What’s the Buzz in the Alternative Energy Market

9 October 2017

The Energy industry has seen increasing adoption of renewable technology since the beginning of the century, as awareness of the harmful environmental effects of fossil fuels has led to greater regulatory and societal pressure. Consequently, the renewable energy market has grown smartly since then, with rapid adoption and advances in technology, especially in the use of solar and wind power.

The growth has been driven mainly by favourable government policies, regulatory action and substantial cost reductions.  The US Energy Information Administration (EIA), citing favourable government policies and various incentives, has projected renewable energy to be the fastest growing energy source from 2015 to 2040, with its share of primary energy rising from 12.5% in 2015 to 18.0% in 2050.

As mentioned above, a key driver of this trend has been the substantial decline in both the manufacturing and installation costs associated with renewables, especially solar and wind energy.  The global average price of solar energy has slipped to $50/MWh in 2016 from around $250/MWh in 2010.  Heightened rivalry among manufacturers and the resultant development in renewable energy technology has contributed to decreasing prices over the past few years. Production of more efficient systems, including improved solar PV modules and wind turbines, has driven growth, with renewables now emerging as a viable alternative to fossil fuels in several markets.

Additionally, a fall in the cost of inverters used for converting DC power from solar panels to AC power for grids has been equally responsible for the continuous drop in installed cost related to solar energy. The BNEF expects the cost of electricity from solar PV and onshore wind systems to decline by 66% and 47%, respectively by 2040.

In line with the substantial decline in cost of solar and wind energy, capacity additions in renewables have remained strong, with an addition of 161 gigawatts (GW) of capacity in 2016, the largest annual rise ever. This accounted for about 62% of net additions to power generating capacity. Worldwide investments in renewable capacity, however, dropped to $241.6 billion in 2016, down from $312.2 billion reported in 2015, in line with lower costs of installations. Most investments in renewables have gone into solar and wind power, with solar accounting for 71 GW in 2016, whilst the growth in wind energy was 51 GW. It is further expected that solar and wind power will bag about 72% of the projected $10.2 trillion in energy investments in new sources of power generation by 2040.

Recent years have witnessed increasing adoption of renewable energy by developing countries, especially in Asia, where about 58% of new renewable additions were made in 2016.  This takes its total renewable energy capacity to 812 GW or 41% of the global capacity. China retained its position as the largest developer of new renewable power, topping the global renewable energy market with an investment of $78.3 billion in 2016, and 45% of global new solar installations. This was despite a slowdown in investment in the Chinese renewable energy market in 2016. Any slowdown appears to be short lived however, with the Chinese government announcing that it will invest $360 billion in renewables by 2020. According to research by the BNEF, China’s renewable capacity would have a 63% share in its overall power generation capacity by 2040.

Conducive government policies and ideal geographical conditions are enabling India to emerge as a key market for solar energy projects. The country has over 8.5 GW of solar power capacity and its government is targeting 100 GW by 2022 by providing subsidies and incentives.  It is estimated that investments worth about $90 billion are needed to achieve this challenging goal. India has attracted investment from global renewable energy firms to build the world’s largest solar power plant in the state of Madhya Pradesh, with a proposed capacity of 750 MW.

Another market trend driving demand is the remarkable growth in corporate renewable procurement in the last few years, even as 2016 witnessed a decline in new corporate Power Purchase Agreements (PPA) signed, from record high volumes reported in 2015. Fulfilling sustainability goals, decreasing carbon footprints, getting a decent return on investment and hedging against volatile energy prices are some of the key drivers behind such corporate purchases. Big firms like Google, Microsoft and Amazon have signed contracts with vendors to use renewable energy to power their data centers. The decline in new PPA’s signed in 2016 was due to uncertainty in tax credits under Trump. The three biggest deals signed last year were Amazon’s agreement with Lincoln Clean Energy for a 228 MW wind farm in Texas, Google’s deal with Enel Green Power for a 200 MW wind farm in Kansas, and Amazon entering into PPA with EverPower Wind Holdings for a 189 MW Ohio wind project. In Europe, a consortium of Akzo Nobel, DSM, Google and Philips agreed to purchase electricity from Windpark Krammer in the Netherlands, once the latter’s 102 MW facility becomes operational in 2019.

