🇺🇸Mr. Trump, Make The Grid Great Again!

One of President Trump’s most resounding battle cries during the election was the bold promise to invest in infrastructure. I am going to argue that Mr. Trump should focus on upgrading the US electric grid, most of which is +25 years old and some parts are even +40 years old.

100 years ago, when the original electric grid was built, it was not conceivable to imagine consumers choosing their distributed generation because an energy generator would burn a fossil fuel and create electricity, which would be transmitted to consumer’s homes and that was that.

But the advent of renewable energy and small, private wind and solar producers means that today’s grid is nearing the end of its useful life both physically and functionally. Today the world is much more mobile, fluid, and flexible, but the grid has not kept up. A smart grid is set to provide real benefits to all stakeholders, including consumers, utilities, and regulators.

For starters, it will bring environmental benefits: through efficient use of energy and existing capacity by using digital communications technology to detect and react to local changes in usage and it will give customers options and choices to change their behavior when it comes to the price and type of power they use, and when to use that energy resource efficiently.

Efficiency is optimized thanks to a smart grid because of a two-way power flow and the integration of energy storage capacity, which would allow consumers to take energy when they need it, and the feed it back (in the case of solar/ wind producers) into the grid when prices are higher or store it. However, today, the grid is not really equipped to handle neither reverse power flows nor storage.

The Grid: An Economy Enhancing Investment

Although Americans bemoan the disrepair of their dilapidated roads, transit, and airports in countless NYT editorial pieces, the Trump Administration must consider the unseen but increasingly crucial issue of reinventing the power grid.

While the electric utility sector may not be the most riveting, the U.S. smart grid expenditures forecasts at more than $3 billion in 2017 (PDF) and the global smart grid market expected to surpass $400 billion worldwide by 2020. Navigant Research, a clean tech consultancy, reports on worldwide revenues for smart grid IT (information technology) software and services, are expected to grow from $12.8 billion in 2017 to more than $21.4 billion in 2026.

The private sector is stepping up. Not only tech companies such as Oracle, IBM, SAS, Teradata, EMC, and SAP but also utility giants such as General Electric, Siemens, ABB, Schneider Electric, and Toshiba are getting involved in smart grid IT.

Moreover, with historically low-interest rates (for now) and the potential for infrastructure projects to deliver long-run economic returns, many believe infrastructure investment could kick-start the country’s slowish GDP growth. Yet in spite of a body of economic evidence which points to clear benefits derived from infrastructure investment, simply building more roads will not guarantee economic growth on its own, as the textbook examples: Japan and China indicate. This lesson is particularly important considering the falling returns from public investment in U.S. highways.

U.S GDP Growth % 1965-2015

USAGDP
World Bank Data, 2017

And this brings us to the grid: aiming investment at the grid would improve conditions for millions of people as well as address the needs of the private sector.

The average American endures 6+ hours of blackouts a year, which amounts to at least $150 billion for the public and private sector each year — about $500 for every man, woman, and child, – that is remarkably bad for a developed country. Power outages in the USA are mostly caused by the effect harsh weather on the aging grid. Heavy industry tends to be most affected by tiny outages, and this example from Saviva Research is painfully illustrative:

A robotic manufacturing facility owned by Toshiba experienced a 0.4-second outage, causing each robot to become asynchronous with the grid; thus short circuiting chips and circuits. Toshiba spent the next 3 months reprogramming each robot, leading to an estimated economic loss of $500m.


International Grid Reliability

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Source: Saviva Research 2013

In the U.S, investments in the power grid lag behind Europe. Across the pond, since 2000, the U.K., Italy, Spain, France and Germany have spent a combined $150.3 billion on energy-efficiency programs, compared with $96.7 billion for the U.S, according to data by Bloomberg New Energy Finance. Moreover, according to a 2015 report by energy consultancy, the Rocky Mountain Institute the, the U.S.  needs about $2 trillion in grid upgrades by 2030.

The Smart Grid: A Strategic Economy-Enhancing Objective

Yet there is much that the government and the private sector should seek to unpack about consumer behavior, strategic implications, governance, and decision-making regarding the grid, before committing to such a massive investment. The incoming investments in the next decades offer a historically important opportunity to rethink how the whole system of power generation, transmission, and usage operates.

Here’s just one consideration: ownership. Future smart grids are likely to have multiple ownerships, which will most likely span across:

  1. The government: through publicly owned power and transmission lines;
  2. The private sector: independent wind farms developers and operators or utility-owned generators;
  3. Private citizens: owners of household-level battery backup systems or rooftop solar panels.

All it really means is that combining forces for a specific project makes it possible to focus each parties’ inherent assets in the way that best reduces their shared risks, and reduced risk means a lower cost of borrowing, and therefore: cheaper projects.

As J. Michael Barrett explains: If the federal or state government can reduce the investment risk of the project by providing seed capital, issuing tax-exempt bonds, and/or signing a power purchase agreement to buy energy for a guaranteed period of time, the private sector can then provide investment capital at more favorable rates because total project risk is reduced. When all the parties share the up-front construction costs (and risk), promote open access to usable land, and lock-in the commitment of long-term users.

