Growth in Renewables has Stalled. Investment is Falling. But Why? We don’t need “more ambition” but a radically different system.  By now, the message should be clear: The insistence on private-sector-led investment in renewables is a failure

We don’t need “more ambition” but a radically different system.  By now, the message should be clear: The insistence on private-sector-led investment in renewables, which we are told needs to be “unlocked” through various incentives – subsidies, feed-in-tariffs, guaranteed returns through PPAs, etc. – has proven to be a disastrous failure. This is the reason why renewables are “underperforming.” This is what must change if deployment is to reach the levels needed to meet the Paris targets.  It’s not getting us there in time.From the perspective of mass deployment of publicly owned and controlled renewable energy, falling costs are good news. Where governments are able to fund infrastructure projects directly, they can do so; where they need to borrow, they can access financing at lower interest rates than private developers. In either case, the costs of installation can be recouped through managed retail electricity prices, without the need to generate an additional profit margin for climate-blind private investors looking to make handsome returns while avoiding risks. At the same time, the phasing-in of renewables can be coordinated in tandem with grid upgrading, development of storage technologies, digitalization and conservation.

The International Energy Agency (IEA) recently announced that the growth of capacity additions to renewable power generation stalled in 2018, after nearly two decades of growth. Calling the new findings an “unexpected flattening of growth trends,” the IEA noted that this development raises serious questions about reaching climate targets. Net new capacity from solar photovoltaic (PV), wind, hydro, bioenergy, and other renewable power sources increased by about 180 Gigawatts (GW) in 2018, the same as the previous year. That’s roughly twice the annual installation of a decade ago. But, according to the IEA, it’s “only around 60% of the net additions needed each year to meet long-term climate goals.”

Why is this happening? We are constantly reminded that the costs of renewable capacity have fallen spectacularly in recent years. According to the latest estimates of annual “levelized cost of energy” (LCOE) from Lazard – the world’s largest investment company – the average cost of solar PV has dropped 88% since 2009, while that for wind has fallen 69%. This pattern of falling costs is often invoked to allay any concerns about lagging investment in renewable capacity, since every million dollars invested can buy significantly more installed capacity than just a few years ago.

Investment is Also Falling

But if a given amount of investment today can buy considerably more capacity than it could have in the recent past, then stalled growth in renewables must mean that investment, in real dollars, must also be falling. In fact, Bloomberg New Energy Finance (BNEF) had already reported a drop in investment in mid-2018, to the lowest in four years. Six months later, with the publication of its annual Clean Energy Investment Trends in early 2019, BNEF reported an 8% decline in investment between 2017 and 2018 (from $362-billion to $332-billion). And this fall in investment has occurred during a period of extremely low interest rates. This is significant because the main contributor to the cost of renewables is not the actual technologies themselves, but the cost of borrowing money for projects – in other words, interest rates. So any future rise in rates would act as a significant further brake on investment levels.

The recent BNEF data confirm that, despite dramatic cost declines over the past decade, investment is indeed falling, and the IEA’s numbers show that, globally, deployment has essentially flatlined. This is happening at a time where both investment and deployment need to be rising steadily if the world is to have any chance of reaching the Paris targets.

But if we dig a little deeper into the recent data, we begin to see that the issue isn’t simply a flattening of global deployment, or a one-year fall in investment, but something much more worrying. As the BNEF chart below shows, if China’s investment in renewables is taken out of the picture, it becomes clear that investment for the “rest of the world” has not suffered a minor setback, but is actually falling to worryingly low levels – in what is already three consecutive years (and even that was following a small uptick after a previous fall, from the historic high in 2011):


We’ll return to China in a moment, but let’s make sure we understand this “rest of the world” performance first – because it will turn out to be important for understanding China.

