After Paris, the Smart Bet is on a Clean Energy Future
by Doug Arent, Executive Director, Joint Institute for Strategic Energy Analysis
Power systems and the investment landscape are changing. Both at home and around the world, the ways that we produce and consume electricity and arrange fuel transportation are evolving.
The many drivers of this transformation include public policy, consumer trends and demands, business models, and technological innovation. The ultimate outcome of the changes remains to be seen, but a clear direction is apparent. A clean energy future is here and poised for rapid growth. Clean energy attracted a record $329 billion global investment in 2015 despite low oil and gas prices. That record was due to investment all over the world – the United States, China, Africa, Latin America, India, and elsewhere.
The energy marketplace is and will remain dynamic. Fossil energies are poised for moderate growth overall, particularly in non-OECD economies in transition, but these traditional energy sources may also lose market share in many more mature markets. Renewable energy technologies are the major growth story coming out of Paris, making prudent investment in the clean energy space a seemingly smart bet.
Why Now?
In December 2015, 174 nations and the European Union struck a landmark climate agreement in France. The Paris Accords include binding commitments in the form of Intended Nationally Determined Contributions, or INDCs, to hold the increase in the global average temperature to well below 2° Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5° Celsius above pre-industrial levels. Preliminary analysis of the INDCs indicates that achieving them will require a 50 percent growth in renewable energy by 2040. Achieving the more ambitious goals would likely mean even more growth in the clean energy marketplace.
The Paris commitments seem likely to strengthen an established trend toward cleaner electricity and transportation systems.
• From 2004 to 2015, global investment in clean energy rose from $60B to more than $320B – more than a five-fold increase.
• In the United States alone, since 2009:
– Wind power production has tripled to more than 70GW (Gigawatt)
– Solar power costs have dropped by more than 60 percent and solar installations have increased by a factor of more than 20; solar now provides more than 20GW of electricity
– Battery costs have dropped more than 70 percent and today we have more than 400,000 plug-in electric vehicles (EV) on America’s roads.
– Highly efficient LED lighting has dropped in cost by more than 90 percent, with LED deployment growing by more than 200 times to more than 80 million installed light bulbs today.
Solar and wind power prices have reached all-time lows—raising eyebrows of many who thought renewables would always be more expensive than “traditional power” like coal, nuclear or natural gas. For example, in early 2016, Dubai Electricity and Water Authority received a 2.99 US cents/kWh (kilowatt hour) bid for the 800MW (Megawatt) solar electricity plant it plans to build. Just in the last few weeks, Enel Green Power managed to set new record lows for wind (3 US cents/kWh – Morocco) and solar (3.6 US cents/kWh – Mexico). These prices are unsubsidized and do not account for the environmental externalities that would make clean energy even more economically attractive.
These statistics only hint at the scope of opportunity this clean energy revolution offers for investors. A broad portfolio of new technologies is emerging as technically and economically viable. These include ‘smart’ and traditional solutions, and options for centralized and decentralized power systems.
What does the future hold? Jedi master Yoda noted that the “future is always in motion and difficult to see,” and that’s certainly true of the energy marketplace. The heterogeneous policy and regulatory environments of power systems make the swirling mists of the marketplace difficult to read, but likely categories of ‘next big things’ include electrified transportation, energy storage at all scales, integrated energy service providers, and smart data applications.
State of Play in the ‘Green’ Investment Market
The appeal of clean energy technologies has not gone unnoticed. As noted at the beginning of this article, clean energy attracted a record $329 billion in financing in 2015. And while China’s economic slowdown has cooled investment somewhat in 2016, the overall trend toward cleaner energy is expected to continue.
And that investment is flowing into the market through varied channels, both traditional and innovative. Green bonds, crowdsource funding, real estate investment trusts (REITs), master limited partnerships (MLPs), and other channels are providing investors with many paths into the clean energy marketplace. And the innovations in finance are helping to bridge traditional financing gaps.
Filling the growing demand for clean energy solutions is anticipated to spur increased growth across the industry and new innovation, particularly with new ambitious targets to double clean energy research and development (http://mission-innovation.net) by 20 leading countries to more than $20 billion per year. These innovative solutions will not only help achieve the bold climate mitigation targets, but will also represent unprecedented opportunities for smart investors. Bringing new clean energy solutions to the market, and providing an attractive set of investment opportunities, historically has been challenged by two financing gaps. These gaps are sometimes called the technological and commercialization valleys of death, so named because financing dries up and the innovations wither. The technological valley of death occurs in the innovation and development stages, as entrepreneurs seek capital to develop, test, and refine technologies. A second financing gap emerges as technologies move from demonstration to commercialization. Venture capital and angel investors may have gotten the technology to this stage, but the entrepreneurs have not yet reached the oasis of traditional project financiers and investors.
Creative financing models are emerging to bridge these gaps. For example, the U.S. Energy Department’s National Renewable Energy Laboratory, where I work, has teamed with the foundation arm of U.S. financial services leader Wells Fargo & Company to create the Innovation Incubator (IN2) program. IN2 offers tailored financial and technical assistance to support startups at critical stages. As an investment vehicle, IN2 represents a unique partnership between a philanthropic organization and industry partners. It is one financing program among many that are creatively expanding opportunities for investment in clean energy technologies.
Of course, not all investments in clean energy are good investments, and not all investment vehicles are good either. A word of caution: Yieldcos. This once-promising financing model, which sought to provide utilities with an investment vehicle similar to MLPs or REITs and lower cost of capital for renewable energy projects, now appears endangered. Some have called it ‘broken.’
As with any investment, prudence is important in assessing opportunities in the energy market. Smart investors will weigh carefully the dynamics of the clean energy markets with the soundness of investment opportunities. The anticipated growth of clean energy to more than 50 percent of world power represents a marked shift in energy markets, strong commitments to climate mitigation, and an unprecedented investment landscape.
photo caption: Apple built the largest non-utility biogas fuel cell installation in the United States to help power their data center in North Carolina with 100 percent renewable energy. Source: http://www.apple.com/environment/climate-change/
Article by Doug Arent, MBA, Ph.D.
Doug Arent is Executive Director of the Joint Institute for Strategic Energy Analysis (http://www.jisea.org) at the U.S. Energy Department’s National Renewable Energy Laboratory. In addition, Mr. Arent is Senior Visiting Fellow at the Center for Strategic and International Studies, serves on the American Academy of Arts and Sciences Steering Committee on Social Science and the Alternative Energy Future, is a member of the National Research Council Committee to Advise to U.S. Global Change Research Program (USGCRP), is a Member of the Keystone Energy Board, and is Associate Editor for the journal Renewable and Sustainable Energy Reviews.
Arent was recently invited to serve on the World Economic Forum Future of Electricity Working Group, and is a member of the International Advisory Board for the journal Energy Policy.
Mr. Arent was a Coordinating Lead Author for the 5th Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). He has been a member of Policy Subcommittee of the National Petroleum Council Study on Prudent Development of North America Natural Gas and Oil Resources, served from 2008 to 2010 on the National Academy of Sciences Panel on Limiting the Magnitude of Future Climate Change, and also served on the Executive Council of the U.S. Association of Energy Economists.
His research interests are centered in energy and sustainability, where he has been active for more than 30 years. He has published extensively on topics of clean energy, renewable energy, power systems, natural gas, and the intersection of science and public policy. Mr. Arent has a Ph.D. from Princeton University, an MBA from Regis University, and a bachelor’s of science from Harvey Mudd College in California.