Finally, the most plausible way forward is to invest in new technologies opposed to retrofitting them later, an educated, unideological clear-eyed strategic effort to make the most of these investments would ensure both improved operations improvements in resilience and adaptability across the board.

tl;dr: A functioning integrated electricity system is a basic public good, imperative to the wealth, safety, and wellbeing of any modern society. In the context of a rapidly evolving energy infrastructure landscape, taking a strategic stance during the development of the smart grid in the USA will determine how much value is captured and who will capture it.

Read more: here The Energy Infrastructure that the US Really Needs

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Energy Transition: From Oil 🔜 Wind

It is often touted as a truism, that in the effort to migrate our energy production from fossil fuels to renewables, we will have to use natural gas (controversially argued to be the *least* polluting fossil fuel, out of coal and oil) as a bridge transition energy source as we develop the green infrastructure necessary to satisfy our consumption.

Be that as it may, I see a trend run in parallel to this. While cheap and abundant gas is readily available, oil companies are starting to challenge the biggest wind developers in the race to build off-shore wind turbines in the North Sea.

North Sea: Wind is Eating into the Energy Market Share

Shell, Statoil, and Eni are three giants who are moving into multi-billion-dollar offshore wind farms in the North Sea. They’re starting to score victories against leading power suppliers including Dong Energy (I wrote about them branching out of conventional oil exploration into offshore wind here) and Vattenfall in competitive auctions for power purchase agreements (PPA).

The idea seems to be to leverage the know how they used from off-shore oil, into offshore wind. Irene Rummelhoff, EVP for New Energy Solutions at Statoil (see here) said she was convinced global warming was a very serious problem and her company wanted to help find a solution. “We strongly believe oil and gas will still be needed in future but we also know we have to do things differently and are working to reduce the carbon footprint of these operations,” she said.

“It makes sense to utilize our project-management skills from oil and gas to offshore wind which is why we are operating Sheringham Shoals and Dudgeon Sands off the UK. We are also looking at more carbon capture schemes and at solar worldwide.”

Even Exxon Mobil, in spite of having a conservative reputation, has recently unveiled plans to investigate CCS more fully in a new partnership with a fuel cell company. They also have pledged million of dollars to developing photosynthetic algae for transportation fuels.

Italian oil and gas major, Eni has signed an agreement with General Electric (GE) to develop renewable energy projects and hybrid solutions with a focus on energy efficiency. Their objective is to jointly identify and develop large-scale power generation projects from renewable energy sources, covering innovative technologies such as, onshore and offshore wind generation, solar power, hybrid gas-renewable projects, electrification of new and existing assets, waste-to-energy projects, the ‘green’ conversion of mature or decommissioned industrial assets and the deployment of technologies developed by Eni’s R&D department.

Luca Cosentino, VP of energy solutions, had this to say, “It is certainly an area of interest for us because there are obvious synergies with the traditional oil and gas business…As the oil and gas industry we know, we cannot get stuck where we are and wait for someone else to take this leap.”

This shift in business can be attributed to many factors. Firstly, large oil companies have spent millions in R&D for building oil projects offshore, and now that that business is on its way in some areas where older fields have drained, it makes sense to shift from off-shore oil to off-shore wind. Returns from wind farms are predictable because producers enter into long-term PPA which reduce risk by pinning down government-regulated electricity prices, unlike volatile oil prices, as the dramatic fall in the oil price from 2014 powerfully showed, the value of oil and gas assets is variable and uncertain.

Secondly, even as oil production is declining in the North Sea over the last 15 years, economic activity has been buoyed by offshore windmills. The notorious North Sea winds which threatened oil platforms have become a godsend for the new workers to install and maintain turbines popped into the Northern seabed.  According to Bloomberg New Energy Finance, about $99 billion will be invested in North Sea wind projects from 2000 to 2017. A decade ago, the industry had projects only a fraction of that size.

Circling the drain: The terminal decline of North Sea Oil

There is an evident trend going on in the North Sea, in spite of a slight resurgence we’ve seen in the last year.

north_sea_oil
Data from EIA, taken from Investopedia

Energy consultancy Wood Mackenzie said oil companies were likely to stop output at 140 offshore UK fields during the next five years, even if crude rebounded from $35 to $85 a barrel. According to the Financial Times, this compares with just 38 new fields that are expected to be brought on stream during the same period. Industry execs believe that this will be good news for the decommissioning industry, still in its nascent phase. Shell is preparing to take apart the first of four platforms in its Brent field, while Riverstone-owned Fairfield is to abandon Dunlin. As the sector oil declines, service providers anticipate that decommissioning may help them plug the revenue gap left by diminishing exploration.

Oil Decommissioning Frenzy?

Thirty years ago, North Sea production helped shape the UK’s energy landscape in a way similar to what the shale boom has done for the United States. In the 1980s, offshore production propelled the UK  to become a net crude exporter of oil and then of gas. But today, it’s a net importer of both oil and gas as the North Sea matured and their productivity declined.

