For the last two years, I have drawn on Russian imagery to illustrate the state of the clean energy industry. In 2013, it was the battle of Borodino: the clean energy sector had suffered a bruising time, but it had survived and was poised to regain ground. In 2014, it was the River Neva in St Petersburg which provided the analogy for an energy industry frozen for aeons, but about to undergo profound and rapid phase change.

This year I want you to go back in time, over 66m years. Dinosaurs roam the earth – in fact they dominate it. They are magnificent creatures, honed by 135m years of competition, huge and fearsome. The very earth trembles as they walk.

Between the dinosaurs scurry some little furry creatures, mammals. No match for the dinosaur’s vast bulk and power, they stay out of their way, operating in ecological niches too small for the dinosaurs to exploit, scavenging scraps and hunting insects. They are industrious, clever, quick and adaptable. They are multiplying and learning, and gaining in confidence, though they are almost imperceptible to the dinosaur eye.

In the distance a herd of Diplodocoals, the biggest of the dinosaurs, is grazing. Slow-moving and with tiny brains, they can chew their way through almost any environment in which they find themselves. As they have done so, they have found themselves in competition with the aggressive Gasontosaurus, and they seem to be losing. The future isn’t looking great for Diplodocoal but they have been around for a long time and are not disappearing soon.

Suddenly, a fight breaks out! A pack of Velocifrackers has been chasing an adult male Tyrannosaurus Saudi, but now it turns on its tormentors, catching them unawares and inflicting terrible wounds. As they thrash around, the huge beasts knock down trees and tear up the ground around them. Naturally everyone stops what they are doing to watch the action.

Right now in the energy sector, everyone is transfixed by the big fight going on in the oil industry between conventional and unconventional production, OPEC vs non-OPEC, Saudi Arabia versus the frackers. It is one of those times when energy breaks through onto the front pages, and suddenly everyone is an expert. Every energy story has to be rewritten to fit around the main narrative of the Great Oil Price Crash.

Of course it is an important story. As we explained in our December press release, the oil price crash will have a range of impacts on the clean energy sector, more severe in the case of businesses directly competing with oil, like biofuels and displacing diesel generators, more moderate elsewhere. But it is probably not the most important story of the past 12 months for the clean energy sector.

The bounce-back in global clean energy investment, up 16% to $310bn after two years of decline, was probably the single most significant development of 2014. EON’s historic announcement that it is splitting into two, selling off its bulk generation and concentrating on its renewable and consumer-facing activities, is another contender. NextEra’s acquisition of Hawaiian Electric Industries was described by its chairman and CEO as “a postcard from the future of the electric industry”. Google’s $3.2bn acquisition of Nest probably said more about the direction of energy technology than any other development in 2014. And ACWA Power’s winning bid of less than 6 US cents per kWh to build 200MW of unsubsidised solar in Dubai is going to set a new benchmark for PV costs, clearly below the price achievable by natural gas.

But all these are “mammal stories.” The press, right now, is only interested in “dinosaur stories.” Welcome to 2015!

It is time for me to try to don my pith helmet, venture out into Jurassic Park, and present my 10 predictions for the year. In doing so, I have drawn on help from Bloomberg New Energy Finance chief editor Angus McCrone, as well as our teams of specialist analysts covering all aspects of the transition to a cleaner energy system.

1. Fossil prices remain under pressure 

Bloomberg New Energy Finance does not currently produce an oil price forecast. Having said that, we do have a view, as described in the accompanying article, and that view is that we are in for a few years of low oil prices. We do not buy the “flash crash” theory that after inflicting sufficient pain on US unconventional producers, the Saudis will tighten the taps before year-end and drive oil prices back above $100/barrel. Indeed, I would be very surprised to see a price above $60/barrel by year-end, and in the longer term I see oil trading in the $60 to $90/barrel range.

In the US, many marginal natural gas producers have been kept afloat by selling liquids into the oil market. The low oil price means they will spend the year cutting their drilling programmes, going out of business, being acquired, or handing the keys to their creditors. Although this will remove some natural gas supply, it will barely do anything to push up prices. Nor, in the short term, will there be any relief from new sources of demand, whether from transportation, export, new industrial projects or pipelines into Mexico or New England, where prices have remained high. Barring a very cold winter, we expect Henry Hub gas to remain in the $3 to $4/MMBtu range for at least the next year, while new sources of demand might produce a somewhat tighter market in 2016.

