Forces of nature: the emerging solar and wind revolution

Forces of Nature

In north-western China’s arid Tengger desert lies a spectacular city. Not one of buildings but solar panels, and millions of them. This “Great Wall of Solar” covers 1,200km2 – only 100km2 less than Los Angeles. It is the latest development in China’s aspiration to be the world’s leader in solar power.

The renewables revolution is being led by China, India and other emerging markets, rather than developed countries. Moody’s estimates that emerging markets will eclipse developed nations in 2018 in their capacity to generate wind and solar power as equipment costs fall and the energy market approaches “peak coal”.

Growth has historically been driven by government subsidies and other policies but developments are now happening without them.

Solar systems

Tengger Desert Solar City is one of several record-breaking solar projects across Asia. Five of the world’s largest ‘photovoltaic’ (PV) power stations are in either India or China. Increasing expansion of solar energy in these two countries is driving a 43% increase in global renewable electricity capacity, according to the International Energy Agency (IEA).

In India, which has around 300 clear, sunny days per year, Prime Minister Narendra Modi’s government has presided over a six-fold increase in total solar grid capacity since his election in May 2014. The average price of solar electricity in India has dropped well below the average price of that generated by coal. Modi has also helped lay the foundation of the International Solar Alliance, a group of 121 countries aiming to efficiently exploit solar energy and reduce reliance on fossil fuels.

Chile is another country that is rapidly expanding its solar capacity, driven by lack of fossil fuels and near-perfect weather. The country now produces among the cheapest energy in the world and is leading the adoption of clean energy sources in Latin America.

After centuries of fossil fuel use, the economics is in favour of solar to sustain emerging economies’ development.

The implications are profound. After centuries of fossil fuel use, the economics is in favour of solar energy to sustain emerging economies’ development.

Winds of change

While Europe has historically led in terms of innovations in wind capacity, growth is slowing in developed markets, while increasing in emerging markets as breakthroughs spread.

The impetus has perhaps been strongest in Latin America where energy prices and energy demand have both risen. China – which already produces half of the world’s wind turbines – is on target to grow its wind capacity tenfold to around 13 gigawatts (GW) by 2026. Commitment to wind power is also strong in India and Pakistan, and across Northern Africa. Morocco aims to install 2GW of wind energy by 2020.

Technological developments and the building of larger, more powerful wind turbines have pushed down the cost of installing and maintaining wind farms. As a result, wind is approaching grid parity where it can compete without subsidies. In some countries, notably India and Chile, wind costs have fallen to all-time lows, and emerging market governments are boosting deployment as a result. New floating offshore turbine technology has the potential to increase capacity further as it starts to be rolled out on an industrial scale.

Tesla recently built the world’s largest lithium ion battery that can store enough energy to power a staggering 30,000 homes.

Tipping point

Advances in energy storage are strengthening the case for renewables by solving the challenge of the intermittency of solar and wind energy. IHS Markit estimates that residential solar and electric battery storage could become cost competitive with grid electricity by 2020. As a sign of progress, Tesla recently built the world’s largest lithium ion battery that can store enough energy to power a staggering 30,000 homes.

Digital innovations in advanced analytics, cloud technology, artificial intelligence and robotics are also improving the value and reliability of renewable energy assets. In Germany, blockchain technology is being used with battery storage to absorb excess wind output and discharge energy when required. German energy giant, E.ON, recently unveiled plans to use high altitude autonomous aircraft connected to tethers to drive wind generators.

Such technological advances have made renewable energy much cheaper, more efficient and viable, resulting in wide-scale commercialisation and adoption. Financing and payment models – historically a barrier to investment – are fast evolving. And pressure from shareholders and customers means companies across industries are improving sustainability in their operations and supply chains. So while renewables only account for 5% of global daily energy supply, this looks set grow rapidly.

Renewables are not a panacea to the risks posed by climate change. The renewables industry will require further consolidation and capital so it can survive without subsidies. And an immediate shift away from polluting fossil fuels to renewables is unlikely – peak oil is probably several decades away and gas prices are falling.

President Trump’s decision to withdraw the US from the Paris (COP21) agreement on climate-change mitigation may also delay progress in the short term. Encouragingly, however, momentum in the US remains strong. Electric-power companies continue to transition to cleaner energy sources, and the ‘We Are Still In’ campaign, a network of states, cities, businesses and universities representing 127 million Americans and $6.2 trillion in capital, has committed to tackling climate change.

Investment in renewable energy and energy efficiency is expected to create six million jobs and $10 trillion of benefits every year by 2050.

Efforts to slow climate change through investment in renewable energy and energy efficiency are expected to create six million jobs and $10 trillion of benefits every year by 2050, according to a report from the IEA and the International Renewable Energy Agency. Access to a reliable source of clean, affordable off-grid energy could lift millions in Africa and Asia out of poverty.

All this really matters to investors.  The route to decarbonisation and the rise of renewables will create winners and losers, not just in the energy industry but elsewhere too. Investors would be advised to take notice of the implications of this seismic shift as they formulate their investment strategy. As the report’s authors state, “the economic case for the energy transition has never been stronger”.

 


The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 21st February 2018