As assets reach the end of their useful lives, company resources will become increasingly drawn into the expensive and at times technically complex activities required to cease production, safely remove subsea and surface infrastructure, and ensure that wells are permanently and safely abandoned.

According to a 2017 KPMG report,

The decommissioning era has now dawned in mature oil and gas provinces such as the North Sea – worsening economics, deteriorating infrastructure, technical limits on further recovery and regulatory pressure will make change inevitable. Industry forecasts suggest an unprecedented scale and pace of decommissioning activity in the years ahead.

The North Sea strategy seemed to be to delay the decommissioning of many offshore platforms, preferring to continue squeezing out increasingly small amounts of oil and gas rather than incurring the massive costs of decommissioning and bringing that equipment back onshore.

But those decommissioning delays mean only that oil companies have been kicking the can down the road and set up a more dramatic decline in North Sea production which will still be true even if prices increase.

This makes the shift into offshore wind all the more interesting.

And the Wind Turbine Winner is … Vestas

Bloomberg New Energy Finance reports that Danish wind manufacturer Vestas reclaimed the top spot in the annual ranking of wind turbine manufacturers.

Top Onshore Turbine Manufacturers, 2016

top-turbine-manufacturer
BNEF 2017
  1. 🇩🇰  Vestas has been on the scene since 1945 as an appliance manufacturer and moved into turbine production in 1979 and has plants in Denmark, Germany, India, Italy, Romania, the United Kingdom, Spain, Sweden, Norway, Australia, China, and the United States. They installed a whopping  8.7GW of turbines in 2016, good for 16% of all onshore wind installations last year. 43% of those 8.7GW were in the USA. Vestas has a very international reach and is continuing to pursue a global strategy with projects commissioned in 35 countries, more than any other turbine maker.
  2. 🇺🇸 General Electric placed second with 6.5GW, some 0.6GW more than in 2015. They are the largest producer in the USA and while they narrowly lost its traditional lead in the US market for newly commissioned turbines to Vestas, GE managed to increase its global presence to 21 countries in 2016, from 14 in 2015.
  3. 🇨🇳  Xinjiang Goldwind Science & Technology fell from first to third place with 6.4GW in 2016. Virtually all of the Chinese manufacturer’s capacity was built in its home market, where Goldwind further extended its market share. China’s contracting wind market had a clear impact on Goldwind, as overall installations were 22.8GW, down 21% from the record 29GW in 2015.
  4. 🇪🇸 Gamesa came in fourth and reported that it had beaten its own annual turbine manufacturing record, having already made more than 1,880 units with a total productive capacity of 3,880 MW. The new record was a long time in the making, taking eight years to beat 2008’s 3,787 MW. Their record was set with turbines assembled all over the world — India (36%), Europe (28%), China (26%) and Brazil (10%). Almost one in three Gamesa turbines was installed in India.
  5. 🇩🇪  Enercon sits in 5th place, with a market share of 7.2% worldwide and 59.2% only in Germany. Enercon has production facilities in Germany, Sweden, Brazil, India, Canada, Turkey, and Portugal. They are limited to onshore wind turbines.
  6. 🇩🇪  Nordex, in 6th place has installed wind power capacity of more than 18 GW in over 25 markets. The production network comprises plants in Germany, Spain, Brazil, the United States and soon also India. Nordex closed the first half of 2016 with a new record in German installations, with a total 134 new turbines installed marks an increase of 135% over the same period in the previous year
  7. 🇨🇳  Guodian / United Power is the Chinese runner-up, with its manufacturing spread entirely across China. Originally, a joint venture with Westinghouse and later a joint venture with Siemens from 1998 to 2006 before restructuring to a state-owned enterprise in 2007. Today, they have 23,030 MW of wind power installed, they have grown rapidly and strategically in the last 15 years.
  8. 🇩🇪  Siemens Wind Power in 8th place seems to be coming in short, but this is because this list looks at onshore wind, whilst Siemens supplies about 60% of European offshore wind turbines.
  9. 🇨🇳  Ming Yang 明阳风电 is the largest privately owned wind turbine manufacturer in China.
  10. 🇨🇳  Envision, the “smallest” Chinese entrant, Since its foundation in 2007, Envision Energy has maintained rapid growth in its business operations.

Top Offshore Turbine Manufacturers, 2016

top-offshore-turbine-manufacturer
BNEF, 2017

🇨🇳  Sewind is the undisputed offshore leader, supplying nearly 60% of the 832 MW of new offshore wind turbines commissioned in 2016 globally and since it manufactures Siemens offshore turbines under license in China, the company actually installed 388 MW of Siemens turbines and 101 MW of own design machines.

What to expect next

I wrote about the upcoming merger between Gamsea and Siemens a few months ago here and the merger between the two is set to go through. It appears that they are aiming at speeding up consolidation due to competition and price pressures. As Gamsea and Siemens combine their wind-turbine manufacturing businesses, creating a company that will dominate the industry, Vestas will be dethroned to second place.

A recent report by the Global Wind Energy Council (GWEC) shows that China installed 592 MW of offshore wind in 2016, entering the global top three alongside Germany and the Netherlands. Although the GWEC and BNEF reports focus on different aspects, both point to a steady rise in Asian offshore wind markets. This is also evident in day to day new reports on deals and contracts.

