Why is the renewable energy industry like the space programme?

Global new investment in renewable energy has risen from $22 billion in 2004 to $211 billion in 2010[1] driven almost entirely by susbidies.   Subsidies have been justified by the perceived need to reduce carbon dioxide emissions to combat global warming and the need to support renewable generation technologies until they are cost-effective.  Now the on-going support for renewable energy appears to be in doubt.  In Germany Angela Merkel has commented on support for solar energy and noted that the relationship between the amount of electricity generated and the cost is “not a rational relationship”, despite effectively shutting down the country’s nuclear programme.  In the UK Chancellor George Osborne has attacked climate regulations at his recent party conference and PM David Cameron made only one passing reference to “green technology”.  The Department of Energy and Climate Change has released its consultation on new levels for Renewable Obligation Certificates, which despite optimistic language, represents a shift away from supporting offshore wind deployment.  In the USA the scandal over the Department of Energy’s $535m loan guarantee for Solyndra continues to develop and is likely to further damage support for subsidizing renewables.  It seems clear that we are in the middle of a policy shift.

There is a parallel here between the development of the renewables market and the space programme.  Both were driven by high-level political objectives; in the case of the space programme in the early 1960s it was the geopolitical aim of beating the Soviet Union, in the case of renewables it was the perceived need to combat global warming which was perceived as, and presented to the public as, an immediate and potentially catastrophic threat.  It seems increasingly clear that this is not the case, but irrespective of the true situation, which by definition cannot be known for many years, public and political belief in the idea of catastrophic climate change appears to have waned rapidly in the face of recession and new evidence. 

Both the early space programme and the renewable energy boom led enthusiasts to project splendid visions of the future, in the case of space a future where we had visited Mars and colonized the moon by the end of the twentieth century and in the case of the renewables, a future where renewables produce the majority, if not all, of humanity’s energy needs.  Both these visions may well come true but the timescales were optimistic because they neglected to consider the economics – in both cases there was no true economic case without subsidies.  Also in the words of Arthur C. Clarke, the science fiction writer and futurist, “we tend to over-estimate what we can do in the short-term and under-estimate what we can do in the long-term”.

After achieving the Apollo 11 landing on the moon, public support (and hence political support) for the space programme in the USA fell away rapidly, accelerated by increasing pressure on public expenditure from social programmes and the Vietnam war.  Now we are seeing public support (and political support) for subsidizing renewables falling away as the public purse is under more and more pressure from the effects of dealing with the financial crisis and the perceived threat of global warming diminishes. 

This doesn’t mean that exploring space or encouraging renewable energy are bad things for society, both are undoubtedly good things in my mind but there are lessons to be learnt here. 

In space exploration real innovation towards reusable and lower cost means of getting into earth orbit, based on aircraft like vehicles, was effectively stopped in the early 1960s as the need to beat the Soviets became the overall goal and reliance was put on using modified Intercontinental Ballistic Missiles (ICBMs) as manned launchers, (and ultimately of course the civilian developed, but ICBM derived launch vehicles such as the Saturn 1B and Saturn V).  Once the route was chosen true innovation was discouraged as the aerospace companies followed the money from government contracts and had no incentive to innovate..  However, once political support fell away the programme was unsustainable.  Now, finally in the space sector, forty plus years after the triumph of Apollo 11, we are finally seeing innovation as a number of private sector companies are developing innovative launch concepts including; The Spaceship Company, (the JV between Burt Rutan’s Scaled Composites and Richard Branson’s Virgin), the Amazon founder Jeff Bezos’ Blue Origin, and Elon Musk’s (the founder of PayPal) Space-X.  These companies see a commercial market for space travel developing driven by space tourism and other market demands.   

In renewables we have seen a similar story.  Subsidies have led to a boom in investment from investors seeking long-term, government backed returns, but they have also prevented significant innovation as developers use existing mature technology to deploy projects that qualify for the subsidies such as wind power and solar power using photovoltaic systems.  In many markets, the subsidies themselves support the price of equipment above the level it is in other, less subsidized markets.  At the same time the high cost of subsidizing these technologies, as well as the difficulties of integrating intermittent supplies into the electricity system at scale, are increasingly being recognized. 

