September 23, 2014

The development of small-scale renewables has changed the relationship between electricity consumers, producers, and utilities. Solar photovoltaic (PV) panels, in particular, have allowed consumers of electricity to produce their own electricity on-site, decreasing the demand from traditional, centralized sources of energy. Jeremy Rifkin believes this trend is part of a Third Industrial Revolution, wherein millions of people will be producing their own green energy and sharing it with each other through an ‘energy internet’.

The pace of this change is accelerating. In fact, 2013 was a record year for global solar PV deployment. For the first time ever, the global growth in solar PV (36.5 GW) outpaced the growth of wind power (35.5 GW) for the year. The growth in solar PV was led by China, Japan, and the US, which surpassed Germany for the first time. In contrast, wind power additions sank to their lowest level since 2008. Wind power capacity remains higher than solar PV capacity, but at current growth rates, solar will surpass wind by 2021 (based on a forecast by Clean Edge). In the US, non-hydro renewables made up 41 percent of new generation capacity in 2013, and were outpaced only by natural gas, which represented 47 percent of new capacity.

This growth in solar PV has occurred despite lagging venture capital investments. But other investors seem to be gaining confidence in clean tech; the NASDAQ’s CELS index, composed of clean technology companies, grew by 89 percent in 2013 compared to a 30 percent increase in the S&P500. Installation costs continue to fall, allowing greater capacity additions at lower costs.  These trends are helping to offset the decline in government incentives around the world. Ontario, for example, has eliminated the feed-in tariff (FIT) for projects over 500 kW, while California, Hawaii, and Germany have also placed limits on project size and decreased remuneration for producers. Spain, on the other hand, has completely eliminated its FIT after 25 years.

But companies are adapting through innovative financing mechanisms, including securitization and green bonds. The securitization of solar assets has allowed some companies to achieve greater liquidity and a lower cost of capital. It has also attracted institutional investors, such as pension and insurance funds, which could drastically increase the level of financing available for solar projects. Green bonds are another way to attract low-cost capital for clean technology projects. Toyota launched the first-ever green bond, worth more than $1 billion, to fund auto loans for hybrid and plug-in EV vehicles in the US. And the growth of green bonds is skyrocketing: according to Climate Bonds Initiative, in 2013, $11 billion worth of green bonds were issued, and as of June 10, 2014, already $18 billion worth were issued (with $36 billion outstanding).

These trends are having a profound impact on utilities, who are in many cases struggling to find adequate funding for necessary infrastructure upgrades. Because of FIT incentives paid to producers and the rise of self-generation, utilities have to increase fixed costs to make up for the loss of revenues from electricity consumption. The rising cost of electricity in turn incentivizes a greater uptake of distributed renewables and therefore intensifies the problem for utilities. Many are adapting by acquiring renewable energy development companies and providing the installation services themselves. But for the most part, in their current fiscal condition, utilities will not be able to afford necessary infrastructure upgrades, nor will they be able to withstand the costs associated with climate change adaptation. The current hope is that the continued growth in private investments will make up for this funding shortfall.

Stay tuned for a follow-up article on investment trends in transmission and distribution infrastructure, and the emergence of the smart electricity grid.


By: Ryan Reiber