Trend #2: Equity Capital for Wind Energy

There are some interesting developments in terms of who’s got skin in the equity game in renewable energy. What’s really interesting to me is that the equity investment landscape has transformed quite a bit in the last few years and in this post we’ll see how and why.

Renewable Energy Asset Financing, 2004-2015

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In USD billion, statlink: http://dx.doi.org/10.1787/888933362596

But first, remember that, according to the OECD, there are three (main) ways to finance renewable energy projects:

  1. Project Finance: This involves a mixture of debt (usually from banks) and equity capital (we will go into more detail below). According to Bloomberg, 2015 was the first year in which project finance constitutes more than half of total asset finance in RE electricity. Remember that project finance involves creating a Special Purpose Vehicle (SPV) with its cash flows separated from those of its sponsor companies;
  2. On-the-balance sheet financing: Done by utilities (EDF, ENEL, Suez), independent power producers and other project developers. On the balance sheet financing, makes up over 47% of total asset finance in RE, about 94 billion;
  3. Project Bonds: Project Bonds, these do not include corporate bonds or government bonds. They account for a small fraction of financing.

Nevertheless, there are other emerging financial structures, which I can go into in another post, but venture capital is one of them. Utilities are substantial providers of equity capital in the renewable sector. However, due to the large scale investment and stable income returns, there is greater interest from the financial services industry.

This brings us to wind equity financing

Back in the day, the first offshore wind-power farms were usually financed on the balance sheets of the utilities that planned, built, and operated them. Today, there are many more players involved, such as banks, private equity funds, pension funds, state-backed “green” banks (such as the Green Investment Bank, the Nordic Investment bank and the European Investment Bank) and insurance companies. The graph below shows how the equity mix has morphed in the last couple of years.

Change in Equity Mix for Wind Energy

wind-equity

The share of equity provided by utilities is steadily shrinking as other players get involved, decreasing from 62% in 2010 to 39% in 2015, and that of non-utility corporates from 31% to 15%. In other words, the combined share of the two traditional equity investors in the wind energy sector decreased substantially, from 93% in 2010 to 54% in 2015. Accordingly, other investors have stepped up their game. One of the possible explanations for this decrease may potentially be due to deleveraging as a consequence of the financial crisis.

The Rise of Institutional Investors

For brownfield wind projects, meaning wind projects where there is already existing infrastructure and possibly licenses as well, institutional investors such as pension funds, insurance companies, private equity and infrastructure funds have become major equity investors. According to the OECD, their cut in total equity provisions increased from 6% in 2010 to a staggering 37% in 2015, making them the second most important equity providers in the 2015 sample, just 1% behind utilities. This sharp increase of equity provision by institutional investors can be traced mainly to the acquisition of brownfield assets or portfolios for onshore wind deals. Pension funds and insurers were not involved in any greenfield onshore wind-power transactions included in the OECD 2015 sample.

This trend suggests that institutional investors look to the onshore wind sector mainly for the acquisition of existing projects.Such a strategy presents several advantages:

  • Lower Costs: Existing projects are already (usually) built, and there they do not need to start from scratch;
  • “Up to Code”: Lengthy permits, licensing and commissioning agreements may already be in place and therefore do not need to be requested;
  • Fast Deployment: Ultimately the project can be up and running (and earning) in less time.

Moreover, equity financing in wind energy assets by state agencies and public finance institutions grew from a negligible cut in 2010 to 9% of total equity invested in 2015. This sharp increase can be linked directly to the investments done by the UK Green Investment Bank. The UK’s GIB, an institution created by the UK government in 2012 with the aim of attracting private sector financing for green infrastructure projects. The creation or expansion of similar institutions is a trend observable at the global level and is important for risk sharing with newer technologies. Take offshore wind, for example, as projects scale up and move into deeper water, newer technologies also add to construction risk. This may be a barrier to entry and discourage some investors from participating.

In Europe, commercial banks have started partnering up with government supported banks (United Kingdom’s Green Investment Bank, Germany’s KfW Development Bank), export credit agencies (Denmark’s EKF and Belgium’s Delcredere – Ducroire and Italy’s SACE), and multilateral banks (the European Investment Bank) as a way to provide equity financing to wind projects .

The diversification of participants is good for everyone, because:

  • Risk: The risk that corresponds to the project is diversified across an array of investors, meaning that investors are more likely to invest if they do it along other reputable investors, rather than going in it solo;
  • Mainstreaming: the diversification of participants shows that equity financing for RE is no longer as niche as it was, with pension funds and insurance companies putting skin in the game.

Example: The Galloper Offshore Wind Farm

The largest wind equity deal in Europe in 2015 the the Galloper Offshore Wind Farm. It’s a project that will be completed in 2018, located off the coast if Suffolk, east England.

 The equity investors are:

  • Innogy Renewables UK, a subsidiary of the German utility company RWE
  • The UK’s Green Investment Bank, a public finance institution
  • Macquarie Capital, an institutional investor
  • Siemens Financial Services, a subsidiary of Siemens, a corporation
  • Sumitomo Corporation, a corporation

This array of private and public investors is an example of what the equity landscape is shifting towards.

