By Angus McCrone
Bloomberg New Energy Finance
The U.S. Constitution famously is a three-cornered thing: executive, legislature and judiciary. So, arguably, is modern life – work, leisure, sleep – although some people might add a fourth (exercising thumb with mobile phone). How many corners does the future of energy have?To judge from this month’s Bloomberg New Energy Finance Global Summit, held on April 4-5 in New York, the answer might be four: renewable power, storage, electric vehicles and grid. That was the quartet of topics that most excited some 1,000 invited thought-leaders, senior executives, investors and policy-makers from the world energy sector.Like the U.S. government triangle of executive, legislature and judiciary, the four energy corners are all linked to each other. They make it possible for each other to do new things – without EVs, for instance, battery storage would not be enjoying such improvements in its cost-effectiveness, and without renewables, the opportunity of an intelligent grid would be low-priority. Without new grid technology, storage, EVs and renewables would find their headroom limited.It is an enticing prospect, but could the sector be getting ahead of itself? Could the unambiguously upbeat mood at the 2016 Summit – exemplified by the excited hubbub in plenary sessions, the innumerable confabs in networking areas, the throngs packed in like sardines at the most topical break-outs (yes, I was at the large-scale solar session!) – give way to a new round of worries in the year ahead?“
The fact that “old energy” has had a tough time recently is not necessarily of help to those active in the low-carbon transition. Low oil, gas and coal prices present a challenge to competing technologies, and may (logically or not) dampen stock market interest in all kinds of energy. The human cost provokes sympathy: the Summit rang with statistics relating to the fall-out from the plunge in fossil fuel prices – 60,000 jobs lost in Alberta, oil and gas investment down 36 percent in 2015, bankruptcies in mining. Having said all that, the sense that old energy is on the retreat is bound to have made Summit delegates all the keener to focus on the new.However, the upbeat mood on April 4-5 had much more to do with the gust of encouraging developments that has blown through the clean energy sector in recent months. There was the record $329 billion invested last year, according to Bloomberg New Energy Finance figures, up 4 percent on 2014. There have been the astonishingly low auction prices agreed for renewables around the world in the early months of this year (in Peru, $37.70 per megawatt-hour for wind and $48.10 for solar, in Morocco $30 for wind, in Mexico $36 for solar). There was the loud chorus in favor of emission reduction that came out of the December climate change conference in Paris, with the promise of five-yearly reviews of progress at the national level. There was the extraordinary news that Tesla’s Model 3 electric car had attracted 300,000 advance orders in a matter of days, more than a year before it will be possible to buy it.Specific to the U.S., the host country for the Summit, there was the warm glow produced by the vote in Congress just before Christmas to extend the Production Tax Credit for wind and the Investment Tax Credit for solar, for an unprecedentedly long period of five years. This gives the sector in the U.S. the promise of a stable incentive regime, and on the estimates of our analysts, could result in an extra $73 billion of wind and solar investment in 2016-21.And then, of course, there were the words of the Summit speakers themselves. John Kerry, U.S. Secretary of State, in his keynote, described clean energy as “one of the greatest economic opportunities the world has ever seen”, and said: “The peer-reviewed studies in the thousands – more than 5,000 – indicate that, unless we transition away from the sources of Edison’s time to these low-carbon alternatives, we are going to self-inflict harm to infrastructure, food production, water supplies, ecosystems, health – potentially to life as we know it on this planet. And the fact is, when we talk about the future of energy, we are actually talking about the future of everything.”Jim Hughes, chief executive of First Solar Inc, told a CEO panel moderated by my colleague, Ethan Zindler, that it was “close to the greatest point in time” to be involved in the low-carbon transition. In two other notable comments, he said that the renewable power sector had reached a point of demand elasticity, where “every time we reduce costs, we trigger new demand on a global basis”; and that the low, non-volatile electricity prices offered by solar had become key to it winning power purchasing agreements, with “the green benefits almost an ancillary bonus”.The break-out session on corporate procurement was notable for the business muscle on the panel – Microsoft Corp, Google Inc, General Motors Co and Facebook Inc – and for the message coming loud and clear from these companies that there was clear advantage to them in purchasing renewable electricity. Bill Weihl, director of sustainability for Facebook, said: “Renewable energy is our energy strategy.”Big corporations from outside the energy sector have developed a taste for clean power – and so have big corporations from within it. Enbridge Inc, the $40 billion capitalized Canadian oil and gas pipeline company, has set a target to lift its portfolio of renewables from the current 1.8 gigawatts, to more than 4 gigawatts by 2019. Vern Yu, its senior vice-president for corporate planning, told the Summit that it was bringing to renewables its experience with complicated construction projects, and a capacity to write “2 billion-dollar cheques”. He said: “We have been taking a long-term view that we do see the world moving to a lower-carbon economy over time, and as that happens, we believe that we need to make investments to make us move in that direction.”Nations are shifting the same way. The energy ministers of Argentina and Chile spoke of the potential for subsidy-free renewables and regional interconnectors. The words of Juan Jose Aranguren, the Argentine minister, rang particularly loudly, since his country has until recently been out of favour in international financial markets and almost invisible in terms of non-hydro renewable energy investment. He spoke of the dramatic moves to cut energy subsidies under the new government in Buenos Aires, with electricity tariffs up by 500 percent and gas tariffs 300 percent, and plans to add 20 gigawatts of new capacity to ease power shortages, with “half of that from renewables”.
