1 Sentimental Journey: the long, winding road to a renewable energy future June 2016 The journey to a renewable energy future is taking longer than many analysts and agencies expected. How so? The solid line in the first chart shows the percentage of US primary energy 1 derived from renewable sources, alongside some over-optimistic prior forecasts 2 . Similarly, most forecasts for electric vehicles (EVs and plug-in hybrid vehicles) have been too high as well, as shown in the 2 nd chart. Now that learning curves have contributed to declines in solar and wind capital costs 3 , renewable energy is finally showing up on the global electricity radar screen. In 2015, global investment in renewable energy reached a new all-time high at $286 billion, despite sharp falls in oil, coal and gas prices. Almost all of the recent growth is wind and solar, with the largest regional increases in China/Asia. Renewables ex-hydro made up 54% of all capacity installed around the world in 2015 (the first time they represented a majority), and accounted for 7% of global electricity generation in 2015. Wind has been growing steadily, while solar remains at just 1% of total generation. 1 US primary energy use by sector: electricity 39%, transportation 28%, industrial 22%, residential/commercial 11%. 2 Rather than focusing just on the US, Jacobson and Delucchi (2009) proposed a global plan for 2030 in which 100% of world energy would come from renewables. Parts list: 3.8 million 5 MW wind turbines; 40,000 300 MW PV plants; 1.7 billion 3 kW rooftop solar installations; 5,350 100 MW geothermal plants; 270 1.3 GW hydropower stations; 720,000 wave devices; 490,000 1 MW tidal turbines; and unprecedented extensions of high-voltage transmission. Assembly required. 3 Since 1976, solar module costs have declined steadily from $100 per watt to $1 per watt as production volumes increased. Wind costs also declined from 1984 to 2004, after which prices stopped falling due to rising component and labor costs. For more information, see our learning curve exhibit from last year’s energy paper. 0% 10% 20% 30% 40% 50% 1960 1970 1980 1990 2000 2010 2020 2030 Source: EIA, listed authors, Vaclav Smil, JPMAM. 2015. Renewables include wind, solar, hydropower, geothermal, biomass, wood and waste. The share of US primary energy coming from renewable sources, and some notable forecasts Actual renewable share of primary energy Amory Lovins (RMI) Carter Admin (solar only) Physicist Bent Sorensen Nat'l Renew. Energy Lab Google 2030 Clean Energy Plan 0% 2% 4% 6% 8% 10% 12% '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 Source: DOE, BEA and listed organizations. 2015. Note: global EV+PHEV sales in 2015 were also around 0.6%. Another generation of electric car projections out of sync with reality, EV+PHEV sales as % of total car sales Deutsche Bank PwC Frost & Sullivan Bloomberg NEF IEA Roland Berger BCG Deloitte Actual US EV+PHEV sales ● US ● Global $0 $50 $100 $150 $200 $250 $300 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: UNEP, Bloomberg New Energy Finance. 2015. Annual global investment in renewable energy USD billions Asia ex. China China Europe US Americas ex. US Middle East & Africa 0% 5% 10% 15% 20% 25% '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 Source: BP Statistical Review of World Energy. 2015 Global renewable electricity generation: still mostly a hydro-electric story, but wind rising, % of total generation Hydro Geothermal, biomass, & other Solar Wind
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1
Sentimental Journey: the long, winding road to a renewable energy future June 2016
The journey to a renewable energy future is taking longer than many analysts and agencies expected. How so? The solid line in the first chart shows the percentage of US primary energy1 derived from renewable sources, alongside some over-optimistic prior forecasts2. Similarly, most forecasts for electric vehicles (EVs and plug-in hybrid vehicles) have been too high as well, as shown in the 2nd chart.
Now that learning curves have contributed to declines in solar and wind capital costs3, renewable energy is finally showing up on the global electricity radar screen. In 2015, global investment in renewable energy reached a new all-time high at $286 billion, despite sharp falls in oil, coal and gas prices. Almost all of the recent growth is wind and solar, with the largest regional increases in China/Asia. Renewables ex-hydro made up 54% of all capacity installed around the world in 2015 (the first time they represented a majority), and accounted for 7% of global electricity generation in 2015. Wind has been growing steadily, while solar remains at just 1% of total generation.
1 US primary energy use by sector: electricity 39%, transportation 28%, industrial 22%, residential/commercial 11%.
2 Rather than focusing just on the US, Jacobson and Delucchi (2009) proposed a global plan for 2030 in which 100% of world energy would come from renewables. Parts list: 3.8 million 5 MW wind turbines; 40,000 300 MW PV plants; 1.7 billion 3 kW rooftop solar installations; 5,350 100 MW geothermal plants; 270 1.3 GW hydropower stations; 720,000 wave devices; 490,000 1 MW tidal turbines; and unprecedented extensions of high-voltage transmission. Assembly required.