So why did the equity investing landscape change?

The explosion of new capacity additions fostered equity market growth for wind projects. New projects not only became more frequent but they also grew in average size, requiring more capital. It would only be normal to have several new, independent developers enter the sector under such favorable market conditions. Moreover, many utilities have been financially constrained due to the difficulties in the merchant power sector, further limiting their contribution to the sector.

The take-home message we can draw from this is that as the demand for wind energy increased so did the associated capital requirements. Utilities and developers did not have the necessary capital to cover demand, so third party investors were roped in. Likewise, corporations like Siemens and Sumitomo are using their financial strength to offer financing directly to smaller developers.

 

How to Handle a Climate Change Denier

Preamble: I would like to point out that I truly prefer not to engage in these types of discussions (read: I’m over it), because the sources of information that are available to me, are available to everyone else. I also do not consider it my duty to educate every Tom, Dick, and Henry on climate change. However, in light of recent developments, we will probably be encountering a more energized brand of deniers, so here is a non-exhaustive list of answers I took from Robert Henson’s Rough Guide to Climate Change.

Since the days of Roger Revelle, the pioneering oceanographer whose body of work was instrumental for our understanding of the role of greenhouse gas emissions in our atmosphere, deniers developed certain criticisms that are still popular today. I believe that these arguments will keep on cropping up for as long as there is a “debate” on climate change, so it’s best that we equip ourselves with appropriate answers.

Taken to the extreme, anti climate change arguments can be summed up in the following quote:

“The atmosphere isn’t warming; and if it is, then it’s due to natural variation; and even if it’s not due to natural variation, then the amount of warming is insignificant; and if it becomes significant, then the benefits will outweigh the problems; and even if they don’t, technology will come to the rescue;  and even if it doesn’t, we shouldn’t wreck the economy to fix the problem when many parts of the science are uncertain.”

toles-washington-post-2006
Toles 2006, Washington Post 

 “But the atmosphere isn’t warming….”

 

According to an ongoing temperature analysis conducted by scientists at NASA’s Goddard Institute for Space Studies (GISS), the average global temperature on Earth has increased by a mean of about 0.8° Celsius (1.4° Fahrenheit) since 1880. Two-thirds of the warming has occurred since 1975, at a rate of roughly 0.15-0.20°C per decade.

This arguement, has seeminly been put to rest, yet deniers seem to resist it, possibly because they do no think that a global mean warming of 0.8°C is a big deal. Here is a more vivd statistical example of what that means:

giphy
Dr. Arun Majumdar’s presentation, Michigan State University

This is a bell curve mapping distribution of temperature anomalies over 60 years. To the left are temperatures colder than average and to the right are temperatures hotter than average. The mean is shifting and the distribution is broadening rightwards. The right tail of the distribution is reaching 4 and 5 sigma, which are probabilities that were unheard of decades ago. The anomalies occurring at 4 and 5 sigma are (were) rare massive heatwaves, storms, and floods, which are becoming more common then ever.

“Okay, but I still went skiing this winter…”

 

The weather and the climate are two different things. The difference between weather and climate is a measure of time. Weather is what conditions of the atmosphere are over a short period of time, and climate is how the atmosphere “behaves” over relatively long periods of time. We talk about climate change in terms of years, decades, and centuries. The weather is forecast 5 0r 10 days ahead, but the climate is studied across long periods of time to look for trends or cycles of variability, such as the changes in wind patterns, ocean surface temperatures, and precipitation. Snow in skiing locations isn’t proof that climate change is not happening.

“The warming is due to natural variation…”

 

This is a very common argument, the denier does not argue against the existence of climate change, generously admitting the climate has *always* changed, but they do not believe that humans are responsible for it.

The IPCC has concluded that the warming of the last century, especially from the 1970s, falls outside the bounds of natural variability.

carbon-budget-exhibits_3-e1488189073538.png
Variation of Co2 in atmosphere, from 800000BC to today, NOAA NCDC

Let’s walk down memory lane and look at what the IPCC has been saying to us for 26 years. And keep in mind that the IPCC reports are the most comprehensive, global, and peer-reviewed studies on climate change ever written by anyone, bringing together the work of over 800 scientists, more than 450 lead authors from more than 130 countries, and more than 2,500 expert reviewers. In short, the IPCC reports are humanity’s best attempt to date at getting the science right.

Over the last 800,000 years, Earth’s climate has been cooler than today on average, with a natural cycle between ice ages and warmer interglacial periods. Over the last 10,000 years (since the end of the last ice age) we have lived in a relatively warm period with stable CO2 concentration. Humanity has flourished during this period. Some regional changes have occurred – long-term droughts have taken place in Africa and North America, and the Asian monsoon has changed frequency and intensity – but these have not been part of a consistent global pattern.

The rate of CO2 accumulation due to our emissions in the last 200 years looks very unusual in this context (see chart above). Atmospheric concentrations are now well outside the 800,000-year natural cycle and temperatures would be expected to rise as a result.