Corporate PPAs are expected to consistently increase as more companies try to accomplish their targets on renewable procurement. Around 71 of Fortune 100 firms in the US have already fixed their renewable targets and 22 Fortune 500 companies are poised to become 100% renewable in time, thus buoying demand for renewables.

While we have highlighted the positive long term drivers for the renewables energy market, there are key near term challenges, primarily emanating from the US, where Trump’s support for the use of fossil fuels could prove to be a major headwind for the sector. His decision to withdraw from the Paris Climate Agreement and terminate the Clean Power Plan is expected to affect demand for renewables. In its 2018 budget, his government reduced funding for the Office of Energy Efficiency and Renewable Energy (EERE) and the Environmental Protection Agency (EPA). The funding for EERE was slashed by about a staggering 70% to $636 million from $2.09 billion which is expected to put a spanner on R&D development in the US renewable industry. Despite these concerns, it is still expected that investment in renewables will increase as deployment is largely controlled at state level.

Additionally, lobbyists are pushing to stall the march of renewables. In the US, growth in solar panel installations has slowed in 2017, due primarily to efforts by large utility firms who are lobbying to roll back incentives for private customers deploying rooftop solar panels, which they consider a significant threat to their business model.

Within the UK, the period since 2016 has been challenging for the renewables industry. Renewables investments in the UK dropped in 2016, even as it remained the largest investor in the European renewable sector for the second year in a row. Historically, the industry has been well supported by favourable government policies, including the Renewables Obligation (RO) policy and the Feed-in Tariff (FIT) scheme. However, last year, Britain slipped to its lowest position on an international league table of the best countries to invest in for renewable energy. A rollback in subsidies for onshore wind farms resulted in the cancellation of about 250 projects. Meanwhile, new solar panel installations declined by 81% in the UK in the first three months of 2017 following the withdrawal of subsidies and an 800% hike in taxes on rooftop solar projects. Furniture maker, Ikea recently announced that it will not invest the planned £524 million in its UK green energy fund in the wake of this policy change.

Additionally, the decision by the government to allow fracking for the oil and gas industry has led to near term headwinds, even as the latter development has received fierce opposition from the public due to environmental concerns and risk of earthquakes in the region.

A key development in the UK market in recent times has been the emergence of disruptive energy start-ups using cutting-edge technologies to create new products and services using renewable energy. As a result of this, major traditional utilities companies in the UK have lost more than 2 million customers since 2010. These small energy suppliers in the UK now hold about 18% share in the dual-fuel energy market, up from just 1% in 2012.

One of these disrupters is Bulb, a start-up that supplies 100% renewable energy to its UK customers at an affordable rate. The company has only one tariff for both electricity and gas supply. Energy supplied comes mainly from a number of independent renewable generators across the UK and three hydropower plants. The company’s customer base has risen to 100,000 customers now.

Another emerging player is Good Energy, which generates and purchases renewable electricity and supplies the same to its UK customers. The company has 2 wind farms at Delabole and Hampole along with 7 solar farms. The Group supplies electricity to over 71,000 customers and supplies gas to over 44,000 domestic customers.

Ecotricity, whose name featured in UK’s top 10 most disruptive companies for 2016, produces electricity by harnessing the power of the wind and the sun. The company successfully raised over £12 million from its corporate mini-bond ‘ecobond four’ from customers to invest in the capital requirements of green energy generation. The company has a 25.3% stake in Good Energy and acquired SunEdison’s rooftop operations in the UK last year.

The alternative energy market has come a long way from its inception and has bright prospects as companies and governments all over the world move towards a more carbon-constrained future. The decline in costs of solar and wind technologies is set to give tough competition to the use of conventional energy and these alternatives are slowly becoming more mainstream in nature. Increasing procurement of renewables by corporates is also starting to become a key driver of demand. There are near term headwinds, which include political factors. Notwithstanding the current political environment, the long-term outlook for the renewable energy market looks promising and it is expected to attract huge investment in the future, thanks to the rapid developments in underlying technology and rising investments in emerging economies.