3 Since 1976, solar module costs have declined steadily from $100 per watt to $1 per watt as production volumes increased. Wind costs also declined from 1984 to 2004, after which prices stopped falling due to rising component and labor costs. For more information, see our learning curve exhibit from last year’s energy paper.
The share of US primary energy coming from renewable sources, and some notable forecasts
Actual renewable share of primary energy
Amory Lovins (RMI)
Carter Admin (solar only)
Physicist Bent Sorensen
Nat'l Renew. Energy
Lab
Google 2030 Clean Energy Plan
0%
2%
4%
6%
8%
10%
12%
'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20Source: DOE, BEA and listed organizations. 2015. Note: global EV+PHEV sales in 2015 were also around 0.6%.
Another generation of electric car projections out of sync with reality, EV+PHEV sales as % of total car sales
Deutsche BankPwCFrost & SullivanBloomberg NEFIEARoland Berger
BCG
Deloitte
Actual US EV+PHEV sales
● US● Global
$0
$50
$100
$150
$200
$250
$300
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15Source: UNEP, Bloomberg New Energy Finance. 2015.
Annual global investment in renewable energyUSD billions
Asia ex. China
China
Europe
USAmericas ex. US
Middle East & Africa
0%
5%
10%
15%
20%
25%
'85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15Source: BP Statistical Review of World Energy. 2015
Global renewable electricity generation: still mostly a hydro-electric story, but wind rising, % of total generation
Will renewable energy continue its recent rapid expansion? If so, wind and solar intermittency costs will have to be absorbed or eliminated. In last year’s energy paper, we analyzed Germany’s Energiewende plan to meet 80% of electricity demand from renewable sources by 2050. One notable finding about Energiewende: Germany’s thermal (coal and natural gas) capacity needs would be almost unchanged from current levels, given the need to meet electricity demand in winter months when German wind and solar irradiance levels are low. As an indication that our estimates may be on the right track, consider the next chart. Despite a lot of renewable capacity added since 2001, Germany’s coal and natural gas capacity has not declined at all. In other words, grids with high wind and solar penetration can still be heavily reliant on backup thermal capacity. This dynamic is not incorporated into levelized costs per kWh for renewable energy, and may also explain why Germany’s electricity costs are the highest in Europe. We get into more details in the New York section on pages 14-15.
For investors, the journey to a more renewable and cleaner energy future has translated into substantial risk. Since 2003 and 2009, two notable renewable and alternative energy indices have trailed both the S&P energy sector (comprised mostly of oil & gas stocks), and the broad equity market as well4.
4 The Wilderhill Clean Energy Index includes US-listed companies focused on renewable energy production, energy conversion (DC-AC, fuel cells, LED screen manufacturers), pollution prevention, conservation and power delivery. The FTSE Environmental Opportunities Renewable and Alternative Energy Index, launched in 2008, includes global companies involved in renewable & alternative energy, energy efficiency and waste and pollution control.
525
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0
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'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
Source: German Federal Ministry for Economic Affairs and Energy. 2014.
Despite a large renewable energy build-out in Germany, almost no reduction in natural gas and coal capacity
Solar and wind capacity, GW
Thermal capacity (coal & gas), GW
Electricity consumption, TWh
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-50%
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Source: Bloomberg. Date range: December 31, 2002 to June 14, 2016.
Renewable/clean energy stocks, traditional energy stocks and the broad market: 2003-2016, Cumulative return
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S&
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-50%
0%
50%
100%
150%
200%
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Source: Bloomberg. Date range: December 31, 2008 to June 14, 2016.
Renewable/clean energy stocks, traditional energy stocks and the broad market: 2009-2016, Cumulative return
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Renewable and clean tech investments have been made by venture capital and private equity investors as well. Private investment is by definition harder to track, but there are sources to look at. Cambridge Associates compiles data on venture capital and private equity investments in clean tech companies5. As with publicly tradable equities, the Cambridge private investment renewable energy and clean tech universe has generated substantial risk and low returns to-date:
• Through September 2015, the gross internal rate of return (before fees) on the Cambridge renewable/clean tech universe of private companies is 3.4%
• US companies which comprise around ¾ of the universe generated a gross internal rate of return before fees of 1.7%
• Cambridge notes that when measured across their entire dataset, such company-level returns are typically 4.4% higher than net fund-level returns earned by limited partner investors
Bankruptcies and 70%+ stock price declines in the renewable, alternative and clean energy sectors
5 The Cambridge Clean Tech universe includes renewable power manufacturing and development, energy optimization and conservation, energy storage, recycling and pollution control. As of Q3 2015, the universe was comprised of 810 companies in which 480 venture capital and private equity funds invested. Over 90% of the investments were made after 2005. Cambridge estimates that their sample represents 20%-40% of all clean tech private investment. I consider the returns to be informative since 45% of the investments have been realized.
