McCrone: Upbeat Summit hears of the “age of plenty but also competition”

Angus McCrone, Chief Editor

Bloomberg New Energy Finance

 

The barometer has been rising at Bloomberg New Energy Finance Summits. In 2012, the pressure reading signalled that there would be a role for renewables but that it would be constrained by politics and would be as second-fiddle to cheap gas. In 2013, it indicated that renewables and efficiency would have an important role to play in ensuring the resilience of the power system in the face of shocks such as Superstorm Sandy. In 2014, the barometer showed clean energy going onto the attack, helped by rapidly falling costs.

This year’s Summit, held in New York on 13-15 April, found the gauge twitching further upward, reflecting a confident bounce in the step of clean energy executives, investors and policy-makers, in no way unnerved by the oil price plunge late last year.

Capturing the mood of 2015 was former Vice-President Al Gore, who told the Summit: “We are going to win this battle. The only question is how long it will take.” And Debbie Dooley, a board member of the US National Tea Party Patriots group and founder of the ‘Green Tea Party’, who said: “This is a battle that we will win.”

The two were talking about slightly different things – Gore about decarbonisation in the cause of curbing climate change, Dooley about freedom to put solar panels on roofs in states such as Florida – but both saw clean energy as the future.

Industry leaders were equally can-do in their contributions. Jose Manuel Entrecanales Domecq, chairman of Acciona, a renewables champion scarred by the saga of retroactive subsidy cuts in Spain, told the audience in New York that after the technology cost reductions of recent years, the price at which wind and solar could generate was “no longer an issue”. He added: “We don’t need to convince anyone. Now, we just need politicians not to interfere.”

Ahmad Belhoul, chief executive of Masdar, the Abu Dhabi based investor, was asked about the impact of the oil price fall on Middle East countries’ choice of generation. He said: “Renewable energy costs are low enough to weather any fluctuation in the oil price.”

It is not just hardware costs that are moving in favour of clean power. Kyung-Ah Park, head of environmental markets for Goldman Sachs, said that there was a virtuous circle at work in which greater deployment of renewables was opening up “many more financial toolkits” – including green bonds – and that this was expanding investor access, in turn “driving down the cost of capital” for projects.

To judge by the Summit, attended by more than 150 thought-leaders and a record 1,300 delegates over three days, the Rubicon is now being crossed on the way to the transformation of the world’s energy system.

Oil and coal take the strain

Michael Liebreich, chairman of Bloomberg New Energy Finance’s advisory board, predicted that the world energy system was heading into an “age of plenty”, in which fossil fuel prices would be low and clean technologies from wind and solar to batteries and smart devices would continue to improve and grab the cost advantage. “It will be a model of plenty, but also competition,” he said.

In the debate over whether oil prices would rebound to $100-plus in response to weak investment, as the International Energy Agency has warned, or whether they would stay down – what he referred to as the “V-shaped” and “L-shaped” scenarios – Liebreich said: “I am an L-ist.”

The reason, he argued, is demand. Supply has taken the lion’s share of the credit for the drop in oil prices since summer 2014, with US shale oil in particular adding to the abundance, but improvements in vehicle efficiency, the advance of electric vehicles and action to address smog in many of the world’s cities would hold back fuel demand in the years ahead, he said.

One of the 10 winners of the 2015 New Energy Pioneers Award is Proterra, a maker of electric buses. Ryan Popple, its CEO, said: “For the first time in human history, 50% of the world’s population lives in cities. By 2040, it could be as high as 75%.” He added: “Buses are horribly inefficient. They are made from hand-me-down parts from the trucking industry, they only get about four miles per gallon. Our buses are five to six times more energy-efficient, they are very quiet, on a greenhouse gas basis they are 60-80% better…. EVs are the obvious technology for urban transit.”

Brook Porter, partner in the Green Growth Fund for venture capital firm Kleiner Perkins Caulfield & Byers, told the Summit: “One provocative line of thinking is that for decades we have had a driver-centric model, but that today, more and more, it is not about the front seat, the luxury seat in the car is now the back seat…. Autonomous driving impacts what we think about transportation.”

He added that the Millennial generation is already “more excited to get a smartphone at 16 than they are to get a driving licence”.

