Renewables Future Finally Arrives

Analysts predict booming market

Policy developments in North America and Europe, along with the emergence of markets in countries like China and Brazil, could spur a booming market in renewable energy this year, industry analysts and market players predict.

In the US, Congress' renewal of the federal production tax credit (PTC)—which gives a 1.8cts/kWh inflation-adjusted tax break to projects that generate electricity
from wind, chicken waste, or biomass grown solely for energy production—will kick-start numerous projects that have stalled since the PTC expired in December 2003.

Alliant Energy, MidAmerican Energy, and PPM Energy (ScottishPower’s US subsidiary) are among the companies that have credited PTC renewal with reviving moribund wind energy projects. In addition, tax benefits will spread this year to more renewable energy companies with President Bush’s signing of a $146-bil corporate tax bill on Oct 22 that extends the PTC to include geothermal, solar, and biomass projects as well as hydroelectric power generated from small irrigation systems. “We’re very bullish. We see renewable energy as a cornerstone of US energy strategy,” said Bill Madia, executive VP for laboratory research for think tank Battelle (Columbus, Ohio). “As we look at the US market, we see nothing but strong drivers.”

Rick Sellers, head of the renewable energy unit for the International Energy Agency (IEA) in Paris, expects uneven growth among various renewable-industry sectors next year. Hydropower in the US, for example, has hit a capacity plateau (and in some areas faces shrinkage) as it competes with other industries for water use. Wind energy and solar power, in contrast, have enjoyed 20% annual growth rates in the US for several years and show no signs of slumping, particularly with the PTC renewal.

Still, wind and solar energy might be hard-pressed to sustain their recent rates of growth in 2005, Sellers said. Chris Groobey, a partner at the law firm Baker & McKenzie, who is involved in renewables project financing, sees a new pattern of financial support emerging as US markets mature. Renewable energy companies are “looking for easier access to capital markets through debt offerings to pay off their construction loans. As the number of developers reaches critical mass, they’ll look to pay off their construction debt with long-term debt,” he said.

Europe maintains its lead

Across the Atlantic, tax benefits and other government incentives will continue to fuel thriving renewable energy markets, with Denmark and Spain setting the pace in wind energy and Finland, Norway, and Sweden leading in biomass energy, said Vijay Murthy, an energy analyst with the consulting firm Frost & Sullivan.

Renewable energy should hit the $7-bil mark next year, he predicted. In addition, the European Union’s Emissions Trading Scheme (ETS) of buying and selling carbon emissions allowances will come into force in 2005 now that Russia’s parliament has ratified the Kyoto Protocol. The ETS, which gathered steam in late 2004, is expected to heat up further as some factories and power plants scramble to meet their emissions limits by cutting their carbon releases and purchasing emissions allowances, while others peddle their excess allowances in the marketplace.

The EU ETS will likely spark interest in renewables projects in non-EU countries through the Kyoto Protocol’s Clean Development Mechanism and Joint Implementation processes, which will allow EU companies that finance renewables projects overseas to convert certified credits from these initiatives to EU ETS allowances. Many American corporations will feel the impact of carbon trading as well, Groobey said. “US companies are understanding that even if the US doesn’t ratify [the Kyoto agreement], they and their worldwide operations will be required to pay more attention to their emissions,” he explained. “Trading mechanisms will allow them to continue running their facilities the same way, as long as they support mitigating technologies in some other place. This will create increasing demand for renewable energy projects.”

Follow the money?

Observers disagree on whether rising oil prices would stimulate demand for renewables. Madia sees the spike in prices as temporary and driven more by political uncertainty in countries like Iraq and Nigeria than by fundamental market changes. Though high oil prices might encourage companies to take a closer look at renewables, substantial long-term deployment will not be determined by short-term price increases, he said.

IEA’s Sellers, though, sees parallels between today’s price hikes and investments in renewables that followed the mid-1970s oil crisis. He points to biomass, where there was “a huge transformation of the forest products industry” as companies that had rarely recycled organic waste began to reuse wood scrap for energy. In the US, federal government officials in the 1970s “threw money at every technology they could think of,” Sellers said.

