What drives Renewable Energy?
While the demand for energy is forecast to grow by 2.5% annually (source: EIA), renewables will grow faster, ultimately increasing their share of the total.
What is driving demand for renewables?
Public PolicyPerhaps the most powerful driving force is a favourable public policy towards renewable energy. Without policy inducement, the only renewable sources used are hydro (for electricity) and biomass. Driven by pressure to combat climate change, many governments have introduced incentive schemes to attract investment in new technologies, which would otherwise not be developed. Officially announced targets further help governments to commit.
Under-Investment in EnergyAfter decades of under-investment in the energy industry, many power plants are near their end of life. This could amount to 5% of existing capacity that needs to be replaced every year on top of new builds to meet the growth in demand.
High Prices for Oil & GasWith growing demand for energy, there is a risk of sustained rises in the prices for oil and gas, not just increased volatiliy. Renewable energy plants rely very little on these commodities.
Volatiliy in Electricity MarketAs demand for electricity fluctuates and as supply and demand have to be kept in balance at all times, electricity prices tend to be very volatile. A larger share of renewables in the electricity mix may help in reducing that volatility, as there is little marginal cost to run a renewable energy plant.
Public SentimentWith high oil prices and climate change on everybody's mind, there is increasing public support for renewable energy. According to a survey 69% of all Germans and an impressive 65% of all Germans that live near wind farms do support wind farms. While public support does not attract many investors by itself, it is crucial in obtaining building permissions.
Energy DependenceVery few of the developed countries can cover their primary energy needs from their own resources. For instance, the EU's 27 countries import more than half from outside the EU. Apart from exposure to commodity price risk, this dependence can cause political friction. Renewable energies help decrease that dependence.
Market LiquidityThanks to attractive feed-in tariffs, renewable power plants have become projects with stable cash flows, attracting investors outside the traditional energy industry that would not invest in traditional power stations that cannot be easily sold.
Cost AdvantagesOf course, in some locations, renewables do not require incentives, as they are the energy of choice already, as is the case with hydro energy in large parts of South America. In addition, all renewable energies have very low marginal costs. I.e. once a solar park has been built, there is no additional variable cost involved to generated electricity.
Growth in Renewables
Within the segment of renewable fuels for electricity generation, wind and solar energy have been among the fastest growing technologies.
Despite a recession, 2009 has seen an unprecedented new build of 35GW wind and 6.5GW photovoltaics worldwide.
There are no commercial applications of wave and tidal stream technologies yet, though it is expected that they will grow as well.
Of courrse, these are just figures for installed capacity. Due to technological advances, cost savings and degressing feed-in tariffs, the growth in the market by revenue has to be lower. How big is the difference? For the solar electricity market, Gartner has forecast an annual growth of 24% by capacity and 17% by revenue.
They are very attractive markets, though concentrated on countries that have attractive incentive schemes.
Mature vs Growth Markets
Are there any segments that are more developed than others? Where is the growth?
To answer this question, we have plotted countries according to relative growth in capacity during 2009 against the country's total specific capacity..
The specific total capacity is the installed total capacity (of wind energy) divided by the total energy consumed by the country in one year. In other words, this is the amount of wind capacity relative to the coutnry's electricity consumption. For example, the U.S. has more wind capacity than Germany, yet its specific capacity is much lower, as the U.S. consumes more electricity.
In the wind segment (in 2009), we found all countries along a traditional maturity curve. Growth slows down in saturated markets, such as Denmark and Germany, whilst China has seen phenomenal growth from its lower base.
In the photovoltaic segment, the market is much more concentrated on very few countries. In 2008 (see diagram), these countries were Germany and Spain. As the diagram highlights vividly, Spain looks like the odd one out. It's no surprise therefore that Spain reverted back to single digit growth in 2009.
Due to the higher costs for photovoltaics, it has a higher political risk than wind, and policy-induced boom-and-bust cycles like Spain in 2008 are more likely.
Revenues from Renewables
Revenues earned from renewables come from two stages:
Revenues from New Equipment and Construction
Revenues from new builds and major maintenance work comes from the installation of renewable electricity generation plants as well as heat technologies from solar thermal, geothermal and biomass.
Revenues from Operations
Revenues from operations include the sale of electricity (either at market rates or feed-in tariffs) as well as the sale of fuels (biofuels, pellets etc). There are generally no revenues from solar thermal modules, as they tend to be used to heat water onsite. The resulting lower gas bill can not be counted as revenue from renewables.
Revenues from Renewables in Germany
Revenues from renewables are vastly different from country to country, depending on the technology mix and new capacity added. In Germany (2008), the €30bn revenues were split evenly between the two revenue streams. It is worth noting, however, that more than half of the revenues from new builds went into photovoltaics, though only 14% from operations. This shows just once more how expensive photovoltaics still are.
The exception may be the solar industry where all three major technologies (photovoltaics, concentrated solar thermal and solar heating) the same measuring devices and glass.
Further along the value chain, grd-tied inverter companies span multiple renewable technologies. For instance, SMA offers its "SunnyBoy" range of inverters to the photovoltaics industry and its "WindyBoy" range to the wind industry.
Even further downstream, companies active in plant operation, distribution, consulting or financing are often involved in all technologies, though this is by no means the norm.