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McCrone: Watch the Debt Markets for Clues on the Next Twist for Clean Energy
By Angus McCrone
Bloomberg New Energy Finance
“It’s life, Jim, but not as we know it,” said Mr Spock. 2010 looks set to be a record year for clean energy investment, but not as we know it.
At the start of the year, we predicted total new investment in clean energy in the $180bn to $200bn range, and with just over four months of 2010 to go, that still looks like the most likely range.
This would be a new record, above 2009’s $162bn and 2008’s $173bn, but only just. We are certainly not going to see anything like the sort of precipitous growth rates that we saw between 2005 and 2008.
Our solar team is predicting that between 13.7GW and 18.2GW of PV capacity will be installed worldwide in 2010, up sharply from 2009’s record of 7.6GW. Behind the surge will be yet another hectic performance from Germany, where the certainty of tariff reductions ahead has spurred developers into a race for the line, plus increased activity in Italy, France, the Czech Republic, Japan and the US.
Even using average PV costs that reflect the savage falls in prices along the solar value chain since September 2008, and using conservative estimates for the cost of rooftop panels, that range for PV installation could equate to investment of more than $43bn in 2010.
In wind, our sector analysts are forecasting total installations of just over 40GW in 2010, up 7% on 2009. This rise might surprise some observers, who have been hearing downbeat noises from turbine makers recently. Taken together with the fact that the Bloomberg New Energy Finance Wind Turbine Price Index is down 15% from its peak in 2008, it is clear that there is little if any growth in the market in dollar terms. This is clearly causing problems for turbine manufacturers that have invested heavily in growth, as we saw last week when Vestas had to reduce its revenue forecast.
The expected level of wind installation would involve total investment of some $65bn, although the actual figure will depend as much on the precise timing of investment decisions as on their magnitude. With that caveat, it looks like PV and wind assets alone will take us over the $100bn mark in 2010. Then you have to add contributions from other significant sectors such as biofuels, solar thermal electricity generation, small hydro, biomass and waste-to-energy. And then there are the non-asset-based categories of investment: venture capital, private equity and public market investment in clean energy companies, and government and corporate research, development and deployment.
The two big surprises of 2010 so far for the clean energy sector have been the ferocity of the wind investment boom in China (remarked on in this column last month) and the rise of small-scale PV. Our solar team expects that more than 11GW of the capacity installed in PV this year will be either residential or sub-1MW commercial.
There are some potential shocks to the upside ahead, for instance if Enel Green Power manages to sell the anticipated $3-5bn of new shares in an initial public offering this autumn, or if the clubs of banks currently negotiating financing for several big North Sea wind projects such as Lincs, C-Power, Greater Gabbard and Borkum West manage to close these deals in time for year end.
At this stage, however, we are sticking with our $180bn to $200bn range for 2010. The actual outturn will not be confirmed until the Bloomberg New Energy Finance database has crunched all the figures early next year, but we will update our estimate as things become clearer over the closing months of the year.
We are also starting to look ahead at the prospects for clean energy investment into 2011, and one of the most important drivers we are watching is the health of government debt markets. This spring, it seemed that they would exert a negative influence – collapsing confidence in Greek, Spanish and Portuguese sovereign debt markets raised question marks over whether those and other governments would be able to continue support for clean energy.
While the immediate Mediterranean crisis quietened down over the summer, government debt continues to pose a potential threat to the clean energy sector, and not just in Southern Europe. One way it could go is that resurgent inflationary pressures in the US and Europe cause bond yields to spike, and with them long-term interest rates for project fi nance. Pretty quickly, central banks would have to raise short-term interest rates too, perhaps in rushed fashion, as they did in 1994.
Since clean energy developers rely on bank debt to cover some 75% to 85% of total project costs (wind and PV), and 50% to 65% in the case of biomass and solar thermal, a sharp jump in the cost of that debt would damage the economics of projects. If it coincided with governments from the US to the UK, France and Germany deciding that it had become expensive to borrow and that therefore they had to ratchet back their largesse for renewable energy, there could be a double hit.
However, from the vantage point of August, it looks at least as likely, if not more so, that events will go the other way, with interest rates held very low to protect the faltering recovery. Economies in the West and Japan have been recovering from the fi nancial crisis and recession, but they are making heavy weather of it. Spare capacity remains at significant levels throughout all leading economies – in the US for instance unemployment in July was 14.6m, some 9.5% of the workforce. Although commodity prices have risen, most recently wheat and other grains after the Russian drought, salary inflation has not taken off. In the 12 months to July, US average hourly earnings increased by just 1.8%. In the UK, average earnings excluding bonuses rose by the same annualised figure in the most recent month.
So on balance there is little reason to expect signifi cant interest rate increases any time soon. Early this month, the renowned bond investor Bill Gross of Pimco said he expected the US Federal Reserve not to raise its Funds Rate, currently in a zero to 0.25% band, for “two to three years”. The government bond markets have got this message too – US 10-year yields falling to 2.6% by late August from a 2010 peak of 4% and 5.3% back in 2007. German 10-year yields were down at 2.3%, compared with a 2010 high of 3.7% and 4.8% in 2007.
Lower long-term interest rates are already having an impact, along with a narrowing in bank margins, on the financing cost for wind farms and solar parks. Bloomberg New Energy Finance’s latest analysis of the European debt finance market showed the overall cost of loans for a typical mid-sized onshore wind project in a major economy falling from a peak of 7% last summer to around 5.5% now.
Within that latter figure, the average spread across Europe has slipped back to about 235 basis points, from a peak of 300 basis points last year, a figure more in line with long-term levels, albeit far above the under-priced 80 basis points of 2007. In addition, the overall figure is being pushed down because the cost of taking out an interest rate swap is easing, in response to the reduction in long-term money market rates.
With banks outside the most troubled euro area economies now reporting a full year of vastly improved financial results, and overall borrowing costs falling, is it possible we might be moving into a new phase of easier credit for project developers? China has already shown how ample bank debt can fuel a spectacular surge in renewable energy project development. When it comes to the longer-term health of the clean energy sector, whether we squeeze a new record investment level out of 2010 is not really the issue. The current period of anaemic growth feels too much like post-war Britain – all credit rationing and austerity, big dreams and dreary reality. What we need is growth that feels like post-war America – big projects and boundless horizons, optimism and confidence all round: in short, growth as we used to know it. Are we going to see it in 2011? Watch the debt markets.