The growth of renewables within the energy mix
One of the most important developments within the global energy market over the recent years has been the increasing number and size of corporate investments in the clean technology (cleantech) sector. While this high level of activity has been significant in many technologies, one area which has seen particularly pronounced growth is that of renewable energy.
The increasing level of renewable energy investments has been notable at almost every stage in the asset life cycle, from the projects entering the planning and construction phase through to the ever bigger transactions involving these assets once they have
become operational. The reasons behind this significant growth are complex and vary from technology to technology and country to country, depending upon the relative attractiveness of various subsectors to investors in the context of their capital agenda. The renewables sector is extremely diverse and includes a range of technologies which make use of feedstocks ranging from wind, waste and water through to sunlight and biocrops to generate outputs in the form of biofuels and heat, as well as electricity. Furthermore, while some of these technologies are relatively mature and require little in the way of economic subsidy, others are still at their development or demonstration stage and will require additional support before they reach technological maturity, or will realize the future projects.
There are a number of terms used to describe different aspects of the energy industry. In this article, the following definitions are applied:Cleantech A diverse range of innovative products and services that optimize the use of natural resources or reduces the negative environmental impact of their use while creating value by lowering costs, improving efficiency or providing superior performance.
Energy generated from natural resources which are naturally replenished, including: sunlight, wind, rain, tides, geothermal heat and biofuels (although these are sometimes instead classified as alternative energy).Clean energy As for renewable energy, plus digital energy, green buildings, waste, carbon markets, fuel cells, transportation, carbon capture and storage (CCS), power storage, hydrogen and services and support).
Several fundamental factors are driving a worldwide transformation in the way that natural resources, including energy and water, are produced, distributed, stored, managed and consumed:
► Continuous growth in world population
► Increasing consumption power of the expanding middle class in emerging markets
► Growing scarcity of natural resources around the globe
► Need to ensure energy security
► Business response to climate change
► Rising energy and commodity prices
Experts participate that this transformation to a more resource efficient and lower carbon-consumed economy will have the magnitude of a new industrial and technology revolution. Cleantech, which includes renewable energy, represents the technological and business model innovation that will enable this massive transformation. A global Ernst & Young survey of more than 300 companies with a minimum of US$1 billion in revenues indicates that the rate of corporate cleantech adoption is accelerating. The survey showed that the key corporate objectives in cleantech adoption are:
► Improving operations and reducing costs through efficiency gains
► Pursuing new revenue opportunities
► Responding to climate change
► Achieving sustainability goals
► Reducing dependency on fossil fuels
► Complying with current and anticipated regulations
Investors’ responses to these circumstances will therefore vary by geography and subsector, according to their own agenda for capital management and growth. This may involve preserving their existing capital by reshaping their operational base to match the global shift away from fossil fuels, seeking out attractive new investment opportunities and structures, or optimizing the returns from limited available capital across a balanced portfolio of assets (please refer to figure 1 for our analysis of the capital agenda influences relevant to an investor’s renewable energy investments). The attractiveness of particular projects to them at any given point in time will therefore depend upon a number of factors, including their strategic and tactical objectives.Also, it is clear that the availability of government support is critical to the success of renewable energy projects. As motioned above, this can be provided for a range of different reasons. For example, Brazil’s use of ethanol derived from native sugar cane as a substitute for petrol in the 1970s was primarily driven by concerns regarding the security of their imported oil supply, rather than any environmental agenda. Another example is the global response to the climate change challenge which is driven by the United Nations Framework Convention on Climate Change.
Meanwhile, the United States of America (USA), although it has not yet signed up to legally binding carbon emission reductions, is nevertheless one of the most attractive countries in the world in which to make renewable investments, thanks largely to a range of government incentives for research, development and adoption of renewable energy driven by a complex blend of energy security concerns, a culture of technological innovation and the need to create jobs.While the specific factors driving any particular renewable investment agenda may vary, there are, nonetheless, a number of general trends which are common across all technologies and all countries. For example, making significant and successful investments in the renewable sector is, for certain types of players, becoming a key factor in supporting corporate innovation, growth and success. However, the high level of pace of renewable development, supported by ever shifting government support regimes, means that all project stakeholders continually need to refine their investment positions in order to maximise value, and their returns to shareholders.
Posted in Cleantech Funds