Part II: The Project Finance Checklist ✔️

I already wrote about why renewable energy companies are using project finance for their energy infrastructure projects here, be sure to check it out before reading this.

Given the fact that project finance is often an expensive and complicated undertaking, it becomes fundamental to figure whether project finance is a realistic opportunity for a renewable energy project. Keep in mind the following considerations:

  1. Size:  Is the project large enough to make PF worthwhile? Banks won’t go through the hassle of PF for small projects, bear in mind that although project finance size varies from country to country, we’re looking at $50m to $100m as being in the ballpark. If the project is too small, both lenders and sponsors will be put off project finance;
  2. Establish Realistic Revenue Streams: Since there are two primary sources of revenue for investors, public funds and the other is revenue streams in the form of charges, paid by end users, sponsors and lenders must figure out what that revenue stream will look like. Will the revenue stream be big enough to support the high debt financing taken by the sponsors?
  3. Length of Project: PF is a long term investment spanning 10-15-20 years so there will be a long payback period;
  4. Physical Assets: Will there be physical assets (solar panels, wind turbine) sufficient to ensure lender repayment in case of default? Banks are going to want more “guarantees”, what is the above-mentioned revenue streams doesn’t come through will they will be able to foreclose on the project’s assets sufficient in value to “make themselves whole,” either by selling the project outright or operating it until the debt is repaid;
  5. Tech Risk: Renewable energy is a very innovative and competitive sector, so tech is evolving quickly. While in many project financings, the tech may be relatively new, generally speaking, project finance lenders do not want to be the first to finance an unproven technology. This is not venture capital. A history of successful use in some context will often be necessary to secure project financing;
  6. Quality of the Contract Network: At the end of the day, project finance is a web of contracts between different parties. It is important to know if the project company has contractual relationships with reputable companies for services key to the success of the project or the technology it employs? Banks will be less keen on lending to a project the success of which depends solely on a few star individuals who may depart, leaving the project unable to meet its potential, so credible contracts are very important;
  7. Receipt of Revenue: In that regard, will the receipt of revenue be enforceable under contractual rights from a creditworthy party? If there is no contract or if the creditworthiness of the purchaser is not credible, this will trigger concern for banks  and set off thorough(er) due diligence procedures regarding revenue projections;
  8. Exit Options: What are the ultimate objectives of the sponsors? Are they looking for a quick exit option, do they want to jump ship? Know that once the project is “project financed” and the contracts are in place, divestiture opportunities are complicated by the requirement of the bank consent, and potential purchasers will be thoroughly examined by banks for development and operational expertise as well as creditworthiness;
  9. Risking the Project: In other words, once project financing is completed, the Sponsor will lose the ability to determine how the vast majority of the project’s revenue is spent. In the event a project becomes uneconomic and unable to service its debt, the only option besides refinancing the debt may be to turn over the project to the lenders (voluntarily or involuntarily), with the loss of the Sponsor’s investment in the project.

You may be interested in Part I: Project Finance 

For more check out: https://www.wsgr.com/PDFSearch/ctp_guide.pdf

What’s (not) happening with Algae Biofuels

Next generation algae biofuel is a fuel derived from growing synthetic (genetically modified) algae and decomposing it to extract oils that can be used to substitute conventional petroleum. It is (was?) envisioned principally as a fuel for vehicles and aircraft and therefore as a possible replacement for gasoline/kerosene.

Before we go any further, any discussion on the viability of algae biofuels needs to be framed along these points:

  • Can biofuels from algae compete on price with fossil-derived petroleum?
  • Is it carbon neutral, emitting only CO2that it absorbs first during growth?
  • Can it scale?
  • Does algae biofuel yield substantial energy relative to the energy inputs involved in its production? (Energy Return on Energy Invested)

Basically, you’re asking yourself: is it better than what’s already out there?
The answer is: Nope, at least for now.

The Value Proposition of Algae Biofuels

Potentially the most promising of biofuel technologies, algae set themselves apart from all other biofuel feedstocks, for the following reasons:

  • Algae do not compete with farmland & water: Algae have been shown to thrive in polluted or salt water, deserts and other inhospitable places, bypassing the age old (and legitimate) problem which has plagued the development of conventional biofuels.
                                     Optimum land for growing biofuel sustainably

    ATAG
    Source: ATAG

    Circle sizes are estimates of potential locations for new generation biofuel feedstock production.

