Financial Investments in the World of Low-Carbon Energy

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Ever-cheaper clean tech provides a real opportunity for investors to get more for less” — Erik Solheim, executive director of UN Environment. The global momentum towards rethinking the way energy is being generated, distributed, traded and consumed has been gaining huge traction in the past decade. In 2015 alone, $285.9 billion were invested globally in renewables, six times what had been invested back in 2004 [Figure 1]. Renewable energy’s market share keeps growing, as governmental efforts and incentives are planning to fade away on the long term thanks to increasing competitiveness of renewables in the energy market. Earlier this year in Germany, the world witnessed the first major wind farm project agreement deprived of any subsidy from the government, where power is to be sold at a profit on the energy market. The challenge ahead is however still huge and full of unknowns, and the question of profitability persists in most cases. This short review addresses the scale and dynamics of the finances behind a number of technologies and projects currently seen as the building blocks of a global sustainable energy system: Solar, Wind, Energy Storage and “Energy-Smart Technologies”. Bloomberg New Energy Finance (BNEF) has been delivering large amounts of valuable insights into these matters and a lot of the data and graphs presented in this review will be sourced from this entity.

Figure 1 [BNEF]

Global Investments

The source and nature of investments vary strongly from one country to the next, depending on governmental objectives, geographic potential for renewables, infrastructure, and country development. Governmental investments in renewable energy generation projects fluctuate significantly in correlation with development plans and policies being put in place. Looking at India for instance: In 2014, Prime Minister Narendra Modi set a target of generating 175GW of power issued from renewables resulting in Small Distributed Capacity (SDC) (e.g. Rooftop PV) investments more than doubling from 2015 to 2016 [BNEF]. Inversely, recent grid related challenges faced by Japanese utility companies and new energy tariff policies in 2016 had a big blow on the local PV sector growth, with investments dropping 56% [BNEF] from 2015 to 2016. Governmental investments are still dominant with respect to corporate investments, as shown in Figure 2, through the example of R&D funding.

Figure 2: R&D Investments in Renewable Energy, in $BN [BNEF]

Again, the weight of governmental investment varies depending on the region, with Chinese R&D in renewables being almost entirely funded by governmental entities for example. Looking back at Figure 1, the funds invested in renewable energy is mainly composed of asset financing which can be briefly defined as investments in renewable energy generation projects (excluding refinancing) in our case.

Wind & Solar

Diving straight into the facts, here is a comparison of asset finances for both wind and solar:

Figure 3: Asset Finance of Wind and Solar Projects Worldwide, by Sub-Sectors, in $BN [BNEF]

Similarly to what’s been seen prior to this section, PV and wind farm project investments have kept growing in the past decade. There has however been a recent exception in 2016, where low manufacturing and deployment costs of wind turbines and PV panels, coupled with reduced investments in China, Brazil and Japan to name a few, led to the dip in asset finance observable on Figure 3. In order to better visualize the distribution of the capacity installed globally for both technologies, the International Energy Agency (IEA) released numbers on global wind & solar infrastructure, per country (Figure 4 & 5).

Figure 4: Top 10: Total PV Capacity Installed, as of 2016 (MW)
Figure 5: Top 10: Total Wind Power Capacity Installed, as of 2015 (MW)

Due to the current significant dependence on coal energy and plans to invest in its national infrastructure, China has been at the forefront of large renewable energy project development recently, with capacity to produce more than 145GW of wind power in 2016, representing around a third of global wind power capacity. China’s investments in renewable energy are however very recent, with 34GW of solar added in 2016 only and wind power capacity jumping from 2GW in 2006 to 168GW in 2016 (compared to 105GW and 71GW jumps in the EU and in the USA respectively).

Looking at the public markets, wind turbine and PV manufacturing groups are dominant in terms of investments. According to BNEF, companies of the wind sector were subject to $4.3 billion in public market investments in 2016 while solar companies saw $1.7 billion of said investments. The Biomass & Waste sector, next on the list, only perceived a limited $0.2 billion of public market investments.

Partially thanks to notable governmental support, Chinese groups are now proving their ability to compete with established global leaders in both solar and wind turbine industries (e.g. Goldwind, Ming Yang).

“Energy-Smart” Technology

Energy smart technology includes four important sub-sectors: the smart grid, energy efficiency technologies, energy storage and low-emission transportation. Global electrical energy demand in 2014 summed up to 20.9 PWh according to the IEA (1 PWh being equivalent to a million billion, or a “1” with 15 following zeros) and will keep growing to support the increasing global population. The need to keep this demand under control and integrate renewable energy sources within the grid is making way for significant investments in the development of the so called “Energy-Smart” Technologies [Figure 6]:

Figure 6: Global New Investment In Energy-Smart Technology By Type, 2004–2016 [BNEF]

As of today, efforts are mainly perceived through R&D investments both in the private and in the public sector. Numerous start-ups are successfully receiving funding every-year in the various sectors in question, creating a large pool of highly specialized technologies available to modernize energy generation, transmission and utilization as we know it. VC/PE investments reached $4.2 billion worldwide in 2016. During the same year, $14.4 billion was invested in smart meters, giving more transparency on the grid’s operation and forming a crucial platform on top of which new, energy efficient solutions can be developed in the future.

The presence of Microgrids in certain remote or sensitive areas give the possibility to produce and consume electrical energy without relying solely on the grid. This gives opportunities for technologies such as Energy Storage to be called upon, not only to guarantee more reliable supply availability, but also making energy cheaper in these scenarios. Arbitrage in general is subject to significant interest by the research community and the private sector, looking at viable possibilities to store cheap energy and discharge onto the grid during peak-demand hours (process also known as “peak shaving”).

Conclusion

The finances behind the ongoing transition to sustainable energy generation are relying on a combination of known energy market dynamics and frequent disruptions induced by the renewables sector. The wind and solar industries, along with the rest of low-carbon energy industrial sectors are subject to increasing investments, as governments look to “future-proof” their energy infrastructure and give renewables the ability to compete with established fossil-fuel based solutions. Growth of the renewables sector is still very dependent on governmental implication and policies but as technology advances and prices of energy issued from renewables continue to drop, new viable and profitable possibilities emerge for large scale renewable energy generation. Note that Hydro-power was not reviewed over the course of this article but remains by far the greatest source of renewable energy worldwide.