Long-Term Clean Energy Optimism, Short-Term Caution
At the beginning of 2017, we drew an analogy between the clean energy sector and the great explorers of the 15th and 16th centuries, embarking on epic journeys, driven by the scale the opportunities they knew awaited them, but facing quite extraordinary danger and uncertainty.
Well, our battle-hardened fleet managed during 2017 to make some good progress towards Eldorado, despite all the storms thrown at it.
2017 looks certain to be the eighth successive year in which global clean energy investment has been in the range of $250 billion to $350 billion; there is a good chance that it will end up a touch higher than last year’s figure of $287.5 billion. Once again, we have seen substantial reductions in the cost of renewable energy, so that 2017 will certainly see another record for new capacity installations.
Prices agreed for renewable electricity at auctions around the world have continued to plummet, with the latest records held in photovoltaics by Mexico in November at an average of $20.77 per MWh, and in onshore wind also by Mexico, at an average of $18.60 – or, in you prefer, by India in October at $40.52 with no inflation indexing. In offshore wind, the U.K. auction in September saw projects for commissioning in 2022-23 win through with bids fully 50% below the 2015 auction.
2017 also saw relatively new markets break into the big league as destinations for clean energy investment, including Mexico ($5.6 billion in the first three quarters of 2017), United Arab Emirates ($2.4 billion in the same period), Argentina ($1.7 billion) and Egypt ($1.3 billion).
Another notable 2017 milestone was the record for the biggest renewable energy corporate power purchasing agreement ever – see number 8 in the break-out below – plus arguably the biggest wind farm repowering ever (the 350MW Wieringermeer project in the Netherlands) and, most importantly, the most solar capacity ever installed in one country in a year, namely an incredible 50GW-plus in China.
Electric vehicles made great progress in 2017, with this year likely to have seen EV sales globally surpass 1 million for the first time, a big leap from just under 700,000 previously (see box on our “10 Predictions”). More significant than the current numbers, however, were the announcements during the course of the year of planned bans on pure internal combustion engines – the Netherlands by 2030, India “within 13 years”, China by a so-far-undefined date in the future, the U.K. and France by 2040. EVs still make up less than 2% of global vehicle sales, but they are certainly starting to loom in the rear-view mirror of the internal combustion sector.
At BNEF this year, we raised our projection for EVs as a share of total light-duty vehicle sales in 2040 from 35% to 53%. We lifted our figure for wind and solar as a proportion of world electricity generation in 2040 from 30% to 34%. Clients can see more in our Long-Term EV Market Outlook, and New Energy Outlook. Other forecasting organizations such as the International Energy Agency and the big oil companies have moved in the same general direction on EVs and renewables, if not necessarily as far. The improving competitiveness of clean technologies, and the prospect of more cost reductions ahead, have prompted those changes.
At the start of the year we predicted a deepening debate about the implications of what we called “base-cost renewables” – renewables with levelized costs that are not just grid-competitive, but that significantly undercut the costs of all other sources of power. That debate has indeed intensified, fueled by the record-low costs of wind and solar that we saw during 2017.
The question is no longer about how to promote wind and solar to enable them to grab a small share of each electricity market, but how to reform the rules of the power system so that as much super-cheap but variable renewable electricity as possible can be integrated into it. “Market design” is the hot topic, and one we examined in a VIP Comment and White Paper back in May.
All in all, therefore, 2017 was a good year. We started by predicting that “our little flotilla will sail on – perhaps not serenely, but more or less as it did in 2016,” and so it turned out.
What about 2018? Maybe it is the short days and fading light of mid-December in the Northern Hemisphere, but it is hard right now to feel 100% relaxed about the next few years – even if the eventual direction for the world’s energy and transport systems seems more apparent than ever.
One reason is that progress towards renewables and low-emission transport can be accelerated, or just as often, held back by political forces. Promising new markets can go in, and then out, of the fast lane. South Africa, for instance, was a star of renewable power deployment via auctions, investing $15.4 billion in clean energy between 2012 and 2015. And yet, in 2017, investment is likely to end up at little more than $100 million, the victim of Eskom’s refusal to sign power purchase agreements with developers of new projects.