  • They do not have an impact on food prices: Since conventional biofuels like corn and sugar are also used as food for us, and farmers can get better prices for their corn and sugar if they sell them to biofuel refiners, leading to volatile food prices. Hartmut Michel, Nobel Prize winner, explains, that when you have “energy plants” competing with food plants, we are all worse off.
  • They feed off CO2: According to Jansson, Wullschleger, Kalluri, & Tuskan, human activities are responsible for an annual emission of 9 gigatons of carbon (33 gigatons of CO2). Whilst terrestrial and oceanic systems manage to absorb 3 and 2 gigatons respectively, leaving the remaining 4 gigatons in the atmosphere making algae ideal for carbon capture from sources like power plants.
  • Fast Oil Production Rate: One of the biggest advantages of algae for oil production is the speed at which they can grow. Some studies estimated that algae produce up to 15 times more oil per square kilometer than others pointed to algae strains that produced biomass very rapidly, with some species doubling in as few as 6 h, and many exhibiting two doublings per day.

So the promise of algae oil is tantalizing: it’s like the silver bullet.

In a nutshell: scientists were meant to identify a strain of algae to be genetically modified to produce lipids (oils) very quickly while feeding on carbon dioxide from the atmosphere. The lipids would be harvested and converted into usable oil while they ducked carbon from the atmosphere. And all this was meant to be economical and scalable.

  🔥 From 2003-2012: The Hype Was On🔥

Turning pond scum into a petroleum-like fuel is both laborious and expensive, yet the end goal was very alluring. As Eric Wesoff ironically puts it, “dozens of companies managed to extract hundreds of millions in cash from VCs in hopes of ultimately extracting fuel oil from algae”.

Researchers and algae oil companies were making huge claims about the promise of algae-based biofuels; the U.S. Department of Energy caught on early and was also making big bets through its bioenergy technologies office; industry advocates claimed that commercial algae fuels were scalable in the near-term and investors jumped the gun.

In 2006, there were a meager handful of specialized companies devoted to commercializing algae biofuel. By 2008 there are over 200, most of which had been active for less than a year. While most of these were angel investor or venture capital backed, there were also some bigwigs that took a stab at developing algae biofuels, such as Shell, Johnson Mathey, General Atomic, Boeing, Honeywell, DuPont, BP, and others.

However, in spite of optimistic investors and bold promises, a few hard truths began to transpire.  It became clear that whilst the technology was indeed “promising”, scaling it in a time frame relevant to our needs at an economic price was not within reach, anytime soon.

Cracks began to show in investment patterns as Exxon Mobil decided to invest $600 million into a joint venture with Craig Venter’s Synthetic Genomics for research into algal fuels, which they quickly scaled back to $300m and then to $100m. Another star player, Sapphire Energy, an algae biofuel start-up, which raised over $100 million in venture capital, including from Bill Gates’ investment firm Cascade Investment, has pivoted away from algae fuel and is now producing omega-3 oils and animal feedstock, while the famous startup GreenFuel, which grew out of Harvard and MIT research, went bust blowing through $70 million.

In the meantime, the surviving algae oil companies have shifted their core business and “branched out” to produce more economically sustainable co-products, like supplements, algae cosmetic oil, pigments and animal feedstocks and products for the pharmaceutical and chemical industry. Here is a list of algae oil companies that have been forced to move away from algae oil.

 So what went wrong?

I think that many stakeholders were blindsided by the great potential of the technology. To date, no company has been able to grow algae at the large enough scale required to produce meaningful quantities of a fuel, affordably. While there are many hurdles, I identified these two main reasons:

  • The basic science behind its cultivation:
    • The first part of the life cycle of the algae turned out to be burdened by obstacles.  As companies developing these algae have attempted to scale up, problems emerged which they could not have anticipated, including the emergence of competitor algae, predators such as microscopic animals that ate the algae, the occurrence of algae diseases in the form of bacteria and fungi and temperature fluctuations, which could kill the algae.
    • Whilst algae can grow quickly, the can do so only in the presence of sufficient nutrients. Algae can obtain carbon, their primary nutrient from atmospheric carbon dioxide, but the amounts present are insufficient to promote the rapid growth that was observed under lab conditions. That requires something more than 10% CO2 concentration in the atmosphere and in fact some of the earliest attempts to grow algae as a fuel source were predicated upon the development of pervasive industrial carbon dioxide capture.

