From a macro perspective, renewable energy technologies seem to be a relatively safe bet for investors…
2015 hit a world record for global renewables investment despite challenging conditions, solar and wind have been deemed “unstoppable,”1 jobs in this sector seem to be skyrocketing, and for the first time ever the majority of new global generating capacity came from renewables.2 According to the “Global Trends in Renewable Energy Investment 2016” report produced by the United Nations Environment Programme, renewable energy investments “demonstrate a solid trend towards increasing investment and capacity.”3 In light of so many records being set and the apparent strength of the sector, it seems as though global investment should be doubling or tripling. If renewables hold so much promise, why did global investment in 2015 only increase by 5%?
The truth is that as good as renewable energy investments look from a big-picture perspective, when you dive down into the details, these investments can still be scary packages of high risk and uncertain reward, especially for non-government investors. This article will explore the global investment climate for renewable energy technologies, highlighting the significant global trends, as well as the investment drivers and challenges. Diverting away from the self-proclaimed “promotional” UN reports, it will also explore some investment failures in order to provide the fullest picture possible of where renewables stand in regards to global investment.
The “Bright” Side
Last year hit a new world record for global investment in renewable energy at $285.9 billion (USD).4 This is a strong, resilient sector, evidenced by the fact that it managed to exceed the previous 2011 investment record ($278.5 billion) despite a number of significant challenges: exchange rate shifts that depressed the dollar value of investments in other currency zones and sharp falls in fossil fuel generation prices.5 Not only is renewable energy investment on the rise but it’s actually outpacing gas and coal investments, which totaled $130 billion, by more than 2 to 1.6 The net impact of the crashing oil, natural gas, and coal prices triggered dramatic downsizing7 in those industries.
Some might think that depressed fossil fuel prices would decrease investments to renewable energy because lower prices makes it harder for renewables to compete. However, the depressed prices actually spurred on renewables investment as decision-makers recognized the inherent risk in selecting power station choices on the basis of short-term spot commodity prices.8 Concerns about future stranded fossil fuel generation assets and a decline in government policy support—as support shifts to clean energy sectors—has instead led some investors to place their investments in renewables.9
For the first time ever, renewables, excluding large hydro, comprised the majority of gigawatt capacity (53.65%) of all technologies installed in 2015.10 Solar and wind alone added 118 GW of generating capacity in 2015, up from 94 GW in 2014.11 Bloomberg News, a leading financial news and tool provider, lauds renewables, saying that “wind and solar have grown seemingly unstoppable.”12 At the end of 2015, renewable capacity in place had the ability to supply over 1/5 of global electricity demand.13 New hybrid policy tools such as energy auctions, which create a competitive electricity bidding procurement process,14 are also driving investment. Recent energy auctions ended with winning bids from companies who promised to produce electricity at “the cheapest rate, from any source, anywhere in the world,” according to Chairman of the advisory board for Bloomberg New Energy Finance Michael Liebreich.15 What’s more, these upward growth trends are not short-term. They are expected to continue in the 2016-21 period.16
With such rapid growth in renewable energy technologies, why isn’t everyone running out to snatch up stock in large renewable energy companies? Why aren’t more businesses taking part in this investment trend? When we begin to think about global renewable energy investment, it’s important to step back. Let’s not just look at the overarching numbers, which boast a market of growing strength and resilience, a sector of rapidly increasing employment, and an industry driven by supportive government policies and national renewable energy targets. Understanding global investment trends means humanizing investment decisions.
As noted in the introduction, when you dive down into the details of who’s investing and where they’re investing, and begin to contemplate why they’re investing, renewable energy investments still represent significant uncertainty. The March 2016 United Nations report on world investments highlighted how much was invested, where funds were invested, and what specifically was invested in (R&D, downstream project development, asset finance, etc.). What the report fails to shine the spotlight on, which may be even more important to understanding the global investment climate, is the number of failed investments or investments with little to no return.
