You know there must be an energy conference in town when walking down the scenic, pedestrianised street that runs alongside the Danube you see a Spaniard turn to a Dane and say in English: “So how is your power-grid capacity?”

In November, 300 global experts gathered in Budapest to discuss the issues surrounding the world of energy at a conference entitled ‘New economic realities: possibilities for greater European co-operation in the field of energy – towards sustainable and secure energy’.

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There were discussions on the impact of the recession on the energy sector, the lessons learned from the January 2009 gas crisis, and whether there could be a common EU energy policy – all fascinating discussions, especially in the lead up to December’s Copenhagen summit. However, what was most revealing was that the programme contained only one event on renewable energy.

It is telling when an energy conference that brings together some of the world’s best thinkers, directors and policymakers on energy only gives one and a half hours to a topic some experts believe is the only way forward.

“I feel like an outsider here,” joked Eduardo Oliveira Fernandes, president of the Energy Agency of Porto, Portugal, before addressing the one panel focused on the future of green alternatives.

 

It’s not easy being green

Feeling like outsiders is something proponents of renewable (also dubbed ‘green’ or ‘alternative’) energy have become used to. While arguments around the global energy crisis – including price wars, political wars and energy security – have tended to focus on fossil fuels, the renewable energy camp has long struggled to assert itself as the logical way forward.

“Renewables are widely accepted as an important element in the fight against climate change and energy security,” says Angus McCrone, an analyst at consultancy group New Energy Finance. It is the ‘an’ that is most revealing here; while Greenpeace and the Renewable Energy Policy Network for the 21st Century (REN21) say that by 2050, 80% of the major economies’ power could come from renewables (a report from Stanford University even estimated it could be 100% by 2030), conversely, many experts seriously doubt whether the EU will even be able to meet its self-imposed target of 20% by 2020.

So could investing in renewables – including the technologies of wind, solar, hydro, biomass and biofuels – prove to be the way forward or just a bunch hot air?

 

Forward thinking

“There is a tendency to overestimate the importance of renewables,” says Laszlo Varro, senior vice-president for strategy development at oil and gas company MOL. “Renewables are part of the policy mix, but I do not envisage they are the only way forward.”

Many agree with Mr Varro. “Using renewable energy on a large scale is a fantastic and romantic story – the sun shines, the wind blows and there are waterfalls all over,” says Witold Ziobro, a policy adviser to the European parliament.

“Unfortunately, the reality is not so beautiful because employing renewables is not a win-win situation for everyone,” he adds, citing Poland as one example where there is limited potential for renewable energy to be cost-effective for consumers and for the Polish economy as a whole.

Those regarding renewable energy as the only possible future argue that there is too much of a reliance on fossil fuels, with 80% of the world’s energy currently coming from such non-renewable resources.

With oil and gas estimated to have reached peak supply by 2030, it is argued that cleaner energies could be used which would be less harmful to the environment and could help slow climate change.

Counting the costs

While REN21 executive secretary Virginia Sonntag-O’Brien claims that “renewables are not only an environmental solution but an economical solution as well”, experts say that costs are one of biggest problems of renewable technology.

“You may be able to generate electricity by different routes but if it costs you twice as much, how sensible is that?” asks David Armfield, a partner at PricewaterhouseCoopers. The main reason renewables cost so much is because much of the technology is still in the early stages of development. And since nothing is yet in mass production, it is difficult to bring costs down. “If it costs $100m to develop a new technology, who is going to take the risk that that is the right one and that it is going to work?” adds Mr Armfield.

 

Power plays

While investors are keeping a close eye on the debate over weaning the world off fossil fuels, they are also busy looking at what investments in renewables will have staying power.

According fDi Markets data, between January 2003 and August 2009 there have been more than 1400 crossborder greenfield investment projects in the field of renewables.

The United Nations Environment Programme’s Global Trends in Sustainable Energy Investment 2009 report states that in 2008, some $155bn was invested in sustainable energy companies and projects globally, up from $148bn in 2007 and just $35bn in 2004. It goes on to say that in 2008, for the first time, investment in new power generation capacity sourced from renewable energy technologies (about $140bn including large hydro) exceeded the $110bn invested in fossil fuel technologies. However, the report is quick to point out that renewables still account for just over 6% of total power capacity.