  • Energy Return on Energy Invested:
    Researchers who looked at life-cycle analysis and the EROI/EROEI found algae biofuels would not have a positive energy balance, in other words, you’d have to put more energy in cultivating, harvesting, refining and transporting the algae biofuel than you would get out of it once it’s burned.

    c458bd8454b21bcc39f8255059793d11aabdc4f7
    EROI is a straightforward and simple concept to get your head around, and it is defined as the energy contained in one unit of fuel divided by the total nonrenewable energy required to produce one unit of fuel. It’s a way of getting a handle on how energy-efficient your energy production is.

    The breakeven point is 1. When the EROI is 1 there is no return on the energy invested, and the entire investment has been wasted. When the EROI ratio is higher, it also signals that the energy from that source is easy to get and cheap. Conversely, when the number is small, the energy from that source is difficult to get and expensive.

    Now, I will be the first to admit that there is no consensus on the methodology used to calculate either Life Cycle Analysis or EROI, making calculations on it is somewhat abstract. In part, it depends on what one counts as an “input”, and neither energy companies nor biofuel producers report detailed information on their energy consumption, resulting in researchers generating assumptions in order to calculate them.  To calculate the energy input, researchers have to make an estimate based on the dollars spent on various processes and goods, which means that two reports calculating EROI will likely yield different results, because of the different variables used.

    In spite of this ambiguity, The National Academy of Sciences (Chapter 8 NAS 2012) concludes: “An energy return on investment (EROI) of less than 1 is definitely unsustainable. An algal biofuel production system would have to have or at least show progress toward EROI within the range of EROI required for the sustainable production of any fuel (Pimentel and Patzek, 2005). Algal biofuels would have to return more energy in use than was required in their production to be a sustainable source of transportation. Microalgal fuels use high-value energy inputs such as electricity and natural gas. If these high-quality energy sources are downgraded in the production of algal fuels, it is certainly a sustainability concern that can only be truly understood through careful life-cycle analysis. EROI of 1, the breakeven point, is insufficient to be considered sustainable. However, the exact threshold for sustainability is not well defined. Hall (2011) proposed that EROI greater than 3 is needed for any fuels to be considered a sustainable source. EROI can be estimated with an LCA that tracks energy and material flow”.

    Here is a look at the available literature on Algae EROI:

    EROIbio.PNG
    Source: Quantitative Uncertainty Analysis of Life Cycle Assessment for Algal
    Biofuel Production, 2012

The studies that gave algae biofuel a positive EROI depended on co-products (something produced along with a main product which carries equal importance as main product, for the pharmaceutical, animal feed, and chemical industry) to tip the balance from a negative energy return to a positive.  But the Department of Energy pointed out “if biofuel production is considered to be the primary goal, the generation of other co-products must be correspondingly low since their generation will inevitably compete for carbon, reductant, and energy from photosynthesis…and coal-fired power plant carbon dioxide”.

So far, nobody has been able to make fuel from algae for a cost anywhere close to cheap, let alone competitive. Companies are trying to overcome these problems, but we will not be seeing companies selling large amounts of algae biofuels anytime soon.

tl:dr -> Cool idea, but due to unreliable cultivation methods, large nutrient requirements (of carbon, nitrogen, and phosphorus), low EROI, high capital costs, and competition from below $50 petroleum, the technology isn’t close to being ready.


 

Reading up on the EROI was very interesting so you might be keen on it too. Check out the following sources:

Peakoil.com,. (2014). EROEI as a Measure of Biofuel Effectiveness

Epa.gov. (2010). Renewable Fuel Standards Program Regulatory Impact Analysis Office of Transportation and Air Quality: The United States Environmental Protection Agency.

Inman, M. (2014). Behind the Numbers on Energy Return on Investment.

 

 

 

 

The Energy Infrastructure That the U.S. Really Needs

A power grid is what transmits electricity from where it is made to our homes because electricity cannot be stored (efficiently…yet).

There are thousands of power plants that generate electricity using solar, wind, gas or coal. These generating stations produce electricity at a certain electrical voltage. Conventionally, this voltage is then “stepped-up” (increased) to very high voltages, to increase the efficiency of power transmission over long distance and minimize the dispersion of energy. Once this electricity gets near your town, the electrical voltage is “stepped-down” (decreased) in a utility substation to a lower voltage for distribution around town. As this electrical power gets closer to your home, it is stepped-down by another transformer to the voltage you use in your home. This power then enters your home through your electrical meter. All of this is very good, but given the evolution of energy production, it needs to modernize to meet consumer preferences and environmental requirements.

