One of the biggest questions resulting from the Covid-19 downturn in electricity demand (pp . 26-27) is the extent to which the fall in electricity demand will impact the renewable energy project market, and whether investor appetite will continue. In January, IHS Markit forecast that solar would grow by a record 14% in 2020. Some independent analysts now believe that the economic uncertainty caused by Covid-19 will stall a significant number of wind and solar projects.
Yet reports on the ground show less impact than expected. Initial concern was that supply chain issues, concern over travel, labor, skills and social distancing would all slow deployment. According to Harry Boyd-Carpenter, director and head of energy EMEA at the European Bank for Reconstruction and Development (EBRD), though, “the supply chain is holding up well, but commissioning is the bottleneck in the process.”
While construction has been impacted, some feared a drop in electricity demand would depress new project development, as power prices fall. Simon Haswell, OE solar PV lead at engineering consultancy Mott MacDonald, reports that this has not been the case. “We’re not currently seeing a drop off in development activity. Developers are inherently optimistic and if Covid-19 is an acute problem to be resolved within six months to a year, we’ll be working to the same forecast plans, albeit some delays may be expected.” Demand for solar power remains strong, and as Boyd-Carpenter puts it, “you’re selling the utility that everyone wants, without the pollution that nobody wants.”
The issue is not the technology but the framework that surrounds it, according to Haswell. “Rather than lack of investor appetite or maturity of the technology, the limiting factor for solar deployment is largely confidence in external project interfaces such as access to a secure PPA or interconnection, with variable significance depending on the region,” says Dolf Gielen, director of IRENA’s Innovation and Technology Center. “The advantage of PV is that it’s a mature technology with significant supply capacity. A limited policy effort would achieve significant growth.”
Different markets will respond in different ways, dependent on power mix, infrastructure and policy environment. Victor Martinez, lead power modeler at the Asia-Pacific Energy Research Centre (APERC), warns of the challenge, referencing Mexico’s recent release of a new policy changing the rules around renewable energy projects – which is expected to negatively affect nearly 3 GW of capacity. Ensuring a green wrapper for stimulus would avoid such fallout, as would linking post-coronavirus support to sectors like aviation and tourism to innovating products and emissions reduction.
If you take a look at the bigger picture, the opportunity remains immense. The dramatic decline in the price of solar, accompanied by the volatility in the oil markets and increasing shuttering of coal-fired power plants, fundamentally changes the outlook for solar as an investment proposition.
Demand for oil was down by a third in April and, on the face of it, lower oil prices would seem to make fossil fuels more competitive and thus slow the energy transition. While oil prices have increased since hitting record-low and even negative prices, they remain roughly half of January prices. Expectations are that the distortions caused by the oil price wars and the pandemic-driven collapse in demand will continue to result in oil price volatility. With interest rates currently zero or negative in some places, investors can find comfort in renewables, with relatively stable returns unlikely to be negatively impacted by policy risk or the introduction of a carbon price.
As Boyd-Carpenter puts it: “The message is not that oil is cheap but that it is more volatile than anticipated.” Andrew Grant, head of oil, gas and mining at Carbon Tracker, says a growing understanding of the impact of the global carbon budget is also raising concern about stranded assets. “Once that is internalized into investment thinking, it becomes clear that a lot of projects can’t be developed,” he explains. “This is a major financial issue and it is affecting the way that institutions look at the valuation and growth prospects for carbon-heavy companies.”
One of the key issues, the fall in electricity demand, is unlikely to remain a problem for long, as electricity demand is expected to recover fairly quickly. According to IEA data, electricity demand decreased by 2.5% globally in the first quarter of 2020, but as Martinez points out, preliminary data from mainland China shows electricity demand increased by 16% in March compared with February, and there are signs of increased demand in the EU and United States.
If we expect to see continued growth in utility-scale solar on an economic basis, what then are the opportunities for the future? Innovation in PV technology may not be where the greatest opportunity lies. Gielen says that IRENA expects no radical PV breakthroughs but rather, “continued and rapid improvement of existing technologies.” Martinez points out that innovation in PV is averaging improvements of five watts per year. There are of course new ways to boost power output, such as bifacial modules. “Last year we financed the largest bifacial project in Egypt and the initial results are really impressive,” says Boyd-Carpenter. “Generation from the reverse [side] is even better than expected. Ten years ago, the EBRD wasn’t investing in solar as it was too expensive. Now we’ve taken a big bet on bifacial at scale.”
