Liebreich and McCrone: The shift to ‘base-cost’ renewables: 10 predictions for 2017
January 18, 2017
By Michael Liebreich, Chairman of the Advisory Board (@MLiebreich)
and Angus McCrone, Chief Editor
Bloomberg New Energy Finance
When Christopher Columbus and the other great explorers undertook their epic voyages of discovery in the 15th and 16th centuries, they navigated a world of extraordinary risks. Buffeted by the worst storms the great oceans could throw at them, ravaged by illness, under constant threat of attack. On they sailed, eyes on the horizon, sustained by their dreams of discovering new lands. Welcome to the world of clean energy in 2017!
At the beginning of 2016, we listed some of the grave threats facing clean energy, but we felt that the sector was well-placed to withstand them. “Clean energy,” we said, “is now a third-of-a-trillion-dollar industry, with a strong cadre of competitive suppliers, enjoying a generally supportive policy environment – now underpinned by the commitments made in Paris.” And clean energy certainly had a decent year, as we wrote last month in our review of 2016.
Nevertheless, when BNEF published its full-year investment figures earlier this month, they were down a significant 18 percent on 2016, to $287.5 billion. Yes, the volume of wind and solar installations hit a new record in 2016, preliminarily estimated by our analysts at 127 gigawatts, some of that funded in 2015, a year of record investment (we are still calculating exactly how much). Of the 18 percent drop in dollar terms, around half may have been due to reductions in the cost of equipment, as opposed to reductions in the volume of activity. Of all the many threats we listed – which included Brexit and the potential of a Trump victory – it was the slowing Chinese economy that most materially impacted the 2016 figures.
At the start of 2017, it is again easy to list the potential storms that might disrupt the smooth sailing of the good ship clean energy. First and foremost, of course, the potentially tempestuous consequences of Donald Trump’s arrival in the White House. Another is Brexit, which has been generating severe hurricane warnings, though no actual wind, for some time. If you like your storms with a European flavour, 2017 will see elections in France, Germany, the Netherlands and the Czech Republic. Pollsters are confident that although Marine Le Pen will get through to the final round, she will then lose to whichever mainstream candidate she is pitched against. So it seems wise to plan for the worst.
Asian clean energy investors too should be keeping an eye on the weather. China’s economy is still dangerously unbalanced, over-investing in construction and infrastructure, over-leveraged and over-burdened with darks pools of poor lending. In addition, China faces the risk that Trump sparks a trade war with all his talk of currency manipulation and import tariffs, or even a military stand-off over its newly fortified island bases in the South China Sea. If Narendra Modi’s India is supposed to provide the next China-style surge of demand to the world’s commodity producers, all the signs are they are waiting in vain.
And globally, one of the biggest risks to clean energy lies in a potential jump in interest rates. The era of super-low central bank rates is most likely drawing to a close. The big question as risk-free rates rise, is whether risk premiums to clean energy projects can continue to come down to compensate – or whether all-in borrowing costs will rise, jeopardising the competitiveness of renewable electricity.
Assuming that none of these storms – or others we haven’t thought of – cause a clean energy shipwreck in 2017, we think our little flotilla will sail on – perhaps not serenely, but more or less as it did in 2016.
The good news is that renewable energy has – at least on a levelized cost of electricity, or LCOE, basis – clearly achieved the long-awaited goal of grid competitiveness. More than that, in many countries it now undercuts every other source of new generating capacity, sometimes by very considerable margins. Last year saw unsubsidized price records of $30 per megawatt-hour for a wind farm in Morocco and $29.10 for a solar plant in Chile. These must be the lowest electricity prices, for any new project, of any technology, anywhere in the world, ever. And we are still going to see further falls in equipment prices.
Super-low-cost renewable power – what we are now calling “base-cost renewables” – is going to force a revolution in the way power grids are designed, and the way they are regulated.
The old rules were all about locking in cheap base-load power, generally from coal or hydro plants, then supplementing it with more expensive capacity, generally gas, to meet the peaks. The new way of doing things will be about locking in as much locally-available base-cost renewable power as possible, and then supplementing it with more expensive flexible capacity from demand response, storage and gas, and then importing the remaining needs from neighbouring grids.