Innovation, both within existing technologies, such as solar photovoltaics, and in completely new technologies such as liquid ink-jet applied solar materials, will drive down the cost of renewables, possibly to levels below existing, conventional fossil fuel energy supplies.  At that point there will be a real market and competition.  This should be bought about, however, by encouraging innovation, not the deployment of uneconomic technologies.

Steven Fawkes

23^rd October 2011

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[1] Renewables 2011 Global Status Report.  REN 21.

Energy Efficiency and ESCOs in China

China’s energy utilisation is now a matter of global interest due to the massive growth in energy use, increasing exploitation of fossil fuels outside China and the fact that China is now the world’s largest emitter of carbon dioxide.  The rapid growth in the economy, some 10% per annum over the last thirty years, has increased the standard of living such that some 300 million people are now considered middle class and are buying the energy consuming appliances and vehicles we have long been used to in the West, and this number is expected to top 600 million by 2025[i].  According to a report by the National Energy Bureau released in September, China consumed 434.4 GWh in August which was up 9.1% on 2010.  For the first eight months of 2011 power consumption was 3,124 GWh, up 11.9% year-on-year. This relentless growth in electricity demand has resulted in spectacular levels of investment in new generating capacity, in 2009 China increased capacity by 90 GW, (for comparison the UK peak capacity is 80GW) and the average annual growth rate in installed capacity between 2000 and 2009 was 11.84%[ii].  Most of this capacity has been conventional, coal fired plant but there has also been a huge increase in the deployment of renewable capacity.  Wind capacity in China grew from 0.3 GW to 42 GW between 2000 and 2010[iii].  The less well known side of the Chinese energy situation is the aggressive promotion of energy efficiency and energy services companies (ESCOs).

On a recent visit to Beijing at the invitation of the National Development and Reform Commission (NDRC – the body that drafts the five year plans) and CECEP, the state owned energy efficiency company, I was able to learn about China’s commitment to energy efficiency first hand.  In the 11^th Five Year Plan (FYP) which ran from 2006 to 2010. A target of reducing energy intensity (measured by energy per unit of economic output) of 20% was set.  This was achieved although not all Provinces achieved their individual targets.  In the 12^th FYP (2011 to 2015) the government has proposed a target of reducing energy intensity by 16%.  Such large reductions in energy intensity appear to be unparalleled by any other country.

Energy efficiency is a national priority.  Rigorous standards have been imposed on all major industries and local officials have ordered less efficient factories to close and ordered new ones to install more efficient technologies.  Indeed, the jobs of local officials can depend on them achieving energy efficiency targets. The government recognise that Energy Service Companies (ESCOs) are an important tool for helping to achieve energy efficiency targets.  The ESCO concept was introduced to China in 1995 by the World Bank and three ESCOs were established in that year with World Bank support.  Since then the ESCO market has grown exponentially with revenues increasing from $240m in 2006 to $4.2bn in 2010.  There are currently 1,700 registered ESCOs and it is expected that there will be c.2,000 by the end of 2011.  A recent estimate notes that in 2010 alone, the Chinese economy added at least $20 billion in annual energy savings from energy efficiency efforts[iv].  Based on figures from the China Electric Power Statistical Yearbook, 2009, energy efficiency in 2010 saved 20-25 times more energy than was generated by China’s massive and expensive development of the wind sector.

ESCOs are seen as a strategic growth industry.  They are encouraged by a number of incentives including:

-       exemption from corporate income tax for three years

-       a 50% reduction in corporate income tax for a further three years

-       exemption from VAT

Other policy measures to encourage the use of ESCOs include allowing state owned enterprises to pay ESCO service fees out of their energy budgets and allowing ESCO fees to be paid pre-tax. 

Despite this blooming of the ESCO industry there are serious constraints which the NDRC are seeking to address.  Firstly, of the 1,700 ESCOs, some 70% have a capital of less than 20m RMB, i.e. they are SMEs with limited technical and financial resources.  There is undoubtedly scope for consolidation in the ESCO industry.  Two of the larger ESCOs have gone public.