Facing the Truth of “Poor Fundamentals”

Let’s get to the heart of the problem: We are told repeatedly that the falling costs of renewable generation capacity makes renewables “more competitive” with fossil fuels, and that each new record low auction result for solar or wind is a reason to celebrate. From the standpoint of private investment and profit making, however, falling auction prices are hardly a good thing. As governments have turned away from “come one, come all” feed-in-tariffs toward more competitive bidding regimes where the “winner takes all,” there are pressures to win the bid in order to secure a 20-year subsidy in the form of a “power purchase agreement” or PPA. The bidding process has driven down contract prices even faster than the real costs of building the projects have fallen (due to “learning by doing,” economies of scale, technological improvements, etc.). Investors then see diminishing profit margins and lose interest. (“Too bad about the planet but, hey, there are many other things to invest in.”) As one analyst writing for Risk Magazine puts it:

“At the end of the day investors aren’t just going to put their money on a good story, their main objective is to make money from these investments. A look at the renewable energy sector fundamentals analysis shows that the total rating of all listed renewable energy companies fundamentals is just 3.9 out of 10, a rating that signals the renewable energy sector has very poor fundamentals.”

Under the current policy approach, private project developers have avoided risk and expanded their market share through PPAs with government entities, or with utilities that are mandated to reach renewable energy targets. But the “guaranteed returns” that such PPAs ensure for investors often translate into higher electricity costs for users, which can quickly translate into “political risk” when electricity users start complaining about rising bills. Governments then phase out – often abruptly – the policies that made investment in renewables attractive in the first place. This is what happened in Europe where, once subsidies for renewables were scaled back, investment collapsed:

Because of falling auction prices, many people still assume that the market share of renewables will reach a “tipping point” once they become the “least cost option.” But because there is simply not enough profit in “low carbon solutions” like renewable power generation – at least, not without subsidies – renewables are unlikely to attract the levels of capital needed to achieve the Paris targets.

By now, the message should be clear: The insistence on private-sector-led investment in renewables, which we are told needs to be “unlocked” through various incentives – subsidies, feed-in-tariffs, guaranteed returns through PPAs, etc. – has proven to be a disastrous failure. This is the reason why renewables are “underperforming.” This is what must change if deployment is to reach the levels needed to meet the Paris targets.

From the perspective of mass deployment of publicly owned and controlled renewable energy, falling costs are good news. Where governments are able to fund infrastructure projects directly, they can do so; where they need to borrow, they can access financing at lower interest rates than private developers. In either case, the costs of installation can be recouped through managed retail electricity prices, without the need to generate an additional profit margin for climate-blind private investors looking to make handsome returns while avoiding risks. At the same time, the phasing-in of renewables can be coordinated in tandem with grid upgrading, development of storage technologies, digitalization and conservation.

But What about China?

We still need to understand what is happening with China, and why its investment has continued to grow while the rest of the world has lagged. China’s approach to tackling the energy transition has differed from that of many other countries, involving significantly more centrally driven planning and coordination. But it has still relied heavily on mechanisms like those that have been used in Europe, the USA and elsewhere: feed-in tariffs, power purchase agreements, etc. In fact, the country’s 13th “Five Year Plan” on energy development, released in March 2017, refers favorably to the German renewable energy development pathway as an example that shows the way forward. Given that, we shouldn’t be surprised to learn that China, like Germany, has seen a significant burst in capacity growth by using similar policy mechanisms.

But the story doesn’t stop there. Like Germany, China’s boom has produced significant overcapacity – beyond what can be successfully integrated into the system and put to use – as well as ballooning subsidy bills. Once we know that, we shouldn’t be surprised to learn that China’s investment in renewable capacity actually took a sharp turn downward in 2018. On June 1, 2018, in an effort to contain exploding subsidy bills and growing overcapacity, the country’s National Development and Reform Commission announced that, effective immediately, approvals for new projects had been “halted until further notice,” and tariffs for existing contracts would be lowered by 6.7 to 9 per cent (depending on the region). The announcement caught nearly everyone by surprise; it caused serious drops in share price values for Chinese solar companies, and various industry players and observers immediately slashed capacity growth forecasts for the year by as much as one-third. In fact, the fallout from the announcement was so severe that the government subsequently partially reversed course, and is now reviewing its subsidy policy regime.

