How to Unlock US$100 trillion in Renewable Energy Investment Opportunities

SoftBank and Saudi Arabia just announced a US$200bn solar-battery hybrid initiative. This is a glimmer of the US$100 trillion in investment opportunities recently identified in a study by researchers at Stanford University, Berkley, and Aalborg University, that would be created by transitioning the world to renewables by 2050 using one of multiple possible pathways. My last article on the subject demonstrated both the necessity as well as the benefits to everyone in doing so. This article will detail how we can accelerate this transition from a policy perspective and thereby unlock these opportunities, with returns typically in the range of 12–18%.

This article will briefly review some key concepts which argue in favor of renewables, problems with existing tender and feed-in-tariff systems (“FIT”) and proceed to a discussion of key policy changes needed and arguments in favor of such changes.

Key Concepts from the Last Article: A Quick Review

My last article on the topic was rather comprehensive, so a quick review of some key concepts seems in order. Please also note, all underlined text contains a hyperlink reference to supporting sources for each point.

• Grid stability is entirely achievable even with 100% renewable energy.
• Multiple sources of renewable energy are typically complementary and combining sources can minimize the amount of backup energy storage needed to maintain stability.
• Multiple sources of renewable energy can also be co-located, minimizing land usage and maximizing generation per unit of area.
• Renewable energy generation and storage costs are declining rapidly, and, excluding subsidies, the cost of building and operating new renewable generation is already below even the operating costs of coal in some scenarios.
• Recent bids demonstrate that the downward trend in the costs of renewable energy continues, with renewables combined with battery storage coming in cheaper than natural gas.
• Authors at the IMF estimate that the fossil fuel industry receives benefits amounting to US$5.3 trillion per year in subsidies, thereby making the true cost of renewables already a fraction of the true cost of fossil fuels.
• Transitioning away from fossil fuels will save lives: the WHO estimates more than 3 million people die per year due to outdoor air pollution alone, with the Lancet Commission estimating 6.5 million deaths per year due to both indoor and outdoor air pollution.
• Utilities that resist the transition to renewables, may face increasing levels of grid defection, with Australia already witnessing this with 20% less electricity purchased from the grid in 2017 than 2010.
• Any new investment in fossil fuels potentially runs a significant risk of becoming a stranded asset over time.
• The latest CO2 reading at Mauna Loa is 408.80ppm, with the global monthly mean as of November at 405.58ppm, meaning we are already over 90% of the way to the 450ppm red line the Intergovernmental Panel on Climate Change (“IPCC”) has warned about.

Given the above, it seems in society’s best interests to move toward renewable energy as quickly as possible given the benefits to everyone. So why is this not happening more quickly?

There are two main reasons for the slower-than-necessary pace: i) current procurement structures that are preventing a more rapid transition to renewable energy and ii) the strength of the conventional power lobbies, some members of which do not yet recognize they are energy companies first, and fossil fuel companies second. Mounting evidence shows they could achieve higher, more reliable, returns by transitioning their own business models to renewables as companies like Equinor, formerly Statoil, are doing.

Problems with Existing Tender or FIT Systems

While an open, competitive energy market should be the long-term goal, many countries are unfortunately not in a situation to achieve this goal in the near future. As such, some countries have turned to competitive tenders, while others are relying on FIT systems. However, there are some key characteristics of renewable energy which enable a different approach with better outcomes for society.

In particular:

1. Renewable energy and energy storage are entirely scalable, making it possible to have tenders without a pre-defined target capacity for each bidder or project, unlike conventional energy;
2. In most cases, the optimal and lowest-cost solution will be a combination of renewable energy sources i.e. hybrid renewable energy solutions such as co-located wind and solar combined with some form of energy storage, not a single source;
3. While energy storage is valuable for a variety of functions, any energy storage directly increases the levelized cost of electricity (“LCOE”). Therefore, bidders should be incentivized to optimize the energy mix to minimize the amount of storage needed to provide reliable electricity;

Also, it is important to remember:

1. Carbon price is not being fully captured in the price of electricity anywhere (e.g. this would require an average carbon tax of around US$0.29/kWh on coal);
2. Renewables can be built in 6–12 months versus several years for conventional energy plants; and,
3. A typical power purchase agreement (“PPA”) has a life of 20–25 years, and some electricity generating facilities can have useful lives beyond this time frame.

Based on the above, governments should urgently work on creating a more efficient procurement process that takes advantage of the unique characteristics of renewable energy. The time to develop such frameworks should not be an excuse. Indeed, governments can take the time to optimize the approach to renewable energy procurement and still gain access to renewable energy in a shorter time frame than the procurement and construction of a conventional facility.

