Liebreich: Clean Energy 2010 – The Good, the Bad and the Ugly

By Michael Liebreich
Chief Executive
Bloomberg New Energy Finance

This is the final Monthly Briefing of 2010, so it’s time to ask ourselves how the year will go down in history, and how that compares with our forecasts from the start of the year.

2010 will not go down as a vintage year for clean energy, and still less for carbon, but neither was it unremittingly gloomy. In January, the headline on Bloomberg New Energy Finance’s 10 predictions was “A Goldilocks Year For Clean Energy: Not Too Hot, Not Too Cold”. Now 2010 did indeed turn out to be middling in terms of overall global investment growth in clean energy, but in the detail I am not sure that Goldilocks ended up being quite right for this year of sharp contrasts. Better might have been Henry Wadsworth Longfellow’s little girl: “When she was good, she was very, very good, but when she was bad, she was horrid.”

Two of the spectacular “goods” in 2010 have been finance of wind farms in China, and the installation of small-scale PV in Europe. Two of the “bads” have been the failure of the US to agree legislation on a federal renewable energy mandate or carbon cap-and-trade; and the slow-motion train crash of Spain’s threat to cut the tariffs for existing PV plants retrospectively.

Anyway, let’s take our 10 predictions one-by-one and give ourselves a score on each:

Our first prediction was “overall investment reaches new record”. It looks as though we will be right on that one, and we could even be correct with the range we suggested – total new investment in clean energy of between $180bn and $200bn, compared with the previous record of $173bn in 2008 and 2009’s $162bn.

The fourth quarter 2010 investment numbers will not be properly crunched for another two or three weeks. But after a first three quarters of the year that saw new-build asset finance of some $91bn, up 21% on the same period a year earlier, and the certainty that 2010 will be a record year by far for small-scale solar projects, it looks very likely that our final investment total for this year will be close to $200bn. It could be higher.

We identified acceleration in “green stimulus” spending during 2010, and a slow recovery in the supply of project debt from banks, as key elements in an improving investment trend. We also said we expected margins on project finance to “continue to fall noticeably from their peak last summer of 300 basis points for European onshore wind”.

Those have indeed gone as we suggested. Our latest “green stimulus” update, published in November, estimated that $59bn of the total sum of $190.3bn promised by the governments of major economies since the Lehman Brothers collapse would reach the clean energy sector during 2010.

There have also been improvements in the supply of debt, and spreads have declined to an average of 230 basis points for European onshore wind according to our latest analysis. However it would be fair to say that we did not spot in advance quite how important wind in China and PV in Germany would be to making 2010 a record year for investment.

SCORE 8/10

Our second prediction was that the public markets would be “open for business” in 2010. We predicted volatility for the NEX clean energy index, but added: “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”. We also suggested that this year could possibly be a record one for clean energy IPO activity, even surpassing 2007’s $14.4bn, and mentioned Enel Green Power, Tesla, Solyndra and Goldwind as candidates.

Whoops. The year has indeed been volatile for clean energy stocks at times, with big falls in the NEX in January and May for instance, but we were wrong about the general direction in 2010. With a week or two to go, the NEX is trading around 207, down some 16% since the end of last year, and – strikingly – down 26% relative to the S&P500; index. We have experienced 12 months of stubborn underperformance by the NEX relative to wider stock markets.

What went wrong? Well, the two “bads” I mentioned above – the lack of progress in the US Congress, and the Spanish tariff scare – certainly hit stock market enthusiasm for clean energy. So did the low natural gas price. This drifted as low as $3.18 per MMBtu in October, from $6 at the start of January and a peak of $13 in 2008. Cheap natural gas reduces the cost of gas-fired generation and makes it difficult for developers in the US to clinch power purchase agreements for wind projects. Meanwhile, in Europe, sluggish progress with debt finance deals slowed demand for turbines. Overall, there was excess supply for many renewable energy devices and that hit profits, and share prices.

On public market investment in clean energy, there were indeed IPOs by Enel Green Power (EUR 2.4bn or $3.2bn), Tesla ($226m), Goldwind ($1bn) and a slew of other Far Eastern companies including Trony Solar and Ming Yang Wind Power. However 2010 will not come close to beating 2007 for equity raising on the public markets by clean energy companies.

SCORE 3/10

Prediction number three was entitled “not much COP 16”, and suggested that global climate negotiations would not produce any significant cheer in 2010. We noted rising protectionist sentiment as an issue that could make agreement between the US and China even more difficult, and we predicted that the Copenhagen Accord would have almost no effect on investment decisions in 2010.

We were almost but not quite right on this one. I do not want to steal the thunder from Guy Turner’s article down below, but Cancun probably surprised us all by putting a small amount of flesh on the bones of the Copenhagen Accord, rather than producing another blast of hot air.

The best news on climate politics of the year was that the “Climategate” scandal of early 2010 has started to fade. Yes, the hoohah over scientists’ emails has done some lasting damage to popular perceptions about global warming. But it has done nothing to change the underlying scientific consensus that climate change is man-made and a serious threat.