A closer look at renewable energy and clean tech bankruptcies and large stock price declines
The following companies are reminders of the risks and exaggerated hype often associated with renewable energy and clean tech stocks. Each stock shown went bankrupt, or suffered a price decline of 70%+ from its peak. The list is primarily drawn from our analysis of concentrated stock risk in the history of the Russell 3000 Index (“The Agony & The Ecstasy”). The list includes public companies only, and excludes failed private companies such as Solyndra (solar panels); Better Place (electric car charging stations); Range Fuels, Qteros, Coskata and Terrabon (biofuels); etc.
Biofuels Fuel Cells, Engines Geothermal Solar Wind
Amyris and Batteries Alternative Earth Resources Akeena Solar Broadwind Energy
Aventine A123 Systems Geothermal Resources Intl American Solar King China Ming Yang Wind
Bioamber Advanced Battery Technologies Applied Solar Energy Cleantech Solutions
Gevo Aura Systems Pollution control Ascent Solar Technologies
KiOR Azure Dynamics Earthshell Corp AstroPower
TerraVia Ballard Power Systems Environmental Elements Energy Conversion Devices Misc. services
VeraSun ECOtality Fuel Tech Enphase Energy Intermolecular
Ener1 Wahlco Systems Equinox Lime Energy
Energy conservation FuelCell Energy Evergreen Solar
Blue Earth H Power Power generation, conversion First Solar
Comverge Impco/Fuel Systems Sol. and storage Hoku Scientific
Magnetek Medis Technologies Aixtron Real Goods Solar
Orion Energy Systems Millennium Cell American Superconductor Sky Solar Group
SemiLEDs Plug Power Amtech STR Holdings
Power Solutions Int. Beacon Power SunEdison
Rare earth minerals Quantum Fuel Systems Capstone Turbine SunPower
5N Plus Sonex Research Proton Energy Suntech Power
Daqo New Energy Unique Mobility/UQM Satcon Technology Trendsetter Solar Products
Molycorp Valence Technology TerraForm Yingli Green Energy
Rare Element Resources Westport Innovations
Source: JPMAM, Bloomberg. May 31, 2016. The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. The use of the above company logos is in no way an endorsement for JPMIM investment management services.
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This year’s paper continues our research into the promise, potential and constraints of renewable energy, after a brief section on the commodity super-cycle and oil. Click on the page links for each section.
[I] How far along in the commodity super-cycle, and is the oil bounce sustainable? Pages 5-6 Prior super-cycles have taken 15-30 years to play out. However, given price declines that have already taken place, we are probably much closer to the end of the current one. And on oil, by mid-2017, the world may be looking at a deficit of supply relative to demand.
[II] The tortoise, the hare and the electric car: the quiet progress of hybrids over EVs Pages 7-9 Electric cars generate excitement, but EV projections have been too high for generations. The more impactful energy-reducing trends are taking place in the hybrid market.
[III] A New York State of Mind: Thoughts on an ambitious new energy plan Pages 10-15 By 2030, New York aims to generate 50% of electricity from renewable energy, and decrease energy consumption in buildings by 23%. Parts of the plan are achievable while others are aspirational, particularly since New York is not a very sunny or windy place.
[IV] The Utility Empire Strikes Back: Distributed solar power and billing changes Pages 16-18 US utilities are changing their approach to customer billing, which could slow the future growth of distributed residential and commercial solar power.
[V] Dam it: A look at the modest potential for more hydropower in the US Pages 19-20 Despite its large stock of streams and rivers, the US gets a lot less electricity from hydropower than Norway, Switzerland, Canada, Austria and Brazil where its share of generation is over 50%. We take a closer look at US hydropower potential.
Sources and acronyms Page 21 As always, our energy piece is overseen by Vaclav Smil, Distinguished Professor Emeritus in the Faculty of Environment at the University of Manitoba and a Fellow of the Royal Society of Canada. His inter-disciplinary research includes studies of energy systems (resources, conversions, and impacts), environ-mental change (particularly global biogeochemical cycles), and the history of technical advances and interactions among energy, environment, food, economy, and population. He is the author of 39 books and more than 400 papers on these subjects and has lectured widely in North America, Europe, and Asia. In 2010, Foreign Policy magazine listed him among the 100 most influential global thinkers. In 2015, he received the biennial OPEC award for research, and is described by Bill Gates as his favorite author.
Michael Cembalest J.P. Morgan Asset Management
This year’s cover. The picture of Jinshui Road in Taiwan at night shows light trails and light bursts which seem to be happening in real time, but which are actually the result of changes to the camera’s shutter speed and aperture settings. With its mixture of the real and the unreal, it captures some of the themes of this year’s energy piece. On a sentimental journey, some of the images you recall seeing were real, while others existed only in the realm of your imagination.
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