The figure below summarizes several of the issues with FIT and traditional tender systems:

The question then becomes how to solve these problems.

Designing A Better Tender Process for All Participants

The answer is to transition, as soon as possible, to a tender-based system with standardized risk allocation appropriate to the market (similar to IFC’s scaling solar program but not limited to solar), that is:

• Is tied to achievable targets that transition each country to 100% renewable energy by 2050;
• Is technology agnostic to enable developers to deploy the optimal mix of generation at each site;
• Incentivizes energy storage and grid stability; and
• Properly accounts for the cost of carbon.

The following figure illustrates high-level concepts which would lead to a more efficient approach, without the need for a FIT system.

For such an approach to work, the tender process would also need to stipulate an additional charge for facilities that have carbon emissions (i.e. a carbon tax) or are unable to operate reliably on a 24/7 basis (i.e. a storage incentive).

The process would be something along the lines of the following:

This approach ensures that:

1. the capacity added each year will eventually lead to a 100% RE grid but with an orderly transition, which takes into account existing generation capacity and PPAs, and ensures reliable energy throughout the transition;
2. the project structure for all projects in the country will be standard and bankable, with risks allocated properly to those parties best equipped to manage them, regardless of project size;
3. critical capacity targets will be awarded to firms qualified and capable of developing the projects;
4. smaller or less experienced firms will still be able to develop projects, and will benefit from the same, bankable structure, and governments can encourage the growth of a domestic, nascent, industry, but not at the risk of critical infrastructure needs; and
5. the private sector will still have a strong incentive to reduce price as they will want to be among the consortiums awarded capacity.

Such a system should be attractive to governments, as it incentivizes renewable energy, grid stability and low costs. It should also be attractive to developers, lenders, and their advisors, as it is not an “all-or-nothing” system as multiple winners can be awarded, and the typically lengthy negotiations over specific contractual terms are substantially eliminated.

What Would a 100% Renewable Energy Market Look Like

Going forward, grid defection will likely happen more frequently in places where utilities resist the transition as renewable prices decline. However, the grid does provide two fundamental and related functions which support its continued existence. First, the grid can be a marketplace where people and firms can buy and sell excess electricity and second, the grid can provide backup for those days where companies and individuals are not able to be self-sufficient.

Until an energy market is well-established it is likely that a tender process such as the one proposed here would be useful in accelerating the deployment of renewable energy and energy storage. However, once a competitive market is established, the future form of such markets is still hotly debated. That said, it appears markets are heading toward a situation whereby:

1. a grid owner / operator (or a co-op for smaller grids) is responsible for maintaining the grid and receives a “transmission charge” for making transmission lines and an energy market available, and
2. energy will come from independent, distributed generation & storage with companies and individuals buying and selling energy using a blockchain or similar solution.

Transitioning to such an open, competitive, market presents both challenges and opportunities. As an example of opportunities, a market-based pricing approach incentivizes the deployment of energy storage as the cost differential between peak and off-peak power prices creates an obvious arbitrage opportunity. On the other hand, the declining price trends in wind, solar, and battery storage, with no end in sight, presents a challenge as investors may delay investment until prices stabilize (with no indication they will) to avoid being undercut by the next generation of technologies. Indeed, large-scale IPPs have lifetimes exceeding 20 years and, as such, investors need to ensure they will have a reasonable rate of return over the life of the facility for them to deploy their capital. This is the problem facing IPPs in Chile, where solar currently faces the prospect of potentially having to give away, rather than sell, power.

The traditional power-purchase agreement addresses many of these issues. However, where PPAs are not available, or where a market wishes to move toward real-time pricing, market-based systems will likely need to provide some assurance to developers that they will be able to generate a minimum return over the lifetime of their investment, while still incentivizing storage and renewables, and dis-incentivizing fossil fuels.

This could be accomplished, for example, by having a combination of a carbon tax, reliability charge, and a mechanism that ensures facilities will receive the equivalent of a capacity charge or an electricity price floor specific to each facility’s year of completion. However, until such a framework is in place, relying on the tender process outlined above may be a better solution.

Conclusion

The goal is clear: transitioning the world to 100% renewable energy as quickly as possible makes sense for all of us. To achieve this future, most governments can still greatly improve their procurement frameworks by creating an enabling environment that accelerates the transition while ensuring their citizens have access to low cost, sustainable and reliable energy.