Enter the smart grid.  The core premise of a smart grid is to add monitoring, analysis, control, and communication capabilities to the grid to maximize the throughput (the maximum rate of production) of the system while reducing the energy consumption. A smart grid entails technology applications that will allow an easier integration and higher penetration of renewable energy, facilitating homeowners and businesses that wish to put their privately-produced energy on the grid. It will be essential for accelerating the development and widespread usage of plug-in hybrid electric vehicles (PHEVs) and their potential use as storage for the grid. Smart grids will allow utilities to move electricity around the system as efficiency and economically as possible.

Essential to efficient use smart grids are smart meters:  Smart meters help utilities balance demand, reduce expensive peak power use and provide better prices for consumers by allowing them to see and respond to real-time pricing information through in-home displays and smart thermostats. For example, you may want to run your dryer for 5 cents per kilowatt-hour at 22:00 pm instead of 17 cents per kilowatt-hour at 18:00 pm in the evening, when demand (and price) is highest. Consumers will have the choice and flexibility to manage your electrical use while minimizing costs.

The need for a smart grid is increasingly recognized by US policymakers at all levels of government, as ways to improve the energy efficiency of producing and using electricity in our homes, businesses, and public institutions become an entrenched imperative. Many believe that a smart grid is a critical foundation for reducing greenhouse gas emissions and transitioning to a low-carbon economy. Certainly, PHEVs and renewable energy have been of great interest to Congress.

In light of this brief introduction, I came across Ethan Zindler’s prepared testimony before the senate Committee on Energy and Natural Resources, here is the meat of what he had to say:

Before I get to my main points, a quick note about “infrastructure”. In the current climate, this term has become a Rorschach test of sorts representing different things to different constituent groups. In the case of energy, infrastructure can encompass a broad scope, including, among other things, building power-generating facilities, expanding oil and gas distribution pipelines, or hardening local power grids.

Those topics are worthy of discussion and I know my fellow panelists will shed light on them. However, my testimony today will focus on the next generation of energy technologies and the infrastructure that will be critical to accommodate them.

The U.S. is transforming how it generates, delivers, and consumes energy. These changes are fundamentally empowering business and home owners, presenting them with expanded choices and control. Consumers today can, for instance, analyze and adjust their heating, air-conditioning, and electricity use over their smart phones thanks to smart meters and smart thermostats. And they can make efficiency improvements through advanced heating and cooling systems and innovative building materials and techniques.

Consumers in much of the country can choose their electricity supplier and may opt for “green choice” plans. They can produce power themselves with rooftop solar photovoltaic systems. They can even store it locally with new batteries.

Consumers can choose to drive vehicles propelled by internal combustion engines, electric motors, or some combination of both (hybrids). That car can be powered by gasoline, diesel, electricity, ethanol, or perhaps even methanol, natural gas, or hydrogen. And electric vehicle drivers who own homes can turn their garages into fueling stations simply by using the outlet on the wall.

Now, realistically speaking, few Americans today have the inclination or income to become high-tech energy geeks. But that is changing as prices associated with these technologies plummet. In the case of electric vehicles (EVs), such cars can be appealing simply because they perform better.

We at BNEF believe that further growth and eventual mass adoption of these technologies is not possible, not probable, but inevitable given rapidly declining costs.

For instance, the price of a photovoltaic module has fallen by 90 percent since 2008, to approximately $0.40 per watt today. For millions of U.S. businesses and homeowners, “going solar” is already an economic decision. Last year the U.S. installed far more solar generating capacity than it did any other technology.

By the end of the next decade, cost competitiveness for distributed solar will arrive most places in the US – without the benefit of subsidies. We expect the current installed base of US solar to grow from approximately 3.6 percent capacity to 13 percent by 2030 then to 27 percent by 2040.

Similarly, the value of contracts signed to procure U.S. wind power have dropped by approximately half as the industry has deployed larger, more productive turbines. We expect current wind capacity to at least double by 2030.

Many of these new energy technologies are, of course, variable (no wind, no wind power; no sun, no solar power). Thus the growth in these and other new energy technologies will be accompanied by unprecedented sales of new batteries of various shapes and sizes.

Utilities such as Southern California Edison Co and others have already begun piloting large-scale batteries in certain markets while providers such Stem Inc and Tesla Inc offer “behind-the-meter” storage for businesses and homeowners.

