Green Investments Alive And Apparently Well
March 8th, 2010 by Fereidoon Sioshansi, EEnergy InformerFinancial markets may be depressed and unemployment high but investment keeps pouring into GreenTech field – loosely defined to include renewable energy technologies, energy efficiency including in-home automaton and energy management systems, smart meters/smart grid, electric cars, storage, batteries, biofuels and a host of supporting technologies.
According to a report recently published by PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), over 19% of venture capital investments in the 3rd quarter of 2009 went into the GreenTech sector. Both established and start-up companies are enjoying the VC bonanza, driven by growing interest in renewable energy, energy efficiency, smart grid and electric transportation.
Investors, one can only surmise, are convinced that concerns about climate change and eventual carbon legislation will make GreenTech even more viable than it is today. They are betting on companies that have neither revenues nor profits – and in some cases – not even a viable product or business plan. If it sounds crazy, welcome to the world of VCs, where it is not uncommon to see 1 out of 100 start-ups to become sustainable, 1 in 1,000 turn profitable and 1 in million become a Google, and that’s if you are really lucky.
The signs of the GreenTech bonanza are hard to miss as large established companies make selected investments in key sectors (see box). Siemens, for example, recently bought Israel’s Solel, a manufacturer of solar thermal systems for $418 million.
French nuclear giant Areva has apparently decided the time has arrived to diversify beyond its core competency, which includes the entire nuclear fuel cycle from uranium enrichment, reactor design to waste management. In February 2010, it acquired the California start-up Ausra, a low-cost manufacturer of solar thermal technology known as Linear Fresnel – which uses flat mirrors to concentrate solar radiation to heat pipes of water – for an undisclosed amount.
According to Financial Times (9 Feb 10), Areva has targeted €1 billion ($1.4 Billion) in sales from renewable energy resources by 2012 – not a huge amount for the state-owned powerhouse, but significant given the corresponding figure in 2008 was a mere €147 million.
Why renewables? Because Anne Lauvergeon, Areva’s CEO wishes to transform the company into a global provider of carbon-free energy – get it? The company has made selected investments in wind and biomass already and Ausra’s acquisition adds solar thermal to its carbon-free portfolio.
Anil Srivastava, who heads Areva’s renewable energy division, was quoted in the article saying, “This is great opportunity for Areva to expand its carbon-free portfolio, but it is also an opportunity to leverage our presence around the world.”
The skeptics – there are skeptics everywhere not just in climate science – say too much money is pouring into GreenTech field, eventually turning it into a gigantic speculative bubble like the housing market – and there may be some truth in this. Most start-ups do go belly up. Yet investors, like greedy gamblers, hope to hit the next big jackpot. There are plenty of other reasons to bet on continued political and financial support for renewable energy technologies.
The growing penetrating of renewable energy resources – a virtual given – leads to a host of issues including the need for more transmission, integration of intermittent resources, back-up and storage technology and what is the best way to pay for renewable generation.
Depending on their location and prevailing regulations, renewable generators are compensated either on costs – as in the case of feed-in-tariffs popular in Europe – through long-term purchase power contracts with the distribution companies – as in the US – or by bidding their output into wholesale markets at prevailing prices, usually supplanted by subsidies, production tax credits or other financial schemes – as in the US. Mandatory targets such as RPS in the US or the 20% quota for 2020 in EU generate the demand.
But which of these schemes provide the best incentives for investors who are behind renewable energy revolution? That is the topic of an article by Professor James Bushnell, now at the University of Iowa. He says that as the level of penetration of intermittent renewables such as wind increases, the mix of other generation resources shifts towards less baseload and more peaking capacity.
This means that over time, renewable producers earn increasingly more revenue in markets with capacity payments as opposed to those that base compensation primarily on energy as determined by fluctuating prices in wholesale markets. This may sound obvious but has important implications in design of future energy markets – increasingly dependent on renewable generation.
The consensus is that a combination of financial subsidies and/or mandatory targets for renewable energy resources will remain as the dominant driver of demand for renewable energy technologies and, more broadly, GreenTech investments. Climate legislation, should it come to pass, will merely be icing on the cake. Of course, a lot depends on how, how much and when – the devil is always in the details.
Fereidoon Sioshansi
This post is extracted from EEnergy Informer, March 2010 issue.
