2020 in Review

January 2021

In January 2020, Infrastructure Ideas made our annual 10 predictions for 2020.  With the year closed, it’s time to take a look at how things unfolded, and as we all know, 2020 proved to be a crazy year all over the place!  A pandemic, a major recession, unprecedented political events in the US, among other things – most people would like to put 2020 as far as possible in the rear-view mirror.  Nonetheless, our 2020 forecast was not dramatically off the mark: of Infrastructure Ideas’ 10 predictions for 2020, six still were on target, while the other four remain… debatable.  This compares to our 7 for 10 outcome for both our 2018 and 2019 predictions.

Here were six predictions which managed to be on the mark for turbulent 2020:

Offshore wind is the new big thing

Pandemic?  What pandemic?  Offshore wind, a stepchild until the last 2-3 years, had a remarkable 2020.  Bloomberg New Energy Finance had reported that 2019 was already well above expectations, with worldwide new financings for offshore wind at a record $29.9 billion; 2020 broke that record… in the first six months.  BNEF reported $35 billion of new financings for 28 offshore wind projects through June 2020, with the still to be determined year-end number likely to come in at least at $50B.  Offshore wind will have accounted for over a quarter of all new renewable power investments, which is remarkable.  Even more remarkable?  Leading offshore wind developer Ørsted has a higher market capitalization than BP ($75 billion versus $55 billion).   Success has been driven by falling costs, from around $0.15-0.20 a kilowatt-hour in 2015 to $0.05-$0.07/KwH in 2020, and increasing geographic acceptance.  After the technology’s early adoption in the EU and China, the US East Coast has jumped into offshore wind in a big way, and markets from Vietnam to Poland are planning large investments.  Falling costs are being driven by improved technology, and by increasing scale.  Two newly announced mega-turbine models, GE’s Haliade-X and Siemens’ Gamesa newest turbine, can provide 12 and 14 megawatts of power – for each turbine.  (see more in Infrastructure Ideas’ February 2020 review of offshore wind).

Challenges mount for power grids and utilities

Grid operators saw a ramp-up of challenges associated with the energy transition in 2020.  Before the pandemic, these challenges already included continued switching to lower-cost intermittent generation sources, transmission, integrating storage, and integrating growing numbers of electric vehicles.  We expected to see in 2020 larger transmission investments in developed markets, and increasing concern in Emerging Markets – particularly those with state-owned grids – about how to modernize grids.  Developed markets were given some breathing room by the pandemic and the ensuing decline in electricity demand, but we can observe growing calls for such larger investments for the post-pandemic period (see “alliance calls for $50B in federal spending for grid modernization,” and “renewables and resiliency drive transmission upgrades.”)  The economic shock associated with COVID-19 has limited the ability of many emerging markets to address these issues, and last week’s country-wide blackout from a grid failure in Pakistan was a reminder of the growing urgency of the issue.

Non-lithium batteries get serious

We expected non-lithium batteries to make bigger headlines in 2020, and this was certainly the case.  Overall investments in battery storage through the first three quarters of 2020 were up $2B over FY2019, in spite of the economic effects of the pandemic.  And this year a much greater slice of this investment went into technologies other than Lithium-Ion.  The biggest splash was made by Latham, New York-based Plug Power, which raised over $1 billion – not once, but twice.  Then the list goes on, and on.  Eos Energy Storage, which produces zinc aqueous hybrid cathode battery storage systems, listed on Nasdaq in November.  Form Energy, with its aqueous air battery, raised $76m in 2020, double their 2019 funding.  Highview Power raised over $50m, while smaller amounts were raised by Quidnet Energy (a long-duration storage start-up), e-Zn (developer of Zinc-ion batteries), Invinity Energy Systems (vanadium flow batteries), Natron (sodium-ion batteries), and Enervenue (nickel-hydrogen batteries).  Aerospace and defense giant Lockheed Martin also made headlines in deploying its GridStar Flow long-duration energy storage technology in October, using a coordination chemistry flow battery.

Lockheed Martin battery

Green House Gas emissions: alarm keeps climbing, but no global agreements yet

We called this one of our safest predictions for 2020, and so it was.  In spite of a pandemic-driven pause in GHG emissions growth, temperature records continued to be broken in 2020, and extreme weather events – both storms and wildfires, set new records.  And 2020 certainly saw no coordinated global action on the front, with the Trump administration formally pulling out of the Paris accords. Two glimmers of hope for better news: the change of administration coming in the US, and China’s unilateral announcement that it would seek “carbon neutrality” earlier than it had claimed before.

Delivery vehicles become the new EV focus

We expected electric delivery vans to get plenty of attention in 2020, and this was without a hint of what COVID would do to the transport market.  Logistics became the fastest growing infrastructure segment around, with consumers everywhere shifting from on-site shopping to delivery.  Demand for delivery vans went through the roof, and electric vehicles were big beneficiaries.  Amazon’s EV van partner Rivian raised $2.5 billion in July 2020 to expand and accelerate production, with its first 10,000 all-electric vans expected on the roads by 2022.  Also in 2020 Ford, General Motors and Mercedes-Benz all unveiled electric van plans.  Ford is investing $100 million in a plant in Missouri, and breaking ground on a new manufacturing facility in Dearborn, Michigan, for mass production of its new electric van.