As Washington’s funding for renewables research was slashed in the 1980s, Sellers says, investment consolidated around three major technologies: wind, photovoltaics (PV)/solar energy, and advanced biomass. With the re-emergence of environmental concerns in the 1990s, “the three technologies are now surging because we’ve figured out how to improve market entry strategies for them. These are natural economic processes we’ve observed historically, and we’ll see them again,” he said.

Getting product to market

Renewable energy companies will certainly face challenges in the coming year. For instance, some of the best areas for wind power in the US (such as the Great Plains) and the UK (particularly Scotland) are also the most remote from large demand centers. Lack of transmission capacity could short-circuit renewables projects that cannot obtain access to electric grids already strained in places to the breaking point. Renewables also confront competition from other energy sources. While some analysts see nuclear power as a natural complement to renewable energy in a carbon-constrained world, others worry that the two will be forced to battle for limited government funding and grid access.

Nevertheless, prospects for renewables
in the US and Europe appear bright, and new markets could surge in 2005. “Most
people are looking at how to enter Asia,
and China in particular,” Baker &
McKenzie’s Groobey said. But China has yet
to make a substantial commitment to
encourage renewable energy development over, say, coal or natural gas, he says, though Beijing has set the goal of producing 12% of the country’s electricity from renewables by 2020.

In the short term, Groobey sees wind technology sellers like GE Energy standing to gain the most in China, while turnkey project developers could find rougher going. Russia could be a strong renewables player over the longer term as international developers begin work on wind power and hydroelectric projects, he says.

Sellers concurs that China offers great potential for renewables and also highlights Brazil and India as countries to keep an eye on in 2005. He notes that Brazil has committed to developing 3,000
MW of renewable energy capacity, divided about evenly among wind energy, biomass, and small hydroelectric projects. As developed nations bring a new generation of renewable energy technology to fruition, “it makes it possible for countries like Brazil to buy into the market,”
he said.

A sunny forecast

Several analysts pointed to the growing potential of solar energy as a technology to watch in 2005 and beyond. Sellers says ongoing concerns in California—the world’s fifth-largest economy—about blackouts,price spikes, and energy security, along with political support for photovoltaics from
Governor Arnold Schwarzenegger, have made PV increasingly attractive. “We’ve entered a
new era in which the price of PV is becoming competitive” when all factors are considered,
Sellers said.

Frost & Sullivan’s Murthy agrees that solar
energy’s time is coming. He notes that
Germany has launched a program to install
solar panels on 100,000 rooftops, and “a lot
of countries are following suit” to boost
electricity generation from photovoltaics, he
says. Though wind energy dominates European renewables markets, “Solar energy could overtake it in the coming years,” Murthy said.

Small-scale photovoltaics still have a long way to go, however, particularly in improving how efficiently they convert sunlight to electricity. A large-scale alternative that is gaining ground is concentrating solar collector technology, Groobey explained. These systems—like the new, 50-MW AndaSol project near Granada, Spain—soak up enormous amounts of sunlight in massive parabolic troughs that heat water, converting it to steam for powering turbines.

Concentrating solar technologies require enormous amounts of land, typically an area larger than the footprint of a conventional power plant. But in wide-open spaces with lots of sunlight, such as the
western US, concentrating solar technology can prove more economical than PV, Groobey said.

The policy factor

Events in the political arenas of several countries will likely leave their mark this year. For instance, in June Chinese government leaders are slated to introduce to the national legislature a comprehensive plan that would set renewable energy goals for the nation’s power sector backed
by commercially competitive prices for renewables.

In the US, Groobey expects renewables companies to flex their political muscles in 2005. He said, “There will be a push from the entire renewables community to move the federal government toward a long-term, stable regulatory and tax scheme so they can develop projects rather than worry about what’s going on in Washington.”

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