TODAY’S STUDY: NEW ENERGY IN THE MARKETPLACE

Global Trends in Renewable Energy Investment 2011; Analysis of Trends and Issues in the Financing of Renewable Energy
October 2011 (United Nations Environment Program, Bloomberg New Energy Finance and the Frankfurt School)

Key Findings

-Global investment in renewable energy jumped 32% in 2010, to a record $211 billion. It was boosted in particular by wind farm development in China and small-scale solar PV installation on rooftops in Europe.

-Of the major types of investment, there were sharp increases in asset finance of utility-scale projects such as wind farms, in venture capital provision for young firms, and in equity-raising on the public markets by quoted renewable energy companies. Asset finance rose 19% to $128 billion in 2010, venture capital investment increased 59% to $2.4 billion, and public market investment gained 23% to $15.4 billion.

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-However, the sharpest percentage gains were in investment in small-scale projects, up 91% year-on-year at $60 billion, and in government-funded research and development, up 121% at $5.3 billion, as more of the “green stimulus” funds promised after the financial crisis arrived in the sector.

-Only two areas of investment showed a fall in 2010 compared to 2009. One was corporate research, development and deployment, down 12% at $3.3 billion, as companies retrenched in the face of economic hard times. The other was provision of expansion capital for renewable energy companies by private equity funds, down 1% at $3.1 billion.

-One of the striking features of 2010 was that, in terms of financial new investment (asset finance and investment by venture capital, private equity and public markets), developing countries overtook developed economies for the first time. Financial new investment in the former totalled $72 billion, against $70 billion in the latter.

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-This performance by developing econonmies owed much to China, which with $48.9 billion (up 28%) was the world’s leading country in terms of financial new investment in renewable energy in 2010. However other parts of the emerging world also showed strong growth.

-Financial new investment in South and Central America jumped 39% to $13.1 billion, and in Middle East & Africa by 104% to $5 billion. India gained 25% to $3.8 billion, and Latin America excluding Brazil a near tripling to $6.2 billion. Asian developing countries excluding China and India saw increases averaging 31%, to $4 billion in total.

-Europe saw a decline of 22% to $35.2 billion in financial new investment in renewable energy in 2010. However this was more than made up by a surge in small-scale project installation, predominantly rooftop solar. Germany alone saw small distributed capacity investment of $34 billion, up 132%, while Italy saw $5.5 billion (up 59%), France $2.7 billion (up 150%), and the Czech Republic $2.3 billion (up 163%).

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-That boom in European small-scale solar owed much to feed-in tariff subsidies in the countries concerned, combined with a sharp fall in the cost of PV modules. By the end of 2010, many countries were rushing to make their PV tariffs less generous. But the small scale solar market is likely to stay strong in 2011.

-Clean energy share prices had a difficult 2010. The WilderHill New Energy Global Innovation Index, or NEX, fell 14.6% during the year, under-performing wider stock market indices by more than 20%. This showing reflected investor concerns about industry over-capacity, cutbacks in subsidy programmes and competition from power stations burning cheap natural gas.

-Acquisition activity in renewable energy, representing money changing hands rather than new investment, fell from $66 billion in 2009 to $58 billion in 2010. The two largest categories of M&A – corporate takeovers and acquisitions of wind farms and other assets – both fell by around 10%. An overview of investment trends in renewable energy in the early months of 2011 is shown in the box on page 15.

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Executive Summary

Global investment in renewable power and fuels set a new record in 2010, and the margin over totals for previous years was wide, not narrow. Investment hit $211 billion last year, up 32% from a revised $160 billion in 2009, and nearly five and a half times the figure achieved as recently as 2004. The record itself was not the only eye-catching aspect of 2010. Another was the strongest evidence yet of the shift in activity in renewable energy towards developing economies. Financial new investment, a measure that covers transactions by third-party investors, was $143 billion in 2010, but while just over $70 billion of that took place in developed countries, more than $72 billion occurred in developing countries. This is the first time the developing world has overtaken the richer countries in terms of financial new investment - the comparison was nearly four-to-one in favour of the developed countries back in 2004. It is important to note that in two other areas not included in the financial new investment measure, namely small-scale projects and research and development, developed economies remain well ahead.

