Former IEEFA Transition Policy Analyst Karl Cates has been an editor for Bloomberg LP, an editor for the New York Times, and a consultant to the Treasury Department-sanctioned community development financial institution (CDFI) industry.
Amid the global economic crisis, utility-scale wind and solar continue to be seen not just as a long-term investment but one for the near term as well.
Writing from Australia this week, my colleague Bruce Robertson notes that two big energy companies—Origin and Santos—are pulling back on oil and gas capital spending but forging ahead on renewable energy investments. Robertson reports also that Acciona, a Spanish multinational, is proceeding with construction of a $1.2 billion 1-gigawatt wind farm in Queensland.
Similar developments are evident in the U.S. as well. The old electricity-generation model has been giving way to a new one over the course of a decade, and capital markets have been moving accordingly.
The old electricity-generation model has been giving way to a new one
The Wall Street Journal summed up investor sentiment last week under the headline: Wind, Solar Farms Are Seen as Havens in Coronavirus Storm. The article cited the sector’s “low-risk stable yield opportunities at a time of extraordinary market volatility,” noting that utility-scale renewable projects are typically tied to long-term power purchase agreements that assure steady revenues.
Compare that assessment with the financially troubled U.S coal sector, and looming company failures across the oil and gas sector. Oil and gas interests are being decimated because of the supply-side global price shock that is continuing and because a largely pandemic-driven economic downturn, the likes of which haven’t been seen in generations, is inhibiting the demand side. What’s happening macro-economically will only hurt coal, too, an industry that for some time has been on a downward spiral because of changing utility company preferences. Coal companies, according to an S&L Global Market Intelligence report published yesterday, are suddenly “borrowing cash from their available financial facilities, lowering production and taking other measures to shore up liquidity in the face of a potential global recession.”
The Wall Street Journal also asserted that new renewable energy projects “likely face financial hurdles.” But whatever these hurdles are, they are probably less substantial than the ones facing fossil-fuel companies. In fact, if corporate, utility industry and regulatory behavior is any indication, thousands of megawatts of utility-scale renewable projects in the pipeline seem relatively well-insulated against such risk.
TWO MAJOR REGIONAL PROJECTS ILLUSTRATE THIS TREND:
In just the past 30 days, utility-scale solar deals or solar initiatives have moved forward in Arkansas, California, Georgia, Indiana, Florida, North Carolina, Ohio, Rhode Island, Tennessee and West Virginia. Wind deals or solar initiatives have also proceeded in Illinois, Nebraska, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, South Dakota, Virginia and Texas.
THE SHIFT TOWARD RENEWABLES IS HAPPENING ON A GLOBAL SCALE, TOO, AS CAN BE SEEN, FOR INSTANCE, when Iberdrola, Spain’s renewables giant that has significant holdings in the U.S., announced on April 2 that it will increase capital spending this year by 23%, to $10 billion from $8.15 billion in 2019. Bloomberg New Energy Finance (BNEF) indicates that global wind industry expansion is slowing now because of the economy’s downturn but still growing—at a record 9% pace in 2020. A New York Times article yesterday cited new research by Raymond James Financial that sees renewables beating out fossil-fueled power as electricity consumption drops nationally: “That’s because utilities, as revenue suffers, will try to get more electricity from wind and solar farms, which cost little to operate, and less from power plants fueled by fossil fuels.” Wood MacKenzie analysts in a late-March note wrote that “capital allocation is no longer a one-way street for Big Oil—renewables projects suddenly look as attractive.”
The EIA sees the renewables sector growing by 11% this year
These conclusions are supported by the Energy Information Administration (EIA)’s latest monthly short-term energy outlook for April. The EIA sees national electricity demand shrinking by 3% this year but the renewables sector growing by 11% (with coal-fired generation losing an additional 20% of its market share and natural gas-fired generation increasing by a scant 1%).
And—in agreement with the broader BNEF projection—the EIA is forecasting a slowdown in U.S. renewables growth, but not a very big one. The agency has reduced its projections for wind and solar expansion by 5% and 10% respectively, but still sees 12.6GW of new solar capacity and 19.4GW of new wind capacity coming online this year.
Taken together, these reports suggest that this crisis will only accelerate the transition to renewables in the U.S. and globally.
Karl Cates is an IEEFA policy analyst.