In the past five years, lithium-battery prices have fallen by at least 57 percent and we expect a further 60 percent drop by 2025. That will contribute to 9.5GWh/5.7GW of battery capacity in the U.S. by 2024, up from 1.7GWh/0.9GW today.

Continuing battery price declines will also make electric vehicles (EVs) for the first time a viable option for middle-class US consumers without the benefit of subsidies. Last year, EVs represented 0.8 percent of global vehicle sales. By 2030, we anticipate that growing to one in four vehicles sold.

The most popular place to fuel such cars could be augmented gasoline stations… or the local grocery store, or simply your garage.

The changes we’ve seen to date are giving U.S. energy consumers unprecedented opportunities to manage, store, distribute, and even generate energy. However, the new, empowered consumer poses inherent challenges to the traditional command-and-control / hub-and-spoke models of conventional power generation and power markets. Already, we have seen examples around the globe where incumbent utilities were caught flat-footed by rapid clean energy build-outs.

In some cases, it has been heavy subsidies for renewables that have catalyzed the change. But more recently, simple low costs are allowing wind and solar to elbow their way onto the grid.

So, where does “infrastructure” fit into this changing energy landscape?

First, conceptually, we must accept that the empowered consumer is here to stay. To some degree, this acceptance is already underway in the private sector where companies that once focused mainly on large-scale power generation are merging with consumer-facing utilities, or buying smaller solar installers and battery system providers.

Second, policy-makers should seek to promote infrastructure that accommodates a new, more varied, more distributed world of energy generation and consumption. Most immediately, this can mean supporting greater deployment of so-called smart meters. To date, the U.S. has installed almost 71 million of these devices, which enable better communication between energy consumers and utilities. Compare that to Italy where all consumers have such meters and are now receiving a second generation with more advanced functionality, or China which has installed 447 million units, across almost its entire urban population.

Policy-makers may also seek to facilitate the development of high-voltage transmission across state lines. It has long been an adage that the Great Plains states represent the “Saudi Arabia of wind”, given the exceptional resources there. To some degree, those states might as well be in Saudi Arabia, given the major challenges of building transmission that would move electrons generated there to more densely populated states in the east or west. The US has added approximately 1.5GW of high-voltage direct current transmission since 2010. By comparison, China has added 80GW over that time.

Investment is needed at lower voltages too. Our passive, one-directional, electricity distribution system is under strain as new distributed generation capacity comes online. In addition, policy-makers might also consider ways to expand support for EV charging stations. As sales of such cars grow, consumers are already putting greater pressure on certain distribution nodes around the country. Ensuring that EV “fuel” demand is managed in an orderly manner will be important.

Finally, the changes afoot and to come will require what might best be described as infrastructure “software”. Most importantly and pressingly, this must include the reform of electricity markets to take into account the new realities of 21st Century power supply and demand.

It may also include expanded programs to educate energy professionals on the new realities of modern energy markets. And, yes, it could include more software to improve energy monitoring and optimize system performance.

In closing, I would reiterate that none of this need be done at the exclusion of investing in traditional energy infrastructure where the needs are also pressing. However, any rational discussion about energy infrastructure investment today must do more than take into account the current situation. It must also consider where we will be tomorrow.

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

capture
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.

 

☀️Sunny Saudi is Going Solar

There is a famous quote by Former Saudi Oil Minister from 1962-86 Sheik Zaik Yamani that people in (renewable) energy never tire of throwing out there,

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil” – Sheik Zaik Yamani

Sheik Yamani was no wishful thinker.

Energy shifts happen, in part because of poles pulling in different directions, not necessarily because of a lack of supply. There is plenty of oil in the ground and it is being extracted more cheaply and efficiently than ever before, yet the current environment is propelling Saudi Arabia (&Co)  into the opposite direction. 

Today, when someone mentions Saudi Arabia’s energy mix, what usually comes to mind is crude, crude and more crude, but come a few years this will change radically. With the nosedive that the oil price took in the last few years, Saudi Arabia is launching a massive renewable energy plan to try to replace some, if not all, of their energy needs.

The Plan

Newly appointed energy Minister Khalid al-Falih, a graduate of Texas A&M University and Chairman of Aramco, intends to launch an ambitious renewable energy program and is currently soliciting tendering bids. The program, which is to be officially launched “very soon” is expected to involve an investment of between $30 billion and $50 billion by 2023, he said at a press conference in Dubai.

solar-panel-tv
Minister al-Falih interviewed by CNN’s Becky Anderson @ ADSW 2017, Solarpv.tv

The plan involves the development of almost 10 gigawatts of renewable energy by 2023, starting with wind and solar plants across the sun-soaked northwestern desert. The effort has the potential to replace the equivalent of 80k barrels of oil a day now burned for electricity generation.