April 8th, 2010 at 8:24 pm
It is interesting to notice that, despite the global recession, investments keeps pouring into green tech sectors. And the figures concerning Venture Capital investments, as the acquisition of Ausra by Areva, are strong evidences of the health of the GreenTech sector. If we keep aside the investments dedicated to “global” improvement (efficiency, distribution or energy storage), the main part of the investments are dedicated to two renewable energies, solar energy for the largest part, and wind energy. How can we explain the investors’ interest for those two energies and would it last?
We can start by few remarks that can explain the attractiveness of those energies. Firstly, almost all states are willing to modify their energy mix by increasing the part of non carbonated energy and this in order to reduce the CO2 emissions, ensure their energy independence and secure their energy supplies (the UE “3*20 in 2020 is a perfect illustration of this trend). Moreover, renewable energies can profit of a good opinion from the public at large (except maybe in some countries like France concerning wind energy, because of its visual impact), which make easier the populations’ acceptance (The influence of the opinion has not to be proved, the nuclear industry can testify of its devastating effect). Finally, in a world hit by the crisis, several countries, such as France and USA, have based part of their reflationary policy on the growth of green projects. It is true that the realization of solar or wind power installations creates assets in the territory and employments that cannot easily be relocated. All those reasons contribute to the current success of solar and wind power.
We can also provide more technical reasons. First, both energies need really appropriate (windy or sunny places) locations to be efficient, and in the developed countries those locations are limited. The technological expertise and the control of appropriate locations are real barrier to entry for new electricity producers and that can explain the investors’ eagerness. Moreover, both solar and wind power need incentive schemes to be profitable. The development of solar power in Germany, that leads to a solar installations capacity of 9GW in 2009, has been possible only when the regulator has offered (and guaranteed in time) very highs price for photovoltaic electricity (from 400 to 600 €/MW in 2004). Those financial incentives currently exist in numerous countries, but will it last?
How can we explain the superiority, in term of investment, of solar power on wind power? We can say that wind technology is now mature and there are no big innovations to expect, except maybe concerning off-shore windmills. As a consequence there are no sizeable R&D efforts and very few company creations because of the existence of well installed manufacturers (Vectas, Siemens, GE wind), even if with the explosion of demand for windmills has lead to long supply delay (about 2 years for a windmills in France) that can open place for new companies (like the French manufacturer Vergnet which just won an sizeable Ethiopian tender). Concerning solar power, we can say photovoltaic panels’ technology is not mature yet, and there are still breakthroughs to expect concerning both the utilization of thin film panels and the improvement of silicon panels manufacturing process. This can explain why solar power, especially photovoltaic, keeps attracting investment.
All those remarks tend to explain the good health of the GreenTech sector and prove that there is currently real financial opportunity in solar and wind power. Mr Sioshansi is right to wonder if we should be glad of the future development of those two energies concerning CO2 emissions since, as he says, even if those energies are carbon free, they also lead to very intermittent power generation. Their integration needs more peaking units to compensate the variability and those units can only been hydroelectric and most often oil, gas or even worst coal. Moreover the massive production of silicon photovoltaic panel in China where the main part of electricity comes from coal is not a “good news” concerning reduction of CO2 emissions. Indeed, according to figures provided by EDF, the carbon footprint of photovoltaic panel is around 150 g/CO2 (when the manufacturing country uses coal), whereas it is around 10 g/CO2 for nuclear power. This is an other argument in favor of the need of fully integrated carbon footprint when we discuss the environmental impact of the different technologies.
April 11th, 2010 at 4:46 pm
The bar chart, at the top of this article, shows big variations in Green investments from 2008 to 2009. While, as the title of the article puts it, investments on Green Tech are still alive and apparently well despite the financial and economic turmoil, one can notice a huge cut in investments on solar energy (more than a half), a reduction of biofuels and wind energy investments and an increase of the investors interest in Green investments related to transportation and energy efficiency. Investors’ interests probably follow the way governments subsidize each type of Green Technology and for instance, if governments reduce their investments in solar energy, they do the same. This doesn’t seem to fit in with effective long term strategies to raise the weight of renewable energy to the objective of 20% in the EU energy mix or RPS in the US. Actually, when governments shift from one type of Green Technology to another one (in terms of amount of subsidies), a lot of projects that were developed on the basis of the previous government policy are destroyed because they are no longer viable. For example, in solar technologies, uncertainty about governments’ subsidies is a brake to effective long term strategies and the fluctuation of investors’ interests in that domain harms its development. Western Governments should really think about long term policies in the way they subsidize carbon free energy, they should make choices and stick to them. This is most probably hard to do in the actual context, but in my opinion, it is essential for the 2020 goal to be achieved.
