Liebreich: A Large Number of Small Steps Can a Low-Carbon Revolution Make

By Michael Liebreich
Chief Executive
Bloomberg New Energy Finance

The third Bloomberg New Energy Finance Summit, which took place this month, was a great opportunity to take a step back from day-to-day concerns, consider how much progress the clean energy sector has made in the last decade, and reflect on where it is likely to be in 10 years’ time. The next 10 years take us to 2020 – a milestone year, heavily festooned with policy goals around the world.

In my keynote address, I highlighted my Magnificent Seven: seven “decadal themes” for the 2010s: the advent of cost-competitive clean energy; the resurgence of nuclear power; the greening of cities; pervasive data in the energy system; the transformation of transportation; the developing world’s chance to leapfrog some of the worst features of our energy infrastructure; and the likelihood of technology black swans. Of course these trends will not have fully played out by 2020, but they will be firmly under way and having profound effects on the nature of our energy infrastructure.

All of the Magnificent Seven are based on long-term trends which have been active for a decade or more. Think back to where we were in the year 2000, and it becomes instantly clear how far we have come, how fast we are moving and in which direction. The most important and relentless of the Magnificent Seven is the trend towards cost competitiveness of clean energy. We are probably never going to see a repeat of last year’s 50% fall in PV module prices, but that was the result of five years of cost reductions being masked by high margins as demand outstripped supply. What we will see is an underlying 5-10% reduction in costs over a very long time – not just in solar, but also in grid-scale power storage. Anyone who thinks this is not going to have profound implications within 10 years has not been watching the IT, telecoms or media industries. The pervasiveness of data will have similarly profound implications. Over the next 10 years, we expect the amount of data produced by the energy industry to double every year on average. This is going to take utility IT departments into new territory and create huge opportunities for software and communications companies.

Spotting long-term trends is relatively easy, thinking through how to make money from them is much harder. Progress on the Magnificent Seven will not be smooth. There will no doubt be times during the next 10 years when some or all of the trends will appear to have stalled. The sector remains policy-dependent, and politics certainly doesn’t move smoothly – particularly, it seems, in the US and Australia. But no sensible politician ignores powerful underlying trends in economics, geopolitics and public perceptions forever. Progress on each of the Magnificent Seven will also be characterised by “break points”: moments when the future suddenly stops looking like the past. So the future energy infrastructure can’t just be like Spain, but with a bit more wind power; cities can’t just look like Brussels, with a bit more public transport and few more electric vehicle charging points. And importantly, geopolitics can’t be essentially the same, with a few more nuclear powers.

So much for the big picture, decadal trends. The Summit was also about taking stock after a brutal year of recession in the world economy and consolidation in the clean energy industry.

A shortage of finance has been the biggest headache for clean energy in the last year, causing suffering for both project developers and technology companies. But the nervousness – even terror – evident at last year’s Summit, with banks unable to lend and the world economy in dire straits, has subsided. In its place were realism and a determination to do business, to get things done. The availability of finance, at least as regards projects, has been soothed partly by the arrival of the first tranches of stimulus funds, but also by practical action from multilateral and development banks: our latest analysis shows that the volume of lending by these institutions to renewable energy has surged from $6bn to $20bn over two years.

A notable example is the European Investment Bank, which lent EUR 4.2bn to renewable energy and EUR 1.5bn to energy efficiency in 2009, as well as further billions for grid development. It is likely to put its muscle in 2010 behind several 50MW Spanish solar thermal electricity generation projects, costing more than EUR 200m each, not to mention heavyweight offshore wind schemes such as the 1GW London Array. Fittingly, Brazil’s BNDES ran away with the award for top mandated lead arranger in the Bloomberg New Energy Finance League Tables for 2009, as it did in 2008.

So project finance is available in 2010, even though we are not back to the glory years of 2006 and 2007. Small projects have a good chance of getting decent terms from a single bank. Larger, strategic projects, in offshore wind and STEG for instance, have the chance of securing multilateral bank debt to anchor their financing. Projects in the middle, say 30MW to 60MW of onshore wind, are finding it most difficult – too big for a single bank to finance, too small to get real political support. They are reliant on club deals with several commercial banks, and the going is slow.

In offshore wind, there was a strong emphasis on partnerships – with bank-utility pairings particularly in focus. As we first pointed out in 2005, the offshore sector needs eye-popping amounts of money to develop the planned super-projects in the North Sea; a promising approach is for utilities and co-investors to fund construction, and banks to refinance once that period of greatest risk has passed. In onshore wind, Vestas described one response to the rise in “green protectionism”, with a vision of a Sustainable Energy Free Trade Area.

In solar, the most interesting new approach being discussed was the initiative by oil companies and the big STEG specialists to site hybrid STEG and gas plants in the US southwest and the Middle East. This is a combination that, they believe, will deliver low-carbon energy at scale, and without the problems of intermittency. There was much discussion about Desertec, although even its backers admitted that at present the project is more of a straw man to drive debate, rather than an engineering spec.

In electric vehicles – subject of a particularly well-attended Summit breakfast and a focus for several plenary sessions – a Nissan representative announced his company’s decision to produce electric cars in Sunderland, helped by a $30m grant from the UK government. And we heard from AeroVironment how it is working with the same Japanese carmaker to roll out charging infrastructure in the US. Meanwhile in biofuels there was renewed interest from investors in the upstream value chain, including the scope for cellulosic technologies and algae, and much better understanding at companies of the potential revenue streams from different processes and by-products.

Masdar Power told us how it is looking to work with the World Bank on STEG in Africa, and how turning non-recourse debt into bonds may be a way forward for it in North American solar. It also believes, intriguingly, that the Department of Energy’s willingness to provide loan guarantees to innovative technologies such as Brightsource’s heliostat project in California may mean that the US steals a march on other countries in the years ahead.

The utilities are the players with the most muscle, and they are using it. James Rogers, CEO of Duke Energy, told us how this is a good time to borrow money – he has secured $2bn at 5% – and investing in everything from gas combined-cycle to nuclear and renewables. He was strikingly down-to-Earth about his company’s preferences, criticising Europe for treating renewable energy as a “theology”. He stated the case for coal gasification as a clean technology, and said the jury was out on shale gas, a technology that many in the US have touted as offering huge supplies of cheap natural gas for the future.

By contrast, Iberdrola is ploughing on with the biggest wind investment programme in the world, and believes that the implied European Union target of 35% of power generation from renewables by 2020 is a “big ask” but achievable, since the commitment and support mechanisms are in place. For it, the unpredictability of the carbon price makes it hard to commit to investment in large nuclear plants. For others, smaller nuclear plants of perhaps 200MW are now looking a good bet for the first time in decades.

Overall, the atmosphere at the Summit was of guarded optimism. With the recession fading, the capital markets recovering and stimulus money starting to flow, this is set to be a record year for low-carbon energy investment.

The world in 2020 will be very different from today, whether or not we see a binding global deal on carbon, or new US climate legislation this year: the Magnificent Seven decadal trends will see to that. After the irrational exuberance of 2007 and the trauma of 2008-09, we are back in a period when significant, profitable businesses can once again be built. And if you are not building them, who is?

The title of our Summit said it all: this is not time to sit on the sidelines. This is “Time to Commit”.

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