LE OPINIONI DI IG PARTNERS n.14 – What future for renewables?

The first move of the new Australian Prime Minister Tony Abbott has been to scrap the carbon tax. The world, or at least the US, is facing a future of energy plenty in the form of shale gas. The financing and the grid connection of offshore wind in Germany is experiencing serious difficulties. Moreover, in a world of austerity, renewables still necessitate important subsidies, which governments are less and less willing to pay. In Spain, in a complete reversal of the past, they are considering a specific tax for households generating electricity from PV installed on roofs to recoup some of the generous earlier subsidies. To make matters even worse, the decrease of electricity demand in many European countries has created overcapacity. Mercifully, at least the German elections have produced a favourable outcome. All of this begs the question whether there is still a viable future for renewable energies, many of which are intermittent and expensive.

Interestingly enough, this year’s stock market valuations for renewables have shown some sign of life. How does this square with all of the bad news above?


Let’s look at the facts first. The photovoltaic (PV) and wind power industries have been growing rapidly in the past five years (figure 1), which have coincided with the great recession at least in Europe: PV cumulative installed capacity rose from 16 GW in 2008 to 102 GW at the end of 2012 (+58% CAGR), while wind grew from 121 GW to 283 GW in the same period (+24% CAGR). Correspondingly, their contribution to total power generation went from 1.3% for wind and 0.1% for PV to 2.9% and 0.5% respectively.

Schermata 2016-05-02 alle 10.53.10

It is worth noting that the impetus for growth has been confined to a few countries and not always the ones you might expect. In wind, the world’s two biggest economies, China and US, account by themselves for almost half of the world capacity with Germany a solid third (figure 2). In solar however, the leading countries are first not so sunny Germany and second Italy, which shows the power of belief and incentives, particularly in the earlier phases of development. Strangely enough, the country most responsible for reducing the cost of PV cells, China, has not yet adopted solar in a major way (figure 3).



Nevertheless, as we pointed out in a previous paper, the impressive growth of wind and solar has not been reflected in the stock market performance of PV and wind companies, which have seen their value decimated. In fact, over the past five and a half years, the 29 world’s major solar and wind listed companies lost more than 90% of their value, resulting in a net market capitalization loss of €91.7 bln (figure 4).

If we expand the sample including after-2008 listed wind companies, which is significant for wind because most Chinese players were listed in 2010-2011, the pattern does not change much as the market cap of these companies has been on average reduced by two-thirds from the date of their IPO.

The stock market overall performed much better than renewables in the five years considered (figure 5). Truthfully, the MSCI Euro and the MSCI World indexes both lost (-37% and -15%), but considerably less than the NEX Index (-74%), which represents almost a hundred global listed companies active in the renewable energy sector.


The massive losses incurred by wind and solar companies are due to a variety of factors including overcapacity, slumping equipment prices and subsidies cut. The PV sector has witnessed the fierce competition of Chinese producers, which supplied the market with lower-price modules and which boosted global production capacity beyond demand, thanks in part to easy lending conditions. As Europe cut subsidies to keep the spending under control and as equipment prices further decreased, margins for solar manufacturers were considerably squeezed. Similarly, the main reason behind the losses of global wind companies is the gradual slowdown of the largest markets: China, because of grid connection issues, the US due to political uncertainties and the rising competition from cheaper natural gas, and Europe, as a result of reduced subsidies and difficult access to credit. All this culminated in overcapacity and increased competition from Chinese peers, leading to the difficulties mentioned above.


The story of the Danish wind turbine manufacturer Vestas well illustrates the challenges faced by the wind energy supply chain: once the biggest wind equipment producer in the world, Vestas lost 94% of its value in the 2008-2012 period and issued four profit warnings.

The troubles started in 2008, at the beginning of the financial crisis, with an ill-timed expansion into the Chinese and US markets (it opened the first US factory in 2008 and then hired 5,000 new workers in China and US). Shortly afterwards, in fact, increased competition from Chinese peers and the slowdown of the Chinese market resulted in a significant reduction of global turbine prices. In the meantime, doubts over political support of US subsidies after 2012 caused record wind power installations for that year, but reduced growth expectations for 2013 and beyond. The shale gas boom, moreover, made perspectives for wind power in the US even worse.

Vestas began a strong restructuring program in 2012, cutting €400 mln of fixed costs and 30% of its workforce, and now the pressure on the company seems to have slightly eased: in the first half of 2013, Vestas has started to recover as a consequence of the mentioned restructuring policies, an increased focus on O&M services to fight Chinese competition and a geographic expansion in new promising markets (India and Latin America). At the end of August 2013, after eight quarters of reporting a loss, the company finally replaced its long-time CEO, in a further attempt to restore profitability.