So the trajectory of China’s investment and deployment in renewable energy seems likely to follow the same pattern as “the rest of the world” – it’s just starting a few years later. And another “green miracle” genie will quietly find its way back into the “business as usual” bottle. With the IPCC telling us we have just 12 years left to limit average warming to 1.5 degrees C, we might want to ask: How many wishes do we have left?

For those familiar with the analysis offered in TUED’s Working Papers and other publications the recent IEA and BNEF data will not have come as a big surprise. The problems with the profit- and investor-focused approach to power sector decarbonization were analyzed in detail in TUED’s Working Paper 10, Preparing a Public Pathway: Confronting the Investment Crisis in Renewable Energy (2017), and more recently in our discussion document for COP24, When “Green” Doesn’t “Grow”: Facing Up to the Failures of Profit-Driven Climate Policy.

We encourage you to use these papers to make the case for a decisive shift away from investor-focused policies, and toward reclaiming energy to public ownership and democratic control, toward public financing at “New Deal” levels to scale up deployment, and toward the restoration of energy planning and delivery as a “public good.”

We don’t need “more ambition.” We need a radically different approach to the transition. •

This article first published on the Unions for Energy Democracy website.

John Treat writes for Trade Unions for Energy Democracy.

Sean Sweeney is Director of the Murphy Institute’s International Program on Labor, Climate, and the Environment. And he writes for New Labor Forum and Trade Unions for Energy Democracy.

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Equitable Beneficial Electrification for Rural Electric Cooperatives: A Report on Electrifying Residential Space and Water Heating

HomeElectrification

Rural electric cooperatives are increasingly enthusiastic about a process that will increase their sales while saving their members money and reduce carbon emissions: beneficial electrification. Beneficial electrification refers to the replacement of fossil-fuel powered systems with electrical ones in a way that reduces overall emissions, while providing benefits to the environment and to households. An example would be switching from propane heating to electric heating, or from a gasoline-powered car to an electric vehicle.

EESI partnered with the Groundwork Center for Resilient Communities, Iowa Policy Project, Midwest Energy Efficiency Alliance, RE-AMP Network, and We Own It to produce a report examining beneficial electrification as a pathway for rural electric cooperatives to decarbonize their power grids equitably, with a particular focus on the Midwest. Making cooperatives more sustainable would have a significant impact on U.S. carbon emissions: about 900 co-ops nationwide provide power to 13 percent of all Americans and 56 percent of the U.S. landmass.

Beneficial Electrification Webinar

Watch EESI’s Miguel Yanez present the beneficial electrification report in thiswebinar.

EESI Program Associate Miguel Yanez was the lead researcher and author for the report. He is part of EESI’s Access Clean Energy Savings (ACES) Program, which helps rural electric cooperatives and public power utilities develop innovative programs to save their members and customers money through clean energy projects. EESI has been helping cooperatives become more sustainable for more than 10 years. As an integral part of its ACES program, EESI helps utilities determine the best pathways forward to expand electrification upgrades in their service territories. EESI also offers assistance to rural utilities that would like to set up on-bill financing programs to help customers pay for the cost of beneficial electrification conversions.

EESI would like to thank The JPB Foundationthe McKnight FoundationNew York Community Trust(NYCT), and Merck Family Fund for helping to make this report possible.

EXECUTIVE SUMMARY


Credit: Orcas Power & Light Cooperative (OPALCO)  

Contact: Miguel Yanez / (202) 662 1882

This report focuses on equitable beneficial electrification as a pathway for rural electric cooperatives to decarbonize their power grid. Particularly, this report examines how Midwest rural co-ops incentivize members to switch from fossil fuel–powered end-use equipment to electric end-use equipment. About 5 million homes in the rural Midwest—mostly served by co-ops—power their space-heating and water-heating equipment predominately with propane.

