put downward pressure on prices worldwide and stir protectionist sentiment. All of this will make internationally binding concessions on emission cuts a tough ask in 2010.
We are not saying that the Copenhagen Accord can’t be turned into a legally-binding document in Bonn or Mexico, but that whether it is or not will have almost no impact on the day-to-day decisions of investors in clean energy. These markets are being driven by the force of regional, national and sub-national legislation – no fewer than 696 new laws worldwide over the past four years by our count – which will continue whether the Copenhagen Accord goes the way of the Doha round or not. The picture looks a bit different for carbon market participants, who really were looking to Copenhagen for a successor to the CDM and JI mechanisms, which are due to die in a few years as surely as Rutger Hauer’s character in Blade Runner, unless given a new lease of life by their creators.
So the $100bn aspirational figure in the Copenhagen Accord for investment in the developing world by 2020 is likely to remain just that. Even the so-called “Quick-Start” funds mentioned in the Copenhagen Accord – a paltry $30bn over three years, split between clean energy, adaptation and forestry – will have to be dug out of the international legal morass before they can be set up, so there is no way they will start to flow this year.
4. Two steps forward, two steps back for US policy
Despite the much-touted last-minute intervention of President Obama in Copenhagen, the US hasn’t wowed the world with its new approach to climate change. The significant commitment to clean energy under the stimulus programme, tightening CAFE standards, the EPA’s threat to regulate, and countless state and municipal initiatives are keeping the US at the table, even if only to feed off China’s scraps.
If there was any doubt after Copenhagen about the US Congress’s willingness to pass an energy and climate bill in 2010, it surely evaporated after the Democrats’ surprise loss in Massachusetts. The particular part of the bill which will stick in Congress’s throat is economy-wide cap-and-trade. In the simplified world of US politics, cap-and-trade – and indeed climate change itself – has become synonymous with job destruction. Luckily, clean energy has become identified in the public mind with job creation, and with the US mid-term elections being all about employment, the sector should benefit.
So the chance of a national renewable electricity standard, or RES, look reasonably good, and we think one will be passed, either as part of a stand-alone energy bill or tacked onto a jobs bill. But it will be a white-knuckle ride, as the gas and nuclear lobbies try to muscle in on the act. Even clean coal will try to be classed as renewable energy. Only in America.
5. Wind suffers hunger pangs
2010 will be a year of belt-tightening for the wind industry. Installation levels will be down slightly on last year as the tight financing conditions feed through into facts on the ground. This will be particularly marked in Europe and even more so in the US. In China the sector will power ahead, simultaneously building new projects and trying to fix existing projects with grid connection or performance problems.
In Europe, the dramatic action will come from the UK as developers jockey for finance for their Third Round offshore concessions and for installation ships and cable. There will be a major breakthrough in the process for a Euro-Super Grid as the offshore wind market becomes a near certainty. The US will eke out its policy support in the shape of grants to 2012 and most likely a federal renewable portfolio standard, albeit a fairly weak one.
We will continue to watch our wind turbine price index closely – as we expect turbine prices to level out after falling nearly 20% in 2009 as strong orders for 2011 and after start to put pressure on prices again. In the meantime, however, some Tier 2 or Tier 3 manufacturers that cannot secure equity will struggle, and there may be outright failures, as the market realises that it is facing an overhang of capacity for some years, and remembers the value of a strong manufacturer balance sheet.
6. Solar plays double-or-quits
2010 will be a test of nerves for the solar sector. On the one hand continued over-capacity, dropping tariffs and disappearing margins say quit, but on the other hand ballooning volumes and the sunlit uplands of grid parity say stay the course.
Fast growth is expected in China’s PV market, as the government gears its incentives to ensure that local demand takes up as much as possible of the slack in its over-expanded silicon, wafer, cell and module factories. By contrast the Czech Republic, Italy and perhaps France are likely to follow Germany with cuts in their feed-in tariffs to prevent costs spiralling for electricity consumers.
But with China, Germany, Japan and now Korea battling to own the crystalline silicon PV supply chain, production capacity looks set to outgrow demand for some years yet. We expect prices to continue to fall all the way along the solar value chain, with the focus shifting now to balance of plant, systems, integration and finance. Some long-established solar manufacturers will struggle as margins get squeezed like never before, and if investors blink we are going to see some big acquisitions by other PV players and diversified industrials.
Solar thermal electricity generation will have a good year, as many new parabolic trough projects are commissioned, and their performance will be keenly watched, but new approvals will be slowed by concerns over water consumption. The critical question is when projects using more pioneering designs, such as high-temperature tower and heliostat, will be able to begin construction and have a chance to prove themselves..