If the future for oil is uncertain, it looks downright bleak for coal. Michael Bloomberg, the former New York mayor and founder of Bloomberg LP, told the Summit that he backed the gasification of North American power. He saw fracking as essential, along with renewables, to make possible the end of coal: “Tomorrow, we’ll save a life if we close a coal-fired power plant. In America we have closed 187….and there are still 300 coal power plants. If you want to do one thing to reduce greenhouse gases in America, that is what you do. Also, the one thing that India and China could do.”

Instability and opportunity for utilities

As my colleague William Young wrote in his curtain-raiser VIP Comment in February, this year’s Summit focussed on “four pillars” of the future electric utility – power generation, grid, the connected home, and the evolution of vehicles. For sure, these pillars all present difficulties for utilities, but they also offer opportunities.

In Europe, E.ON has tried to position itself by retaining its distribution, transmission and renewables businesses while disposing of its fossil-fuel generation arm – a split into what Liebreich dubbed “E.ON and E.OFF”.

Other speakers also saw the future for utilities as being cuddling up to the consumer, not trying to protect cooling towers or businesses based on selling the maximum number of kWh.

Ralph Izzo, chairman and CEO of Public Service Enterprise Group, said: “You can imagine a future in which distribution fixed-cost recovery is provided for for the regulated utility, and then energy efficiency becomes an opportunity for the utility….and still leaves savings for the customer.”

He added: “So I don’t see this as a death spiral, I see this as an opportunity for policy-makers to say: hey, why don’t we allow utilities to invest on the customer side of the meter in a way that can create a win for the environment, customers and shareholders?”

Utilities have tended to present themselves to customers as providers of power, according to Jim Hughes, chief executive of First Solar. He predicted: “I think utilities will begin to communicate to customers a different message – that they are providers of reliability as opposed to providers of energy.”

Hughes described the idea that the utility model is going to disappear as “absurd”, adding: “The advent of micro-grids and self-generation means the need for a cost-effective provider of reliability at the centre grows.” He went on to say that when he mentioned at a conference two and a half years ago that he thought residential tariffs would “move to a demand charge and an energy charge, 90% of participants said ‘you’re crazy, that’s never going to happen’. But in the last six months, at least three state consumer advocates and a number of utility commissioners are saying that it is inevitable and the only thing that fixes this mess.”

If the comments of Izzo and Hughes were reassuring for utilities, there was plenty at the Summit to unsettle them too. The connected home exhibit, put up in the lobby of the Summit by retail energy supplier Direct Energy, showed how consumers are set to take advantage of an array of smart devices – from intelligent thermostats, to hot water heaters that can turn on or off one cylinder, depending on the power price, to garden sprinklers that can tell whether the grass is wet and therefore does not need dousing.

My colleague Colin McKerracher, in a break-out session on the connected home, mapped out how an array of corporate carnivores, from Google to security alarm companies and telecommunications providers, were increasingly finding their territory overlapping that of utilities.

The potential for knowledge to lead to big efficiency gains was noted by Badar Khan, president of Direct Energy. He said: “A couple of years ago, we started sending customers a text message saying how much energy they have used in dollars and cents. On the back of receiving that one data point real-time so they knew what they were using per day, those customers lowered their consumption without any technology addition or energy efficiency support or assistance, by 18%. It is pretty staggering.”

Meanwhile, the advance of renewables at the expense of fossil fuel and nuclear generation continues apace.

Michael Picker, president of the California Public Utilities Commission regulatory body, said that his state’s power grid could handle taking much more of its supply from renewables such as wind and solar than the 40% level attained in a few days last year. “Getting to 50% is not really a challenge,” he said. “We could get to 100% renewables.” The key was placing renewables capacity where it is needed most to support the grid, and shipping excess power to neighbouring states.

Carbon markets, climate deals, nuclear

The last few years have seen most of the running in emission mitigation being done by renewables, energy efficiency and (in the US) coal-to-gas switching, with other approaches – such as international climate change negotiations, carbon markets and  nuclear generation – trailing behind, at best.

However, times may be a-changing. Carbon prices and taxes are still in the game, even if their level is often still too low to have much impact, and during the Summit, Ontario said it would join Quebec’s cap-and-trade programme. Gore told the Summit that this meant that 75% of Canadians “would be living in provinces or cities that have cap and trade or carbon taxes, or both”.