The lens in which the authors are viewing this research and information is based on the ReAMP Networks’ Equitable Deep-Decarbonization Framework which states, “Include everyone, electrify everything, and decarbonize electricity.”

To address equity, we examine some of the barriers that have led to historic inequity in distribution of energy efficiency program funds, evaluate equity of existing beneficial electrification and efficiency programs, and discuss opportunities to address equity in future program design and implementation.

Rural electric cooperatives have been energy innovators and leaders since their formation around 80 years ago. Today, about 900 co-ops nationwide provide power to 13 percent of all Americans and 56 percent of the US landmass. In the Midwest, 300 co-ops serve power to about 3.7 million members across 12 states.

As nonprofits owned by their members, co-ops are guided by seven cooperative principles, which are: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; cooperation between cooperatives; and concern for community. Electric Cooperatives also have a commitment to serve their members by providing safe, low-cost, and reliable power. One way to better serve their members is for co-ops to offer incentives for beneficial electrification programs.

Beneficial electrification (aka Strategic Electrification) refers to switching fossil-fuel end-use equipment to electric equipment in a way that reduces overall carbon emissions, while providing benefits to the environment and to members. In buildings, this means replacing older and inefficient gas or propane-powered furnaces and water heaters with more efficient, electric space and water heat pump technology. It could also include incentives to electrify vehicles, for example, incentives to finance electric charging stations or electric school buses. Specifically, the report focuses on the replacement of fossil fuel–powered (e.g., propane and fuel oil) space and water heating with high efficiency air-source heat pumps or electric water heaters in residential buildings.

In 2018, the National Rural Electric Cooperative Association (NRECA), a trade association providing resources to all 900 co-ops, unanimously approved a resolution supporting beneficial electrification programs. This resolution indicates that co-ops should start to consider such actions and programs as part of the services they provide to their membership. This report provides a landscape view of current residential energy efficiency, energy equipment programs, and space- and water-heating beneficial electrification programs run by Midwest co-ops for their members.

The report reviews beneficial electrification reports published on this emerging topic. It also analyzes hundreds of Midwest electric cooperative websites to identify electric space- and water-heating conversion programs and assess whether these programs could be deemed “beneficial electrification.”

Unlike older fossil fuel-powered end-use devices, newer electric equipment provides multiple benefits, creating a winning proposition for the member, the utility, and the environment. For the co-op member, new equipment achieves energy and monetary savings as new generation air-source heat pumps and electric water heat pumps are two-to-three times more efficient than their fossil fuel-powered counterparts. Cold climate air-source heat pump (ccHP) technology has advanced greatly in the last five years, to the point where ccHP can efficiently heat buildings as outdoor temperatures approach 0 F.

Co-ops also benefit as these devices offer a multitude of grid management attributes including load-shifting and load-shedding capabilities. These actions flatten the load curve and make it more predictable. All these attributes provide reductions in energy usage during high-demand times, meaning savings for utilities through lower demand charges. At the same time, co-ops can experience increased load and revenue by incorporating newly converted electrical equipment into their grids.

The environment also wins with lower carbon emissions as fossil-fuel (e.g., propane) devices are replaced by residential electric space- and water-heating equipment. With more renewable energy on the grid, this same equipment can contribute to even lower carbon emissions.

Combing through hundreds of co-op websites and after carrying out a dozen surveys and interviews, our research found that about 88 percent of all Midwest co-ops offer some type of energy upgrade and/or loan program for their members to improve their energy efficiency and/or replace their heating and water equipment. Co-op energy efficiency upgrade programs can serve a dual purpose: first, they can help a member weatherize their home, which saves money, reduces energy use, and improves comfort; and second, these programs can be building blocks for a beneficial electrification program. A non-insulated home can negate the energy savings from a new electric heat pump/and or water heater. Some of these co-op energy upgrade programs are offered in conjunction with specific-conversion rebates for water heaters and heat pumps.