However, since the beginning of this year, the stress on the PV and wind energy supply chains seems to have eased a little and both sectors have experienced a small bounce. Solar listed companies grew 33% on average adding €3.3 bln of market capitalization in the first eight months of 2013, while wind companies rose by 138%7 gaining €3.6 bln, thanks to the positive performance of Vestas and Gamesa (figure 6).

The small rebound comes as the major PV and wind manufacturers start to recover after years of turmoil and stress on margins. The PV market is benefiting from increased demand, expected to reach a record level this year (37 GW, i.e. +20% over 2012), led by deployments in China, Japan and the US. At the same time, the troubles experienced by the industry have led to the exit of uncompetitive players and resulted in reduced production capacity and growing equipment prices (the price of Chinese solar panels rebounded 23% this year after a reduction of 64% in 2011-2012). Wind turbine suppliers, on the other hand, are benefiting from the results of the restructuring they went through to fight increased competition and slower growth: Vestas, Gamesa, Nordex and Sinovel, for example, all have cut jobs and shut down factories to restore margins.


Is this bounce an inevitable rebound of wind and solar companies in a growing stock market after years of difficulties? Or is it showing instead a long-term trend backed by sound fundamentals and indicating that, as often happens in growth industries, the years of destructive competition and overcapacity are over?

The growth of renewable energies is sustained by three major drivers. The first is environmental: renewables are along with nuclear power the only carbon-neutral option we have to generate electricity. Moreover, the combustion of fossil fuels not only generates carbon dioxide, but a whole variety of health- adverse emissions: in China, for example, the concentration of fine particulates in the air was this year three times higher than the limit suggested by the World Health Organization and burning fossil fuels certainly contributes to it. Although a global political consensus on how to cap greenhouse and polluting emissions is still lacking, environmental concerns are on every government’s agenda. Competition from nuclear power does not appear to be a formidable threat to the growth of renewables: for one thing, the security issues highlighted by the Fukushima disaster are not yet fully resolved and have resulted in very strong political opposition in countries like Germany and Japan itself. In addition, the remarkable delays and extra costs incurred so far during the construction of new plants using the latest technology are casting a shadow on the real economic competitiveness of nuclear.

The second driver concerns energy security and supply diversification: green technologies are fuelled by unlimited natural resources and can ease the dependence of many countries on foreign energy supply. This used to be possibly the most important reason but may today be viewed as a weaker driver, since we constantly hear about the shale oil & gas revolution in America. Let’s look at the facts though. In the United States, fast growing production in Texas, in Louisiana, around the Marcellus shale in Pennsylvania or in states such Arkansas and Oklahoma has beaten all expectations (in the years 2007-2011 production grew fourfold, accounting now for about 30% of national gas production) and depressed the price of natural gas to values in the $2-4 range (figures 7-9).


The electric power industry rode the wave: natural gas in the US now accounts for 30% of total generation (from 22% in 2007), and over 90% of the expected net power capacity additions in the years 2013- 2016(figure 10). Interestingly enough, solar and wind are the preferred solutions after gas, accounting for over 30% of the planned additions.


Therefore, the shale revolution is real and changing the energy landscape in North America. But it appears to be confined to the US: although significant resources are present in many other countries, from China to Algeria and Europe, non-U.S. production is still marginal and likely to remain such. Why? First of all, geologies are less favourable, as non-American shale resources are deeper and thus more expensive to extract. Moreover, the shale gas industry requires local technological know-how and a skilled supply chain in exploration and fracking, all very scarce or missing altogether outside of the US. On top of that, regulatory environment and fiscal regimes are not always so favourable. The North American shale gas revolution will not extend to the planet, at least in the short term: unlike oil, in fact, gas is not an easily transportable commodity. In order to be shipped, it must be first liquefied and then re-gasified at arrival by costly terminals, which need years to be built and whose authorizations are difficult to come by.

We must point out, finally, that the environmental issues related to shale gas extraction are still fundamentally unresolved: local seismic activities, contamination of water basins and stress on local water supply might turn out to be very relevant side-effects of gas production. In the United States, where the risks are under scrutiny, governmental restrictions have so far been minimal and the industry is waiting for the Energy Protection Agency to publish an environmental study in 2016; in Europe, where population density is higher, political opposition has been sometimes very strong. As of today, France, Romania and Bulgaria have banned fracking, whereas the UK and Poland are willing to develop national shale resources. The shale gas boom, in a few words, appears to be confined at least for the time being to the American market, whereas energy security will likely continue to be an issue for many other countries.

