Published: June 13, 2011

Energy

Renewable Energy at a Crossroads

by Christopher Dann, Sartaz Ahmed, and Owen Ward

The wind, solar, biomass, and geothermal energy sector has grown in fits and starts during the last 30 years but now may finally have the momentum to become a self-sustaining industry.

In 2007 , renewable energy sources were poised for accelerated growth. Then the global econom ic downturn

interv ened, depressing energy dem and in general and casting particular dou bt on the business case for wind, solar, biom ass, and geotherm al energy . Now that the sector is beginning to grow again, som e indu stry observ ers are still qu estioning whether the m arket is resilient enou gh to continu e that growth, considering the v olatile energy prices in sev eral im portant way s during the last few y ears, to the point at which it is unlikely to experience the periods of decline or stagnation we hav e seen in the past. One of the hallm arks of the renewables sector today is its structural div ersity in term s of technologies, play ers, and geographic regions and that will m ake all the difference.

and a shifting political clim ate. The answer is m ore optim istic than one m ight expect, becau se the m arket has ev olv ed

The story of the new wav e of renewables begins in 2 005, when a num ber of div erse factors cam e together to accelerate the growth of new renewable energy generation in the United States. The first was an incentiv e for change: Power prices ju m ped as natural gas prices reached a historical high. The second was an opportunity : Technology adv ances led to significant redu ctions in renewable energy costs. Finally , the inv estm ent com m unity , at that tim e flush with capital and in hot pu rsuit of the next boom m arket, began to inv est in the sector in earnest.

Bu t by far the biggest driv er behind the growth of renewables du ring this tim e was m eaningfu l policy su pport, at both federal and state lev els in the United States, and also around the world. With a focu s on fighting clim ate change and and adoption of renewable energy technologies. ju m p-starting new industries, legislators adopted a wide range of incentiv e m echanism s to support the dev elopm ent Recognizing a fav orable inv estm ent env ironm ent, priv ate equity and v enture capital firm s com m itted m ore and

m ore m oney to the clean-tech sector, which is heav y in renewables, between 2006 and 2008, exceeding US$1 0 billion in North Am erica alone at the peak. These inv estors felt su re that predictable rev enu e stream s arising from federal and state policy su pport would help ou tweigh the technology risk. Inv estm ents were also influenced to som e degree by financial crisis hit.

a fear of m issing ou t on the next big thing, which created a herd m entality in the m arket at least before the global

From Boom to Bust to Balance

During the first y ear of the crisis, pessim ism about the sector returned. Many of the underly ing factors that had

That dy nam ic shifted with the dev elopm ent of u nconv entional gas resources; m ost analy sts forecast that natural gas prices will rem ain below $7 per m illion Btus for the foreseeable fu tu re. The worsening econom ic conditions hav e also brou ght a shift in political priorities, one that fav ors bu dgetary restraint ov er fresh spending on env ironm ental issues. Som e federal subsidies su pporting renewables m ay be sacrificed in forthcom ing cutbacks. State and local su pport could likewise fall prey to state budget reductions.

elem ents su pporting the business case for renewables was the high power prices anchored to high natu ral gas prices.

conv erged to driv e dem and for renewables faded, and others becam e highly uncertain. For exam ple, one of the key

The econom ic slowdown also cau sed ov erall electricity dem and to decline, resulting in ov ercapacity in m ost U.S. and there is little reason to add new capacity when the m arket is ov ersupplied.

power m arkets. Less generation translated into lower power prices, which weakens the bu siness case for renewables, Yet despite this u ncertainty , the m arket continued to ev olv e in im portant way s, setting the stage for a return to

econom ic v iability and growth. This ev olu tion took place along sev eral dim ensions.

Technological diversit y. The renewables sector is far m ore div ersified today than it was in the early part of the biom ass. Biom ass both wood and waste accounted for m ore than 7 0 percent of renewable power generation

1 9 80s, when renewable energy generation (other than from long-established hy dro sources) was prim arily reliant on installations throu gh 2000. Although it was a conv enient and econom ical source of power in areas like California and the northeastern United States, biom ass dem onstrated lim ited potential for either rapid technological im prov em ents or large-scale capacity dev elopm ent. Wind and solar technologies, m eanwhile, were in their em bry onic stage. the supply of oil and natu ral gas increased and prices fell.

