Transcript Over 25 Years of Energy Investing An investor’s view of renewable energy November 6, 2009

Over
25 Years of Energy Investing
An investor’s view of renewable energy
November 6, 2009
Renewable energy, it feels good but it’s expensive
Renewable
energy is good …
• Local supply; jobs
• Low operating costs
• No emissions; carbon neutral
But, it’s not
cheap or simple
to build …
• Levelized cost of energy, including capital cost is high
Renewable
energy needs
support …
• Policy support: mandated renewable portfolio standards
• Availability is low – it doesn’t always blow or shine
• Resources are regional and often remote
• CO2 cost: the cost of pollution must be priced into energy
• Price certainty: a robust economic case will only be financed with
a long-term off-take
1
Clean forms of energy are becoming economic, but still have a way to go
Illustrative order of magnitude
Emerging
Expensive
Economic
Efficiency
Algae
Fuel Cells
CCS
Clean
Geothermal
LFG
Nano
Solar
Batteries
Cellulosic
CMM
Anaerobic
Tidal
Hydro
Wind
Ethanol
Biodiesel
IGCC
Biomass
Nuclear
Gas
Coal
Dirty
Oil
2
Renewable energy resources are available, but not everywhere
3
A proposed Federal RES is good but not radically different than the sum of
32 States
Gigawatts
200
Mandatory, Nonbinding, and Proposed Targets
180
Existing Mandatory RPS Targets
Waxman-Markey:
20% by 2020 (equivalent
to 12% of retail sales)*
160
140
Equivalent to 9%
120
… but the
increment is
not that
meaningful
100
Waxman-Markey:
6% by 2012
(equivalent to 3.5%
of retail sales)*
80
60
40
This is not a
given …
Equivalent to 6.6%
of US Retail Sales
Equivalent to 3.7%
of US Retail Sales
20
0
2008
2010
2012
2014
2016
2018
2020
Source: IHS Cambridge Energy Research Associates.
*Waxman-Markey combined efficiency and renewable electricity standard (CERES) translates to effective renewable targets of 3.5 and 12 percent of retail sales when accounting for exemptions for
small retailers and the reduction of non-qualified hydro, new nuclear, and carbon capture as provided for in the legislation, and estimated levels of energy efficiency achieved towards the CERES.
4
The US produces a lot of greenhouse gases – a big reduction will require a
big change
2005 Annual U.S. Greenhouse (GHG) emission (million tonnes),
(Baseline for current Waxman-Markey climate proposal)
7,206
86% reduction*
from 2005
N2O 368
CH4 674
CO2
5,990
5,990
5,990
Gas
1,174
Industrial
1,660
1.
A change from combustion
to renewables… or shutting
down emitting
hydrocarbons
Transport
1,974
2.
Reduced consumption, or
3.
Emissions offsets
Oil
2,602
Coal
2,145
U.S. GHGs
Other
U.S. CO2
Sources
Commercial
1,053
GHG reductions will force:
1,035
Residential
1,245
U.S. CO2
Uses
Renewables or clean energy is
the only real cure
GHG target
2050
Source: EIA
* ACES quotes 83% reduction but 2005 baseline to 2050 target is an 86% reduction
5
Policy has had an enormous effect in solar …
 Feed in tariffs provided
technology companies the
headroom to install expensive
solar capacity and still generate
15-25% IRRs
 With increasing scale economies
of production have resulted in
solar costs collapsing. So now
FITs (and IRRs) are coming down
with costs
 It is projected and with
Japan started slowly, Germany was the big bang and then Spain followed with
such favorable FITs that installed capacity has increased 25xs in 8 years
identified savings that costs will
approach grid parity in the next
5-10 years (i.e. without
subsidies)
From “nowhere” to a large growth story inside 10-15 years as a result of
public policy
Source: McKinsey, Solarbuzz
6
Commodities have been volatile, and now put renewables out of the
money
• Renewable energy
competes with
hydro-carbons
• Biofuels vs. oil
• Wind, solar etc.
vs. gas and coal
• Oil has recovered, so
has biofuels
• Natural gas (the
price setter for
power) is low and so
renewable power is
out of the money
7
Investment performance in clean has mirrored the market – weak
•
Shareholder returns for the
past 12 months have been
worse than the NASDAQ and
S&P500
•
Green is a color not a halo
•
Many funds are pursuing
early stage technology
angles, but returns are
unclear (or poor)
•
Until there is fiscal and policy
support there will not be
outperformance
Source: Clean Edge
8
Dear Santa …
… as an investor in the renewable energy industry I’d like:
Price certainty
a price high enough to incent building will bring on many new
projects, and reduce prices. Can be a PPA, MRP, or FIT
Price certainty
…
Price certainty
…
Volumetric targets
change needs to happen fast and with magnitude, either large
scale RFPs or FITs (what ever gets built goes into service)
Policy support
covers such details as accelerating transmission build out,
siting approval support
CO2 cost
a policy to price pollution will bridge the gap between
hydrocarbon and renewable power
Credit
one day lenders will return and with a good project (see 1, 2, &
3) financing will improve
PPA: Power Purchase Agreement
MRP: Market Reference Price, used in CA to establish acceptable price for PPAs
FIT: Feed In Tariff
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