Another important issue raised by this article is the fact that more renewables imply more peaking units. The result of this is probably that with the increasing dependence of energy markets on renewable generation and the shift from baseload to peaking capacity it entails, energy prices will likely get higher and higher. How much is the end user, the consumer willing to pay for that? How are Western governments and state owned companies like EDF going to cope with that? These are open questions. But, investors should take into account the fact that if today, renewable producers earn increasingly more revenue in markets with capacity payments as opposed to base energy producers, this situation is not immutable and they should be wary of it instead of giving way to any kind of euphoria.
April 12th, 2010 at 3:11 pm
Are green investments sustainable in the coming years? Are the extra costs a hurdle to the wide-scale development of green technologies? Has the crisis slowed down the investments or is it a boost for the shift of our means of producing energy?
The regulation trend is definitely “renewables oriented” especially in Europe with the Energy Climate Package voted in 2008 with the 3*20% rule and the ETS scheme. To support these objectives the EU Member States have put into force loads of supporting patterns like feed-in-tariffs, ROCs, Green Certificates in addition to the Kyoto CDMs and MOCs. As we can see, even if the legal framework is European, the means of complying with the objectives are decided on a national scale. Most of them have bet on a new kind of economic growth based on green tech development. Is it realist? Achievable? The answer is unclear. The States are ready to subsidise renewables but at the same time are facing another challenge: reducing the public deficit. Thus, the support provided to green energy is recently evolving. The feed-in-tariffs have decreased, -15% for the solar facilities in Germany in 2010, -20% in Italy for the solar facilities in 2010, banding introduced in the UK to support the offshore wind power more than other technologies and so on…
In other words, the signals sent by the European governments to the investors are blurred. Moreover, regarding the households, the crisis has dramatically affected their investments in favour of the green technology at least on the very short term.
Creating a green economy is a cost for the society while cash flow is lacking during a crisis. According to WWF-E3G, the green investments made by the governments of the EU in their “recovery plan” are 4,369M€ out of 26,500M€ for France, 11,100M€ out of 81,490M€ for Germany and 2,527M€ out 5,000M€ for European Union. It seems to be a lot of money nonetheless it is not enough to cover the extra costs induced by green technologies. For instance, to meet their renewable objectives, the UK would need to invest more than £6,800M from now on till 2020. It means an additional cost of £80 per year on the consumer energy invoice. Is it a reasonable and bearable cost for our society?
The crisis has postponed green investments and the resulting costs. It has also permitted the EU to comply with the Kyoto protocol objectives. However, it the former does not mean that the EU growth for the coming years can be based on green economy. The required investments to reach the multiple 20 target seem far too expensive in the short term especially considering the ongoing withdrawal of Member States in the support mechanisms.
Everybody is ready to invest in green technologies if some business can be made without hampering competitiveness. The recent renunciation of a carbon tax in France is the best example. Is a green protectionism on the European scale the best way to coax the rest of the world in a climate fight while developing their economy? It might be a good move…
April 21st, 2010 at 2:34 pm
The issue highlighted in the second box is indeed critical. In fact, through different incentives, the amount of renewable energy increases. The utilities, in order to cope with the inherent intermittence of wind and solar power, shifts their mix of other generation resources “towards less base load and more peaking capacity” as James Bushnell noticed. And, because peaking units reject more CO2, the overall carbon generation will not evolve as much as expected, even if some industrial, commercial and domestic users will claim that their electricity is 100% green.
The critical issue is to cope with the intermittence in a neutral carbon way. The more obvious solution is probably energy storage coupled with intermittent generation, in order to transform renewable resources in base load generation units. Currently, because storage facilities are expensive, not very efficient and not always “green”, they are not a short-term credible solution.
Another solution, not mentioned by the author, would be the implementation of dynamic demand mechanisms. This system is currently used to avoid outage by shutting off some electrical load. In a “smart grid future”, it can be still used to shut off electrical load to avoid high prices (if time-of-use pricing is implemented), outage, starting of expensive and carbon intensive generation resources but also to start on electrical load (like AC, water heater or washing machine), when renewable generation is high. In some area, where a high percentage of distributed generation (windmill, solar panel, micro-CHP, …) begins to generate problem on the distribution network, these dynamic demand mechanisms, by stimulating in situ consumption, could avoid expensive investments in the network.
These solutions raised once again a recurrent issue with smart grid investments: how these mechanisms, which will bring benefits to various stakeholders (customers, DSO and generators), will be funded ?