Until the 1990s renewable energy was seen largely as the province of “whole earth” environmentalists rather than of business. While I recognise the scale of achievement by the industry in the face of ongoing challenges, I see many themes prevalent in the late 1990s still here today. We are still debating which type of incentive structure is more effective and the need for cap and trade, to name but two.
One big change: in that earlier era those attending conferences, even those such as the Renewable Energy Finance Forum (REFF) at its founding in 1998, included a high proportion of academics. The few bankers and financiers in attendance came along as much from personal interest as from the expectation of large volumes of business.
But even then a limited core of entrepreneurs shared the vision that the sector would become a significant driver of energy solutions for the 21st century, though they may have been driven as much by memories of the 1980s oil price shock as much as concerns over the environment.
Then Governments began to get the idea by introducing feed-in tariff incentives, with Germany in the lead in 1991, along with other measures to stimulate nascent manufacturing industries, and soon we all embarked on the long journey to Kyoto and beyond.
Early wind farm
My own interest in the sector came via a request for finance: a farmer called Peter Edwards approached me to finance the Delabole Wind Farm in Cornwall. The idea was to take advantage of the UK’s non-fossil fuel support mechanism, introduced here in 1990 largely to provide help to the nuclear industry.
I was very pleased to be associated with Delabole, which went operational in 1991 as the UK’s first commercial wind farm, but in reality from a business point of view it was a sort of “professional hobby”. I certainly did not foresee that similar project finance structures to those innovated then would still be in use in the industry today.
My professional hobby became my vocation when I decided within Ernst & Young to found the renewable waste and cleantech team. This has now grown in the UK alone from a fledgling three to more than 60 specialist staff. Today big business is very much part of the industry with utilities such as Iberdrola not only having renewables as a key tenet of their corporate strategy but using that business as a key driver of profitable global expansion.
Now many players have multi territory 1000 MW plus portfolios, with wind and increasingly solar as the mainstays of the green component of a utility business, often quoted in its own right. While some of these players were already active in the 1990s, others such as E.ON and SSE have assembled transformational portfolios through acquisition.
In solar the industry itself has, by and large, made its own future while in wind technology, specialists have been joined by acquisitive power equipment giants such as GE, Alstom and Areva.
The number of banks and financial institutions in the sector has grown substantially, though, given the credit crunch, many are in a holding pattern and some have retired from the field due to other injuries.
Benefits of recession
What about the recession? In my view, you might call it the most significant device man has yet deployed in the battle against climate change. It has certainly led to a downturn (but not a stop) in investment. But it has also given the opportunity for forward-thinking countries to use the industry as a key component of their stimulus packages (South Korea as well as China and the US), and it has also given the industry time to adjust to the change in balance of power from west to east and, less certainly, to avoid the worst of the capacity constraints that were becoming a major issue.
The recession has also allowed some of the exaggerated and probably less helpful financial structures to fall to earth and flushed out those players who were toying with the industry on PR grounds rather than as part of a coherent commercial strategy. It may be a good thing if P/E-based bubbles do not recur.
In the USA more stimulus monies are being spent on energy efficiency and grid than on renewables though the sum for renewables is very large. Investment in the grid was a late 1990s priority and remains so. We need to allow intermittent distributed renewables to become the new base load, and consumers to become producers, and too slow grid deployment remains the most likely reason carbon reduction targets won’t be met.
Not only do we need smart grids, but we also need new basic transmission infrastructure involving a scale of change not seen since the advent of the railways. An example is connections to the offshore wind industry, which was really only a gleam in the eye in the 1990s.
Onshore wind also requires significant investment as urban population centres often built around coal or deep water ports are rarely near significant wind or indeed solar resource. So we need transnational grids to provide solar from Africa to Europe and distribute wind output amongst the countries bordering the North Sea.
Looking forward, costs per carbon tonne saved is likely to become one of this century’s key policy indicators, achieving a place alongside internal rate of return and other more conventional indicators in the private sector as carbon gets a price, whether explicitly through cap and trade and specific taxes or implicitly through customer behaviour.
To date, policy measures have largely been fixed by reference to the needs of a particular technology i.e. wind or solar, many of which are at different places on the cost curve. This is likely to remain the case given the scale of the immediate challenge which requires aggressive deployment of all deliverable solutions. With the post recession stimulus, paid out of depleted treasuries, value for money is likely to become an increasingly significant factor particularly against a backdrop of rising fossil energy prices.
With strong financial incentives in Germany and Spain, western Europe was seen, as the last millennium approached, as the key market, with the US thought likely to be significant if the stop start nature of its stimulus measures could be overcome. Some informed industry commentators were talking about opportunities in China and India, both in terms of generation capacity and manufacturing presence. Most would say their expectations have been exceeded, with those countries likely to be at least as significant as Europe and the US in the next 10 years - and in terms of manufacturing capacity perhaps more so.
New entrants in China in particular have quickly embraced the latest thinking and could significantly challenge some legacy based western players. New emerging markets such as Chile, South Africa, and central and eastern Europe are likely to challenge lower ranking European countries. Indeed countries such as the UK and France, with high resource but relatively low deployment, may find themselves left behind - if their pace of development does not accelerate.
France has a slightly more comfortable place in a climate change sense, given its strong nuclear industry, while the UK, very dependent on the success of its offshore wind strategy, continues to ignore by and large its onshore wind and biomass resource.
In technology terms, there have been great strides. For example, individual wind turbines are rapidly scaling up to the size of whole windfarms in the early 1990s, a considerable engineering achievement.
Going forward, outside the offshore arena, technological advances may be more challenging and refinement and reliability and cost per MW/h are likely to be the arbiters of success. In solar, the race to grid parity by thin film PV and, increasingly, CSP, continues. In both industries previous capacity shortages have been solved by the recession, but may well reappear.
Among the sectors, biomass is one still awaiting significant innovation in the sense of widespread commercial deployment. In my view, along with energy efficiency and longer term marine and tidal, biomass is one area in which VC returns - and challenges - are likely to occur. There remains much to look forward to.
Jonathan Johns was head of Ernst & Young's renewable energy, waste and clean energy unit. He was also the originator of the Ernst & Young Country Attractiveness Indices. He is a former treasurer of the British Wind Energy Association. He is now a director of Climate Change Matters.