“A key feature of 2014 was the continuing spread of renewable energy to new markets. Investment in developing countries, at $ 131.3 billion, was up 36% on the previous year and came the closest ever to overhauling the total for developed economies, at $ 138.9 billion, up just 3% on the year. Indonesia, Chile, Mexico, Kenya, South Africa and Turkey were all in the billion-dollar-plus club in 2014 in terms of investment in renewables.” – UNEP / Bloomberg New Energy Finance
This AfricaFocus Bulletin contains excerpts from two recent reports, one on Global Trends in Renewable Energy Investment, from UNEP and Bloomberg New Energy Finance, and the other from Carbon Tracker Initiative, laying out the economic imperative even for fossil-fuel companies themselves to begin a transition to less carbon-intensive investments or risk enormous losses in “stranded assets.”
These rapidly accelerating trends are affecting the relative costs of fossil-fuel and renewable energy, both globally and in Africa, with renewables gaining ground despite the current predominance of the fossil-fuel industry.
In related recent news, a group of governments calling for removal of fossil-fuel subsidies issued a communique on April 17 (see http://tinyurl.com/ksms9cn). The governments signed on to date include Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, and Switzerland.
For previous AfricaFocus Bulletins on climate change, energy, and the environment, visit http://www.africafocus.org/envexp.php – Editor’s Note
Global Trends In Renewable Energy Investment 2015
UNEP / Bloomberg New Energy Finance
March 2015
[Key findings & excerpts from executive summary. Full report at http://fs-unep-centre.org/publications/]
Key Findings
Global investment in renewable power and fuels (excluding large hydro-electric projects) was $ 270.2 billion in 2014, nearly 17% higher than the previous year. This was the first increase for three years, and reflected several influences, including a boom in solar installations in China and Japan, totalling $ 74.9 billion between those two countries, and a record $ 18.6 billion of final investment decisions on offshore wind projects in Europe.
The trend last year was, arguably, even more impressive than it would seem from the investment numbers, because a record number capacity of wind and solar photovoltaic power was installed, at about 95GW. This compared to 74GW in 2013, 79GW in 2012 and 70GW in 2011, the only year in which dollar investment was higher than 2014, at $ 278.8 billion. The main reason why investment last year was below that three years earlier was that technology costs, particularly in solar, have fallen sharply during the intervening period.
A key feature of 2014 was the continuing spread of renewable energy to new markets. Investment in developing countries, at $ 131.3 billion, was up 36% on the previous year and came the closest ever to overhauling the total for developed economies, at $ 138.9 billion, up just 3% on the year. Indonesia, Chile, Mexico, Kenya, South Africa and Turkey were all in the billion-dollar-plus club in 2014 in terms of investment in renewables, and others such as Jordan, Uruguay, Panama, the Philippines and Myanmar were in the $ 500 million to $ 1 billion range.
Renewables faced challenges as 2015 began – notably from policy uncertainty in markets such as the US and the UK, retroactive policy changes in countries such as Italy and Romania, and concerns about grid access for small-scale solar in Japan and some US states. The most daunting challenge was, at first sight, the impact of the 50%- plus collapse in the oil price in the second half of last year. However, although the oil price is likely to dampen investor confidence in parts of the sector, such as solar in oil-exporting countries, and biofuels, in most parts of the world, oil and renewables do not compete for power investment dollars. Wind and solar sectors should be able to carry on flourishing, particularly if they continue to cut costs per MWh.
The cost-cutting achieved to date helped to ensure strong momentum for both those technologies in 2014. Overall investment in solar was up 29% to $ 149.6 billion, while that in wind advanced 11% to a record $ 99.5 billion. Other renewable energy sources mostly did less well, biofuels seeing an 8% fall in investment to $ 5.1 billion, a 10-year low; biomass and waste-to-energy dropping 10% to $ 8.4 billion; small hydro slipping 17% to $ 4.5 billion; and geothermal managing to rise 23% to $ 2.7 billion.
The biggest locations for renewable energy investment last year were, predictably, the established markets in major economies – with China far out in front at $ 83.3 billion, a record number and 33% ahead of 2013. In second place came the US, at $ 38.3 billion, up 7% on the year but still well below its all-time high, reached in 2011. Third came Japan, at $ 35.7 billion, a tenth higher than in 2013 and its biggest total ever. India was up 14% at $ 7.4 billion, and Brazil 93% higher, at $ 7.6 billion.
Investment in Europe advanced less than 1% to $ 57.5 billion. There were seven billion-dollar-plus financings of offshore wind projects, boosting the investment totals for the Netherlands, the UK and Germany. These included, at the euro equivalent of $ 3.8 billion, the largest single renewable energy asset finance deal ever, outside large hydro – that of the 600MW Gemini project in Dutch waters.
Renewable energy technologies excluding large hydro made up 48% of the net power capacity added worldwide in 2014, the third successive year in which this figure has been above 40%. New investment in renewable power capacity last year, at $ 242.5 billion excluding large hydro, was below the gross investment in fossil fuel capacity, at some $ 289 billion, but far above the figure for net investment in additional fossil fuel capacity, at $ 132 billion.