More seriously for the global picture, the Trump administration in the U.S. has not only set back international climate efforts by committing to quit the Paris agreement, but has been nibbling at the foundations of that country’s renewable energy boom. First, it proposed subsidies for generation sources that could keep 90 days of feedstock onsite (coal and nuclear), then the President got the chance to impose tariffs on imported solar cells, and finally the tax reform bill being discussed in Congress at one point threatened to undercut severely the all-important Production Tax Credit for wind and the Investment Tax Credit for solar. It appears – cross fingers – that the final version this week may more or less spare the PTC and ITC.
So far, those developments have not changed hard reality for renewables, but they have affected confidence. Whether by cunning coordination or not, the Trump administration’s broad program, from removing regulations on power station emissions, to tax and trade measures, and international diplomacy, all point in one direction – and that is to preserve the country’s ancient fleet of coal-fired power stations rather than decarbonize.
It is not just politics that provides inertia. The fact that vast amounts of coal-fired capacity are already installed around the world means that it is a struggle to change the mix in more than an incremental way, especially when that coal is plentiful. This year has seen the seaborne coal price extend its recovery from lows reached in 2016, and it has also seen the Global Carbon Project estimate that world CO2 emissions are likely to have increased by 2% in 2017, the first rise for four years.
There are also risks in the markets at the end of 2017 that, if they came to pass, could wash over the economy generally, and therefore indirectly over investment in clean energy and transport too. One is that the financial markets look more exposed than for many years, with interest rates rising or soon to start rising almost everywhere, and share prices sitting on top of a 19% gain on the S&P 500 Index in 2017 alone. In more idiosyncratic markets, bubbles seem to be the air, whether in art with a Leonardo da Vinci sold for $450 million, or in crypto-currencies with bitcoin up from $952 to almost $18,000 this year alone.
But let’s not be too cautious. It is the festive season after all. Clean energy and transport continue to enjoy powerful long-term trends in their favor. The pace of technological change is picking up, in particular in the areas of power storage and machine learning, after a decade in which change seemed to be mainly about scale, not about kind.
In January, perhaps cheered by the knowledge that the darkest part of the Northern Hemisphere winter will by then be receding, Bloomberg New Energy Finance will publish its 10 Predictions for 2018. In the meantime, a happy festive season and New Year to all our clients and friends!
BREAK-OUT: What happened to our 10 predictions for 2017?
Global investment to struggle
Well, we said that we thought 2017 would produce a similar figure for global clean energy investment to the previous year’s $287.5 billion, and that it would remain well short of the record set in 2015, of $348.5 billion. This looks likely to be right, with the first three quarters of this year producing a total just 2% ahead of the same period in 2016. And there have been some struggles this year – offshore wind investment being down sharply, so too public markets equity raising by clean energy companies. But, given the latest news on the 50GW Chinese solar boom this year, the risk is probably that the full-year total for 2017 ends up rather higher than we thought in January. We will give ourselves 8 out of 10 for this prediction.
Growth spurt for batteries, smart meters
We said that we expected battery storage added worldwide to jump from 700MW in 2016 to 1.5GW in 2017, and there to be a further 15% drop in lithium-ion battery prices. Our direction was right, but it looks like we might have over-clubbed it on installations and under-clubbed it on battery prices. BNEF’s final installation figure, still being crunched, is likely to be a bit below 1.5GW but there are plenty of projects that progressed during the year, set to break ground in 2018. Meanwhile battery prices, at an average of $207 per kWh, have fallen by a remarkable 24% since 2016, exceeding our January prediction. We will be generous with ourselves and say 7 out of 10.
Solar installations fall in China but rise worldwide
The second part was right, the first part emphatically not. The year is ending with our analysts estimating that more than 50GW of solar will have been added in China in 2017, a runaway record. We had expected a much more modest 21GW. There were some 75GW of PV capacity added worldwide in 2016, and our solar team now expects this to reach 92-97GW this year – far in excess of that installed by any other renewable or conventional generation technology. 3 out of 10.
Wind blows sideways
We got this one right. The latest forecast from our wind analysis team is for 56GW of onshore and offshore additions in 2017, up just 2GW from last year and some way below 2015’s record of 63GW. We also correctly predicted “fiercely” competitive bids in offshore wind auctions in Germany and the U.K. this year. 10 out of 10.