New nuclear plants will remain the political bauble they currently are, unless next-generation nuclear can prove it can deliver fail-safe designs at affordable cost. Demand will be suppressed by energy efficiency and self-generation, and augmented by electrified transport and heat.
Putting super-cheap, “base-cost” renewable power at the heart of the world’s grids in this way will require a revolution in the way the electricity system is regulated. Renewable power’s progress to date has been achieved mainly by subsidizing or mandating its installation, while forcing the rest of the system to provide flexibility, within otherwise unchanged regulatory environments and power market rules. The additional system costs have been material but generally affordable.
That has taken renewable energy to 20, 30 or 40 percent of supply in many markets. But it won’t work when it comes to 60, 70 percent or higher. That would mean a smaller and smaller proportion of conventional power generation has to provide a larger and larger amount of flexible supply for which it was never designed. We are reaching the point in the story where power system regulation will have to be fundamentally rethought. Simply layering on a capacity market is the wrong response: creating guaranteed demand for obsolete technologies has never ended well.
But enough of the mood music and wider trends: it is time to take a deep breath and make 10 bold predictions for 2017. As before, we are doing so with the help of BNEF’s teams of 120 specialist analysts around the world. Here goes:
1. GLOBAL INVESTMENT TO STRUGGLE
As we have already said, BNEF’s figures for 2016 showed that clean energy investment worldwide fell 18 percent, from 2015’s all-time high of $348.5 billion to $287.5 billion. We expect 2017 to produce a similar total to last year, and certainly short of the 2015 record.
Why so becalmed? Many reasons. The first is cost. The abrupt slowdown in Chinese solar deployment half way through last year left the photovoltaic industry once again in over-supply and triggered a fresh plunge in module prices. Solar system costs are expected to fall at least a further 10 percent in 2017. Modules will fall another 25 percent or so, so that the cheapest type of standard solar module, multi-crystalline silicon, will be around 32 U.S. cents per watt by year-end. Good news for the competitiveness of solar, but it does act as a down-draft on the figures.
The second is China itself, where weaker-than-expected electricity demand growth and enormous levels of curtailment of wind and solar power have put the brakes on renewables deployment for the first time in over a decade. The Chinese government said at the turn of this year that it expected renewable power investment of around $360 billion over the five years from 2016 to 2020. That is consistent with our figure, allowing for differing definitions, of $88 billion last year. But we are now in a new phase of slower investment for China, and a return to the $119 billion of 2015 is not on the cards.
The third reason is Japan, where the runaway solar boom of recent years has turned to the predicted bust, and few utility-scale plants are likely to be given grid permits from now on. Instead, rooftop solar will become the main game, but its best years lie some way in the future, not in 2017. Fourth is Brazil, where an eagerly-awaited 2016 wind and solar auction was cancelled just before Christmas. This will mean fewer projects coming up for financing in 2017. The fifth is European offshore wind, which is unlikely to see another financing year quite like 2016 for some time (more of that under Prediction 4 below).
The sixth is India. On taking power, Prime Minister Modi set a hugely ambitious target of 100 gigawatts of solar energy by 2022. Although activity has been strong since then, and investment is around $10 billion a year, it has yet to break through the record of $13.7 billion set in 2011. We remain bullish about the prospects for clean energy in India, but don’t expect the big money to start flowing in 2017: momentum will be disrupted by the move to a national goods and services tax that may put up the cost of renewables in the short term. We expect investment to be fairly flat, close to 2016’s $9.6 billion.
The final two reasons are that the era of near-zero base rates is coming inexorably to an end, as discussed above; and the strength of the dollar, likely to persist given the level of global uncertainty and President Trump’s spending promises.
2. GROWTH SPURT FOR BATTERIES, SMART METERS
It’s a safe bet that energy storage will see further strong growth in 2016, with year-on-year global commissioned capacity addition looking like exceeding 1 gigawatt for the first time. We predict a doubling of new capacity from this year’s 700 megawatts to 1.5 gigawatts, almost all of it lithium-ion batteries. With Tesla’s Gigafactory and several other large manufacturing facilities coming on stream in 2017, we are going to see a further reduction in battery prices of at least 15 percent this year, after a 70 percent reduction in the past five years.