Investment “success” is subjective and varies depending on the ultimate goal. At times governments may dub certain investments a “success” even if they lose money from defaulted loans. Why is this? Governments may place a higher value on energy security and sustainability objectives and see a “success” in anything that works towards those goals, even if there is a notable economic loss. Prior to 2016, nearly $1 billion in loans had defaulted under the U.S. Energy Department program, including a solar company stimulus project and many Obama-administration-approved green technology programs. According to the Government Accountability Office’s audit, this totaled nearly $30 billion in taxpayer backing.17 The uncertain reward can help explain why venture capital, at $1.3 billion in 2015, makes up such a small portion of total global renewable energy investment. Investment is about perceived realities, and to many investors, the risk relative to the potential returns may still feel too high.
Numerous factors are playing their part to drive global investment in renewable energy: dedicated policy initiatives, improved access to financing, concerns about the environment and energy security, increased demand for energy in developing and emerging economies, and, perhaps most significantly, the cost-competitiveness of renewable technologies.18
Perpetuating public and government investment in 2015, national and international renewable energy policies and policy support increased significantly. As noted in the REN21’s “Renewables 2016 Global Status Report,” 2015 was “a record year of firsts and high-profile agreements and announcements related to renewable energy.”19 While the G7 and G20 made commitments to accelerate access to renewable energy and to advance energy efficiency, the United Nations General Assembly adopted the goal of Sustainable Energy for All (SDG 7).20 At the United Nations Framework Convention on Climate Change’s (UNFCCC) 21st Conference of the Parties (COP21) in Paris,
195 countries agreed to limit global warming to well below 2 degrees Celsius. Remarkably, 189 countries submitted Intended Nationally Determined Contributions, essentially climate pledges, many of which are largely focused on scaling up renewable energy and energy efficiency while reforming fossil fuel subsidies.21 In general, the total number of countries with renewable energy policies increased to 173.22
In addition, policies at the state and municipal level also expanded enormously. Relying on a mix of regulatory policies, mandates and direct purchasing, cities have played an important role in local-level climate-based commitments that promote deployment of renewable energy technologies on a large scale. High-profile global and regional partnerships like the Covenant of Mayors and the Compact of Mayors offer a collaborative network for advancing energy goals. A number of cities joined the 100% Renewable Energy movement in 2015, an effort to commit to achieving a 100% renewable electricity or energy (across all sectors). Now totaling 55 cities, new members as of 2015 include Byron Shire, Cos Harbour and Uralla in Australia; Oxford County and Vancouver in Canada; and Rochester and San Diego in the US.23
This type of international, national, and local support is critical to driving investment. According to the EY G20 Entrepreneurship Barometer, the second-most important funding source for fueling entrepreneurship is public aid and government funding, which creates a multiplier effect.24 Part of the increased policy support stems from increasing employment opportunities in the renewable energy sector. At the end of 2015, an estimated 8.1 million jobs had been created, the largest numbers coming from the solar PV and biofuels sectors and the leading government employers including China, Brazil, the United States, and India.25
Another driver of investment is better access to financing. Green bonds, crowdfunding, and yield cos are new investment vehicles that have become attractive.26 YieldCo’s are publicly traded corporations that provides stable and growing distributions for investors from operating assets and can be created from assets that wouldn’t generate the qualifying income required for passthrough treatment under most current tax laws.27 Innovative business models and payment methods are also growing. Many enterprises now use mobile payment systems and scratch cards. The “Powerhive” business model is a pay-as-you-go micro-payment scheme that increases access to products ranging from solar lamps to mobile phones and even televisions.28 New investment vehicles, innovative business models, and mainstream financing and securitization structures continue to lower investment risks. As a result, private investors significantly ramped up their commitments to renewable energy, large banks became more active and increased the sizes of their loans, and international investment firms made major new commitment in 2015.29
Arguably the most significant investment driver, the increasing cost-competitiveness of renewable energy technologies is providing market-based incentives that speak to what many investors care about most: the bottom-line. “Electricity from hydro, geothermal and some biomass power sources has been broadly competitive with power from fossil fuels for some time; in favourable circumstances (i.e., with good resources and a secure regulatory framework), onshore wind and solar PV also are cost-competitive with new fossil capacity, even without accounting for externalities,” according to the “Renewables 2016 Global Status Report.”30 Power auctions from Latin America, to the Middle East and North Africa region, all the way to India, have seen record-low winning bids.31 As Senior Analyst for GTM Research Mohit Anand explains, auctions inherently requires solar and other renewable technologies to be more competitive and thus drives down prices.32 So far, the record-breaker was a 200 MW plant in Dubai being built by ACWA Power International for only $58.50 per MWh.33