Moreover, the IPCC in 1995, in its second assessment report included a sentence that hit the headlines worldwide:

“The balance of evidence suggests a discernible human influence on global climate”

By 2001, IPPC’s third report was even clearer:

“There is an new and stronger evidence that most of the warming observed over the last 50 years is attributable to human activities.”

By 2007, in it’s fourth report, IPCC spoke more strongly still:

“Human induced warming of the climate system is widespread”

In 2013, in the 5th Assessment Report, they stated,

“It is extremely likely that human influence on climate caused more than half of the observed increase in global average surface temperature from 1951 to 2010”

Human activity has led to atmospheric concentrations of carbon dioxide, methane and nitrous oxide that are unprecedented in at least the last 800,000 years.

There is, therefore, a clear distinction to be made between what is “natural variability” and what is our contribution.

“The amount of warming is insignificant…”

 

screen-shot-2017-01-18-at-12-28-35-pm

The European Geosciences Union published a study in April 2016 that examined the impact of a 1.5°C vs. a 2.0°C (bear in mind we are at 0.8°C now, without the slightest chance of slowing down) temperature increase by the end of the century. It found that the jump from 1.5 – 2°C, a third more of an increase, raises the impact by about that same fraction, on most of the natural phenomena the study covered. Heat waves would last around a third longer, rain storms would be about a third more intense, the increase in sea level would be that much higher and the percentage of tropical coral reefs at risk of severe degradation would be roughly that much greater.

But in other cases, that extra increase in temperature makes things ever more dire. At 1.5°C, the study found that tropical coral reefs stand a chance of adapting and reversing a portion of their die-off in the last half of the century. But at 2°C, the chance of recovery disappears. Tropical corals are virtually wiped out by the turn of the century.

With a 1.5°C rise in temperature, the Mediterranean area is forecast to have about 9% less fresh water available. At 2°C, that water deficit nearly doubles. So does the decrease in wheat and maize harvest in the tropics.

Bottom line: It may look small but it’s a huge deal.

“The benefits will outweigh the problems”

 

When people talk of alleged benefits of climate change, they are usually talking about agriculture. The argument says that the increased concentrations of CO2 will give a boost to crop harvests leading to larger yields.

This is laughable

Climate change will slow the global yield growth because high temperatures result in shorter growing seasons. Shifting rainfall patterns can also reduce crop yields. Climate trends are already believed to be diminishing global yields of maize and wheat. These symptoms will only worsen as temperatures and extreme weather events become more common. If climate change is allowed to reach a point where the biophysical threshold is exceeded, as would be the case on current emission trajectories, then crop failure will become normal. Also, the severest risks are faced by countries with high existing poverty and dependence on agriculture for livelihoods. Even at “low” levels of warming, vulnerable areas will suffer serious impacts.

  • Sub-Saharan Africa, according to the World Economic Forum, at 1.5°C warming by 2030 would bring about a 40% loss in maize cropping areas;
  • South East Asia, in a 2°C would experience unprecedented heat extremes in 60%-70% of their areas.

Agricultural productivity is at risk, not only in developing countries but also in breadbasket regions such as North and South America, the Black Sea and Australia.

Moreover, in October 2015, a study published in Nature estimated that the world could see a 23% drop in global economic output by 2100 due to a changing climate, compared to a world in which climate change is not taking place. The coauthor of the study had this to say,

“Historically, people have considered a 20% decline in global GDP to be a black swan: a low-probability catastrophe – Instead, we’re finding it’s more like the middle-of-the-road forecast.”

Technology will come to the rescue…”

Deniers who make this case seemingly acknowledge climate change, yet they are optimistic believers in technology being the be-all end-all and that geo-engineering will save us from the clutches of global warming.  There are two things I find problematic about this approach:

  1. I think this argument is akin to the “We almost discovered nuclear fusion- we’re only 20 years away!” argument, which stipulates that the nuclear fusion is at any given point in time 20 years away. It takes into account that we have not developed the appropriate technologies to “save” us from climate change, and when we do, there is still a maddening lag between the innovation and deployment. Not to mention the fact we still have not identified which technologies can do the greatest good in the shortest time so we cannot fly blindly in a vague hope that tech will rescue us;
  2. Such an approach fights the “symptoms” of climate change, not the cause of it, meaning that it entrenches our extremely wasteful and inefficient ways that have brought on climate change in the first place.

None of this is to say that I do not believe that technology will play a pivotal role in our transition, of course, it will! But we cannot afford to rely entirely on waiting for carbon capture and storage and the likes to become a deployable and scalable economic reality.

“We shouldn’t wreck the economy to fix the problem when it’s still uncertain!”

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When you really get down do it, people will just tell you what their ultimate bottom-line is. If we don’t know with absolute confidence how much you warmer and what the local and regional impact will be perhaps we’d better not committing ourselves to costly reductions in greenhouse gas emissions.

I have written a post on the employment benefits tied to jobs in the renewable energy sector, and there are a plethora of studies pointing to the huge costs of climate change inaction, amongst these, a new study by scholars from the LSE, published last year in Nature Climate Change, offers a daunting scenario.