Also on the up are smart meters, which last year saw record investment worldwide of $14.4 billion, up from $8.8 billion in 2015. Our analysts think it could hit $19 billion in 2017, with 69 million smart electricity and gas meters installed. Europe, Middle East and Africa will take the top spot among the regions, outstripping Asia-Pacific, as countries race to meet the fast-approaching 2020 EU deadline.
3. SOLAR INSTALLATIONS FALL IN CHINA BUT RISE WORLDWIDE
We are expecting new solar installations worldwide to increase again, but by a more modest proportion than in recent years: 75 gigawatts, up from around 70 in 2016.
With the Chinese solar drive settling at a less frenetic (but still prodigious) rate of around 21 gigawatts per year, down from 26 gigawatts in 2016, and Japan cooling to about 6 gigawatts a year from 2015’s peak of 11.5 gigawatts, the question might be asked, where is this growth is going to come from?
We expect fairly widely spread market expansion. India could add some 9 gigawatts in 2017, some of which was already financed last year and some this year, twice the 2016 total.
Pakistan will become a 1-gigawatt-a-year market for the first time, as will Turkey and Brazil; and that old favourite, Germany, will bounce back to perhaps 1.7 gigawatts. There will also be more utility-scale projects financed in Africa, the Middle East and Central and Southern Asia than ever before.
The US is likely to see another 12 gigawatts or so financed, roughly on a par with 2016, as developers and households continue to take advantage of the five-year Investment Tax Credit extension by Congress just over a year ago, which looks likely to survive the arrival of the Trump Administration, at least for 2017.
4. WIND BLOWS SIDEWAYS
Wind may be playing second fiddle to solar these days on a global investment basis, but the sector is nevertheless maintaining strong momentum – wind is now one of the main workhorses in power markets around the world. BNEF expects another 59 gigawatts to be commissioned in 2017, slightly up on last year’s 57 gigawatts but still short of the 63-gigawatt record in 2015.
Within that, almost 5 gigawatts of offshore wind are likely to be commissioned, more than double last year’s 2 gigawatts. Meanwhile, investment in European offshore wind leapt to a $25.8 billion record in 2016 courtesy of some of the largest projects yet financed, but is unlikely to reach those highs again in 2017.
Auctions in Denmark and the Netherlands last year showed that costs are tumbling fast – as low as $55 per megawatt hour, excluding transmission – which sends a great signal about the long-term viability of the sector. The impact will be felt in the U.K. and Germany in 2017, driving developers to bid fiercely in Germany’s first auction, and in the U.K.’s April Contract-for-Difference round.
In onshore wind, a further cut in Chinese commissioning in 2017 to about 21 gigawatts (compared to a peak of 28.7 gigawatts in 2015) will coincide with steadiness rather than growth in U.S. and European markets. After the consolidation we saw in the manufacturing space in 2016, look out for acquisitions and new alliances among developers in 2017, as they face an era of witheringly competitive auctions and low margins.
Look out too for the launch of 4-megawatt onshore turbine platforms from a number of manufacturers, opening up the prospect of further cost reductions.
5. COAL AND OIL RALLIES PETER OUT
The last 12 months have seen price rebounds for fossil fuel commodities. In the case of oil and coal (the latter up from $40 per metric ton to $66.50 on the Amsterdam-Rotterdam-Antwerp contract), the rallies would look quite dramatic – were it not for the fact that the price slumped even more precipitously during the previous 18 months.
We had the foresight to call the coal and oil recovery in our 10 Predictions last year.
This year, we are going to stick our neck out again and say that we expect the rallies in both coal and oil to peter out.
The coal market is exposed to the undershoots in expected electricity demand that are occurring in both developed and developing markets. Whatever President Trump may say, U.S. coal’s main problem has been cheap natural gas and renewable power, not a politically driven “war on coal”, and it will continue being pushed out of the generating mix. In the U.K., coal-firing shrunk to a miniscule 3.6 percent of total electricity production in the third quarter of 2016, and other European countries are finally – and belatedly – turning their attention to forcing the early retirement of coal plants. In India and China, tackling urban pollution is a top priority. China has just announced the suspension of plans for 100 new coal plants, including ones whose construction has already begun, and India’s Electricity Central Electricity Authority has said that after the current crop of coal-fired power stations under construction are completed, the country will need no new ones until 2027.