7. Biofuels comes out of the doldrums
The biofuels sector has had a harrowing last three years, but the survivors are now beginning to enjoy slightly friendlier conditions. Investment in sugar cane ethanol will catch the wind again, not just in Brazil, but also in other South American countries such as Peru and Colombia, as well as in the Caribbean and in southeast Asia. We will also be seeing some big acquisitions as the leading players build their market share and start to integrate through the value chain.
In the US, established players in corn ethanol should find that the “crush spread” between the corn price and the oil price allows them to make some return, even if it is less than their investors expected when projects were first developed. The country will fail to meet its 100m-gallon cellulosic ethanol target for 2010 by a country mile, and second-generation biofuel developers will continue to struggle with a financing shortage. Nevertheless, some headway will still be made, to a greater extent in advanced biochemical technologies than in advanced thermo-chemical approaches.
Meanwhile the love affair with algae will drift towards the rocks, just like the world’s infatuation with corn, cellulose and jatropha in previous years. With current production costs equivalent to around $800 per barrel, the sector needs to demonstrate convincingly how it will halve its costs, then halve them again, and then again, if it is to keep the romance alive. The air travel industry may have to play the algae game through lack of alternatives, and the oil industry may place a few wild-card bets, but other sectors and investors will find it hard to stop their eyes from roving.
8. The year of resource constraints
Across the clean energy sector there have been rumblings over the past few years about second-order resource constraints that could stymie the best laid development plans.
Will there be enough lithium for all those electric and hybrid vehicle batteries? What happens to western wind turbine manufacturers if China refuses to export its rare earths for use in generator magnets? Can the smart grid be built without “conflict” coltan from the Congo? Is there enough water for the expected expansion in bioenergy? Is there enough land in the desert for all those solar plants?
Constraints and imbalances in electricity grids, which have been holding back the deployment of clean energy in many parts of the world, have now been fully recognised and in many places are on track to be resolved. The spotlight is shifting to other resource constraints; expect them to be reflected more accurately in equity valuations and to drive private equity investment activity.
9. Natural gas crashes the party
In the US the past two years have seen a dramatic re-calibration of domestic natural gas supplies, as technological advances look like allowing large quantities of cheap shale gas to come to market. A battle royal is under way between the proponents of shale gas and environmentalists who claim that the fluids used in fracturing (“fracking”) the shales to extract the gas cause contamination of water supplies. A second battle is going on between the big oil and gas players jockeying for position, with Exxon, Total, BP, BG Group, Eni and Statoil among the big names moving in on the space.
2010 will see a number of natural gas developments demand the attention of clean energy investors. We expect to see the first significant breakthroughs in European shale gas, and deals being done in Asia to export the technology there.
In the US, despite the fact that natural gas and renewable energy make natural bedfellows, teaming up to squeeze coal out of the energy mix, there are those who will try to use the fact of abundant domestic natural gas to drive a wedge between the energy security and renewable energy crowds. Expect this to complicate the passage of a federal renewable portfolio standard, and expect a strengthening drumbeat of support for LNG in transportation.
10. Digital energy and energy efficiency deliver
The smart grid really went mainstream in 2009, breaking into the business press and attracting attention of new players in the ICT industry. No less than $34bn of the world’s stimulus funding was targeted at the grid, generally linked to some sort of perceived smart grid imperative. To date, however, there are only a few million smart meters in use worldwide, full smart grid pilots have so far struggled to hook up more than a few thousand households, and no one is sure of the scale of expected benefits.
This is about to change: 2010 will be the year when the benefits of the smart grid really start to emerge, as pilots begin to scale up into commercial-scale operations, and real data is collected and published. We believe the results will be impressive and the momentum towards smart grids will be maintained. That’s not to say the final shape of the sector will become clear – different players will be jockeying for position for some time.
Energy efficiency is another area where the hype has run some way ahead of the delivery. This month we published some of our Marginal Abatement Curves (MAC curves), explaining how the version everyone has been treating as received wisdom has significantly over-estimated the extent to which emissions can be reduced at little or no cost through energy efficiency. However, despite being cautious about the potential of energy efficiency, we don’t underestimate its impact and importance.
We expect 2010 to be the year when the reality starts to catch up with some of the expectations. Long-heralded LED lighting solutions will start to pick up commercial momentum this year, although remaining far behind compact fluorescent lighting. Stimulus-funded building efficiency programmes will get to scale and start to make a dent in domestic energy use; and city-based policy-makers will spread best practice in building codes and retrofit programmes. All of which – to steal a phrase from London Mayor Boris Johnson – will make lagging one of the leading sectors for 2010.
Well, those are our 10 predictions. We will stand to be judged on them at the end of the year, and will see how well – or badly – we do.