TODAY’S STUDY: NEW ENERGY TRENDS, THE NUMBERS

Clean Energy Trends 2012
Ron Pernick, Clint Wilder and Trevor Winnie, March 2012 (Clean Edge)

Clean Energy Trends 2012

Clean energy, with double-digit growth rates and competition spanning Europe, Asia, and the Americas, has been a dynamic and forward-looking industry for more than a decade. The year 2011, however, will not likely be remembered for this robust growth and global activity, but for the now-infamous Solyndra bankruptcy. The failed company, which represents a potential loss in excess of $500 million for American taxpayers, has become a rallying cry for many as an example of government gone wrong. For clean-tech critics, Solyndra encapsulates everything bad about government largesse and “proof” that clean tech can’t compete without subsidies and government regulations. Stinging headlines and partisan attacks have left many in the clean-tech community caught off guard, as the industry has become a modern-day whipping boy for all that ails the U.S. economy.

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Renewables: Leveraging Economies of Scale

But these criticisms, offered up in sound bite-sized nuggets delivered more for their impact than accuracy, miss several key points:

1. The oil, gas, and coal industries still receive massive subsidies.

Mature fossil fuel industries have historically received, and continue to garner, six times as many subsidies as the clean-energy industry globally. While subsidies might make sense for emerging sectors – that’s what subsidies have traditionally been used for – ongoing support for oil and gas industries no longer makes sense. Nor, according to groups like the International Energy Agency and World Bank, are they prudent from an economic, environmental, or energy security perspective.

2. Venture capital is a risky, high-reward business critical to U.S. innovation.

Venture backed companies, no matter what the industry, naturally come with a high-risk profile. For every VC-funded home run (think Google, Amazon, and Apple), VCs expect to back many other companies that don’t make it big or fail altogether. You can question whether government should be placing such bets, but there’s no denying that such risk is part of the American capitalist system, and something that’s historically been revered, not reviled, by business leaders and politicians alike.

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3. Nuclear power projects require considerably more in loan guarantees than renewables.

Two new nuclear power plants at the Vogtle complex in Georgia recently received a conditional commitment for an $8.3 billion loan guarantee from the U.S. government. This loan amount is equivalent to more than 15 Solyndras, and the two plants alone equal nearly a quarter of all recent DOE loan guarantees. This one guarantee, based on its sheer size and the long history of nuclear power plant public opposition, delays, and closures, puts taxpayers at far greater risk than perhaps any other project.

4. 2011 marked a number of developments that point to the significant scale up of clean tech.

Some major developments that went underreported in 2011 include landmark changes in Germany and massive investments by notable investors. Germany, for example, in the aftermath of the Fukushima Daiichi nuclear disaster, announced plans to shutter all of its nuclear plants by 2022 while expanding of renewables, efficiency, and natural gas - embarking on perhaps the most aggressive clean-energy build out seen to date. And a number of noted investors upped their clean-tech investment activities, with Google and Warren Buffett’s MidAmerican Energy Holdings investing nearly $1 billion and $2 billion respectively in U.S. solar projects.

Clean tech isn’t withering on the vine as some would proclaim, but instead is continuing its rapid expansion, witnessed by the growth of green buildings, smart meters, hybrid electric vehicles, distributed and centralized renewables, LED lighting, and a host of other clean-tech breakthroughs that are becoming increasingly ubiquitous. There have been growing pains for many firms, with low-cost manufacturing in China and elsewhere giving U.S. and European manufacturers a not-soinsignificant run for their money, but the industry as a whole has continued to expand throughout the economic downturn of recent years. Combined global revenue for solar PV, wind power, and biofuels, for example, surged by 31 percent over the prior year, growing from $188.1 billion in 2010 to $246.1 billion in 2011. The bulk of this expansion came from double-digit growth rates for both wind and solar deployment, along with an increase in pricing for biofuels.

