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November 6 , 2009

An investor’s view of renewable energy. November 6 , 2009. Renewable energy, it feels good but it’s expensive. Renewable energy is good …. But, it’s not cheap or simple to build …. Renewable energy needs support …. Local supply; jobs Low operating costs No emissions ; carbon neutral

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November 6 , 2009

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  1. An investor’s view of renewable energy • November 6, 2009

  2. Renewable energy, it feels good but it’s expensive • Renewable energy is good … • But, it’s not cheap or simple to build … • Renewable energy needs support … • Local supply; jobs • Low operating costs • No emissions; carbon neutral • Levelized cost of energy, including capital cost is high • Availability is low – it doesn’t always blow or shine • Resources are regional and often remote • Policy support: mandated renewable portfolio standards • 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

  3. Clean forms of energy are becoming economic, but still have a way to go Illustrative order of magnitude Emerging Expensive Economic Efficiency Algae CMM Fuel Cells CCS Anaerobic Geothermal LFG Clean Nano Solar Wind Hydro Batteries Ethanol Biodiesel Cellulosic Biomass Tidal IGCC Nuclear Gas Coal Dirty Oil

  4. Renewable energy resources are available, but not everywhere

  5. 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)* 160 140 120 100 Waxman-Markey: 6% by 2012 (equivalent to 3.5% of retail sales)* 80 60 Equivalent to 6.6% of US Retail Sales 40 Equivalent to 3.7% of US Retail Sales 20 0 2008 2010 2012 2014 2016 2018 2020 … but the increment is not that meaningful Equivalent to 9% This is not a given … • 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.

  6. 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) Other 7,206 86% reduction* from 2005 N2O368 5,990 5,990 CH4 674 • GHG reductions will force: • A change from combustion to renewables… or shutting down emitting hydrocarbons • Reduced consumption, or • Emissions offsets • Renewables or clean energy is the only real cure Gas 1,174 Industrial 1,660 CO2 5,990 Oil 2,602 Transport 1,974 Commercial 1,053 1,035 Coal 2,145 Residential 1,245 U.S. CO2 Sources GHG target 2050 U.S. GHGs U.S. CO2 Uses • Source: EIA • * ACES quotes 83% reduction but 2005 baseline to 2050 target is an 86% reduction

  7. 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 identified savings that costs will approach grid parity in the next 5-10 years (i.e. without subsidies) 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 From “nowhere” to a large growth story inside 10-15 years as a result of public policy • Source: McKinsey, Solarbuzz

  8. 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

  9. 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

  10. Dear Santa … … as an investor in the renewable energy industry I’d like: • 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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