Renewable Energy Investment Trends
Investment in renewable energy was up 2% from the year 2016, however 13% below its peak record of $323.4 billion USD in 2015. While dollars are great at depicting trends, they can disguise and dwarf happenings which are equally if not more important than a dollar denomination. The case here is that capacity added through renewables last year was a record high of 157GW, substantially higher than the 70GW of net capacity additions of fossil fuel generators. Solar capacity alone (98GW) out-paced fossil fuel additions in 2017 and accounted for 38% of power coming onto stream. These strides helped raise the proportion of world electricity produced by renewable sources (small hydro, marine, geothermal, bio-fuel/waste-to-energy, wind and solar) from 11% to 12.1%. Resulting in the curtailment of approximately 1.78 gigatons of carbon dioxide emissions.
China was the lead country in 2017, investing $126.6 billion accounting for no less than 45% of the global total of $279.8 billion. Its highest figure ever was further bolstered by the amount of solar capacity it brought onboard during the year, 53GW, with investment amounts rallying up nearly 60% to $85.5 billion for solar in China. Many western countries paled in comparison, with the U.S. investing $40.5 billion, a figure down 6% on the year. Although investment was lower in 2016 than in 2017, it still was not as low as some predicted; with policy uncertainties following the election of President Trump poised to hamper growth from beginning it can be argued investment in the U.S. was rather resilient.
European nations slowed down considerably more, with a decline of 36% in dollars invested. A notable reason for this was the 65% drop in investment in the United Kingdom alone, marking an end to subsidies for onshore wind and utility-scale solar projects. Germany was another investment hub that experienced a fall in investment of 35%, while a portion of this can be attributed to lower costs per MW for offshore wind, it is largely driven by the uncertainty investors face as tariffs are being swapped out for auctions for wind projects.
There were leaps in investment in renewables investment In Sweden of 127% to a total of $3.7 billion, Australia rose at a significant rate also, 147% to $8.5 billion of investment in 2017. Mexico had investment grow 810%, Egypt grew to nearly six times what it was the year prior and Saudi Arabia had a startling 29-fold increase on the year 2016, with $2.2 billion being committed to renewable energy sources in 2017.
CATALYSTS OF INVESTMENT
Renewable energy has emerged as both an economically feasible and increasingly competitive method of generating energy when compared to traditional methods. While this can be attributed largely to falling costs, the implementation of government policy has and continues to play a crucial role in driving investment into renewables by providing investors with the confidence that their project will produce a positive return.
Feed-in tariffs and green certificates are two critical tools used by governments to drive investment in renewables. A feed-in tariff is a mechanism which offers long-term cost-based contracts to producers of renewable energy. Green certificates, which are used to a much lesser extent, are a tradable commodity credited to producers of renewable energy, which can then be sold on an open market. Criticisms that these tools stifle competition and keep development costs of renewable projects artificially high has led to a decline in the use of both.
As the use of these tools has declined, we’ve seen a rise in the use of power purchase agreements and auctions. The idea behind an auction is to drive down prices and increase competition by attracting only the most competitive bidders. Auctions in Mexico in 2017 produced record low average bids for both wind and solar, indicating in part, the effectiveness of auctions in driving down cost. A PPA is a long-term contract between a producer of renewable energy and a large corporate purchaser, which reassures investors that a project will produce stable and sufficient cash flows over its lifetime. A PPA also offers tax benefits in the form of Production and Investment Tax Credits to the producer.
PPAs also serve a crucial role in securing funding for renewable projects. In the eyes of a lender, stabilization of returns serves to lower the risk associated with a project, meaning a lower cost of borrowing. While this cannot be entirely attributed to PPAs or auctions, these instruments have helped lower the cost of renewables, which has dragged the cost of borrowing down. In fact, between 2012 and 2017, we witnessed the overall cost of borrowing fall from 5% to 2 - 2.5%. This is a significant development given the importance of bank debt as a source of funding, through both on-balance sheet financing or non-recourse project finance.