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According to our research:

* Biofuels (global production and wholesale pricing of ethanol and biodiesel) reached $83 billion in 2011, up from $56.4 billion the prior year, and are projected to grow to $139 billion by 2021. However, this increase was mostly due to an increase in ethanol and biodiesel prices. The continuing trend of rising biofuel prices, up 10 to 20 percent in 2011, is the result of higher costs for feedstock commodities – mainly sugar for ethanol and rapeseed and other vegetable oils for biodiesel. Between 2010 and 2011, global biofuels sales remained relatively flat, expanding from 27.2 billion gallons to 27.9 billion gallons of ethanol and biodiesel production worldwide.

* Wind power (new installation capital costs) is projected to expand from $71.5 billion in 2011, up from $60.5 billion the prior year, to $116.3 billion in 2021. Last year’s global wind power installations equaled 41.6 gigawatts, the largest year for global installations on record. China remained the global leader in new installations for the fourth year in a row, installing more than 40 percent of all global wind turbines, or 18 GW in total. The European Union came in second with nearly 10 GW, followed by the U.S., India, and Canada with approximately 7 GW, 3 GW, and 1.3 GW respectively.

* Solar photovoltaics (including modules, system components, and installation) increased from $71.2 billion in 2010 to a record $91.6 billion in 2011. We project the market to continue to expand to $130.5 billion by 2021. These market numbers, while impressive, do not fully capture the extent of actual industry expansion. While total market revenues were up 29 percent, installations climbed more than 69 percent from 15.6 GW in 2010 to more than 26 GW worldwide last year. This reflects a more than 40 percent decline in crystalline module prices between 2010 and 2011. Between now and 2021 we project that installed costs for PV will continue to decline, falling to nearly one-third of their current levels.

Together, we project these three benchmark technologies, which totaled $188.1 billion in 2010 and grew 31 percent to $246.1 billion in 2011, to grow to $385.8 billion over the next decade.

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U.S. Clean-Tech Venture Investments

As noted above, the scale up of renewables is apparent in the rapidly declining costs and resulting increase in deployment of a host of clean technologies, most notably solar PV. Solar cells, which are mostly made from silicon (the same basic material used in manufacturing computer chips), are now exhibiting economies of scale seen in earlier high-tech revolutions such as personal computers and cell phones. Between 2007 and 2011, solar PV total system costs (including PV modules, balance of system components, and installation) dropped by more than half, with complete systems being installed globally in 2011 at an average $3.47 a peak watt or 14 to 23 cents per kWh. Contrary to Solyndra’s critics who say the industry isn’t ready for prime time, solar is, in fact, becoming increasingly cost-competitive (making it difficult for high-cost providers like Solyndra to survive). Clean Edge historical data and projections (see table below) show that solar PV is on a steep price decline that is bringing it into cost parity at the retail level (for residential, commercial, and industrial applications), and increasingly competitive at utility scale, far sooner than many had projected.

At the retail level (the customer side of the electric meter), where solar is most competitive, the U.S. shows a dynamic and rapidly changing landscape. In less than a decade, Clean Edge projects that in 13 states (Alaska, California, Connecticut, Delaware, Hawaii, Maine, Maryland, Massachusetts, New Hampshire, New Mexico, New York, Rhode Island, and Vermont) solar PV will be cost-competitive at the residential level without any subsidy requirements. And solar will become increasingly attractive with a likely explosion in a new breed of power providers (such as solar installers/financiers SolarCity, SunEdison, and SunRun) providing residential, commercial, and industrial customers with a hedge against fluctuating retail electricity rates tied to volatile prices of fossil fuels.

Similar cost breakthroughs have already occurred in much of the wind industry. New wind farms can produce electricity in the 5-8 cents per kWh range, making it competitive today with the cost of fossil fuel electricity generation in many markets.

In 2011, U.S.-based venture capital investments in clean technologies increased from $5.1 billion in 2010 to $6.6 billion in 2011, an increase of 30 percent, marking a near-record year according to data provided by the Cleantech Group.

Last year’s $6.6 billion, while slightly below 2008’s record-breaking $6.9 billion total, represented clean tech’s largest percentage of VC activity in the U.S. ever recorded, clocking in at 23.1 percent. At nearly a quarter of total VC activity in the U.S., the clean-tech sector has expanded more rapidly than any other venture category, up from just 1.2 percent of total venture activity a decade earlier.