There was, perhaps, even more optimism at the 2016 Summit than in earlier years about the role that new technology could play in the energy transition. The 10 New Energy Pioneers, winners from a field of more than 150 young companies applying, included 24M Technologies Inc, a U.S. company working to engineer big reductions in the cost of lithium-ion batteries by eliminating 80 percent of the inactive material that currently goes into them; and AutoGrid Systems Inc, aiming to “turn data into a new source of energy” so that utilities can incentivize customers to shift usage when the system is under stress; and Newlight Technologies LLC, turning greenhouse gas emissions into AirCarbon, a material from which it is possible to make an Ikea table or a Dell bag.Technology is driving the assault by electric vehicles on the traditional car industry. Bloomberg New Energy Finance’s figures show that EV sales overwhelmed expectations in 2015, rising 60 percent to 462,000 worldwide. Regulators have no doubt of the significance. Alberto Ayala, deputy executive officer of the California Air Resources Board, told the Summit: “We will see more change in the auto industry in the next 10-20 years than in the last 100.”One of the memorable phrases of the event in New York this year was on the wider implications of the rise of EVs. It came from Nancy Pfund, managing partner of venture capital firm DBL Partners: “The EV is like a Trojan Horse…..Once they have got the car in the garage, they will start to ask where the electricity is coming from. It will drive a transformation towards energy literacy.”Recent months have seen rising interest among utilities in the potential of storage, with several making equity investments in young battery companies, including RWE AG‘s interest in Stem Inc, American Electric Power Co Inc‘s gambit with Greensmith Energy Management Systems LLC and AGL Energy Ltd‘s equity purchase in Sunverge Energy Inc. Bruce Huber, managing partner of specialist investment bank Alexa Capital LLC, said that storage could pose a threat to utility businesses in some countries, and that therefore they are having to respond: “We see utilities figuring out how to make this market work. They recognize that the market is too dynamic [for them] and that they will need entrepreneur-led companies to hammer out the business cases to enable capital to flow.”There was more emphasis than at earlier Summits on the role that grid improvements could make in smoothing the path to a higher percentage of renewable generation. Francesco Venturini, chief executive of Enel Green Power SpA, talked of the problems in U.S. transmission that had held back the spread of wind and solar, but added: “Now, we are finally getting there.” Jonathan Weisgall, vice-president of government relations at Warren Buffett’s Berkshire Hathaway Energy, argued for a regional “Match.com for electrons” on the west of the U.S., in which “over-generation of solar in California can be picked up in a bigger market.”
Underlying many of the changes described above has been the apparently remorseless reductions in wind, and particularly, solar generation costs achieved over the last seven or eight years. Bloomberg New Energy Finance’s latest Levelized Cost of Electricity Market Outlook, covering the first half of 2016 and published the week after the Summit, showed onshore wind’s LCOE declining to $81 per megawatt-hour on average worldwide (compared to $96 in 2H 2009), and crystalline-silicon PV’s levelized cost tumbling to $99 per megawatt-hour, from $122 in the second half of last year and a vastly higher $315 in late 2009.Of course, in the last two years, lower prices for coal and gas have pushed down levelized costs for fossil fuel generation. But wind and solar claim advantages over hydrocarbons in being free from commodity price volatility and being on steeper long-term experience curves for cost reduction, not to mention the climate change and human health issues.Michael Liebreich, chairman of the advisory board at BNEF, said in his Summit keynote that the move by many countries to competitive auctions for renewable power capacity had resulted in average reductions of 35 percent in costs in the first year. Recent auctions around the world had produced “world record-low prices for wind and solar”. He added: “Truly we need ‘an energy miracle,’ in the words of Bill Gates. [In solar], we have seen costs come down by a factor of 150 since 1975, we’ve seen volumes up by 115,000 times. How much more ‘miracle-y’ do you need your miracles to be?”