In Europe and Asia we expect further falls in the price of natural gas, on top of those already seen. The spot price for LNG in Asia dipped below $9/MMBtu for the first time in at least four years, down from the $12-18 range; European gas prices are hovering between $9 and $10/MMBtu, down from the $11 to $13 range where they have spent the last few years.

The oil price fall, the persistently weak economy, a mild winter and high storage levels look set to bring about even lower gas prices in Europe during the course of this year.

Prices in Asia will also weaken, although not quite as far. On the supply side, significant new natural gas sources are being brought on-stream. Over Christmas, the first shipment of LNG left Australia’s Curtis liquefaction plant, bound for Asia, one of a number of new Australian facilities coming on stream in the coming two years. A wild card could come from shale gas in China, though it looks more and more like taking quite a few years to come to market in volume.

Tempering the overhang of new supply, however, Asian natural gas consumption remains robust. Demand from China, India, South Korea and South-East Asia continues to grow. Japan is finding it hard to restart more than a few nuclear power stations, and still looking for ways of replacing soaring post-Fukushima fuel oil and coal imports with gas. On balance, while we see prices continuing to come under pressure, we don’t see a collapse on the cards.

2. Clean energy investment struggles to match 2014

You might be surprised at this one, given the strong investment figures from last year, the sector’s increasing competitiveness, and the confidence that low oil prices are not a show-stopper.

There are several reasons why clean energy investment growth might stall in 2015. The first is that 2014′s figure of $310bn will be a tough act to follow. It was up 16% on 2013, it was less than 3% below the all-time record, of $318bn in 2011, and indeed it could yet be revised higher in the months ahead if Bloomberg New Energy Finance’s data hawks in Cape Town and elsewhere spot more deals.

The second reason is that the 2014 total relied on a couple of features that are unlikely to recur. One was a spurt of large offshore wind financings, adding up to a record $19.4bn in total, one-and-a-half times the figure for 2012 and 2013 combined. The other was a jump in public market equity raised by clean energy companies to $18.7bn, a seven-year high. With sector share prices, measured by the WilderHill New Energy Global Innovation Index, or NEX, now nearly 20% below their March 2014 high, public market investment, at least for the first half of 2015, is likely to be weak.

There will be one other bit of grit in the engine this year too. The jump in the US currency’s exchange rate (in the last year up 22% versus the euro, 15% against the yen, 9% against a basket of currencies) is likely to depress the dollar value of investment outside the US in 2015.

We are optimistic about the GW capacity of new onshore wind and PV that will be installed in 2015 (see sections below), and there may well be a burst of new investment-stimulating policy ahead of the Paris COP21 climate change conference in December. India could be a star performer in clean energy this year, as Narendra Modi’s renewables-friendly government targets a doubling in solar installations to some 2.3GW, and the reinstatement of accelerated depreciation for wind projects drives a jump in investment activity.

If you push me for a 2015 investment figure, I would go for something in the $280bn to $320bn range. In other words, probably just short of last year’s figure, but with just a chance of exceeding it if things pick up through the course of the year.

Finally, green bonds: these have been one of the great success stories of the past two years, increasing from a paltry $3-5bn per year between 2007 and 2012, then suddenly jumping to $14bn in 2013 and $39bn last year. In 2015 we expect to see further rapid growth. No fewer than 75 major banks, investors and issuers have now signed up to the Green Bond Principles. There have been no major controversies and demand for green bonds has grown in line with supply. Most new issues have been healthily over-subscribed and have got away at the low end of their yield range, a very positive sign for the future.

We see the volume of green bonds doubling again this year to around $80bn. It should be noted that BNEF tracks green bonds separately from total investment in clean energy: total investment is counted at the point at which it is committed to projects, companies and research, not when funds are raised. Where we add, for instance IPO proceeds, we then adjust the totals to remove double-counting. So our figure for total investment takes into account the clean energy assets financed by green bonds, not the green bonds themselves.

3. It’s still all about the costs, stupid 

The last five years have delivered formidable improvements in the cost-competitiveness of PV, and to a more modest extent, wind power. After a pause in 2014, I expect to see renewed progress this year. The oil price plunge may help to bring this about, because a lower levelised cost of electricity for gas-fired generation in some countries will force solar and wind developers to respond with keener prices themselves.