According to Bloomberg, bidders seeking to qualify to build 700 megawatts of wind and solar power plants should submit documents by March 20, and those selected will be announced by April 10, Saudi Arabia’s energy ministry said Monday in an e-mailed statement. Qualified bidders will be able to present their offers for the projects starting on April 17 through July.

The Kingdom intends to require all investors to invest in the local supply chain of goods and services, so as to render themselves more competitive.

🇸🇦The Kingdom’s Electricity Needs

Relying heavily on hydrocarbons as feedstock for the electricity sector, Saudi Arabia is by far the largest user of crude oil for power generation in the world. Oil accounts for two-thirds of the input into electricity generation, with natural gas providing most of the remaining portion, according to the Joint Organizations Data Initiative (JODI). During the prohibitively hot summer months, consumption of electricity increases as domestic demand for air conditioning rises. The Kingdom has recognized that this is both highly inefficient, expensive and unsustainable.

main
EIA, JODI

Saudi Arabia used an average of 0.7 million bbl/d of crude oil for power generation during the summers from 2009 to 2013, which is massive. To put this into perspective, that same period, Iraq and Kuwait, the next two largest users of crude oil for power generation in the Middle East, each averaged roughly 0.08 million bbl/d of crude burn. At the same time, net electricity consumption in Saudi Arabia has more than doubled since 2000.

Shifting the energy mix towards renewable energy would bring about several key advantages:

  1. Local Emissions Reductions: more on that later;
  2. Economics: The Kingdom has seen two years of budget deficit, and is looking at a $53b deficit moving into 2017. Stubbornly low oil prices have forced austerity measures on a country that is not associated with belt- tightening measures. In the context of the 2018 Aramco IPO prospected to raise $100b, it is clear that the economic tide is shifting. With the Kingdom’s main sources of income: oil exports, decreasing due to a number of economic factors, this leaves less for exporting and therefore less revenue. By shifting to renewables, they aim to free the crude currently being consumed domestically so they can export it, thus generating more revenue;
  3. Diversification: diversifying their investment portfolio away from oil is recognition that an economy based on the export of crude is, as demonstrated, highly vulnerable to prices drops and other external shocks.
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Price Oil Drop from 2014- Feb 2017

Saudi Arabia has boosted output for years to sustain export income while also satisfying domestic demand. Demand for refined fuels such as gasoline has doubled since 2003, according to JODI. Moreover, Saudi Arabia, the UAE, Qatar, Oman, and Bahrain have significantly reduced or eliminated fuel subsidies over the past year to limit government spending because of low oil prices. Brent crude is trading at $55 a barrel today compared to $112 per barrel between 2011 and 2014.

Domestic demand for oil increased by about 24,000 barrels a day in the first five months of 2016, the slowest growth rate for that period since at least 2010, the first year according to JODI.

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Bloomberg, 2016

Mario Maratheftis, chief economist at Standard Chartered Plc. said, according to Bloomberg, “Renewable energy is not a luxury anymore – If domestic use continues like this, eventually the Saudis won’t have spare oil to export.’’

Without alternative power sources, including gas and renewables, the kingdom would be forced to increase the amount of crude it burns, diverting it from exports. That can reach as high as 900,000 barrels a day during the kingdom’s summer months, according to data from the JODI.

Saudi Arabia has already taken steps to substitute natural gas for oil in power plants, a change that’s had “immense” impact on the crude burn, OPEC said in its Monthly Oil Market Report released in January. The use of crude for domestic power has fallen by nearly 1/3rd since the Wasit gas plant began operations in March 2016, according to the OPEC report.

300,000 Barrels

Saudi Aramco will bring online the similar-sized Fadhili gas project in the country’s east by the end of the decade. That gas project along with the renewable projects, planned for completion by 2023 could save about 300k barrels of oil from being burnt for power, according to estimates based on IEA and OPEC data.

According to Fabio Scacciavillani, chief economist at the Oman Investment Fund, “Alternative energies are a key factor in the economic transformation, this region has a great competitive advantage in low-cost energy production and that will continue with renewables. That will create a big advantage particularly in energy-intensive industries.’’