In terms of which technology investment is being deployed in, wind and solar lead the pack by a wide margin. Wind and solar accounted for 97%, equating to roughly $209 billion, of all asset financing taking place in 2017. Although wind activity has slowed down – due to a fall in activity as opposed to falling costs – solar has more than offset this decline. Asset financing of solar jumped by 20% in 2017, largely due to growth in Chinese investment, as well as projects in the UAE.
RESEARCH & DEVELOPMENT
Research and development (R&D) in renewable energy has maintained steady growth from 2014 to 2017, when a record high of $9.9 billion was invested. The $9.9 billion came from a 12% increase in corporate R&D (for a total of $4.8 billion), while government investment remained around $5.1 billion. This indicates an effort from corporations to grow their renewable energy market share, without the intention of immediate profits, looking instead to the future of renewable energy.
Europe is number one with $2.7 billion invested in R&D, a spot they’ve held since 2010, followed closely by the United States at $2.1 billion, and rounded out by China in 3rd with $2 billion. This is a telling statistic, as it is the first time USA has lead China in R&D since 2011, displaying their efforts to further advance their renewable energy technology. It is important to note that China’s lower R&D demonstrates that they are lower cost researchers and have different policies on capitalizing development effort. They are not lacking investment into renewable energy. When comparing Canada to these big three regions, its overall R&D for renewable energy technologies pales in comparison, as most recent statistics show a total $125 million spent on renewable energy resources. This figure represents just 5.9% of the $2.1 billion Canada spent on energy resources, as they tend to focus efforts on fossil fuel energy (coal, oil, natural gas production) and its transportation.
There has been a lot of evidence that R&D has been paying off. Solar energy has been the greatest beneficiary, as it reached a total of $4.7 billion in investment. For example, polysilicon, a key ingredient in developing solar energy, has seen its electricity requirements for production cut in half over the last 5 years. Diamond wires have also been created, which require a lot less energy and have resulted in an increase of wafers made per kg of silicon, allowing for a huge decrease in cost. Automated factories have been introduced, which provide robotic production lines that can make solar panels in 3.5 hours, rather than 3 days, like the conventional methods of producing in batches. Design of the actual panels has improved as well. For example, the size of cells has increased, by limiting the space in between each cell, resulting in increased power output. Electrical losses have also been reduced, by increasing busbars in the panel from 4 to 5. Developers have been able to research newer materials such as perovskites, which could get efficiency up to 30-40%, a huge increase to the less than 20% efficiency currently maintained.
Wind energy has also seen improvements, with an investment of $1.9 billion, an increase of 6% from 2016 to 2017. The goal of wind R&D is to create larger turbines, reduce costs of offshore foundations, and develop floating turbines. As of today, the industry’s biggest wind generator is the MHI Vestas 9.5MW V164 model, but with these investments, it’s expected that there will be models with 10MW by 2022 and 13MW by 2025. The development of the models will be helped by decreased costs from designs which will cut steel requirements and newer suction designs which will help in deeper water. The current offshore record of 42MW in floating wind capacity is expected to be 175MW by 2020, a huge increase on a new record in a very short time. Currently, floating wind turbine faces two challenges, one, the towers are 40-75% heavier, and two, the difficult transportation of their 90x14 meter spars, weighing almost 2200 tons while empty, and 8000 tons when filled. R&D has allowed companies to develop alternatives. Ideol has created a turbine supported by a floating concrete pattern, while Eolink has begun trials on a floater design, which will allow turbines to be supported by lighter and stronger structures compared to the current single towers. These are all expected to be introduced in the short term, showing the effect that investments in renewable energy can make.
Two important pillars that supported investment until now have been record low interest rates and subsidies. As we see a shift from this economic environment with many countries adapting auctions where there is more transparency of costs and macroeconomic factors indicating hikes in central bank rates. Renewable energy projects will now feel stress tests, as they are left to float on their own with no tariffs or low financing costs.
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