Finance remains a major blockage.  ESCOs are dependent on equity and debt financing.  Expanding equity to fund new projects is not viable.  Debt finance is available from commercial banks but the banks often lack capacity in assessing projects.  Furthermore lending tends to be short-term and requires collateral of 2 to 3 times the value of the loan.  In addition, recent changes mean that much of the targeted support from International Financial Institutions such as the Asian Development Bank (ADB) is being funnelled through four major banks.  These banks cannot effectively cope with the small average project size. The ADB is strongly committed to energy efficiency in China and throughout its region of operation – it currently invests $1bn per annum on energy efficiency and this will increase to $2bn in 2013.

One technological area that has received a lot of investment in China is Waste Heat to Power (WHP).  Many high temperature processes such as glass and steel furnaces, have been retro-fitted with WHP installations using an ESCO model.  It is reported that the total WHP capacity is 31GW, more than the $22bn, 22 GW Three Gorges hydro-electric project, the largest power station in terms of installed capacity.  To date WHP has mainly been high temperature conventional rankine cycle technology but there is increasing focus on lower temperature cycles such as the Kalina cycle.  This is an area that the West needs to consider encouraging. 

China’s support programmes for ESCOs are more developed that any other country and are still developing.  Although energy efficiency cannot stop the inexorable rise in energy demand that comes with increasing affluence, the government of China has recognised the large role that improved efficiency can, and indeed has to, play in China’s energy future.

Steven Fawkes

26 September 2011   

[i] The value of China’s emerging middle class

  McKinsey Quarterly

[ii] The Expansion of China’s Generation Capacity

  Yijia Nan and Mark Moseley

  PPP in Infrastructure Resource Center for Contracts, Laws and Regulation (PPPIRC)

  www.worldbank.org/ppp

[iii] Global Wind Energy Council

[iv] Financing Energy Efficiency in China: 2011 Update

  William Chandler, Holly Gwin and Chen Shiping

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Is the IPCC finished?

This week I had the privilege of hearing Professor Fred Singer, the noted anthroprogenic global warming (AWG) “sceptic” speak at a lunch time session at the think-tank Civitas.  Professor Singer is well known for his views and has been much maligned by the extreme wing of the climate change movement, people he labelled “warmistas”.

In the presentation Professor Singer went through the latest scientific evidence on global warming.  The conclusions that he came to were:

-       there is no evidence of global warming

-       the IPCC is finished. 

The report behind Professor Singer’s remarks, which is an update on the Non-Intergovernmental Panel on Climate Change (NIPCC) report, Nature, Not Human Activity, Rules the Climate (2008), can be found at:

http://www.sepp.org/science_papers/ICCC_Booklet_2011_FINAL.pdf

Without diving into the detailed science and numerous charts the summary points are: 

·       There is a substantial disparity between observed atmospheric trends and those derived from the IPCC climate models.

·       The chaotic variability of climate models, i.e. the fact that you get different results every time you run them, can be overcome by running the models five, ten or more times.  In practice IPCC models have one, two and never more than five runs. 

·       Independent climate data does not verify the reported rise in surface temperature between 1979 and 1997.

·       Finally, there is considerable evidence for solar influence on the Earth’s pre-industrial climate and the sun may well have been a factor in post-industrial climate change in the first half of the last century.  Solar activity may be a major cause of decadal scale climate change.  This is supported by analysis of ¹⁴C and ¹⁸O in stalagmites which suggests a strong association between the solar activity and temperature.  As Professor Singer says, we can agree that the temperature on Earth is not likely to affect the sun’s output so in this case correlation does suggest causation! 

The over-reliance on complex models, the disparities between models and observations, an interest in astronomy, and the fact that when I started in the energy field scientists were worrying about global cooling, have always led me to be an AGW sceptic.  Some of my thoughts were expressed in a Matrix research note New Energy & Clean Tech Review (27 October 2010) and an unpublished piece in January 2010.  The idea that we understand the atmosphere, and its interactions with the sun, well enough to predict temperature rises for the next fifty to hundred years is absurd.  We just don’t know enough.  Starting from an astronomical perspective, rather than a meterological one, we know that a) the sun is very big (just to remind you how big – 110 times the diameter the Earth and a power output 27,000 billion times the average power usage of global society) b) the sun is dynamic and c) we really don’t know very much about it and its interactions with the Earth (a good argument for increased space science spending!). 