Consequently , the political com m itm ent to renewables as a v iable alternativ e to fossil fu els was weak, particu larly as Today , the renewable energy portfolio in m ost cou ntries is m uch m ore balanced, in large part thanks to wind and

categories su ch as wind, biom ass, and geotherm al to the subsectors u nderpinning them . For instance, the proliferation of different solar technologies su ch as therm al and photov oltaic (PV) and the ev en further su bsets of thin-film and cry stalline silicon helps to ensu re that produ ct characteristics m eet the targeted needs of different custom ers (for exam ple, utility v ersus residential).

solar, which hav e grown substantially ov er the last decade. The div ersity extends bey ond the high-lev el technology

This technological div ersity allows local gov ernm ents and bu sinesses to m ix and m atch sou rces of renewable energy , m ost widespread renewables technology . Hav ing already benefited from $3 billion spent on R&D globally ov er the past decade, it m ay hav e reached the point of dim inishing inv estm ent returns. Still, the slowdown has led to an estim ated 3 0 percent ov ercapacity , which will result in lower equipm ent costs and thu s help su stain steady growth in wind installations. taking adv antage of technology alternativ es that were prev iously unav ailable. Consider the case of wind power, the

Meanwhile, the im pact of the rise of Chinese PV m odule m anufactu rers cannot be ov erstated. These m anu factu rers m odule m anufactu rers com bined hav e six tim es the m anufacturing capacity of the top 1 0 U.S. m odule

hav e increased their share of the m arket in the last four y ears to m ore than 50 percent. Today , the top 1 0 Chinese PV

m anufactu rers com bined. Building on their strong position in the m odu le segm ent, these com panies will continu e to v ertically integrate, setting them selv es up to deliv er further cost reductions through both innov ation and inv estm ents.

Geographic diversit y. Renewable energy generation is no longer confined to certain regions around the world, and its new geographic reach has positiv e im plications for political support and im plem entation. For exam ple, in the percent of the nations renewable energy generation capacity . Their share of capacity is now down to about 40 New Jersey , and Oregon hav e seen significant growth in PV installations thanks to generou s state su bsidies. United States six y ears ago, just two m arkets the western and southeastern regions accounted for m ore than 55 percent; other regions hav e grown at a faster clip. Sev eral states with com parativ ely less sunlight Massachu setts,

Renewable energy generation and supporting industries hav e becom e an integral part of local econom ies. In the

industrialized world, with few other industries in growth m ode, local gov ernm ents are beginning to see renewables as a source of opportu nity . In the U.S., local politicians and econom ic dev elopm ent officials in such locations as Florida and Arizona hav e extended a range of tax breaks and other incentiv es to attract renewable energy com panies.

The sectors geographic div ersity has also helped it address specific technical challenges, inclu ding the interm ittent natu re of renewable energy sources. Distributing renewables capacity m ore broadly across the country helps to

m itigate such v ariability (that is, the wind blows in different places at different tim es).

T oo Broad to Fail

Sev eral decades ago, the renewables landscape was relativ ely bare and uncom plicated; today , the sector has attracted a range of play ers from different industries and geographies. These new constituents hav e joined with industry ecosy stem , which accelerated during the recent boom , has brought needed innov ation and capabilities to the industry , and helped to reduce its reliance on subsidies. v eterans to form a strong ecosy stem of dev elopers, suppliers, cu stom ers, financiers, and others. The em ergence of this

For the pu rposes of the discussion below, we segm ent the new play ers into three categories: those that im prov e technology , those that im prov e project econom ics, and those that im prov e com m ercialization and m arketing. Ent rant s improving t echnology. In recent y ears, m arket entrants from other, established indu stries hav e

brought new technologies into the renewables industry , which has helped lower installed costs and im prov e efficiency . Nowhere is this m ore ev ident than in the solar m arket, where sev eral big play ers hav e joined the fray to take their own shot at capitalizing on the m arkets growth. General Electric Com pany is reentering the solar battle, directly taking on m arket leader First Solar Inc. Boeing Com pany is getting into the m ix by apply ing technology first dev eloped in its satellite business to achiev e potentially record-breaking efficiencies for solar panels.