The third driver behind the growth of renewables is a novelty and is potentially a game changer: in some parts of the planet, wind and PV are becoming increasingly competitive with fossil fuels. First of all, the price of oil is high (as are gas contracts linked to it) and likely to remain such due the relevant costs of marginal production and constant political tensions in oil producing countries. On top of this, as green technologies mature and are further deployed, their cost keeps falling: the levelized cost of PV power generation is now basically half of what it used to be in 2009, while wind turbine prices fell by 25% in the same period (figure 11). In Germany, for example, it is now cheaper for factories to produce electricity with a PV system than buying it from the grid!


True, this cost reduction has come at the expense of national governments and electric power consumers who have subsidized and still are subsidizing renewable power generation, as The Economist recently pointed out. Although such a burden is real and sometimes hampers the competitiveness of industrial companies, it should not be seen as a gift to renewable power producers but rather as the cost of a transition towards nationally-sourced and carbon-free technologies. In the same article, the magazine highlights that gas prices for industry in Europe are much higher than in America, but it omits to explain that such high prices are by no means related to the deployment of renewables and are, to the contrary, due to the quasi-monopoly of the producers (Russia, Algeria, Qatar) serving the European gas market. These suppliers sell natural gas through long-term contracts linked to the price of oil, which has been rising in the past few years.


The development of renewable energies has drawbacks as well.
First of all, the two main ones are intermittent: solar radiation and wind strength are not constant and only to some extent predictable. Electric storage is mostly provided by operating hydroelectric plants in reverse, i.e. using power to pump water uphill in order to later use its gravitational energy to produce electricity again. But given the physical constraints, the environmental impact and the cost of pumped hydro, this is unlikely to be a solution deployable on a global scale. Batteries seem to be the most likely solution in the years to come, but are currently still expensive, and no significant breakthrough is foreseen in the immediate future. With storage still in development, the most viable solution in the short term to avoid black-outs in case of weather-adverse events is to employ gas power plants, to be left idle when renewables are running at full capacity and demand does not need them. Again a costly solution.

Secondly, it must be said that not all countries are blessed with solar or wind resources, and thus the cost of renewable energies may vary significantly from country to country and from area to area. It will be quite low for areas where the sun has strong DNI (California, the Chilean Atacama desert, North Africa and even Greece, Sicily and Southern Spain) or that are windswept and close to sizable population, but obviously remain very expensive in areas where wind is scarce and solar irradiance feeble.

Finally, renewables still have energy densities significant lower than traditional alternatives: according to the International Atomic Energy Agency, a few squared kilometres of land are enough for a nuclear or fossil fuel of 1 GW of capacity. To produce the same amount of electric energy with a PV plant running ca. 1,500 hours, 20-50 km2 would be needed (the size of a small city), while for wind (2,500-3,500 hours of operation) the land requirement goes up to 50-150 km2. Biomass is much worse to the point of absurd and should plantations be employed for the purpose, the size of a province (4,000-6,000 km2) would be necessary. We note, moreover, that PV and especially wind can have a strong visual impact on the landscape, which in densely populated or touristic areas might become a serious issue.


The presence of strong solar irradiation and wind will simply determine where renewables will grow and the land requirements are likely to be not a major factor for sources of energy expected to remain below 10% of total by 2020. Storage is probably the biggest roadblock to the growth of renewables. That said, it is an issue which is being researched and tackled aggressively and there is every reason to believe that storage costs will diminish. Therefore, on balance we believe that the rise of renewable energies is likely to continue. As we said, currently wind and PV contribute only marginally to global power generation. However, the scenario is set to change: more and more countries are supporting the development of green technologies, fostering the growth of the wind and PV industry, which by 2020 is forecasted to contribute over 8% to global power generation (figure 12). In the PV sector, the traditional European markets are expected to cool off and leave room to China, Japan, the US and to new emerging geographies, such as South America, Africa and the Middle East (all forecasted to install more than 1 GW in the next 10 years). Similarly, wind market growth in the coming years should mainly come from China, India, Brazil and other emerging countries in Africa and Latina America, while Europe and US will experience consistent slowdown. One factor for determining the extent of wind growth will be the ability to reduce the cost of offshore wind, which is currently very expensive but otherwise the preferred option when considering wind strength and environmental objections.


In conclusion, the fundamental drivers behind the development of renewable energies remain valid and in effect the relative competitive position of green technologies has actually improved. The accident at Fukushima and the security issues which the nuclear industry has yet to solve make them the only safe carbon-neutral and local option we have. The high price of oil, the practical difficulties of expanding the shale boom beyond North America in addition to the falling costs of green technology, all favour the future growth of renewable energies.

Milan, October 1st 2013