It seems to me that what has been happening over the last few years can be illuminated by referring to Thomas Kuhn’s paradigm model of how science changes.  Kuhn describes how in any time period work in science is dominated by a prevailing paradigm and most work is carried out within that paradigm and therefore supports it.  Eventually cracks appear in the paradigm and heated debate (not necessarily based on the science) begins with the “establishment” working to suppress any research that undermines the paradigm (think Climategate).  Finally enough evidence is produced that the prevailing paradigm is over-thrown and a new one comes into force.  Examples include:

·       The detection of the ozone hole by satellite data was initially put down by established scientists in the field to “instrument error” until it was confirmed by ground based equipment operated by the British Antarctic Survey.

·       X-raying of pregnant woman gained popularity in the 1950s based on the idea that below a certain threshold level of exposure to radiation there was no effect on health.  Following the rise of X-raying pregnant women there was an increase in infant leukaemia.  When this link was first identified it was denied by the establishment, the data discredited and not followed up.  The epidemiologist who first identified the problem, Alice Sewart, was regarded as a maverick and rubbished by the establishment.

The climate change paradigm came into force very quickly compared to normal paradigms, aided by several factors including; a natural human fascination with catastrophes, governments looking for a new enemy in the post Cold War world and business finding new ways to make money such as renewable energy subsidies and carbon trading.

Fred Singer is adamant that the IPCC is finished.  I agree but the situation is more complicated.  The AGW paradigm is clearly deeply flawed and public and political support for the global warming agenda is waning.  Unlike other scientific paradigms, AGW is overlaid with; an international bureaucracy, government bureaucracies and legislation in most countries, subsidy programmes for renewable energy in many countries, educational systems, hundreds of NGOs devoted to the cause, and large pools of capital assembled to invest in renewable energy to take advantage returns secured by subsidies and regulations – a governmental, social and financial paradigm.  This huge inverted pyramid of vested interests sits on the point of climate science and right now it looks like this small foundation is crumbling.  However, the size and power of the vested interests means that whatever the science says it will take time to change direction.  Politicians find it hard to admit they were wrong and they will only do so if driven by public opinion, a public opinion that in the UK at least (and probably in most countries), does not to want to pay the high cost that current policies will force onto energy consumers.  

What does this mean for clean technology investors?  It does not mean that we should stop looking for cleaner and cheaper sources of meeting our needs for energy services; heat, light, motive power etc.  We are facing many other global and national energy challenges particularly around security of supply and the rising demands of developing countries.  Any technology, however, that relies on subsidies cannot be sustainable.  The use of conventional wind and solar technologies may continue to grow and in certain markets, particularly where power supply or grid infrastructure is limited, may make economic sense.  Elsewhere we are likely to see a gradual dismantling of subsidies although in most markets I wouldn’t expect retro-active changes – that is too damaging to the general investment climate.   I should say I would also advocate removal of all subsidies for all types of energy including oil, coal and nuclear – let’s have a truly free energy market.   Even if energy prices rise due to supply constraints producers of existing wind and solar technologies will need to aggressively innovate to bring costs down or go out of business.

There is a bright future for new clean technologies based on real innovation that bring costs down to competitive levels.  I see great potential for advanced solar technologies and of course, above all, for energy efficiency which is usually NPV positive at existing energy prices and not subsidy dependent.  Similarly there will be huge opportunities for new energy storage technologies that can achieve cost levels that allow them to offer services such as balancing into the electricity system, support deployment of cost-effective intermittent technologies and price arbitrage.   Any clean tech proposition, whether energy related or not, has to either offer significant cost savings compared to the conventional technology or provide new and better services – those are the real drivers of technical change – not subsidies.  Clean tech innovations have to be cheaper, better and have a positive effect on the environment.    

Steven Fawkes

8^th September 2011