Altogether, wind, solar, biomass and waste-to-power, geothermal, small hydro and marine power are estimated to have contributed 9.1% of world electricity generation in 2014, compared to 8.5% in 2013. This would be equivalent to a saving of 1.3 gigatonnes of CO2 taking place as a result of the installed capacity of those renewable sources. The methodology behind this calculation is explained in Chapter 2 below.
Equity raising by renewable energy companies on public markets jumped 54% in 2014 to $ 15.1 billion, helped by the recovery in sector share prices between mid-2012 and March 2014, and by the popularity with investors of US “yieldcos” and their European equivalents, quoted project funds. These vehicles, owning operatingstage wind, solar and other projects, raised a total of $ 5 billion from stock market investors on both sides of the Atlantic in 2014.
Executive Summary
2014 was a year of eye-catching steps forward for renewable energy. Investment rallied strongly after two years of decline, renewables excluding large hydropower reached 100GW of installations for the first time ever, developing countries led by China came within just a few billion dollars of overtaking investment in developed economies, and there were record statistics for financings of solar in China and Japan and offshore wind in Europe.
It is also the case that the recent period has seen the competitive environment for renewables become even more exacting. The near-50% plunge in crude oil prices between June 2014 and March 2015 will have a direct effect on renewable energy in a few places, such as developing countries burning oil for power and biofuel markets not covered by mandates. More significant may be the indirect effect, via downward pressure on gas prices. That will lower the cost of gas-fired generation, a competitor of wind and solar in many countries. So far, renewables have been up to the challenge, with for instance January this year seeing a project in Dubai setting a clear, new record for the lowest price ever agreed for electricity from a solar photovoltaic plant. Further cuts in the cost of generation for both solar and wind look to be on the cards in 2015.
The top headline for renewable energy in 2014 was that investment rebounded by 17% to $ 270.2 billion (see Figure 1). This was the first annual increase in dollar commitments to renewables excluding large hydro for three years, and brought the total up to just 3% below the all-time record of $ 278.8 billion set in 2011.
The 2014 performance by renewable energy investment was arguably more impressive than that in 2011 anyway – because capital costs in wind, and particularly in solar PV, fell sharply in the intervening three years, so each billion dollars committed added up to many more MW of capacity than it did in the earlier year. Some 103GW of renewable power capacity excluding large hydro is estimated to have been built in 2014, compared to 86GW in 2013 and 80.5GW back in 2011. The 2014 total was dominated by wind and PV, with 49GW and 46GW respectively, both record figures.
…
Once again, solar and wind were runaway leaders in terms of renewable energy investment, the former accounting for $ 149.6 billion, the second highest figure ever and up 25% on 2013; and the latter bringing in $ 99.5 billion, up 11% to a new record.
Within these solar and wind totals, two features stood out last year. The first was an unprecedented solar boom in China and Japan. …
The other big feature was European offshore wind. No fewer than seven projects costing $ 1 billion or more reached “final investment decision” stage during 2014. …
the split in investment between developed and developing countries was more equal than ever before in 2014, with the first group attracting $ 138.9 billion and the second group $ 131.3 billion. Developing countries have increased their investment in renewable energy almost in a straight line since 2004, with a single blip in 2013, while developed economies saw commitments reach a peak in 2011 on the back of stimulus programmes in the US and runaway solar booms in Germany and Italy. The level of investment in developed nations has fallen back into a range of $ 135 billion to $ 150 billion in the last three years.
Much of the surge by developing economies over recent years has been thanks to investment in China. This raced up from just $ 3 billion in 2004 to $ 83.3 billion in 2014, helped by supportive government policies aimed at boosting power generation in the country, at providing demand for domestic wind and solar manufacturing industries, and – especially recently – at offering an alternative to pollution-inducing fossil fuel generation.
However, the advance of the developing nations in renewable energy has not been only about China. In 2014, Brazil ($ 7.6 billion), India ($ 7.4 billion) and South Africa ($ 5.5 billion) were all in the top 10 of investing countries, while Mexico, Chile, Indonesia, Kenya and Turkey were all in the $ 1 billion- plus club and several others were challenging to join them.
…
[Despite obstacles] other issues have been moving in favour of renewables. One is that there is increasing evidence of the role that renewables and energy-efficiency technologies are playing in limiting the increase in global emissions. As Chapter 2 shows, renewables excluding large hydro accounted for 9.1% of world electricity generation in 2014, up from 8.5% in 2013. Meanwhile, energy efficiency has been one of the factors contributing to a remarkably weak trend in electricity demand in OECD countries.A second is the fact that the battle to curb emissions is looking more and more urgent, as the world prepares for the Paris climate change conference in November-December 2015. Recent data on the carbon dioxide content of the atmosphere have shown a three-partsper -million increase in 12 months and a 21ppm increase in a decade. CO2 could hit 404ppm later this spring. Third, renewables are being seen increasingly as a stable – even relatively low-risk – investment by institutional funds. This is evident partly in the rising commitment by institutions to renewable power projects, and partly in their backing for green bonds, which hit a record $ 39 billion of issuance in 2014 (see Chapter 4). Giant German utility EON gave a strong hint in November last year on where it sees relative risk, when it committed to retaining its renewables, distribution and transmission businesses, while putting its conventional generation arm into a separate company.