REASONS FOR CAUTION
Stock market contrarians will tell you that when surveys report high levels of investor confidence, it is often a sign of trouble ahead. Now, I am not saying that the upbeat mood at Summit 2016 is a danger signal, but it is worth asking whether there might be some reasons to be cautious. One is that ever-rising investment in clean energy is not a given – indeed, Bloomberg New Energy Finance’s data for the first quarter of this year, published on April 19, some two weeks after the Summit, showed a fall of 12 percent in investment compared to the same quarter of 2015. It is possible that the 1Q 2016 number, of $53.1 billion, may be revised up during the course of this year as more deals come to light.However, the China figures for the first quarter do give food for thought. The world’s largest clean energy investing country saw investment down 37 percent in the first quarter compared to 1Q 2015, as wind developers, in particular, paused for breath after a rush to take advantage of expiring feed-in tariffs. At the very least, it will be hard for China to match its record full-year total from last year, and with Japan also cooling somewhat, and public markets equity raising depressed by the crisis at SunEdison Inc and investor cold feet about U.S. yieldcos, a global investment total lower than 2015’s $329 billion looks possible this year.A second caveat is that, however good the news has been on wind and PV installations (runaway records of 62 gigawatts and 56 gigawatts respectively last year), renewables excluding large hydro still only accounts for just over 10 percent of world electricity generation – as the latest UNEP Global Trends report, published last month, shows. Put it another way, renewables are increasing their share but fossil fuel generation still accounts for a majority of global electricity. This at a time when the climate indicators, such as the rate of increase in CO2 in the atmosphere and Arctic ice cover, are looking alarming.Clean energy’s biggest foe – coal – is not shutting down quickly at all in most parts of the world, despite the climate change pressures and eye-catching news items such as the bankruptcy filing by Peabody Energy Corp. Developing countries such as India continue to invest heavily in new coal-fired capacity (as well as renewables), and even in the U.S., some important utilities are talking about burning coal long term.Thomas Fanning, chief executive of Southern Co, told the Summit that his firm’s $6.2 billion power station project in Mississippi, which will convert slurry of low-grade lignite coal into a synthetic gas to fuel turbines, provides a blueprint for future generations of coal-burning power plants. “This world is going to continue to consume coal, and we’ve got to figure out a way how to do it responsibly,” he said. (Southern Company watchers might point out that the 582-megawatt Kemper project in Mississippi is two years behind schedule.)Third, “It’s the Politics, Stupid.” That was the headline on the equivalent of this article after BNEF’s Summit back in 2012. It reflected the fact that although the clean power sector was alive and kicking, a poisonous political divide had needlessly arisen over future energy choices.It is not as bad now. Declining wind and solar costs have seen to that, and key countries have moved away from fossil-fuel-favoring policies (Australia and Canada, for example), but progress towards a low-carbon transition has a habit of not happening in a straight line. What some politicians giveth on clean energy support or emission regulation, their successors can taketh away. The consensus in the U.S. is that the PTC and ITC extensions will survive the outcome of this November’s U.S. Presidential election, and it is probably right. But, right now, it is hard to be sure about anything in relation to the next President.Finally: so far, rising wind and solar generation has been handled successfully by grids. The lights have stayed on, even as variable sources have risen to 10 percent, 20 percent and higher shares of total generation in markets such as Denmark, Germany, the U.K. and California. Much depends on this continuing to be managed well – black-outs, if they ever happen for reasons that can be blamed on renewables, would jeopardise hopes of a “four-cornered” shape to future energy.Exactly how many corners Bloomberg New Energy Finance reckons energy will have in 2040 will be revealed in June, with its New Energy Outlook forecast to 2040. Last summer, we predicted $12.2 trillion would be invested in power generation worldwide over the 25 years, with two thirds of that going to renewables, and a 15-fold increase in “flexible generation” sources to balance it.All I will say now is that there have been a lot of changes in energy in the last year. Note that the annual total includes corporate and government research and development spending, and digital energy asset finance, neither of which are included in quarterly figures.