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The clean energy space, like the rest of the world, has seen significant change since the release of the first Green Investing report more than two years ago. In Green Investing 2009: Towards a Clean Energy Infrastructure, the World Economic Forum and Bloomberg New Energy Finance described what a low-carbon energy system would look like and estimated that it would require investment in clean energy to grow to US$500 billion per year by 2020, for global warming to be limited to 2°C without compromising economic growth.
Last year's report, Green Investing 2010: Policy Mechanisms to Bridge the Financing Gap, focused on the range of policy tools that might help spur these large-scale flows of finance. This year, the third report in the series shows that, despite the very difficult economic environment, the clean energy industry has made significant progress, reaching the halfway mark towards the US$500 billion per annum investment target.
Over the last two years, governments have pledged no less than US$194 billion in stimulus to support the development and deployment of clean energy. But with deficits expanding and national debt rising in many countries, these programmes and other clean energy subsidies are coming under harsh scrutiny. In some cases, these new examinations are merited as governments have, in effect, paid above-market rates for clean energy generation. Elsewhere, the concerns have been overblown.
This report hones in on the question of how to craft clean energy policies that are both effective in spurring development and efficient in ensuring taxpayers and consumers get best value. It examines the fundamental costs associated with generating a clean megawatt-hour of electricity and the role that financing costs play. It then overlays existing policy prescriptions from around the world and examines those that have proven successful in reducing developers' costs. Finally, it compares these new adjusted local costs of generation with the size of local subsidies to determine whether a "policy premium" of over-payment exists.
Ultimately, there is no one-size-fits-all clean energy policy prescription sure to succeed in every part of the globe. But in this new era of fiscal austerity, policy-makers need to ensure that the supports they put in place drive sustained long-term growth. This could be aided by ensuring that the bulk of the value they provide flows to ratepayers and taxpayers.
In the future, clean energy technologies will likely be competitive with dirtier forms of generation on a completely unsubsidized basis. Until then, however, the onus is squarely on policy-makers to devise programmes that are both effective and efficient.
Progress in 2010
Global clean energy investment surged 30 percent in 2010 to a new record of US$243 billion. This represents a major milestone for a sector that enjoyed an average compound annual growth rate of 37 percent between 2004 and 2008, but then saw growth stall in 2009 in the face of the worst recession in half a century.
The largest investment asset class in 2010 was the asset financing of utility-scale projects such as wind farms, solar parks and biofuel plants. This rose 19 percent to US$127.8 last year. Venture capital and private equity investment had a strong year, up 28 percent from a relatively depressed 2009 total to reach US$8.8 billion, although failing to match 2008's record figure of US$11.8 billion.
Public market investment bounced back from its recession-driven lows in 2008 and 2009, up 18 percent to US$17.4 billion in 2010. This fell short of the US$24.6 billion of clean energy stocks in 2007. But the fact that public market investment bounced back--despite the WilderHill New Energy Global Innovation Index (the NEX) of clean energy stocks dropping 14.6 percent and underperforming the S&P 500 by more than 20 percent--signifies the resilience of the sector.
In 2009, Asia and Oceania overtook the Americas and, in 2010, drew level with Europe, the Middle East and Africa as the leading region in the world for clean energy investment, largely as a result of activity in China, where investment was up 30 percent to US$54.5 billion (inclusive of reinvested equity), by far the largest figure for any single country.
China now produces well over half of the photovoltaic modules used globally and is home to several of the biggest brands in the sector. It installed approximately 17gW of new wind capacity--about half of the global total--with most of the equipment supplied by domestic manufacturers. No other country came close in terms of new power generating capacity added, manufacturing expanded or funds attracted.
But it was investment in small-scale, distributed generation projects that really stole the spotlight in 2010, surging by 91 percent to US$59.6 billion, and now accounting for approximately US$1 in US$4 invested in clean energy. Germany alone saw 7.5gW of new photovoltaic capacity added in 2010, an all-time record, mostly in the form of small-scale residential or commercial rooftop systems. Other countries with feed-in tariff systems, including the Czech Republic, Italy and the UK also saw rapid growth, as did certain US states.
The mass scale-up of small-scale solar was driven by an extraordinary decline in the cost of photovoltaic modules. For several years, progress along the so-called "learning curve" was suspended by a global shortage of solar-grade processed silicon. That bottleneck broke in 2008, allowing prices to fall very quickly thereafter.
Challenges
Not all news has been good in the clean energy world. Debt markets have remained fragile and Europe, in particular, continues to suffer from the aftermath of the financial crisis. Confronted with significant national budget deficits, key countries that had been supporters of clean energy have been cutting back support--and the Czech Republic and Spain have made retrospective changes to their tariff regimes.