Concerns grow over hacking of infrastructure

Unfortunately, correct.  No need to say much about this prediction.  One has only to look at the still continuing fallout of the massive Solarwinds hack to see that this issue continues to get worse.  Even Standard & Poor’s has issued a warning about the related vulnerabilities of utilities.

Here are our four other infrastructure predictions for 2020 that were either thrown off by events or were premature.

Wind and solar keep growing. 

After two years of fairly flat investment levels, we expected global renewable energy investment to resume strong growth in 2020. The picture looks decidedly mixed.  While year-end numbers are still awaited from industry analysts, it looks as though 2020 will again have seen flat investment levels.  Bloomberg New Energy Finance did see a small increase in the first half of 2020 in renewable investment, compared to the same period of 2019, but the first half of 2019 had been particularly slow.  China, the world’s largest renewables market which had seen a significant decline in 2019, did bounce back, with a 42% increase shown at mid-year, largely thanks to large offshore wind investments.  Onshore wind investments worldwide on the other hand were particularly hard hit by supply chain disruptions, and renewable installations in the US were significantly off from their 2019 levels.  The IEA is forecasting that electricity generation from renewable energy sources will have grown by almost 7% in 2020.  We will see what year-end numbers bring.

Emissions-free city zones multiply

In a “normal” environment, we would have expected many more cities to declare “emission free zones,” as we’ve seen in Spain and other parts of Europe.  The pandemic and ensuing recession have drawn the attention of urban policy-makers elsewhere.  This said, a new phenomenon which greatly expanded in 2020 was the closing of certain areas to vehicle traffic – allowing for more walking or bicycle riding — in many cities.  Initially a response to the pandemic and the need for social distancing, these closures could well both become permanent and draw more replication.  Even Bogota joined the bandwagon in 2020.

Unilateral “100% renewables” commitments multiply

In the same vein, our expectation of more unilateral commitments to 100% clean energy in 2020 was disappointed by policy-makers’ attention being turned elsewhere.  Give the size of job losses and economic problems stemming from the pandemic, other priorities dominated the agenda.  The decline in emissions due to reduced transport activity also contributed to reduced urgency.  We can expect both a bounce-back in emission levels post-COVID, and renewed action on both the joint and unilateral fronts, especially given the results of the US election.

Financing premiums appear for climate risks

The press continued to be filled in 2020 with stories of problems for insurance companies related to climate change – whether from flooding or fires.  Yet we were premature in our expectation that this would become a visible piece of financing costs.  It won’t be long now…

What Infrastructure Ideas did not predict, and which massively impacted infrastructure in 2020, was COVID-19.  While a few areas flourished, notably logistics, infrastructure businesses designed for transporting people rather than goods were devastated by a disappearance of demand – the fallout for mass transit, airlines and railways will continue to unfold over the next 12 months (see our pieces on the impact of the coronavirus on infrastructure, and on airlines from May).  On the energy front, it was a bad year for coal, natural gas, and oil, with all the decline in energy demand being absorbed by fossil fuels.  We can also expect that provision of public infrastructure, especially in economically hard-hit emerging markets, will face a steep decline until public finances stabilize.  Look soon for our 2021 predictions.

Offshore Wind: The Next Big Thing

Offshore wind: The Next Big Thing
January 2020

Offshore wind has been beyond the horizon for energy planners everywhere but the North Sea, until the last few years. That’s no longer the case: offshore wind is becoming a major piece of the energy future for multiple countries and jurisdictions. Bloomberg reports offshore wind financings in 2019 came close to a whopping $30 billion, and in September 2019, the UK saw bids for offshore generation at under $0.05/KwH, cheaper than coal and natural gas alternatives. It’s a whole new water world out there.

Among the offshore wind projects reaching financial close in Q4 of 2019 alone were the 432MW Neart na Gaoithe array off the Scottish coast at $3.4 billion, the 376MW Formosa II Miaoli project off Taiwan at $2 billion and the 500MW Fuzhou Changle C installation in the East China Sea, at $1.5 billion. And in November Vattenfall was announced the winner of the Holland South Coast Phase II project, having already won Phase I; the 1.5 Gigawatt project will be Europe’s first subsidy-free offshore wind farm.

What happened? Only five years ago, offered prices for offshore wind tended around $0.15-0.20 a kilowatt-hour, well-above the price for competing sources and requiring government subsidies to proceed. Now larger and more efficient turbines, bigger projects, access to better offshore wind resources, and more developed supply chains have been driving prices down rapidly. Capex per MW of offshore wind capacity dropped from 4.5 Euros in 2015 to 2.5 Euros in 2018, a decline in costs of over 20% a year, according to Wind Europe. This has enabled the advantages of offshore turbines to come through: wind is much stronger off the coasts, and unlike wind over the continent, offshore breezes can be strong in the afternoon, matching the time when people are using the most electricity. Offshore turbines can also be located close to urban demand centers along the coasts, eliminating the need for new long-distance transmission lines