SCORE 7/10

Number four was “two steps forward, two steps back for US policy”. We correctly deduced that the Democrats’ shock defeat in the Massachusetts by-election in January would hobble their chances of getting cap-and-trade through Congress.

In the event, the Democrats used up their reserves to get healthcare through Congress and were not up to the job of passing anything on renewables before the mid-terms. This was despite the fact that they had – in the shape of the Gulf of Mexico oil spill – a fossil-fuel disaster that skilful leadership might have been able to turn into a rallying call for clean energy legislation.

So although we were a bit optimistic about the chances of a national renewable energy standard passing, it does look as though some of the key provisions of the American Recovery and Reconstruction Act will be extended into 2011 and beyond.

SCORE 8/10

Prediction number five was that 2010 would be a year of “belttightening” for the wind sector. We forecast that installation levels would be down slightly on 2009, particularly in Europe and the US, but that China would “power ahead”. We optimistically foresaw a breakthrough in the quest for a European super-grid. Lastly, we predicted stabilising turbine prices and financial problems for “some Tier 2 or Tier 3” turbine manufacturers.

Our latest Wind Market Outlook, published in mid-October, found that 2010 was likely to see a 4% fall in installation levels compared with 2009, despite surging Chinese investment. Turbine prices have been falling, rather than stabilising, in 2010 – with Vestas for instance reporting average prices per MW of just under EUR 1m in its latest trading statement. Meanwhile, there has indeed been corporate distress, with Clipper forced by financial problems into the arms of UTC.

SCORE 8/10

Solar was the subject of our sixth prediction. We said there would be a face-off between over-capacity, falling tariffs and disappearing margins on the one hand, and “ballooning volumes” on the other. We forecast cuts in tariffs by the Czech Republic, Italy and France, following the German lead. Finally, we declared a good year ahead for solar thermal electricity generation “as many new parabolic trough projects are commissioned”.

Much of the picture we painted for the sector has been correct, with PV installation likely to be more than 100% higher in 2010 than in 2009, at somewhere between 16GW and 20GW. Investment in solar worldwide, in fact, is likely to have surpassed that in wind for the first time ever – in money terms, though not in GW terms. There has also been a volley of tariff reduction announcements in Europe, from Flanders to Berlin, Prague to Madrid, Paris to Rome. In STEG, there have been impressive capacity additions, as we suspected, with cumulative capacity up 55% in the last 12 months, or 363MW, almost all of the increment going into Spain.

PV prices have been somewhat firmer than we thought at the beginning of the year. The heat of demand in the second half of the year, as developers rushed to build before tariff cuts, has caused prices to rebound along the solar value chain – although we now expect a sharp fall-off in demand early next year to cause another price downturn.

SCORE 8/10

On biofuels, number seven, we predicted that this battered sector would come out of the doldrums in 2010. We forecast a more comfortable “crush spread” for US corn ethanol producers this year, and that second-generation biofuel developers would struggle with a finance shortage. The crystal ball showed progress in biochemical technologies, but disappointment in algae.

Again, we got much of this right. Algae has perhaps been quiet rather than disappointing in 2010, but there has certainly been no breakthrough in bringing down the very high cost of algae biofuel production. On the crush spread, 2010 has been the best for US corn ethanol since the 2006 bubble, with the average at $0.488 per litre on our analysis, compared with $0.351 in 2009, $0.319 in 2008 and $0.329 in 2007.

SCORE 8/10

Our eighth prediction was that 2010 would be a “year of resource constraints”. We even asked: “What happens to western wind turbine manufacturers if China refuses to export its rare earths for use in generator magnets?” We also mentioned that coltan could be a pressure point for smart-grid products, and water for the bioenergy sector. We certainly called this one right.

In October, a Bloomberg New Energy Finance insight note entitled Rare Earth Wars: Drawing The Battle Lines examined the row between Japan and China over the latter’s alleged restrictions on exports of rare earth metals, and the emerging US response.

Meanwhile, on stock markets, rare earths became a sudden “hot” area for investors, with the share price of US producer Molycorp for instance rising from its $14 IPO price in July to a peak of $38.56 in late October.

SCORE: 9/10

Number nine concerned natural gas. We foresaw the first significant breakthroughs in European shale gas, a low gas price complicating “the passage of a federal renewable portfolio standard”, and “a strengthening of support for liquefied natural gas in transportation”.

Well, we were right in terms of fundamentals. Gas stayed cheap in 2010, indeed got cheaper still in the US. The International Energy Agency was even prompted to make a “gas glut” one of the key new elements in its projections for world energy supply and demand over the next 20 years. However, the other changes we mentioned were shy in happening. European shale gas remains a likely emerging sector rather than one that is emerging fast, while LNG use appears logical given the 20-year record ratio of oil prices to gas prices. Since May 2009, oil prices have out-performed gas prices by 70%. Nevertheless, the substitution of gas for oil in transport remains a trend for the future rather than one that exploded in 2010.

