When Christopher Columbus and the other great explorers undertook their epic voyages of discovery in the 15th and 16th centuries, they navigated a world of extraordinary risks. Buffeted by the worst storms the great oceans could throw at them, ravaged by illness, under constant threat of attack. On they sailed, eyes on the horizon, sustained by their dreams of discovering new lands. Welcome to the world of clean energy in 2017!
At the beginning of 2016, we listed some of the grave threats facing clean energy, but we felt that the sector was well-placed to withstand them. “Clean energy,” we said, “is now a third-of-a-trillion-dollar industry, with a strong cadre of competitive suppliers, enjoying a generally supportive policy environment – now underpinned by the commitments made in Paris.” And clean energy certainly had a decent year, as we wrote last month in our review of 2016.
Nevertheless, when BNEF published its full-year investment figures earlier this month, they were down a significant 18 percent on 2016, to $287.5 billion. Yes, the volume of wind and solar installations hit a new record in 2016, preliminarily estimated by our analysts at 127 gigawatts, some of that funded in 2015, a year of record investment (we are still calculating exactly how much).
Of the 18 percent drop in dollar terms, around half may have been due to reductions in the cost of equipment, as opposed to reductions in the volume of activity. Of all the many threats we listed – which included Brexit and the potential of a Trump victory – it was the slowing Chinese economy that most materially impacted the 2016 figures.
At the start of 2017, it is again easy to list the potential storms that might disrupt the smooth sailing of the good ship clean energy. First and foremost, of course, the potentially tempestuous consequences of Donald Trump’s arrival in the White House.
Another is Brexit, which has been generating severe hurricane warnings, though no actual wind, for some time. If you like your storms with a European flavour, 2017 will see elections in France, Germany, the Netherlands and the Czech Republic. Pollsters are confident that although Marine Le Pen will get through to the final round, she will then lose to whichever mainstream candidate she is pitched against. So it seems wise to plan for the worst.
Asian clean energy investors too should be keeping an eye on the weather. China’s economy is still dangerously unbalanced, over-investing in construction and infrastructure, over-leveraged and over-burdened with darks pools of poor lending.
In addition, China faces the risk that Trump sparks a trade war with all his talk of currency manipulation and import tariffs, or even a military stand-off over its newly fortified island bases in the South China Sea. If Narendra Modi’s India is supposed to provide the next China-style surge of demand to the world’s commodity producers, all the signs are they are waiting in vain.
And globally, one of the biggest risks to clean energy lies in a potential jump in interest rates. The era of super-low central bank rates is most likely drawing to a close. The big question as risk-free rates rise, is whether risk premiums to clean energy projects can continue to come down to compensate – or whether all-in borrowing costs will rise, jeopardising the competitiveness of renewable electricity.
Assuming that none of these storms – or others we haven’t thought of – cause a clean energy shipwreck in 2017, we think our little flotilla will sail on – perhaps not serenely, but more or less as it did in 2016.
The good news is that renewable energy has – at least on a levelized cost of electricity, or LCOE, basis – clearly achieved the long-awaited goal of grid competitiveness. More than that, in many countries it now undercuts every other source of new generating capacity, sometimes by very considerable margins.
Last year saw unsubsidized price records of $30 per megawatt-hour for a wind farm in Morocco and $29.10 for a solar plant in Chile. These must be the lowest electricity prices, for any new project, of any technology, anywhere in the world, ever. And we are still going to see further falls in equipment prices.
Super-low-cost renewable power – what we are now calling “base-cost renewables” – is going to force a revolution in the way power grids are designed, and the way they are regulated.
The old rules were all about locking in cheap base-load power, generally from coal or hydro plants, then supplementing it with more expensive capacity, generally gas, to meet the peaks.
The new way of doing things will be about locking in as much locally-available base-cost renewable power as possible, and then supplementing it with more expensive flexible capacity from demand response, storage and gas, and then importing the remaining needs from neighbouring grids.
New nuclear plants will remain the political bauble they currently are, unless next-generation nuclear can prove it can deliver fail-safe designs at affordable cost. Demand will be suppressed by energy efficiency and self-generation, and augmented by electrified transport and heat.
Putting super-cheap, “base-cost” renewable power at the heart of the world’s grids in this way will require a revolution in the way the electricity system is regulated. Renewable power’s progress to date has been achieved mainly by subsidizing or mandating its installation, while forcing the rest of the system to provide flexibility, within otherwise unchanged regulatory environments and power market rules. The additional system costs have been material but generally affordable.
That has taken renewable energy to 20, 30 or 40 percent of supply in many markets. But it won’t work when it comes to 60, 70 percent or higher. That would mean a smaller and smaller proportion of conventional power generation has to provide a larger and larger amount of flexible supply for which it was never designed. We are reaching the point in the story where power system regulation will have to be fundamentally rethought. Simply layering on a capacity market is the wrong response: creating guaranteed demand for obsolete technologies has never ended well.
But enough of the mood music and wider trends: it is time to take a deep breath and make 10 bold predictions for 2017. As before, we are doing so with the help of BNEF’s teams of 120 specialist analysts around the world.
To see full story, and the 10 predictions, please click here