In the oil market, although world economic growth may continue to strengthen, improved vehicle performance and the first tiny impact of electrification mean this will not feed through fully into demand. Prices around $50 per barrel will see North American drillers resume activity in shale fields, and output return to growth. As OPEC members’ hopes of a sharply higher oil price fade, many of them will have no alternative but to break their quotas in order to meet deep fiscal deficits.
With weaker demand and stronger supply than many others expect, we think the oil price will finish the year around where it started. Though, frankly, our best advice would be to file all forecasts by so-called experts under “fake news”.
6. U.S. GAS PRICES REMAIN FIRM
U.S. Henry Hub natural gas prices did in 2016 what they have not done since 2013: they rose sharply. Starting the year at $2.31 per MMBtu, they finished December at $3.68. After a downward correction so far this year to $3.21, the question is whether we are headed back to the rock-bottom sub-$2 range seen in the spring of last year, or whether we will see continued price firming. Our gas analysis team is going the latter, moderately, as demand continues to increase.
The use of gas in the U.S. power sector has risen sharply in recent years, spurred by ultra-low Henry Hub prices and contributing to the decommissioning of 41 gigawatts of coal-fired power stations in the last six years. These will not reopen whatever anything President Trump does; nor do we see much appetite among investors for ploughing money into U.S. coal extraction – stranded asset risk will trump rhetoric.
Further contributing to upward pressure on natural gas prices, in 2016 the U.S. exported 3.4 million metric tons of LNG. Another 3 new LNG liquefaction trains coming on stream this year will boost sharply the amount exported to Europe, Latin America and the Far East. Overall, therefore, U.S. gas demand will continue to strengthen, so we expect natural gas to finish 2017 closer to $4 than $2 per MMBtu.
7. EVS BREAK THE MILLION VEHICLE MILESTONE
A year ago, we were bullish on electric vehicles but significantly under-called the market, estimating 550,000 sales globally in 2016. Instead, sales came in around 700,000 units, an eye-watering 56 percent annual growth from around 450,000 in 2015. At the start of 2017, our advanced transport team’s central estimate is for a further jump to 900,000 EV sales this year, but Angus and I are going to throw prudence to the winds, run our hands through our grey sea-captain hair, and bet it breaks the million mark.
The fact that the oil price is higher than a year ago – $54-a-barrel now compared to $31 in January 2016 – is again pushing up prices at the pump, most noticeably to U.S. consumers. Meanwhile, a number of highly attractive EV models are reaching showrooms, such as the Chevy Bolt and the Prius Prime, nearing the magical 200-mile-range for $30,000 after taxes and incentives that many consumers need to see. This year will bring further sharp falls in battery prices, increased pressure to improve urban air quality, and more committed marketing of EVs by the car companies – further accelerating the trend.
We also expect decisive progress in EV charging infrastructure in 2017. Last year saw a number of important milestones: the VW “dieselgate” settlement; an emerging consensus allowing regulated utilities to invest in EV-charger-readiness (though not EV chargers themselves); the launch of high-power chargers which can deliver 100 miles of driving in ten minutes; and announcements by the German auto majors that they intend to cooperate to build rapid-charging networks. But all of these were paper developments – this year they should start feeding through to investment and installation of hardware.
China, meanwhile, unexpectedly moved to rein in its generous EV subsidies, which have led to exploding numbers of very cheap, low-quality vehicles. However, it remains as committed as ever to using EVs to help solve its urban air pollution problems, so we expect to see continued support and further growth there too.
8. CORPORATE RENEWABLE ENERGY ON A TEAR
Corporate purchasing of renewable energy has become a hot area. A BNEF Research Note published earlier this month (clients can read ithere) showed that seven of the 10 largest quoted corporations in the world have committed to using 100 percent renewable electricity in their operations. They will do this via a mixture of onsite solar and wind, purchasing renewable energy certificates, and power purchase agreements, either “virtual” deals with faraway generators or private-wire deals with nearby third-party power plants (in other words physically connected to the off-taker). The latter approach has grown strongly in the last 3 years, first in the Americas, but increasingly in Europe and Asia-Pacific too – so that by December 2016, the cumulative capacity covered by these PPA deals had reached 18 gigawatts.