They estimate that a business-as-usual emissions path would lead to expected warming of 2.5 degrees C by 2100. Under that scenario, banks, pension funds, and investors could sacrifice up to $2.5 trillion in value of stocks, bonds, and other financial assets. The worst-case scenario, with a 1% chance of occurring, would put $24 trillion (about 17 % of global financial assets) at risk.  This is but one of the scenarios that have been studied, that point to the huge costs of inaction.

Climate change can affect the economy in myriad ways; including the extent to which people can perform their jobs, how productive they are at work, and the effects of shifting temperatures and precipitation patterns on things like agricultural yields or manufacturing processes. These factors help determine our “economic output” — all the goods and services produced by an economy.

In spite of the fact that there is disagreement on how much exactly economies will be affected, we know the cost of inaction will be immense. With the information at our disposal, it would be foolish and dangerous to assume that reducing emissions will cost more than coping with a changing climate.

Good luck with your “debate” and let me know how it goes.

Trend #1: Investment in Renewable Energy 2015

Old critiques, die hard. For the longest time, renewable energy (RE) has been viewed as too expensive and un-scalable, as a luxury energy source, that will not be deployed in developing countries. As a matter of fact, how many times did you hear the criticism, that by diverting investment away from so-called “cheap” fossil fuel energy, we would be depriving developing countries of their right to develop?

The numbers quantifying investments in RE are in! It should be no surprise that RE investment is increasing significantly and the developing world, especially China, is leading the way.

The findings of the United Nations Environment Programme (UNEP) Global Trends in Renewable Energy Investments 2016 confirmed that RE set new records in 2015 for dollar investments, the amount of new capacity added and the relative importance of developing countries in the context of that growth.

Record-breaking uptrend in Renewable Energy Investments

Global investment in RE rose 5% to $285.9 billion from 2014 to 2015, breaking the previous record of $278.5 billion reached in 2011 (FYI that’s double the dollar allocations to new coal and gas generation, which was an estimated $130 billion in 2015) when the famous ‘green stimulus’ programs in German and Italian were in full throttle. The figure below shows that the 2015 investment increased sixfold since 2004 and that investment in RE has not been below $230b since 2010.

GLOBAL NEW INVESTMENT IN RE BY ASSET CLASS, 2004-2015, $BN

global-investment-in-re-asset-class-2004-2015-b
Source: UNEP, Bloomberg New Energy Finance

*Asset finance volume adjusts for re-invested equity. Total values include estimates for undisclosed deals.

Over the course of the 12 years shown in the chart, the cumulative RE investment has reached $2.3 trillion.

Moreover, in 2015 some 134GW of RE excluding large hydro were commissioned, equivalent to some 53.6% of all power generation capacity completed in that year – and this is worth mentioning because it is the first time it has represented a majority. Of the renewables total, wind accounted for 62GW installed, and solar photovoltaics 56GW, highest ever figure and sharply up from their 2014 additions of 49GW and 45GW respectively.

Developing Countries Leading the Way

The investment which led to record-breaking levels came from China, which lifted its investment by 17% to $102.9 billion, about 36% of the global total. In the Middle East and Africa, investment was up a total of 58% at $12.5 billion, helped by project development in especially in South Africa and Morocco; and in India, up 22% at $10.2 billion.

More significantly, 2015 was the first year in which investment in RE (excluding large hydro) was higher in developing economies than in developed countries. The figure below shows that the developing world invested $156 billion last year, some 19% up on 2014 and a remarkable 17 times the equivalent figure for 2004, of $9 billion.

INVESTMENT IN RE: DEVELOPED/ DEVELOPING COUNTRIES, 2004-2015, $BN

global-new-investment-in-re-developed-vs-developing
source: UNEP, Bloomberg

The key contributors to this shift from developed to developing are the big three: China, India, and Brazil, who saw an investment rise of 16% to $120.2 billion

A large part of the record-breaking investment in developing countries took place in China. Indeed China has been the single biggest reason for the strong increasing trend for the developing world as a whole since 2004. In spite of low market fundamentals and much talk of decreased investment in RE, China has been a key contributor to these figures. China invested $102.9 billion in 2015, up 17%, representing well over a third of the global total.

Likewise, India enjoyed a second successive year of increasing investment, breaching the $10 billion for the first time since 2011.

Other developing countries, excluding the big three, lifted their investment by 30% last year to an all-time high of $36 billion, some 12x their 2004 investment, the biggest players are:

  • South Africa also deserves an honorable mention as it’s RE investment is up 329% at $4.5 billion significantly ramping up their solar PV, in the context of their auction program. In June last year, the government in Pretoria launched a tender for an additional 1.8GW for its renewables program. One of the signal deals later in the year was the financing in September of the 100MW Redstone solar thermal project for an estimated $756m, helped by loans from the World Bank’s International Finance Corporation and Overseas Private Investment Corporation of the US;
  • Mexico saw a 105% increase at $4 billion, aided by investment from the development bank Nafin for 9 wind projects. Moreover, Mexico is emerging as an important location for bond issues to back renewable energy projects. In November last year, National Financiera issued $500 million worth of five-year bonds to contribute towards the development of nine wind farms with a total capacity of 1.6GW;
  • Chile saw an increase of 151% higher at $3.4 billion, thanks to a sizable uptrend in solar project financings;
  • Morocco, Turkey, and Uruguay also saw investment increases in excess of the $1 billion milestone in 2015.