Technology firm s are increasingly integrating downstream on the renewables v alue chain. For exam ple, leading

Chinese solar PV wafer and cell m anufacturers, such as ReneSola and JA Solar, hav e expanded their bu sinesses to

include m odule assem bly , a critical link in the v alu e chain with low barriers to entry . Fu rther downstream , Sharp two y ears to gain a dedicated sales channel in a com petitiv e dev elopm ent env ironm ent and to hav e an integrated, end-to-end play within the solar m arket.

and First Solar, m anufactu rers of solar panels and m odu les, hav e acquired large solar project dev elopers ov er the last

Ent rant s improving project economics. The renewables sector has experienced dram atic growth in the nu m ber of project developers, financial play ers, and other interm ediaries in recent y ears, and this trend has been one of the m ost critical factors behind the recent boom .

Large international m erchants looking for geographic div ersification and sm all startu ps with hopes of landing their y ears. Their participation has helped to identify the m ost attractiv e sites and to secure financing, creating a steady pipeline of renewables installations with great potential. Significant com petition am ong dev elopers has helped

first custom ers are am ong the bev y of project dev elopers that hav e flooded the renewables sector ov er the past sev eral

m aintain pricing discipline in power purchase agreem ents. Com panies su ch as SolarCity hav e also helped stoke latent residential dem and by leasing solar PV sy stem s for hom e installations, thereby addressing potential custom ers concerns about financing the expensiv e sy stem s and m anaging their m aintenance. Although consolidation is likely to occur in the com ing y ears, the robu st dev eloper m arket has already prov ided a strong foundation on which the industry can continu e to grow.

The entry of a div erse group of financial players has prov ided the fu nding the industry needed to establish its footing specializing in renewables financing, while tax equity partners hav e becom e increasingly inv olv ed; these solu tions fu nds joined them by adding renewables positions for long-term steady cash flows, a strategy they will likely continue. channels to im prov e project econom ics. The creation of com panies su ch as Sterling Planet and Green Mountain (NPV). Interm ediaries su ch as renewable energy credit (REC) brokers and green power marketers hav e prov ided additional hav e offered innov ativ e approaches to ov ercom ing the lim itations of existing financial incentiv es. Infrastructure and identify av enu es for cutting capital and installed project costs. In recent y ears, a num ber of firm s hav e begun

Energy has enabled project dev elopers to secure increm ental sources of rev enue to achiev e positiv e net present v alue

Going forward, the continu ed growth of smart grid companies and energy storage providers will play a critical role in

enabling the next wav e of renewables dev elopm ent. Successful dev elopm ent of econom ical energy storage technologies would solv e m any of the interm ittence challenges faced by wind and solar, im prov ing project econom ics. Meanwhile, the widespread adoption of sm art m eters and v ariable pricing will m ake solar power m ore attractiv e, giv en that its greatest output is during the day , when dem and is at its peak. In addition, investor-owned utilities will likely begin to div ersify upstream into new parts of the renewables v alue

chain. Com panies such as Duke Energy and Exelon hav e already acqu ired large asset ownership and dev elopm ent

positions. Utilities that build and own the renewable energy generation and transm ission infrastructu re, as opposed to sim ply pu rchasing energy through power purchase agreem ents, will hav e m ore balance sheet flexibility than sm aller to load centers. renewables financial play ers to build the new transm ission lines required to bring renewable power from rem ote areas Ent rant s improving commercializat ion and market ing. The introduction of new and innov ativ e bu siness at which renewables are deploy ed in the m arketplace. In the U.S., one of the m ost im portant driv ers of growth in Corporation and other com panies hav e introduced new pricing structu res whereby they install solar panels on incur large, u p-front capital expenditu res.

m odels particularly those that address the technology s som etim es steep u p-front costs will likely decide the pace com m ercial solar installations was the introduction of long-term , fixed-price contracts for electricity . The Su nPower custom er rooftops and charge m onthly fees, sim ilar to a lease arrangem ent, rather than requiring the cu stom er to

Sim ilar approaches will be needed if the sector is to fu lly tap the potential of the residential and sm all com m ercial

m arket. Different segm ents of the m arket will hav e different wants and needs, bu t the features are likely to include A nu m ber of com panies are already offering m ore sophisticated com m ercialization and m arketing, but additional bu siness m odel innov ation will no doubt occur as the renewables m arket m atures.

qu ick and econom ical installations, predictable power prices with no u p-front inv estm ent, and m ore elegant designs.