On top of that, the Saudis want to build nuclear reactors, a less ambitious program that would see 2.8 GW of new electric capacity.

The end goal is to generate 30% of the Kingdom’s electricity from renewable sources by 2030, with the remainder to come from natural gas and a small portion from nuclear.

Deputy Crown Prince Mohammed, at the forefront of promoting reforms and development in his country, said, “I think by 2020, if oil stops, we can survive…We need it, we need it, but I think in 2020 we can live without oil.”

The Tide is Turning to an Energy  Transition

It goes without saying that the primary reason the Saudis are shifting to renewables is economics rather than emissions, yet we can still predict some emission reductions.

It is clear that the Kingdom does not expect oil prices to increase above $100 like it was a few years ago. They know that the days when they would squeeze massive economic rent out of oil have passed. Their long-term objective is to ensure the future competitiveness of their oil in a global environment where paradoxically, fossil fuels are abundant and renewable energy has a higher penetration, while still decarbonizing their energy sector.

This takes me back to Sheik Yamani’s prediction. It is not so much that the Kingdom is physically running out of oil to sell as much as the energy environment is changing. The supply is outpacing demand and oil is just not as profitable as it was. The hammer blows of energy efficiency, renewable energy, and global economic trends are forcing a transition to better options.

Sheik Yamani’s prediction is coming to life.

 

The Employer of the Year is….(Renewable Energy)

I have heard it said:

“The [traditional] energy system employs millions of people!”

“Renewables will create massive job losses!”

“Fossil fuels may not be good for the planet, but at least they employ millions!”

and last but not least:

“Green jobs are the miracle that never happened”

Far be it for me to assess whether green jobs were ever meant to be “miraculous”, but I will say that “green jobs”, defined by the US Bureau of Labor Statistics (BLS) as either “jobs in business that produce goods and services that benefit the environment or conserve natural resources” or as “jobs in which workers’ duties involve making their company’s production process more environmentally friendly or use fewer natural resources”, are increasing at unprecedented levels.

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Number of Jobs in Renewably Energy, Irena, 2016

The International Renewable Energy Agency (IRENA) published their annual report detailing employment in the IRENA’s 2016 report, (link here – to learn more about their methodology, I suggest you check it out) estimated total employment in the RE sector to amount to 8.1m people. Adnan Amin, director-general or IRENA commented on the report stating, “The continued job growth in the renewable energy sector is significant because it is in contrast to trends across the energy sector. The increase is being driven by declining RE technology costs and enabling policy frameworks.”

Most of these jobs are in China, Brazil, USA, India, Japan, Germany, Indonesia, France, Bangladesh, and Colombia.

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Renewable Energy Jobs by Country, Irena, 2016

Jobs in renewable energy increased by 18% from the estimates reported two years ago with a steady regional shift towards Asia.

In 2014, the Solar PV emerged as the largest employer in the energy sector accounting for 2.8 million jobs, an 11% increase from last year, and two-thirds of which were in China. Solar PV grew the most in USA and Japan while decreasing in Europe. Indeed, the global aggregate production of solar panels keeps increasing and pushing further into Asia, with lower costs of installations driving that accelerated growth. Global wind employment crossed the 1m job mark, fueled mainly by deployment in China, Germany, the USA, and Brazil.

Although, it’s good news (mostly) all around, the winner this year is:

🇨🇳Gold Medal: China

China has firmed up to be the leading renewable energy job market in the world, with 3.5m people employed. Domestic deployment and rising solar PV demand solidified that growth at 4% to 1.4m jobs. Chinese Solar PV jobs are focused on manufacturing (with 80%) following by installations and operations. The largest solar water heating technology industry and market are in China since they provide for both domestic and international demand. Half of the global wind jobs are in China, and more than 70% of those are in manufacturing.

Moreover, China is also is a leader in hydropower employment, as they add 75 GW of new projects between 2014-2017. Construction and installation account for 70% of the countries large hydropower employment.

Indeed, China has and installed 65 gigawatts more in renewable energy in 2015, shift the labor force from oil and gas, towards renewables. Now, China employs 3.5m people in renewable energy and only 2.6m in oil and gas, that 35% more people in RE than in oil and gas (coal excluded).

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Source: Irena, taken from Bloomberg

Although the lion’s share of the RE labor force is employed in manufacturing, this growth rate is likely to begin to contract, in spite of growth in technological deployment due to:

  1. market consolidation in favor of large suppliers/ manufacturers resulting in economies of scale;
  2. automation of process will make manufacturing more efficient, which will make it less labor intensive.