Investment Challenges & Failures
In tiny print at the bottom of page 4 of REN21’s “Global Status Report” there’s a disclaimer that emphasizes that the purpose of the report is the promotion of renewable energy and that its participants cannot be “held liable for its accuracy or correctness” (although the information used is the best available at the given time).34 The report, a leading document for renewable energy forecasts, uses its information to paint a realistic but sunny picture of renewables. Thus, it’s necessary to travel beyond the realms of this ostensibly comprehensive report, where failures and investment losses are not heavily emphasized, to see and understand the whole picture. The fact that renewable energy investment is now greater in developing economies than developed countries is remarkable. However, this trend presents investment challenges, as developing countries are often known to have greater policy and political instability.35 An article from Energy Finance Report, notes the higher level of funding risks associated with developing countries, including geo-political, legal, currency, physical, and counterparty risks.36
Additionally, many of the downsides to renewable energy policy tools are glossed over. Touted as a great policy tool, energy auctions have their drawbacks: projects do not always progress as quickly or as cheaply as they say they can. The issue of failed subsidy contracts was highlighted when the U.K. government created plans to double the penalty for clean energy projects that failed to hit key milestones in order to discourage companies from entering auctions with unrealistic project plans.37 Likewise, feed-in tariff policies (FITs), despite being responsible for massive renewable energy growth (largely solar), have also had many problems.38 As Greentech Media Editor Stephen Lacey bluntly puts it, “FITs are a ridiculously expensive policy.”39 Designed to accelerate investment in renewable energy technologies by offering cost-based compensation to renewable energy producers, this policy is less controllable than originally thought. In some cases, it has contributed to more renewable energy coming on the grid than the grid could easily handle, resulting in over-saturation. In large part, this explains the investment and policy shift away from FIT policies, especially in Europe and Asia.40
Finally, it’s worth analyzing the returns on investment and the patterns in investment failures and successes. Between 2006 to 2011, venture capital firms spent over $25 billion funding clean energy technology start-ups.41 Notably, not even half of that capital was returned.42 In comparison to software technology and medical technology, one report found that early-stage investments in cleantech companies had a higher likelihood of failing and returned less capital. In response, and despite global upward investment trends, many VC investors reduced their total capital allocated to the sector.43 Why aren’t many cleantech companies producing returns? Unfortunately, many have declared bankruptcy, been acquired, or closed over the past few years. An article titled, “Rest in Peace: The Fallen Solar Companies,” tracks the solar companies alone that have failed since 2009. Between 2009 to 2014, over 80 solar companies mostly in the US and EU either went bankrupt or closed, with another large portion being acquired or restructuring.44 Despite the global rise in renewable energy investment, there is a reason why it’s increasing relatively slowly (5% in 2015) even in the face of such potential and promise.
What’s the Takeaway?
Past investments, globally and otherwise, have been shown to have a multiplier effect. By advancing renewable energy technologies, improving energy efficiency, increasing the use of smart grid technologies and the support of the integration of renewable energy, and accelerating energy storage development, those previous investments drove the change that continues to grow the industry, markets, and body of research that incentivizes and excites a greater number of new investors. Expected to grow by more than 600% in the next 25 years,45 the renewable energy industry is clearly on the rise.
But make no mistake, the global energy industry is by no means a “safe place” for investment. From utilities experiencing distributed generation disruptions, to potential mass-market acceptance of electric vehicles, to promising cost-competitive energy storage, the energy industry is an industry in transition. In many cases, it’s high risk for high reward. Among the successes are devastating failures. But without the failures, without the innovation and breakneck pace of venture-capitalist and government funded downstream firms, the U.S. and global renewable energy markets could’ve taken years longer to reach their current levels, if—as some caution—they ever even took off at all. As Greentech Media Editor Eric Wesoff sees it, “It’s at volatile times like these that smart investors could position themselves to make money, while actually making a difference in the energy mix.”46