Renewable Energy as 2019 begins: Winner and Losers
Renewable energy continued in 2018 as the largest segment of infrastructure financing globally. Utility-scale wind and solar, and rooftop solar new capacity installations grew again. The days of double-digit industry growth in capacity, however, seem to be past, and with falling costs the total capital going to renewables is clearly at a plateau. There’s good news and bad news for different parties, and in this column infrastructure ideas offers a guide to the winners and losers of the moment.
The numbers for 2018
Based on just-released figures from Bloomberg New Energy Finance, the fastest to estimate year-end numbers, “clean-energy investment” was down 8% from 2017, yet nonetheless, at $332 billion, over $300 billion for the fifth straight year. Within those numbers, investment in all segments were up except for two: small scale-hydro, and solar power generation – the latter seeming counter-intuitive but we’ll unpack it below. Onshore wind investment rose slightly, 2% to $101 billion, while offshore wind came into its own for the first time, recording $28 billion in investment. Bio-mass, waste-to-energy, biofuels and geothermal were all up from 2017, yet together accounting for only about 3% of total investment. Investment in solar, interestingly, fell from $160 billion to $131 billion. Two big factors seem to be have driven the plunge: one visible everywhere, with the cost per unit of new solar capacity continuing to fall be double-digits in 2018, and overall capacity installed still grew from 2017 though the costs of this declined; the other factor being visible mostly in China, where big policy changes led to a 32% fall in new renewables investment in the world’s largest solar market. India’s market, arguably the fastest-growing market in the world from 2015-2017 for new solar financings, also cooled off, with clean energy (mostly solar) financings falling from $13 billion to $11 billion.
Winners
1. Investors looking for RE assets. For investment funds and others who built up capacity to finance renewable energy, assets are increasingly there. The $300 billion in new financing in 2018 means renewables continue to be the biggest game in town, with over $2 trillion having been invested in these sectors in the past decade. And while the overall global market may have been slightly negative, the sharp slowdown in China obscures good growth outside of China: non-Chinese investment in wind and solar increased over 20%, and the non-Chinese share of the global RE market went from 45% to 60%. Given how relatively closed the Chinese market has been to external investment, this means the effective pool of investable RE assets has grown significantly.
2. Offshore wind in OECD. Offshore wind, a curiosity only a few years ago, is at $28 billion now the fourth largest segment of clean energy – after onshore wind, utility solar and rooftop solar. It dwarfs other clean energy segments such as geothermal, biomass and small hydro. For many infrastructure funds, offshore wind has another attraction: large average project size. So while there remain a limited number of offshore assets, and they are all limited to either OECD markets or China, this is clearly now a legitimate and important sub-market.
3. Policy-makers. The continued declines in the costs of solar, and to an extent onshore wind capacity, are great news for energy sector policy-makers. In particular, energy sector policy-makers in developing countries – whose task is to address insufficient power capacity and/or high-cost electricity systems – have now at their disposal the means to increase power availability and to sharply cut the average generation costs of power in their economies. Wind and solar power at below 6 to 7 cents a kilowatt/hour – or even below 3 cents are a number of markets are achieving – means new capacity at less than half the average tariff in many developing countries. And everywhere, policy-makers concerned over greenhouse gas emissions and looking to meet “green” policy mandates have well-established options for their electric systems.
4. Solar plus storage advocates. Not yet in the numbers but worth a flag. While new capacity of solar-plus-storage systems account for less than 1% of total 2018 investment, and does not show up in global clean energy numbers yet, one can see this is just around the corner. With energy storage costs plummeting as fast as solar panel costs did a decade ago, we are already beginning to see the first solar-plus-storage tenders emerge with costs competitive with or bettering the costs of new thermal power capacity. Look for this segment to be bigger than biofuels or geothermal within the next 1-2 years, and larger than the offshore wind segment within 5-10 years.
Losers
1. Investors looking for RE assets. If the big loser sounds like the big winner, that’s because they are one and the same. There are indeed more and more renewable energy assets available in which to invest, and a greater share of these is “market,” as the non-China share of this segment is where growth is concentrated. At the same time, though, price and risk of RE assets are an increasing concern for investors. Solar power-purchase agreements (PPAs) are increasingly being priced so low that making money has become an increasingly tricky proposition. Or put another way, the benefits of falling RE costs are being largely apportioned to consumers (and policy-makers), leaving thin margins to compensate providers of capital. And at the same time, many markets are seeing shorter PPAs being offered, meaning new solar and wind farms have shorter periods of guaranteed returns, and face the prospect of yet lower-priced competitors when the guaranteed-return periods come to an end. And more investors are coming late to the party, further pressuring returns. Assets are there for investors, but making good returns from them will require being smart.
2. China RE portfolios. If you had financed wind and solar assets in China during the past decade – and if those assets were not being curtailed by the Chinese grid (a big “if”) – things were not too bad through 2017. Not only has China been by far the world’s largest renewable energy market for several years, it’s also paid some of the highest prices for renewable-generated power through Feed-in Tariffs. The kind of wind and solar auctions which have been so effective at driving down the cost of new capacity in Brazil, India and South Africa, among other markets, have come late to China. But with the big policy changes enacted in 2018, China was more disrupted than any other market. Going forward it will be a new game, with China adopting the auction approach – post the 2018 disruptions, this is likely to be good news all around: cheaper RE power across China, increasingly competitive with existing coal-fired capacity and less likely to be curtailed. It will mean, however, a new approach to the Chinese market.
3. Thermal power. New RE capacity additions were more than double the roughly 70-80 GW of new thermal power capacity added worldwide in 2018. Even with the growth of natural-gas fired capacity in the US and China, thermal power is becoming a shrinking market for operators and investors. And this is with continued historically-low natural gas prices, in the $3-5 mmbtu range. Driving this shrinkage is the combination of declining cost-competitiveness of thermal power, as technology improvements are unable to drive down costs as fast they are declining in renewables and energy storage, and policy preferences in many markets. It’s not going to get any better, though natural gas – especially in combined-cycle plants, is increasingly outcompeting coal-fired generation.
4. Small hydro. In the days of early enthusiasm for renewables, hydropower enjoyed a boost in popularity, riding on the same wave propelling new technologies. Small run-of-the-river hydropower plants especially, seen as more environmentally-friendly than large dam-reliant hydropower, began to attract considerable interest from operators and investors. The 2018 numbers show that small hydro has been left far behind by its former renewable peers, wind and solar. At only $1.7 billion, about ½ of 1% of all clean energy investments, and one of the only categories declining in 2018, it looks like the lost stepchild.
5. Proponents of a 1.5-degree limit. For those concerned about climate change, and especially those wanting to see the world on a course to limit global warming to 1.5 degrees, 2018 was not a good year. Yes, renewable energy capacity is growing, and new investments are almost double those in fossil fuel-based power generation. But even with this, the penetration level of renewables in the overall share of power generation is too low for a 1.5-degree warming scenario. Given that the rate of increase of renewable generation has slowed, it becomes harder to see climate mitigation efforts relying just on the economics of new generation facilities. So expect, therefore, both to see escalating effects of global warming – more extreme weather events, more calls for climate adaptation investments – and growing odds of a major discontinuity in energy policies down the road. One good bet: growing interest in funding decommissioning of fossil-fuel generation – watch this space for a forthcoming analysis of the topic.
Infrastructure Ideas 