The runner up is:

🇺🇸Silver Medal: United States

Renewable energy jobs in the USA have increased at a historic pace, owing to large consumer demand and constantly declining prices of RE, especially solar. The Solar Foundation’s National Solar Jobs Census 2016 found that the solar industry accounts for 2% of all jobs created in the US over the past year, with the absolute number of solar jobs increasing in 44 of the 50 states. As of November 2016, there were 260k solar workers employed in America, “representing a growth rate of 24.5% relative to November 2015” according to the report.

This is great news all round since it signals that solar is receiving investments and creating thousands of high-skilled jobs, ultimately driving growth, strengthening businesses and reducing emissions (pollution) in cities. Moreover, wind recovered from a policy-induced slump in new installations and saw wind jobs rise by 43%.

Moreover, according to the annual U.S Energy Employment Report, published January 2017, more people are employed in solar power last year than in coal, gas, and oil combined. They report found that 43% of the total electric power generation workforce was employed in solar energy while fossil fuels accounted for a mere 22%. The report goes on to say that the US solar installation sector alone employs more than the domestic coal industry. Since 2014, solar installation has created more jobs than oil and gas pipeline construction and crude petroleum and natural gas extraction combined.

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Source: Department of Energy, BLS, taken from Bloomberg

The electricity mix in the USA is shifting decisively in the direction of renewable energy, driven by the transition from coal-fired power plants, to gas and now, steadily in low-carbon energy sources.

🇧🇷Bronze Medal: Brazil

Employment in RE in Brazil is concentrated in the cultivation and production of biofuels. I am aware that there is a huge debate regarding whether of not biofuels production (especially from sugarcane..etc) is considered a real “green job” but that is an argument for another day, but today, I will be counting them as green jobs.

With 821,000 jobs, Brazil continues to have the largest liquid biofuel workforce by far. Reductions of about 45,000 jobs in the country’s ethanol industry (due to the ongoing mechanization of sugarcane harvesting, even as production rose) were only partially offset by job growth in biodiesel. Biofuel production, especially in a developing country tends to be labor intensive, on account of inefficiency and poor access to technology, which have explained why those working in biofuels in Brazil are just under 1m people.

However, Brazils wind energy sector is growing rapidly, which power capacity expanding from 1 GW in 2010 to 6 GW in 2014. Moreover, while there was one mere wind power equipment manufacturer, there were ten in 2007, indicating the sector is maturing. Most of these jobs are in construction and manufacturing.

Brazil’s solar heating market is expanding strongly in the past decade. In 2013, there were an estimated 41k people employed, between manufacturing and installation.

🇪🇺Consolation prize: European Union

Owing to a mélange of adverse policy conditions, regulatory uncertainty and a sharp decrease in investment, the number of RE jobs in the EU declined from 1.25m to 1.2m. Germany, however, is the euro leader in terms of job, with 271k jobs in RE. This is more than double the runner-up, France, which is ahead of UK, Italy, and Spain. RE employment in France fell by 4%- primarily because solar PV installations dwindled by 45%). We are likely to see a shift, due to Denmark and the UK’s ambitious off-shore wind plans which will (if they go through with them) likely create expansion in the near future. The EU has been suffering consistent defeats against China in terms of lower manufacturing competitiveness and a weaker installations market, leading to a net decrease in solar jobs… for now.

“But Jobs!”

Growing awareness of the harmful effects of GHGs on the environment and on our health, coupled with consumer preferences are pushing investment into renewable energy, leading to logical increases in employment in RE.  Conversely, the tumbling price of oil has led to a slowdown of industry expansion (too expensive deep off-shore, arctic projects, and unconventional drilling) and the corresponding reduction in capital expenditure and operational expenditure has had significant effects on the oil and gas labor force.

I do not think that the “But what about the jobs!” argument to be complete without merit. But a growing trend and body of evidence point to the fact that potential job losses in the traditional energy sector can be compensated by green jobs, however, an argument runs in parallel with this reasoning. And that is the fact that energy jobs are geographically and personally specific, meaning you can’t plug a worker out of an oil field in Texas and jettison them into a solar PV role easily. Re-skilling, training, and compensation for job losses are some of the conversations we will have to have in the next few years.

Nevertheless, the writing is on the wall.


Cover picture: Alex Wong, Getty Images