“If you are risk adverse, which we are, then investing in any technology that is new or unproven is difficult,” says Freddie Lee, director of Barclays Natural Resource Investments. “From an investor’s perspective it is difficult to tell which particular technology is going to win, and so we either invest in 50 of these things on the basis that 49 are going to fail and one will do really well, or we just avoid it.”

Renewables, as with almost every other industry, have taken a fairly heavy hit as a result of the recession and investment is expected to reach about $120bn this year, with activity in the first quarter down 53% compared to the same period in 2008.

Capital raised via stock markets for equipment manufacturing and project pipelines fell by 51% to $11.4bn, while clean energy share prices saw a 61% dip to their values.

“The recession has been very bad for alternative energy investments,” says Max Wolff, senior economist with Beryl Consulting. “Businesses that specialise in alternative fuels have had a hard time raising money, and some have quite simply ceased to exist. It has not been halcyon days for the business as of late.”

The two sectors that so far have had a fairly successful investment track record are wind and solar, with wind accounting for 42% share of the renewables market against solar’s 32%. And while Shell got out of wind energy earlier this year, BP Alternative Energy, the renewables arm of the oil and gas giant, is investing $8bn over the next 10 years, focusing partially on these two markets. But considering BP’s total capital per year is $20bn, the figure remains small.

Meanwhile, Danish company Vestas Wind Systems reported a 70% increase in third-quarter profits in 2009 and is planning to double its investment targets for 2015.

 

Danger zone

One of the big debates that remains with regards to wind and solar power is on the issue of intermittency. EDF senior manager Richard Burton says: “When the sun is not shining or the wind is not blowing you are not going to generate power, and though there are people who think that in the future there will be sufficient technology development around energy or electricity storage to cope, at the moment that is unproven.”

The biofuels sector (with a 13% market share) has been the centre of controversy in terms of the food versus fuel debate and the amount of land it would take to meet demands; research from the US suggests it would take the acreage of Texas and Ohio combined to fuel US cars on corn bioethanol.

Grid parity – the point at which renewable electricity is equal to or cheaper than grid power – is another issue, as are subsidies.

“In Europe, when you saw the subsidisation of solar, money crowded in. But as soon as there were rumours of amendments to the subsidies, the bottom fell out of the solar market and firms lost 15% to 20% of their market capitalisation in a four-hour period,” says Mr Wolff.

“In the oil market, consumption from country A to B on the production side will be fairly similar and symmetric. With renewables, from year to year you may face a totally different series of subsidies, tax breaks and incentives in the alternative energy space, which has served to destabilise the investment flow and makes the sector a bit more dangerous.”

 

IN FOCUS

Jaguar: getting behind the green wheel

 

 

Luxury car manufacturer Jaguar is jumping on the green bandwagon. Two models both expected to be introduced in 2011 – the specific retail date is yet to be set – will run on electric power from batteries charged mainly by hooking up to a grid, but can also be recharged on the move with small-battery capacity.

Both the four-door XJ and the XE convertible roadster will have a range of 30 miles and fuel efficiency of 24 kilometres per litre. “We are taking environmental innovation as one of our three core strategies,” David Smith, Jaguar Land

Rover CEO, told fDi. “In Europe there is new legislation coming into play that requires the industry to reduce overall CO2 in new vehicles by 20% by 2015, [while] we have committed to deliver 25% by that same timescale.”

Jaguar Land Rover needs to remain competitive by investing in a wide range of new technologies, he says, but also by improving existing ones such as fitting standard and diesel engines in the Freelander with a new stop/start system that saves energy while a vehicle is stationary by switching the engine off. Mr Smith believes there needs to be more incentives in place to encourage car companies to invest in research and development for greener, meaner cars. “Michigan is putting lots of money into batteries in the US but there is not equivalent funding in the UK,” he says. “The government is looking to tap into private equity or overseas finance markets to fund that kind of commercialisation.”

As reported in fDi, Michigan, home to the big three beleaguered US automakers of General Motors, Ford and Chrysler, announced in 2008 that the state would give up to $700m in refundable credits to firms that manufacture and develop advanced batteries. “Support between manufacturers, suppliers and universities supported by government is going to be critical because there is a lot of new technology here,” says Mr Smith. “Leveraging what is available through the tax payer, the manufacturer, additional private equity or pension companies is an underdeveloped concept.”