Developed world downward trend (mostly)

In the developed world, however, we are witnessing a downward trend quite consistently, since 2011, when it peaked at $191 billion, some 47% higher than the 2015 outturn. Developed countries invested $130 billion in 2015, down 8% and their lowest figure since 2009. This decline is due to two major factors:

  1. because of the US, where firstly; there was a rush of investment in 2011 as projects and companies tried to catch the Treasury grant and Federal Loan Guarantee programmes before they expired and secondly, the US Supreme Court’s decision in February 2016 to allow all legal objections to the Environmental Protection Agency’s Clean Power Plan to be heard before it can be implemented may be deterring investment in 2016.
  2. but much more to do with Europe, where allocations fell by 60% between 2011 and 2015. That big drop was caused by a mix of factors including retroactive cuts in support for existing projects in Spain, Romania and several other countries, an economic downturn in southern Europe that made electricity bills more of a political hot potato, the cut of government subsidies aimed at incentivizing RE in Germany and Italy, and the big fall in the cost of PV panels over recent years.Italy, in particular, saw renewable energy investment of just under $1 billion, down 21% on 2014 and far below the peak of $31.7 billion seen during the PV boom of 2011.

Retroactive cuts to feed-in tariffs really weaken support for solar energy investments. Spain, scene of particularly painful retroactive revenue cuts imposed by the government during the 2011-14 period, and the end of all support for new projects, saw investments of just $573 million in 2014. This was slightly up on the previous year but miles below the $23.6 billion peak of 2008.

But it’s not all bad in Europe, especially since the UK has not seen a significant slowdown in RE investments in recent years, and is actually pushing in the opposite direction. Moreover, in spite of the fact that offshore wind in the North Sea has seen massive investments amounting to $17b, Europe’s aggregate RE investment is still in decline.

The Siemens-Gamesa Merger

Following several rounds of consolidations by their competitors in the energy sector including General Electric’s purchase of Alstom’s energy business and a merger between Germany’s Nordex and Spanish rival Acciona Wind Power, Siemens and Gamesa have announced their merger.

Siemens and Spain’s Gamesa agreed last week to merge to create the world’s biggest manufacturer of wind farms, with the German company paying 1 billion euros ($1.13 billion) for a majority stake in the combined business. The combined group’s order portfolio would be worth some 20b euros. The merged business will have 21,000 employees, an installed power base of 69 gigawatts.

Before the merger

Before their merger, Siemens had an 8% share of the global wind turbine market, according to data from FTI Consulting, which made it the second-biggest manufacturer after Denmark’s Vestas, which had a share of nearly 12%.

But Gamesa’s relatively small 4.5% market share put it steadily behind other large players, such as China’s Goldwind, which has been growing internationally into fast-growing renewable energy markets in Latin America, as well as the parts of the US and Europe.

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Wind Turbine Manufacturers by Market Share 2015,
www.statista.com 

The Siemens-Gamesa merger

The Siemens-Gamesa merger would create a new global market leader in wind energy by capacity, surpassing China’s Goldwind, Denmark’s Vestas and General Electric, according to FTI Consulting.

The merger is broadly considered a win-win in that this move would bring together Siemens’ strength in offshore wind power in mature markets and Gamesa’s leading role in emerging markets.

Each has their own competitive advantage

More specifically, Siemens operates in the mature North American and European markets and whereas Gamesa’s turf are the fast-growing markets such as India, Mexico, and Brazil. 

Moreover, Siemens’s wind division, which had almost €6 billion in revenue in 2015, manufactures and installs wind turbines for on- and offshore farms. But the business has been largely focused on the offshore market—where it has a large order backlog for turbines—while fumbling on onshore growth opportunities. Gamesa is also a major player across South America, where it expanded when the Spanish government cut subsidies to clean energy producers in 2013 as well as China and India, where it is the number one foreign producer.

Siemens is known to all of us as a quality engineering company (whose other products include trains, medical body scanners, and technical instruments), but it has struggled to make its wind turbine business profitable. After the merger, it will take a 59 % stake in the company but it will not have a majority on the board but will have five out of the 13 board members in the new group.

Their deal states that in return for Siemens becoming majority shareholder, Siemens will pay Gamesa’s shareholders, which include Spanish utility firm Iberdrola, 1b euros in cash in the form of an extraordinary dividend.

The businesses will be combined within Gamesa which will retain its Madrid headquarters. The Spanish group is creating new shares to be offered to Siemens.

Gamesa has further affirmed that the merged business will be operational by March- April 2017  and will be worth 230m euros of earnings before interest and taxes (EBIT) within four years due to the cost and savings strategy that is being implemented. The idea is that getting bigger would also help to lower costs, one of the industry’s key targets in its race for more efficient turbines, which in turn will make it more competitive.