Merce Labordena, senior policy adviser at SolarPowerEurope, expects “to see growth in innovative solar technology such as such as building-integrated PV, technical solutions that combine agricultural infrastructure and solar PV, floating solar plants, and renewable hydrogen produced from solar power.”
There is also potential for countries to build up their own manufacturing facilities, building more local supply chains. SolarPower Europe recently launched the “Solar Manufacturing Accelerator” on the back of growing momentum to boost solar PV manufacturing activities and R&D in Europe, and for this segment to become a strategic value chain as part of the Green Deal.
“European solar manufacturers are leading in innovative solar technologies, such as perovskite tandem cells, heterojunction cells, grid-connected technologies, and battery storage,” says Labordena, noting the need to stay ahead in the global market. “We expect to see a larger body of manufacturing in Europe of highly digitalized segments of the solar sector such as the manufacturing equipment for PV wafers, modules and cells, operations and maintenance and asset management of large-scale plants.”
As countries move to decarbonize and adopt renewable energy, many are finding it difficult to do so cost-effectively because of fundamental limitations in domestic solar and wind resources. For these countries to fully decarbonize economically, they must develop innovative renewable energy carriers and build new zero-carbon energy supply chains. Electricity is the favored energy carrier – flexible, efficient and high value. The trend is toward electrification in heating, industry and energy. So, investors and the industry need to be looking at grid technologies and deployment, new products, combined infrastructure, and innovative storage solutions.
“There has been a significant build out of renewables and the [Australian] grid needs substantial upgrades to accommodate the different flows of power and the likely changes as the generation mix continues to evolve over time,” says Monique Miller, executive director at Clean Energy Finance Corp. (CEFC) in Australia. According to Tim Grejtak, analyst at Lux Research, “countries representing $9 trillion of global GDP cannot meet their energy demands solely through domestic renewable energy production and will require the import of renewable energy from more resource-rich countries.” While over distances of less than 1,000km powerlines may be the best option, land-based infrastructure can be expensive, which means the focus needs to be on energy carriers and, of course, storage.
The fact of the matter is that there is no decarbonization without renewable energy, and renewables won’t dominate the energy market without some component of long-term storage. And for many, that means hydrogen. The challenge is that green hydrogen remains expensive and the infrastructure is not in place. “Our expectation for renewable hydrogen is that the plummeting cost of solar will contribute to cutting costs of renewable hydrogen,” Labordena says. Significant volumes of cheap solar PV, therefore, will contribute to the cost-efficient production of renewables-based hydrogen, which is a win-win combination for countries with high solar resource.
What will truly drive the market outside of utility-scale solar is innovation. “Green stimulus may help to support technology innovations beyond use of solar beyond producing electricity, like solar-powered cars, solar for cooking and heating, building-integrated PV, and solar to hydrogen,” explains Yongping Zhai, the chief of the energy sector group in the sustainable development and climate change department of the Asian Development Bank. “Such innovations will expand the market of solar energy much beyond the current projections for solar PV installations.”
This means that integration will become a driver of transformation. Floating solar PV on reservoirs and other bodies of water will generate power in landlocked parts of the world while minimizing evaporation. New products behind the meter can also be integrated into projects. And if electrolyzers follow the same cost curve as solar PV, the market will increasingly become a commercial reality. As Martinez puts it, “standing alone is no longer an efficient way to design projects, especially if we want to accomplish the goals of the Paris Agreement and decarbonize the entire energy matrix.”
Gielen says there is huge growth potential and a big need for expansion – up to a factor of 10 in order to achieve 2050 targets. “We’re moving to a market where renewables are the most competitive choice and that has profound implications. Then it will have momentum of its own and won’t be dependent on policymakers.”
Concern has been expressed that green stimulus could lead to a bubble, with too much money chasing too few projects, which in current circumstances seems unlikely. “The recent acceleration of solar rollout has been driven by cost-competitiveness against other forms of generation, rather than being led by incentives that crash the industry when reversed,” Haswell says. Gielen also notes that the low cost of capital is beneficial to the sector: “We’re unlikely to see a massive construction bubble, because investors look at revenues. As Boyd-Carpenter adds, “there’s only going to be a bubble if people stop using electricity and stop caring about carbon.”
While the EU’s green stimulus package still has to be approved, along with the €1.1 trillion budget, climate neutrality is at the heart of its recent proposal. It includes plans for 15 GW of renewables, 1 million tons of green hydrogen production, and alongside this €20 billion has been set aside for clean transport. The use of green stimulus for innovation, driving down the cost curve in complementary technologies as it did in solar, could underpin a seismic shift in the deployment of solar at scale.
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