However the balance of power in renewables has been shifting towards developing countries for several years. The biggest reason for this has been China’s drive to invest: last year, China was responsible for $48.9 billion of financial new investment, up 28% on 2009, with the asset finance of large wind farms the dominant part of that. But the developing world’s advance in renewables is no longer a story of China and little else. In 2010, financial new investment in renewable energy grew by 104% to $5 billion in the Middle East and Africa region, and by 39% to $13.1 billion in South and Central America.

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The developing world - at least outside its most powerful economies - may not be able to afford the same level of subsidy support for clean energy technologies as Europe or North America. However it has a pressing need for new power capacity and, in many places, superior natural resources, in the shape of high capacity factors for wind power and strong solar insolation. It, also, is starting to host the development of a range of new renewable energy technologies for specific, local applications. As Chapter 10 recounts, these range from rice-husk power generation to solar telecommunications towers and are becoming the technology of choice, not a poor substitute for diesel or other fossil-fuel power options.

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A second remarkable detail about 2010 is that it was the first year that overall investment in solar came close to catching up that in wind. For the whole of the last decade, as renewable energy investment gathered pace, wind was the most mature technology and enjoyed an apparently unassailable lead over its rival power sources. In 2010, wind continued to dominate in terms of financial new investment, with $94.7 billion compared to $26.1 billion for solar and $11 billion for the third-placed biomass & waste-to-energy. However these numbers do not include small-scale projects and in that realm, solar, particularly via rooftop photovoltaics in Europe, was completely dominant. Small-scale distributed capacity investment ballooned to $60 billion in 2010, up from $31 billion, fuelled by feed-in tariff subsidies in Germany and other European countries. This figure, combined with solar’s lead in government and corporate research and development, was almost enough to offset wind’s big lead in financial new investment last year.

No energy technology has gained more from falling costs than solar over the last three years. The price of PV modules per MW has fallen by 60% since the summer of 2008, according to Bloomberg New Energy Finance estimates, putting solar power for the first time on a competitive footing with the retail price of electricity in a number of sunny countries. Wind turbine prices have fallen 18% per MW in the last two years, reflecting, as with solar, fierce competition in the supply chain. Further improvements in the levelised cost of energy for solar, wind and other technologies lie ahead, posing a bigger and bigger threat to the dominance of fossil-fuel generation sources in the next few years.

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$211 Billion Investment

Figure 1 shows the trend in renewable energy investment from 2004 to 2010. In this year’s Global Trends report, we are concentrating on renewable power and fuels rather than the wider definition of clean energy, which includes energy-smart technologies such as smart grid and electric vehicles, covered in previous years’ reports.

However we do also take a brief look at energy-smart technology investment in a box at the end of Chapter 2. Total investment in renewable energy in 2010 was $211 billion, up from $160 billion in 2009 and $159 billion in 2008. Within the overall figure, financial new investment - which consists of money invested in renewable energy companies and utility-scale generation and biofuel projects - rose to $143 billion, from $122 billion in 2009 and the previous record of $132 billion in 2008.

A sharper increase however has been evident in the other components of the total investment figure – namely small-scale distributed capacity, and government and corporate R&D. These jumped to $68 billion in 2010, from $37 billion in 2009 and $26 billion in 2008, reflecting mainly the boom in rooftop PV, but also a rise in government-funded R&D, as spending increased from “green stimulus” announced after the financial crisis.

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Figure 2 shows in detail how the $211 billion total investment figure is reached. The left side of the chart shows investment in technology, via venture capital financing of small companies, and R&D spending by governments and larger corporations. Slightly further on is financing of the expansion of manufacturing capacity by private equity and public market investors. Then there is the largest single element of total investment - the asset finance of utility-scale projects such as wind farms, solar parks, biofuel refineries and biomass or waste-to-power generators - and finally, small-scale distributed capacity (overwhelmingly photovoltaics on rooftops). On the right hand side of Figure 2 is $58 billion of acquisition transactions - this is not included in total new investment, because it is money changing hands, not net funding coming into the renewable energy sector.

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The momentum of clean energy investment over recent years has been strong, but there have been many jolts and bumps on the way, as the detail of Figure 3 shows.