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NASDAQ® Clean Edge® Stock Indexes Performance

Another view on the markets comes from tracking the performance of publicly traded clean-energy stocks. Clean Edge, along with NASDAQ®, produces three indexes which act as transparent and liquid benchmarks for the sector: CELS, which tracks U.S.-listed clean-energy companies; QWND, which tracks global wind power companies; and QGRD, which looks at smart grid and grid infrastructure companies. These Clean Edge indexes* have been extremely volatile, soaring 75, 67, and 34 percent respectively in 2007; falling 64, 54, and 43 percent respectively in 2008; outperforming most market indicators once again in 2009, up 44, 38, and 49 percent respectively, and mixed in 2010, up two percent, down 35 percent, and essentially flat (down 0.4 percent) for the year. 2011 demonstrated the continued decline of most clean-tech indexes, with retail investors perhaps questioning the relative lack of public market exit opportunities and an economic environment with severe government budget shortfalls. CELS, QWND, and QGRD were down 41, 30.4, and 21.6 percent respectively in 2011, against a relatively flat S&P 500. As of February 15, 2012, however, all three indexes were once again outperforming the S&P, with CELS, QWND, and QGRD up 16.7, 7.4, and 13.2 percent for the year compared to the S&P’s 6.8 percent, demonstrating once again the sharp rises and falls that we’ve come to expect from this emerging investment sector.

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Financing the Future

There’s little doubt that the future of energy will be cleaner. The shift from carbon-intensive energy sources like wood, coal, and oil to nuclear, and now natural gas and renewables, is well underway. For much of the developed world, and for developing nations leapfrogging the West, the future looks increasingly like it will be built off of a mix of energy efficiency, renewables, the electrification of transport, and lower carbon fuels like natural gas.

In 2011, for example, nearly 70 percent of new electricity capacity in the European Union came from renewables. Solar PV and wind power accounted for 47 percent and 21 percent of new additions respectively. Add in natural gas, which made up 22 percent of new capacity installations in Europe, and these three sources are proving the energy sources of choice, representing 90 percent of new capacity additions in 2011. By contrast, coal’s contribution to new capacity in Europe was just five percent. Globally in 2011, investments in clean-energy projects reached an all-time record of $260 billion, according to Bloomberg New Energy Finance.

But the industry at large, and the nations pursuing cleaner electrons, will need significantly more funding in the coming decade to reach established deployment targets. This build out will require new and innovative financing tools. In our forthcoming book, Clean Tech Nation: How the U.S. Can Lead in the New Global Economy (HarperCollins, September 2012) we outline how such financial tools could give the U.S. a leadership edge. We call for the development of new tools that have worked in the past for fossil-fuel infrastructure and real estate, and for leveling the playing field by making such tools available for renewables. In the U.S. such vehicles as master limited partnerships (MLPs) and real-estate investment trusts (REITs) offer up two of the best examples. Relatively simple tax code changes could enable renewables and efficiency measures to leverage the same tools that have enabled the aggressive expansion of oil and gas exploration development in the U.S.

The next few years, we believe, will be clearly defined by those nations that provide the infrastructure for the deployment of innovative and effective financing tools. Just like Google and Warren Buffett, retail investors should be able to tap the relatively steady, reliable, and secure returns that can be offered by these types of clean-energy project investments.

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Moving Forward

Clean tech is a dynamic and fast-changing industry. Each year we do our best to uncover the key trends that we believe will shape clean-energy markets this year and beyond. Our five major trends for 2012, which are covered in the following pages, are:

• The Few, The Proud, The Green: Military Leads Clean-Energy Deployment

• Japan Moves Toward Cleaner Post-Nuclear Future

• Deep Commercial Building Retrofits Reap Major Efficiency Savings

• Waste-to-Resource Breakthroughs Attract Attention - and Investment

• New Energy Storage Solutions Embolden the Grid…