Reductions in rates are likely to occur in most feed-in tariff markets in 2011, starting in Germany. In the US, clean energy continues to suffer from the lack of a federal climate or energy bill, as well as competition from low-priced natural gas. In China, increasing inflation could lower the unprecedented levels of debt and hence decrease investment in one of the national economic priority sectors. But none of these factors have been sufficient to derail the sector's progress.
Helping to counter these obstacles, the clean energy industry in 2010 enjoyed an unusual level of support from governments around the world in the form of stimulus funding. As discussed in the second Green Investing report last year, no less than US$194 billion in stimulus has been pledged to clean energy since the start of 2009. Those funds have played a key role in supporting the sector through what could have been difficult times.
It took some time for these funds to start to flow, but estimates indicate that 2010 saw US$75 billion investment from this source. However, less than half the stimulus has actually "hit the street" to date. The positive news for the industry is that plenty remains to be spent in the next two years but, with government deficits rising, the possibility of the funds being rescinded is also increasing.
Stimulus funding is only one reason for the resilience of the sector over the past few years. Of even greater importance is the extraordinary progress made by all clean energy technologies in driving down their "levelised costs" (the cost per unit of energy before taking into account any support mechanisms or subsidies).
Today, biomass, geothermal and wind projects can compete with their fossil-based rivals in increasingly significant energy markets. Brazilian sugar-based ethanol has been competitive with gasoline on an unsubsidized basis for some time. Photovoltaics have already reached parity with retail electricity prices in certain parts of the world--such as Italy, Hawaii and parts of other US states--and will undoubtedly do so elsewhere soon.
The clean energy sector appears to be poised for further strong growth. To date, government supports have played a decisive role in dictating financing flows; where supportive policies have been put in place, private dollars have followed. In recent years, the decline in the cost of clean energy has been due almost entirely to lower equipment costs resulting from growing scale in the supply chain.
But there are two other ways in which costs are set to be driven down. The first is R&D; research and development spending on clean energy technologies by companies and governments grew to a record level in 2010, up 24 percent to US$35.5 billion from US$28.6 billion in 2009 and US$20.5 billion in 2005. The fruits of this growing research pipeline will filter into the market over the coming years.
The other important driver of the cost of renewable energy is the cost of financing. Clean energy projects are particularly sensitive to interest rates as they have large upfront and minimal marginal costs. As the capital markets continue the long process of recovery from the crisis of 2008--punctuated no doubt by further negative developments--the effective interest rates paid for all infrastructure projects are likely to come down, and this should differentially advantage clean energy. Every few basis points of reduction in debt costs impact the fate of hundreds of clean energy projects, representing gigawatts of new capacity.
Innovation
Clean energy developers and backers are further innovating--not just in the technologies they employ but also in their financing mechanisms. Examples in 2010 included wind leases in Turkey and the US; listed equity funds purchasing assets and development portfolios in France and Germany; a project bond financing for solar in Italy; and a pension fund directly owning a stake in a Danish offshore wind farm.
Another factor pointing to strong demand for clean energy in coming years is the likelihood of a return to higher energy prices. Amid turmoil in the Middle East in February and March, oil prices rose above US$100 per barrel; in the US, the combination of high oil and commodity prices with low natural gas prices is unlikely to persist in the longer term.
Overall, there are promising signs that the industry's strong momentum can be maintained. Investment in the sector has surprised everyone with its resilience in the face of crisis. It now remains to be seen whether it can continue its progress towards the magic figure of US$500 billion per annum by 2020.
The levelised costs of energy for renewables
The report scrutinises the actual underlying cost of generating clean energy. Because of the fundamentally different ways in which clean energy and fossil fuel power projects are financed, comparing the economics of the two is a bit like comparing apples and oranges. Still, in most markets, power projects deliver a single undifferentiated commodity--a kWh of electricity--purchased by consumers.
There are a number of ways to measure the relevant costs affiliated with generating that kWh, but one most commonly used method involves measuring the "levelised cost of energy" (LCOE). The LCOE seeks to take into account all project costs and financial assumptions over the lifetime of a project.
Reducing LCOE should be the long-term goal for policymakers looking to spur deployment of renewables projects quickly. The last portion of this report examines which policies have proven more or less successful in reducing generation costs. It then looks at which subsidy regimes appear to make the most efficient use of public funds when the LCOE of clean energy is considered.
Some policies intended to spur clean energy growth have already had the unintended consequence of raising the cost of capital for wind, solar and other renewables projects. Hence, the cost of the power generated from such projects has risen.
Given the long-term importance of growing this sector to help address climate change, policymakers must seek ways to make clean energy available at the lowest possible cost. Furthermore, to help build long-range consensus on clean energy, they must ensure that the benefit of low-cost clean energy is passed on to the consumer or taxpayer rather than accrued to the clean energy sector.
This article is from the Green Investing 2011: Reducing the Cost of Financing report, first published in April 2011 and reproduced with permission from the World Economic Forum and Bloomberg New Energy Finance.
By : World Economic Forum (in collaboration with Bloomberg New Energy Finance)