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IEEFA presentation: China, Germany, South Australia and California are leaders in embracing the global renewable energy transition

February 19, 2020
Tim Buckley

Renewable energy is deflationary.

Renewable energy is deflationary.

Wind and solar have been on a sustained double digit annual deflationary trend over the last decade. Batteries are also going through this deflationary process, aided by a 50% decline in lithium prices in the last two years. We expect this trend to continue, further driving energy market disruption.

VARIABLE RENEWABLE ENERGY IS THE LOW COST SOURCE OF NEW ELECTRICITY SUPPLY IN INDIA, cheaper than existing thermal power, and half the price of new non-minemouth or imported coal-fired power plants.

Now it’s a matter of how to accommodate the intermittency of renewable energy in India.

Longer term deflation is to be expected.

To unlock the financial markets for peaking power capacity, India needs time-of-day pricing. Such a price signal will drive investment in the balancing on-demand flexible peaking power generation. This will drive the capital market to deliver the products and technologies that entirely exist today: batteries, peaking gas power, faster ramping coal and pumped hydro, plus demand response management and greater grid connectivity.

India’s successful January 2020 tender – 1.2 gigawatt (GW) of hybrid-storage capacity at an average Rs4 / kilowatt-hour (kWh) tariff locked in with zero inflation for 25 years – could be a game changer.

In 2017, India experienced a 50% decline in wind and solar tariffs. Now that renewables are the lowest cost, that is not the end of the line. Longer term deflation is to be expected.

Here are some examples.

IN THE LAST 9 MONTHS, CALIFORNIA HIT A NEW RECORD LOW OF US$20 / MEGAWATT-HOUR (MWH), and 15% lower solar and battery tariffs than one year ago. Portugal hit record low tariffs, with the average at just €20/MWh. Brazil hit record low tariffs of US$18/MWh – down 15%. Finally, in January 2020 a solar tender in Qatar hit a world record low of just US$15.70/MWh.

India has some of the lowest variable renewable energy in the world and it will get cheaper, without a doubt.

The flip side is that stranded asset risk globally is rising for both coal-fired power, and in India, for baseload imported gas-fired power. The global trend away from thermal coal is accelerating.

China is an absolute world leader in embracing this transition.

Coal will be used in India for decades to come, but the share will be progressively eroded by lower cost, cleaner domestic renewable energy.

One of the key drivers is financial markets.

There are 126 globally significant financial institutions – banks, insurers and asset managers – that have now announced formal coal exit policies.

China is an absolute world leader in embracing this transition.

In July 2019 China announced the biggest renewable energy tender in the world – 23 gigawatts of renewable energy with zero subsidies, to be operational by the end of 2020.

In effect China has reached grid parity for renewable energy, a point that India reached 3 years ago.

China plans to dominate and drive this sector – not just wind and solar, but batteries, rare earth, lithium, iron, grid, hydro and electric vehicles – in all of these aspects China is already the world leader and is very ambitious. China is driving the price of these products down drastically in order to drive volumes and economies of scale, gaining market share in the process.

IN LESS THAN TWO DECADES, COAL-FIRED POWER IN CHINA HAS FALLEN FROM 70% OF GENERATION to be well on the way to their target of 50-55% by 2030.

China like India is absolutely transforming and doing it in a growing economic backdrop, and within that coal is being diluted very significantly.

China is the largest renewable energy installer in the world, but India is now in the top three, being on track to install 12-14GW in 2019/20.

California, Germany and South Australia have up to five times the level of variable renewable energy integration

India’s target of 30-40GW a year of variable renewable energy is world-leading in its ambition, but it can be done. China has been doing over 60GW every year since 2016.

Variable renewable energy integration at the national level is not yet a major problem in India. In the 2019/20 year, variable renewable energy was 25% of installed capacity, but only 10% of generation given the lower utilisation rates of wind and solar.

California, Germany and South Australia have up to five times the level of variable renewable energy integration, so there are lessons to be drawn from these markets as India progresses down a similar path.

INDIA’S NET THERMAL POWER INSTALLS DROPPED 80% THREE YEARS BACK, with net installs of now just 3-4GW annually becoming the norm as end-of-life closures accelerate, while renewable energy annual installs have doubled in the last four years to 12-14GW in 2019/20.

Despite the lack of government policy, investors in Australia have embraced renewables

It’s a state by state market in India. Karnataka in July 2019 had three days of more than 50% variable renewable energy. Some states are going to hit constraints much faster and will need to adopt key balancing lessons soon.

California delivered 34% of its energy from renewables last year. It has a target of 100% by 2045 and they are ahead of schedule. The U.S. state is one of the leading markets in the world.

Despite the lack of government policy, investors in Australia have embraced renewables. Nationally the trend is upwards, north of 20% of variable renewable energy. South Australia is one of the world’s leaders with 49% variable renewable energy for the last 12 months.

GERMANY HAS BEEN DRIVING THE TECHNOLOGY DISRUPTION GLOBALLY OVER THE LAST 20 YEARS. In 2019 there was 46% of energy from renewable energy, and 34% from variable renewable energy. In contrast, coal fired-power generation in 2019 was down 26% year-on-year.

Anyone who thinks this is going to be a gradual multi decade transition, think again.

Watch Tim Buckley’s presentation at the 2nd international conference on large-scale grid integration of renewable energy in India.

Tim Buckley is director of energy finance studies, IEEFA Asia Pacific.

This presentation was delivered mid-2019. This commentary has figures updated to the end of 2019.

Related links:

Policy certainty and stability sought to increase renewable energy development and investment

India urged to boost competition, modernise and upgrade the grid

India’s top renewables states can learn from South Australia

Risk factors multiply for GE as California power plant shutters—20 years early

How California became a global leader in renewable energy

Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective. Tim was formerly Director Energy Finance Studies, Australia/South Asia, IEEFA, and was a Managing Director, Head of Equity Research at Citigroup for 17 years until 2008.

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