We expect to see this trend continue, with Asian companies accounting for a growing share of the world total. Not all of this will be for green reasons – increasingly companies simply see renewable energy as a way of securing a meaningful proportion of their power needs at a low price.
Another development we expect in 2017 will be a breakthrough business model: virtual corporate PPAs (i.e. non-private-wire) being signed with wind or solar projects, without any form of subsidy. Up until now, projects involved in almost all virtual PPAs have been based on some form of renewable energy credit program, or at least a renewable tax credit. Large corporates signing renewable energy PPAs in the merchant power market alone would be a strong signal.
9. RESILIENCE AND SECURITY RECEIVE OVERDUE ATTENTION
Like all industrial sectors feeling the winds of the fourth industrial revolution in their sails, the energy and transportation sectors are becoming geometrically more connected, and hence exposed to failures and security breaches; at the same time, the world is becoming a more hostile place. From Vermont to Ukraine, the suspicion is that Russian hackers are on maneuvers and that utilities are in their sights.
Just as new immigrants are unfairly blamed for all societal problems, renewable energy will be blamed for all emerging energy system problems. We saw an example of this when the South Australia grid failed in September last year during a huge storm. The blackout was not caused by the state’s high levels of wind power, but by a failure by the grid operator to plan accordingly – but that did not stop opportunistic politicians from pointing the finger. The clean energy sector must think carefully about how to protect itself, but also how to contribute to grid stability, particularly through power storage and ancillary services.
The reality is that we are entering an era when a catastrophic failure could potentially cascade through the energy, communications, transport, financial and industrial systems, in a way that has never been seen before. It is vital that the world invests time, brains and money now to ensure it never happens.
We hope that 2017 marks the year when the world gets serious about protecting its increasingly digital and connected infrastructure – whether that is from malicious attacks, technical failures, or unpredicted weather impacts or spikes in demand. If we are wrong, we worry that the world will get a sudden and very unpleasant wake-up call – if not this year, then some time soon.
10. THE CLIMATE DEBATE HEATS UP – AGAIN
The election of President Trump produced dire warnings about the end of international attempts to avert climate change. His early picks for Secretaries of State, Energy and Transportation suggest that while his administration will have a climate-skeptical bent, it will at least accept that anthropogenic climate change is occurring (the exception may be Scott Pruitt, the extraordinary pick for head of the Environmental Protection Agency, who has long fought actively against climate action and environmental protections).
Whether or not the U.S. steps away from the Paris Agreement entirely or merely soft-pedals, it is already clear that other countries have no intention of following suit. China has already shown signs of willingness to step into any leadership vacuum left by the U.S., and it has the financial and technological firepower to do so effectively. India too has indicated that its climate ambition is likely to harden in coming years, as has Europe, and even close U.S. ally the U.K. shows no signs of abandoning its leadership on the issue.
With even the Republican mainstream now admitting that climate change is happening, and that humans are causing some or all of it, the terms of the climate debate are going to change. What we are going to see now is opponents of climate action and defenders of fossil fuel interests, like an army finding its opening battle lines being overwhelmed, fall back on deeper lines of defence: challenging the evidence that a warmer climate will necessarily produce more storms, droughts higher sea levels and so on, promoting the benefits of higher CO2 levels on agricultural production, publicising reductions in excess winter deaths, and so on – in short arguing for a lower or even negative social cost of carbon.
They will no doubt continue to argue that there is in any case nothing much mankind can do at a reasonable cost to abate its emissions. We expect 2017 to be the third year in a row in which the global economy grows, but energy-related emissions do not. The contribution of renewable energy and energy efficiency to this achievement will be evident to anyone whose mind is at all open.
As progress in decarbonizing the power system is acknowledged, so it will become clearer than ever in 2017 that it can and must be matched by progress in heating, industrial production and, above all, transportation.
So there we have it: 10 bold predictions for 2017. All of them will no doubt be robustly debated at the 2017 Bloomberg New Energy Finance Future of Energy Summit, to be held in New York on April 24 and 25, and at our London and Shanghai events later this year. Further details can be seen at https://about.bnef.com/summit/.
We hope to see you there. Until then – happy sailing! Disclaimer: Michael Liebreich is a small investor in Chargepoint Inc, the U.S. EV charging technology provider.