These have included the biofuel boom of 2006-07 and subsequent bust, resulting in a fall in financial new investment in that sector from a peak of $20.4 billion in 2006 to just $5.5 billion last year; and the impact of the financial crisis and recession on Europe and North America. Financial new investment in renewable energy was significantly lower in 2010 in both Europe and North America, although this setback was more than out-weighed by growing investment in China and other emerging economies, and in small-scale PV projects in the developed world.

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The shift in investment between developed and developing countries over recent years is shown in Figures 4 and 5. Figure 4 shows that developed countries in 2010 retained a huge advantage in small scale projects, but not what we define as financial new investment. Figure 5 shows that in 2010, developing countries edged narrowly ahead of developed countries in terms of financial new investment for the first time. In 2007, developed economies still had an advantage of more than two-to-one in dollar terms, but the recession in the G-7 countries and the dynamism of China, India, Brazil and other important emerging economies has transformed the balance of power in renewable energy worldwide. As later chapters show, that has led to big changes in the location of initial public offerings and manufacturing plant investments by renewable energy companies.

Wind was the dominant sector in terms of financial new investment (though not of small-scale projects, as noted above) in 2010, with a rise of 30% to $95 billion. Figure 6 shows that on this measure of investment, other sectors lagged far behind. Although the number of GW of wind capacity put into operation last year was lower than in 2009, the amount of money committed was higher. This reflected decisions to invest in large projects from China to the US and South America, a rise in offshore wind infrastructure investment in the North Sea, and the IPO in November of Italy’s Enel Green Power, the largest specialist renewable energy company to debut on the stock market since 2007.

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In venture capital and private equity investment, wind came a creditable second, with a figure of $1.5 billion last year, up 17% on 2009. However, as Figure 7 illustrates, solar stayed ahead as the most attractive destination for early-stage investors, its $2.2 billion figure coming after a 30% gain year-on-year. The positions of the two technologies were reversed again in terms of public markets investment (Figure 8), with wind boosted by the Enel Green Power flotation, and also some healthier figures for investment in 2010 in quoted companies specialising in biofuels, biomass and small hydro.

Asset finance of utility-scale projects (Figure 9) is the dominant figure within financial new investment. Wind “mega-bases” in China continued to receive billions of dollars of funding, while large projects in Europe attracted important support from multilateral development banks, notably European Investment Bank debt for the Thornton Bank project off the coast of Belgium. US wind farm investment owed much to the Treasury grant programme, introduced in 2009 but due to expire at the end of 2011.

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Problems as Well as Progress

2010 was not a year of uninterrupted joy for renewable energy. New challenges emerged, and some existing challenges became tougher. First, moves by Spain and the Czech Republic to make retroactive cuts in feed-in tariff levels for already-operating PV projects damaged investor confidence. Other governments, such as those of Germany or Italy, announced reductions in tariffs for new projects - logical steps to reflect sharp falls in technology costs. What caused concern was the idea that governments, facing economic hardship, might go back on previously promised deals for existing projects, damaging returns for equity investors and banks.

A second challenge came from the natural gas price. The Henry Hub US benchmark stayed in a range of $3 to $5 per MMBTu for almost all of 2010, far below the $13 peak of 2008 and also below the levels prevailing in most of the middle years of the decade. This gave generators in the US, but also in Europe and elsewhere, an incentive to build more gas-fired power stations and depressed the terms of power purchasing agreements available to renewable energy projects.

A third challenge for renewables came from outside scepticism. This manifested itself both in the stock market - where clean energy shares under-performed wider indices by more than 20% on pessimism about future profit growth - and in international politics, where the mood post-Copenhagen and post-Climategate was cooler than in some previous years. In fact, more progress towards emission reduction was achieved than expected at the December 2010 meeting in Cancun; and the consensus among climate scientists about man-made global warming actually strengthened during last year. However neither has - yet – catapulted clean energy back to the top of government agendas. There was a sense, in both the second half of 2010 and early 2011, that progress in renewable energy was taking place at a pace that public opinion and policymakers in many countries were simply failing to spot.

This progress was both in investment levels and, even more, in cost-competitiveness with conventional power sources.