Coal and oil rallies peter out
We started the year with ARA seaborne coal at $70-a-tonne, and Brent crude oil at $57-a-barrel, both recovering from price slumps in 2014-16. Their recoveries have, in fact, gone on longer than we expected, with ARA coal now at around $89 and Brent at $64, reflecting in part the strength of the world economy during the year. Secular trends such as countries trying to reduce emissions, and the rise of electric vehicles, have been overshadowed at least in terms of these prices in 2017. Although this was a clear miss, prices have not risen to anything like the levels before the 2014 crash, and they remain far below where many mainstream forecasters had predicted. 3 out of 10.
U.S. gas prices remain firm
We also spluttered a bit with our gas price projection, as Henry Hub is finishing the year around $2.83 per MMBtu, down from $3.32 on January 3. We thought that new U.S. LNG trains and further coal-to-gas switching in generation would bolster demand, and they have. But producers have responded with increased output. Actually the natural gas price has been pretty steady in an unusually tight range during most of the year. 3 out of 10.
EVs break the million vehicle milestone
We did much better on electric vehicles, sticking our necks out quite a long way by predicting in January that sales would break the 1 million barrier in 2017, having finished 2016 at just under 700,000. In fact, surging sales of battery electric vehicles in China have helped push the global total for the first three quarters of this year to 693,000 and our team covering the sector is now forecasting no fewer than 399,000 in the fourth quarter, helped by worries about a possible subsidy cut in China. This would take sales for the year well north of million mark. 10 out of 10.
Corporate renewable energy on a tear
Corporate power purchasing agreements did have a fourth strong year in a row, and look like ending up with a total of between 4.6GW and 5GW in terms of the renewable energy capacity contracted, a little below 2015’s record. This year has also seen probably the largest such deal ever agreed – Norsk Hydro’s contract to take most of the electricity from the 650MW Markbygden Ett wind project in Sweden. On the minus side, we said we expected to see the first virtual corporate PPAs being signed without any form of subsidy. That has not quite happened – a few projects have been built without subsidy in Europe, and PPA negotiations are understood to be under way but not completed. 8 out of 10.
Resilience and security receive overdue attention
We said in January that the energy and transport sectors are becoming “geometrically more connected, and hence exposed to failures and security breaches,” and urged action. The issue has certainly begun to get more attention – ironically, one sign being the U.S. Department of Energy’s clumsy attempt to protect coal and nuclear by proposing special treatment for power stations that could store 90 days’ worth of feedstock on site. More sensibly, the Federal Energy Regulatory Commission suggested in October that grid operators should have to take measures to prevent being infected by malware from laptops. In July, Bloomberg News reported that hackers working for a foreign government had breached at least a dozen U.S. power plants, including a nuclear reactor in Kansas, and just this week it was reported that a suspected state actor had penetrated the defenses of a plant in the Middle East, causing it to shut down. But there was no sign of a new global determination to protect its increasingly smart infrastructure. 6 out of 10.
The climate debate heats up – again
Yes and no. The year started with confirmation that 2016 had been the hottest year ever. The Trump administration’s statement at the beginning of June that it would pull out of the Paris agreement was met with dismay from almost every other country, and even Syria and Nicaragua belatedly signed up in 2017, leaving the U.S. as the only country outside the accord, if it really does go ahead and leave in 2020. Then, in the fall, three disastrous hurricanes in the Caribbean and Gulf of Mexico (Harvey, Irma and Maria) devastated Houston, Barbuda and a number of other islands, and Puerto Rico – with scientists attributing part of their cause to climate change. So yes, climate was in the spotlight, but not in a game-changing way. Some U.S. Republicans proposed a carbon-tax-and-rebate scheme; almost everyone but the U.S. Federal Government promised to double down on climate action, but in fact made only modest actual moves. Germany did not announce an end to coal-burning. 7 out of 10.
There we have it. By our reckoning we earned 65 out of 100 for our January 2017 predictions. A long way from our best year, but not our worst.
By Michael Liebreich
Chairman of the Advisory Board
and
Angus McCrone
Chief Editor
Bloomberg New Energy Finance
Source: BNEF