Application Div ersity

Any one of these forces wou ld hav e led to som e change in the indu stry . Together, they are pushing it past the tipping point to large-scale v iability . Gone are the day s when solar PV panels were considered only for sm all rooftop sy stem s. Renewables technologies hav e broadened in scope to the point at which they can be accepted as contributors to any regional energy m ix. For instance, m any solar PV m anufactu rers rem ain singu larly focu sed on m egawatt-sized projects, but som e thin-film riv als are pursuing breakthrou ghs in off-grid applications in a range of m arkets.

At the sam e tim e, renewables are finding a hom e at a m icro scale with som e m acro effect. Consu m er goods, such as briefcases with solar power chargers for m obile phones, are expected to spu r a com pound annual growth rate of 3 0 percent in the $3 00 m illion m arket for flexible thin-film PV m odu les.

the potential to su bstantially alter the m ilitary s dependence on fossil fuels.

gallon of fuel that reaches Afghanistan represents six m ore gallons that were expended getting it there. Solar PV has

The m ilitary is another likely channel for future growth. The energy dem ands of the m ilitary are considerable: Ev ery

PV m odu les could also bring electricity to m any in the dev eloping world, where the grid is underdev eloped and consum er electronics su ch as m obile phones hav e leapfrogged the infrastructu re built to support them . Mu ch work rem ains to m ake these m arkets com m ercially v iable for PV applications, but all hav e the potential to new m arkets cou ld dwarf the traditional rooftop m arket.

driv e disruptiv e change in the growth of dem and for and the m anufacturing supply of PV m odules. One day , these

A New Lev el of Scrutiny

Renewables hav e been a hotbed of activ ity in the past decade, attracting a wide v ariety of com panies asset

ev olv ing env ironm ent continues to present opportu nities for inv estm ent.

dev elopers, dom estic and international u tilities, technology com panies, and financial com panies am ong them . The

Howev er, giv en the uncertainty and com plexity in the renewables m arketplace, inv estm ent decisions are now m uch forward, inv estm ent decisions will need to explicitly address uncertainty throu gh effectiv e risk m anagem ent and contingency planning.

m ore difficult, requiring decision-m aking skills and tools that were not essential before the econom ic downturn. Going

For utilities, renewables are not v iable baseload technologies. Ev en as a com plem entary energy source, they carry costs that are not com petitiv e withou t su bsidies. Power sou rce decisions will therefore depend largely on local conditions, including the presence of renewable energy m andates, gov ernm ent incentiv es, and site av ailability . Here im perativ e. Many u tilities are m ore accu stom ed to m anaging old generation assets and will need to consider new operating m odels and program m anagem ent capabilities. Meanwhile, for large energy u sers, rooftop solar PV rem ains the only alternativ e to the grid. Although that is too, the array of incentiv es and technologies will m ake com prehensiv e bu siness case planning and risk analy sis an

historically the m ost expensiv e renewables option, solar PV costs are falling, in part becau se a growing num ber of those offered by the California Solar Initiativ e), inv estm ents are NPV positiv e. Still, users need to be cognizant of ongoing technology , regu latory , and political risks that m ay shift the econom ics against them .

installers are willing to take on the inv estm ent risk. In locales with su fficient tax and other incentiv es (for exam ple,

assets and technologies that are likely to reenter the m arket in the m onths and y ears ahead. The relativ ely fav orable

Fu rtherm ore, it will be critical for com panies to dev elop the capabilities needed to both ev aluate and add v alu e to the

inv estm ent clim ate of the past decade attracted a nu m ber of com panies that u ltim ately lacked the expertise to endu re and win in this m ore difficu lt inv estm ent env ironm ent. For exam ple, a nu m ber of sm all utilities and other com panies m ade subscale inv estm ents in renewables where they could add little v alu e, and they m ay soon be forced to div est those assets. The com panies that can pick u p the assets and position them to create a su stained com petitiv e adv antage

bu t plenty of opportunity rem ains for those with the v ision and the capabilities to power the next era for global energy m arkets.
AUTHOR PROFILES:
Christopher Dann is a partner with Booz & Company based in San Francisco. He specializes in developing strategy, assessing risk, and facilitating decision making for clients in the U.S. power, gas, and renewable energy industries. Sartaz Ahmed is a principal with Booz & Company based in Washington, D.C. She specializes in developing strategy for clients in the energy and infrastructure sectors. Ow en Ward is a senior associate with Booz & Company based in New York. He specializes in assessing markets, investment decisions, and risks for clients in the power generation, renewable energy, and nuclear energy industries.

will be the ones that establish the right to win in this m arket. Clear industry leaders are already starting to em erge,