Offshore wind has already become the next big thing on the US East Coast. In November, New Jersey Governor Phil Murphy signed an executive order backing a goal of 7.5 GW of offshore wind by 2035, and said he expects that offshore wind could provide New Jersey with half of its electricity. Those figures would probably represent $15 billion of investment in New Jersey alone. In December, Connecticut awarded an 804 MW project with an (undisclosed) offset price “lower than any other publicly announced offshore wind project in North America,” expected to generate the equivalent of 14 percent of Connecticut’s total electricity supply. New York state announced in early January a 1 GW procurement of offshore wind in 2020, after 2019’s award of 1.7 GW of capacity, and announced a 9 GW offshore capacity target for 2035. And in early January Virginia’s Dominion Energy awarded a $7.8 billion, 2.64 GW offshore project – the largest currently on the drawing board in the US — to Siemens Gamesa.

The Land of Giants. With the average capital costs of offshore wind projects now easily in the $3-7 billion each range, the competitive landscape in the industry has evolved very differently than for the solar and onshore wind sectors. Solar in particular was characterized in its early days by many dozens of developers, at times trying to launch projects with capital costs of less than $50 million on a shoestring and selling them on to raise funding for their next investment. Not only are offshore wind turbines far larger than their onshore counterparts, but offshore wind players are far larger as well. The biggest current developers are Dong Energy in China, Scandinavians Ørsted (today’s market leader) and Vattenfall, and Iberdrola. All these have Balance Sheets with equity in the $100 billion-plus category. Vestas, Siemens Gamesa, and General Electric lead among turbine suppliers. An interesting sign of the times was the recent announcement from EDP of Portugal (itself partly owned by Three Gorges of China) and Engie that they would join forces in developing offshore wind projects, in order to gain the scale needed to compete.

Financing amounts are sufficiently forbidding that most developers have been financing projects on Balance Sheet, and until recently little commercial project finance debt has been available, outside of the policy banks in China for Chinese projects. The bulk of third-party financing for offshore wind has largely been in the form of ownership syndications and post-construction refinancing. The large scale of projects, while a major hurdle for many banks and smaller developers, is conversely an advantage for institutional investors such as pension funds and insurance companies, who have large minimum investment thresholds. These institutional investors have more typically invested in wind and solar through portfolio purchases rather than single project financing, as for example this week’s purchase of 50% of Total’s wind and solar portfolio by Caisse des Depots in France. From late 2018 European banks began to enter the UK offshore market with large amounts of non-recourse debt; as this model gains traction, it may allow smaller developers to become more active. As the sector is becoming more established, one can also expect the gradual development of a merchant risk-based financing model.

Offtake models have also been affected by the large scale of offshore wind developments. Corporate renewables, an increasingly big – and often well-priced – source of demand for solar and onshore wind projects, has not been a factor yet for offshore. In December, Ørsted announced the largest-ever corporate offshore wind deal, with German chemical company Covestro, for 100 MW.

What’s next? Tenders are planned in many countries, and are spreading beyond initial markets of Europe, the US and China. Vietnam, already with 99MW of offshore wind in place, is looking at what could become the world’s largest offshore wind farm with a capacity of 3,400 MW. ESMAP, a unit of the World Bank Group, published a study in October 2019 looking at eight non-OECD markets: Brazil, India, Morocco, the Philippines, South Africa, Sri Lanka, Turkey, and Vietnam. The ESMAP study estimated these eight markets alone have a technical capacity of over 3 Terrawatts – that’s 3,000 Gigawatts – for offshore wind. Globally, Wood Mackenzie expects 128 GW of offshore wind capacity to be built between 2020 and 2028, while Bloomberg New Energy Finance forecasts 188 GW of capacity to be installed by 2030. Those projections would imply capital investment in the sector in the range of $300 billion over the next decade. China is forecast to remain the largest country market, but with about half the global share that it has seen in solar (25% vs 50%).

Nonetheless, it may be difficult for offshore wind to gain more than a fraction of the geographic diversification that onshore wind, and particularly solar, have achieved. Many emerging markets are too small to consume the output of even a single offshore wind farm – at least in offshore’s current form. Construction timelines will also be an issue: an attraction of solar for lower-income, electricity-deficient countries is that solar farms can be financed and built fairly quickly, bringing new generation capacity on stream in a year or less after a country’s decision to proceed. An offshore wind farm typically takes five to ten years to develop. One possible model for smaller markets, for instance West Africa, might be multiple country offtakes.

A big factor in the longer-term development of offshore wind will be the feasibility – and cost – of floating wind farms. 99% of offshore wind farms to date are bottom-anchored, a big factor in the cost and scale of projects, and a limit on geographic deployment. Floating wind farms can in principle be deployed across many more areas, and could be built at a smaller scale. Indeed, the ESMAP emerging markets study puts 2/3 of identified potential offshore wind technical capacity in the floating, rather than fixed, category. IRENA’s late 2019 “Future of Wind” study forecasts floating platforms to make up a more modest 5-15% of total offshore capacity. Yet to date less than 50 MW of floating capacity is operational, so time will have to tell on this part of the technology. We’ll have to see how the winds blow…