Ban Ki-moon, secretary-general of the United Nations, said in a keynote speech that he is optimistic about the chances of a climate change deal at this December’s Paris meeting, because “up to now, everything has been moving in the right direction”. He added: “We have to leverage all the possible resources and powers, particularly private sector investment in climate change.”

Obstacles remain. On other panels at the Summit,  there was plenty of carping about the fact that major countries (India, Brazil, Canada among others) have yet to offer their national pledges to cut emissions.  And it was agreed that the US pledge can only be fulfilled by the next president.

Meanwhile, prospects for nuclear in many countries remain murky. Nobuo Tanaka, former executive director of the International Energy Agency, observed: “The Japanese government is trying so hard after Fukushima – nuclear can reduce CO2 emissions and increase energy efficiency for the good of the economy – but unfortunately these discussions cannot convince the Japanese public to support nuclear. What I am arguing now is that sustainable nuclear needs additional conditions, for example passive safety, and non-proliferation is a very important feature, and high-level waste….we need some solution. With these three conditions, I think we can get nuclear back. It is trying to use this technology to turn the devil we created at Fukushima into good fortune.”

Too much confidence?

Renewable energy costs are set to fall further, the cost of capital for new projects is at record lows, energy efficiency is on the march, the connected home and a revolution in vehicles promise to squeeze demand further for fossil fuels. There was a palpably upbeat mood at the Summit, but is there a danger of over-confidence?

I asked myself that question several times in Summit week. In a narrow, statistical sense, the answer is probably “yes”. Clean energy investment in 2015 is likely to fall short of 2014’s $310bn levels, for the reasons Liebreich put forward in his “10 Predictions” article in January – that the dollar has risen sharply against other currencies in the last year, so investment figures from many countries will be worth less in dollar terms than they would have been previously; and because 2015’s crop of offshore wind financings is unlikely to match last year’s record $18.6bn.

The evolution of policy can smooth the way for clean energy – or it can stymie it. Entrecanales of Acciona stressed in his remarks to the Summit that the company will look elsewhere to invest rather than in its home market of Spain, after years of retroactive cuts in support. “I think the regulatory system is not going to call for new investment,” he said.

In other mature markets, the direction of policy is worrying investors. In the UK, the Conservative manifesto for the 7 May General Election contains a promise to stop support for onshore wind – even though it is the cheapest form of clean power and, elsewhere, the same party argues for cost-competitiveness to be a key consideration on whether to invest in renewable energy.

In the US, a further extension of the Production Tax Credit for wind looks unlikely, given Republican dominance of both houses of Congress. In any case, the tax credit system is far from perfect – the Summit heard concerns about too much of the value created by utility-scale projects going to providers of tax equity rather than the customer, and also about the danger that support for small-scale solar gets seen as “regressive”, if most of the installation is done by better-off households.

There was discussion at the Summit about whether the hot area of “yieldcos” – last year supplying some $5bn of lower cost-of-capital equity from public markets for the ownership of projects – could be at risk if interest rates start to rise.

Mike Garland, chief executive of Pattern Energy, one of the main US yieldcos, said: “My biggest concern is the investor perception more than the reality. First of all, all of our assets are kind-of immune to it because our debt is fixed long-term, so if interest rates go up, it doesn’t affect our economics. People would say that, well, the value has gone down because interest rates have gone up, but we would use a higher discount rate and bring in assets with higher returns into the yieldco.”

One question that arose for Summit guests I spoke to was where the profits will be made in in the “age of plenty but also competition”. In the past, oil and gas exploration and extraction have enabled industry giants to command huge market capitalisations, and monopoly utilities have been able to make stable if unexciting returns. In the era that is coming, margins may be much thinner, and even more volatile than before, across a complex and splintered energy system.

Video footage of some of the keynote speeches from Summit 2015 can be found at http://about.bnef.com/summit/.

Bloomberg New Energy Finance clients can see full video footage of all the plenary sessions at https://www.bnef.com/core/summit-on-demand.

About Bloomberg New Energy Finance

Bloomberg New Energy Finance (BNEF) is an industry research firm focused on helping energy professionals generate opportunities. With a team of experts spread across six continents, BNEF provides independent analysis and insight, enabling decision-makers to navigate change in an evolving energy economy.
 
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