Executive Summary
Clean energy technology development has arrived at a crucial juncture.
Since the new century began, enormous progress has been made along practically all experience curves associated with low-carbon energy generation. As a result, the cost to manufacture wind, solar, biomass and geothermal equipment has plummeted, and operating efficiencies have soared. Yet generating a watt of clean power is for the most part not yet cost competitive with producing from coal and natural gas. While some of this gap is attributable to the current ultra-low price for natural gas – against which green technologies primarily compete – clearly more innovation, experience and scale are needed before price parity can be reached in the long run.
Exacerbating the situation is what may be a long-term change in global credit markets. While borrowing costs for the most creditworthy companies have touched all-time lows, funding is now relatively scarce for start-ups and other firms developing as yet unproven technologies. For many clean energy firms, access to conventional financing can be highly restricted and prohibitively expensive.
In the Great Recession of 2008-2009, public institutions played a critical role in providing capital otherwise unavailable from private sources. Collectively, governments around the world approved more than $190bn in stimulus funding for clean energy. Multilateral state-sponsored institutions made more than $21bn in credit available in 2009 alone. The bulk of these funds will have been disbursed by the end of 2011, raising an important question: where will the next wave of capital come from to propel low-carbon technologies further down their respective learning curves toward price parity?
In the West, national budgets have been hammered by the recession. Massive national debts in key clean energy markets such as Spain, the UK and Greece have prompted deep government spending cuts that have gone beyond green-oriented subsidies to broader social welfare programmes. In the US, efforts to pass a national renewable energy standard and carbon cap-and-trade fell victim to concerns about a fragile economic recovery.
Not all countries are cutting back, however. China has maintained its upward trajectory of support for nascent and advanced clean technologies. The China Development Bank alone has made more than $40bn in credit facilities available to the wind and solar sectors in 2010.
Other national governments have seized the opportunity to foster indigenous clean energy industry by establishing state-backed funding organisations. Whether those entities — which include Sustainable Development Technology Canada, Chile‘s CORFO Renewable Energy Centre and Sitra of Finland – will remain steadfast is important for low-carbon technology start-ups and producers that have not yet attained commercial scale.
This report examines the current and future roles of government support for clean energy technologies, given their various stages of development. Our basic conclusion: until these technologies are truly cost-competitive on an unsubsidised basis with their dirtier rivals, governments have little choice but to subsidise their progress if the spectre of climate change is to be addressed. It should be noted that this also is the conclusion of the International Energy Agency, which devoted unprecedented attention to the role of government support in its recently issued World Energy Outlook. The IEA said governments around the world spent $312bn in 2009 subsidising the conventional energy industry but just $57bn on the clean energy sector.
This report also identifies four specific target technologies where state funding could make a critical difference between whether a new energy technology ultimately succeeds or fails in competing with its conventional energy sector rival: utility-scale power storage and advanced batteries, advanced transport, carbon capture and storage, and advanced biofuels.
Key Findings
In 2009, China led the world in new clean energy funds invested with $34.6bn. In 2010, the gap between China and all other countries is widening. Much of this investment in China has been spurred by a strong policy environment plus heavy state support, particularly via state-backed financial institutions and state-owned companies.
Bloomberg New Energy Finance projects that 2011 will mark the peak year for stimulus disbursements for clean energy. In 2012 and into 2012, stimulus will drop sharply.
A new era of fiscal austerity could have significant negative consequences for clean energy. Early examples include Spain, which has slashed subsidies for new solar projects, and the US, where stimulus funds received by overseas firms provoked a protectionist backlash.
As stimulus begins to wind down, national and government-sponsored organisations that supported pre-commercial low-carbon technologies prior to the economic downturn in 2008 stand to play an even more important role than they do today.
Government dollars can be put to work more efficiently than ever before in the next several years in subsidising commercially-viable technologies. This is because per-watt prices of utility scale wind turbines and, in particular, photovoltaic modules, have dropped sharply over the past 18 months. Prices could well drop further in the coming year, particularly as Chinese-made equipment plays a more prominent role in the global market.
Market risk – as demonstrated by the pullback in clean energy stock prices – has restricted access to public equity markets and amplified the importance of government grants and credits.
There are certain critical areas where public financing will likely be needed for not just the short-but the long-term as well. The problem of the so-called financing “Valley of Death” confronting many new technologies is largely intractable. This valley cannot be traversed without public support in many cases.
Utility scale storage and advanced batteries, advanced transport, carbon capture and storage and advanced biofuels are four technologies that, in particular, will require further public sector investment in coming years to scale up and become truly cost-competitive.
Please download the full report for more detailed analysis.