SCORE: 6/10

Our tenth, and last, prediction was that digital energy and energy efficiency would “deliver” in 2010. We forecast that smart-grid pilots would begin to scale-up into commercial-scale operations, and LED lighting would gain commercial momentum, albeit remaining behind compact fluorescent.

We were maybe a bit too simplistic The reality is that both pilot and commercial-scale projects that were in the pipeline this time last year are now getting installed and many of them have bits that are up and running. Smart metering is now a given – there’s no turning back. Based on known projects, we can safely say that half of all US homes will have a smart meter in the next 3-4 years – and it’s likely to be quicker as more projects get announced. Europe will have 80% smart metering by 2020.

So the most interesting pilot projects these days are not around smart metering, but around management of distributed resources – especially distributed PV, batteries and electric vehicles.

Meanwhile, the US stimulus that was supposed to transform the grid finally got flowing mid-way through this year. This is helping to pay for a good 100 of the 300-plus projects that we are tracking globally.

However, 2010 has been very much the year of Smart Grid Backlash. The number of places where consumers or regulators have kicked up a fuss about smart metering roll-outs now includes California, Texas, Maryland, Colorado, Indiana, Hawaii, Victoria (Australia) and the Netherlands.

On LEDs, costs have indeed continued their downward trend, which has been going on for some time. The technology has also been in the commercial spotlight in 2010, with some retailers citing LEDs as an option. If you go to Amazon, for example, and click under gift ideas for “Dad” there are LED torches and for “Someone with Everything” various novelty LED lighting products come up.

SCORE 8/10

On my maths, we scored 73 out of 100. Not quite first-class honours, but a good solid performance. The main blemish was the performance of clean energy shares. Maybe we were just a bit too early on that. 2011 will tell whether we just got the timing wrong on this one.

In the next Monthly Briefing, chief editor Angus McCrone and I will be presenting Bloomberg New Energy Finance’s 10 predictions for 2011. I will resist the temptation to lift the lid on that now, except to say that we expect it to be a year of potential turning points, as cost reductions and recovering capital markets collide with the diminishing willingness of governments to pay generous subsidies.

It only remains for me to thank you all for your help and support in 2010. Input from our clients and friends remains vital fuel for the analysis we do, so please keep it coming! And have a happy Christmas and prosperous New Year.

CANCUN DELIVERS WARMTH ON DEMAND, BUT NOT SUPPLY

By Guy Turner
Head of Carbon Markets
Bloomberg New Energy Finance

Despite many expectations that international negotiations on climate change would run aground in Cancun, the outcome from Mexico delivered some positive signals, especially for the global carbon markets.

The failure at last year’s Copenhagen talks to decide on a replacement for, or extension of, the Kyoto Protocol left many investors in the carbon area to wonder about the future of international offsetting initiatives like the UN’s Clean Development Mechanism.

With the heat on negotiators turned up to Caribbean temperatures, the December 2010 Cancun Agreements not only confirmed the continuation of CDM post 2012, when Kyoto expires, but the formal decisions also widened the mechanism’s scope to include carbon capture and storage. Additionally, the agreements outlined the framework for REDD+, a mechanism for forestry protection activities.

What exact role CCS and REDD+ will play in the carbon market remains to be seen. CCS, a technology that siphons off carbon dioxide produced by power plants and stores it underground, is still too expensive to be financed entirely by carbon credits. And it is uncertain whether the carbon market will benefit at all from REDD+, as financing for forestry projects and the role of the private sector was deliberately left out of the text. However the decision on REDD+ is certainly a good sign for the planet.

It is too early to pat ourselves on the back and say this has been fantastic progress. Ultimately the acid test will be whether new policies and investment happen beyond what would otherwise occur. In order for that to take place there need to be commitments on new targets for emissions, funding and investment.

As yet, none of that has come through. The mitigation targets set for limiting the rise in global temperatures to two degrees Celsius above pre-industrial levels are still not binding. For its part, the EU is the only bloc or region to have already formalised its aspirations in terms of domestic legislation. The US, Japan and Australia still do not have legal mandates that impose investment requirements on business.

This is important because the carbon market needs to know where the demand is going to come from. If CDM progresses and REDD+ moves forward with a market-based mechanism, this would be a success for the supply side of the equation, but investors need to know about demand for carbon credits too.

So what is the future of the Kyoto Protocol? While the outlook for global climate negotiations is more hopeful than it was post-Copenhagen, the euphoria out there needs tempering.

Ultimately the progress rate is still too slow. At this stage, it looks likely there will be a gap between the end of the Kyoto Protocol and its successor, which will probably not be decided by 1 January 2013 when the UN treaty expires.

But Cancun has materially changed the landscape. The trust in the process has been restored after the debacle of Copenhagen. While the Copenhagen Accord was completely voluntary with no commitments, the Cancun Agreements have taken it one step further down the road with a formal UN decision. It is still a long way from a binding target involving the US, China, Europe, Japan and Australia, but it is a bit closer.

Download the PDF here.

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