Blueprint for managing climate risk in an energy transition
http://www.carbontracker.org/report/companyblueprint/
New York/London, April 23 – The Carbon Tracker Initiative and Energy Transition Advisors today jointly publish a “blueprint” showing the benefit of fossil fuel companies stress testing their businesses using a set of low carbon, low price scenarios.
The blueprint, which primarily focuses on oil and gas, includes examining the impact of limiting global temperature rise to 2°C above pre-industrial levels.
Its publication coincides with a major gathering this week of energy chiefs at the IHS-CERAWeek conference in Houston, Texas, and as oil companies back or prepare to support shareholder resolutions that test company resilience to climate change.
The thrust of the roadmap paper puts the onus squarely on fossil fuel management to respond properly to how growing climate regulation, advances in cleaner technology, cheaper renewables, and greater energy efficiency hit demand and the implications those global trends have for commodity prices.
“Carbon Tracker believes senior management is overly focused on demand and price scenarios that assume business as usual. As such, there may be a risk assessment ‘gap’ between a management’s view of the future and that resulting from action on climate change, technological advances and changing economic assumptions,” said Paul Spedding, an advisor to Carbon Tracker and co-author of the blueprint.
“Critically, the greatest impact will – initially – not be directly from reduced demand, but from the consequent pressure on commodity prices,” said Spedding who was previously global co-head of oil and gas research at HSBC.
Integrating a risk assessment of a major energy transition into companies’ governance processes is critical to ensure value is preserved.
The launch of the financial think-tank’s first roadmap comes as BP adopts a shareholder resolution on the risks climate laws pose to its business and as Royal Dutch Shell gives its backing to a similar resolution to be voted on at its forthcoming AGM.
Carbon Tracker recognises many fossil fuel companies acknowledge both the threat posed by climate change and the energy transition needed to mitigate that threat.
But its analysis of what, for example, Exxon Mobil has disclosed is an example of a company’s business forecasts that are still not yet aligned with even the IEA’s New Policy Scenario (NPS) on demand – an outlook that is less constrained than the IEA’s 450 or 2C scenario.
The think tank has through its work warned that high-cost investments in oil sands, the Arctic, and deep-water exploration are at significant risk of not making an acceptable return. They have a real chance instead of becoming economically stranded amid volatile prices – a trend recently borne out by the oil price crash.
Carbon Tracker research advisor Mark Fulton who co-authored the report and has 35 years’ experience in financial markets said: “Focusing on higher Internal Rates of Return and lower-cost projects reduces risk for companies and shareholders. It might also create additional value by improving stock ratings should historic returnrating relationships persist.
“What our blueprint advances is a risk management process that tests for what could be seen as an ‘orderly’ energy transition and considers a ‘disorderly’ one where change is abrupt, a so-called ‘black swan’ event, that tests business models to the limit, potentially destroying shareholder value in the process.”
“Carbon Tracker’s focus is and has always been on the financial implications of an energy transition. The overarching theme of our analysis has been to improve shareholder value whilst lowering risk,” said Anthony Hobley, CEO of Carbon Tracker.
The Recommended Risk Management Process
Carbon Tracker recommends fossil fuel companies carry out a thorough risk assessment on the implications of an energy transition including demand and price pathways that differ from the status quo.
Relevant stress tests include key indicators for the future project portfolios such as Internal Rates of Return and breakeven price curves; indications of cash flow and revenue at risk from commodity price changes and the flexibility built into a company’s committed and uncommitted five-year capital investment programme.
One of the paper’s central findings is that companies need to pursue capital discipline, focusing investment on high return projects and limiting exposure to low return ones. Carbon Tracker believes that some corporate investment decisions, which it views as high cost, call some company claims of capital discipline into question.
It is also less clear with carbon-intensive companies who view themselves as more progressive whether in fact the threat has permeated company governance structures including executive planning, strategy, compensation and annual investment decisions.
Should high cost carbon projects ultimately get sanctioned or companies return capital or diversify and what role should the Chief Financial Officer play in oversight of this?
Carbon Tracker notes the fossil fuel industry’s history is peppered with examples of failing to adequately assess risk to investments because certain scenarios were deemed “highly unlikely”. Ones that spring to mind includes the infamous Kashagan Oil field project in Kazakhstan and recent oil sands ventures.
The recent wave of capex cuts for 2015 and ENI’s 30% cut to its dividend implies the industry was not ready for a scenario of $ 60 oil. For coal, Peabody Coal’s near $ 1 billion asset write-downs for 2012 suggests another “highly unlikely” scenario that was not planned for or anticipated. The blueprint asks whether such highcost carbon projects ultimately get sanctioned or companies return capital or diversify.
“Companies must ensure they follow both a top-down and bottom-up approach to addressing risks. It’s the interaction of these governance and business processes in relation to the energy transition that is crucial to our blueprint,” said Robert Schuwerk, senior counsel to Carbon Tracker who is responsible for US regulatory and legal analysis.