I have a bit of an unfair advantage here, because I am writing this during January, having already seen what will clearly be one of the bellwether deals of 2015: ACWA Power’s extraordinary 5.84 US cents per kWh winning bid to build 200MW of solar PV on behalf of the Dubai Electricity and Water Authority (DEWA). In fact ACWA offered to go to 5.4 cents per kWh if DEWA awarded them the contract for a whole GW. At the World Future Energy Summit in Abu Dhabi last week, there was much debate about whether 5.84 cents could be replicated, or whether it was an artificially low price.

Dubai has superb solar resources, ACWA was able to obtain 86% leverage from local commercial banks because of the stability of its off-taker, and the tariff will be in place for 25 years. As a major developer, ACWA has a lot of leverage over equipment suppliers – it plumped for First Solar panels. So the conclusion must be that although 6-cent solar is certainly not going to be the norm, it is certainly the new benchmark. Around the world, solar project developers will be sharpening their pencils and seeing how close they can get. We are leaving behind the world of 15-cent solar, just as we have left behind the world of 30-cent solar and 50-cent solar within a few short years. Soon even Bjorn Lomborg, Dieter Helm, Matt Ridley and Martin Wolf will have to admit it.

Another thing we will be seeing is a narrowing of the surprisingly large gulf between PV system costs in cheap markets such as Germany, and that in expensive ones like the US – particularly California – and Japan. The expensive markets will get cheaper as scale and competition grow, which they will. We also expect to see the fruits of some of the initiatives aimed at squeezing expense out of the PV value chain – using more tailored pastes, new structures and better printing techniques, reducing material waste in manufacturing, using more economical fixings, cheaper inverters, and so on. And PV developers will be able to secure more financial leverage, as more investors become comfortable with the economics of solar power, enabling lower prices to produce the same equity returns.

In offshore wind, we should see cost reduction thanks to an unlikely friend, oil. A $100-plus crude price meant intense competition for large crane vessels, and therefore high charter rates. Anecdotal evidence suggests that the cost of hiring such a vessel has fallen by more than half in the last year, and when we are talking about many tens of thousands of dollars per day, that is a big deal. In onshore wind, lower oil prices will cut transport costs for the large components such as blades, nacelles and tower sections.

Geothermal may also benefit from lower rig rates, but since projects take so long to prepare, the effect of that during 2015 is likely to be minimal.

4. Paris COP21: More light show than meteorite 

The Paris climate change conference in December is the biggest fixture in the climate calendar since Copenhagen in 2009. To pursue the dinosaur theme, the climate community are dearly hoping it will prove to be a vast meteorite, streaking across the sky to deliver a long-overdue extinction event.

The reality is rather different. As is well-known, I have never bought the narrative that what the world needs most in order to address climate change is a binding top-down agreement assigning a carbon budget to each nation for all time. I am a relentless bottom-upper – favouring action on the ground over multilateral talks – and I am very much encouraged by what I see at levels around us: concrete and effective initiatives at national level, led by municipalities, mayors, companies, individuals and sectors, as well as bilaterally and plurilaterally, and the emergence of a very convincing set of technical solutions.

In terms of bilateral agreements, last November’s US-China deal was the most significant development on the climate front for years. As we speak there is an ongoing plurilateral negotiation under the auspices of the World Trade Organization, aiming for a trade deal covering environmental goods, perhaps to be announced by year-end. However, we have also seen India continue to refuse to make any significant pledge in bilateral talks with the US, a position it will most likely maintain in Paris, to the detriment of any effective outcome.

I believe the best we can hope for is that the UNFCCC process does not impede progress on all these fronts, in particular investment in clean energy and infrastructure, and perhaps that it provides some overall encouragement. That may sound unambitious, but the collapse of Copenhagen and the fiasco of rebuilding the climate negotiations thereafter set back the cause of clean energy considerably.

The way the Paris talks are structured, it is possible to be optimistic about this limited goal. There is little talk of a top-down, binding deal structured around carbon budgets. Most likely, a deal will emerge, structured around what used to be called “pledge and review”. In other words, each country will state what it is prepared to do, and then there will be some process of totting up commitments and pushing for more ambition in subsequent negotiating sessions. It will be denounced as unambitious by activists, but the reality is that it will be a decent outcome.

With any luck there will be general acceptance that the Kyoto approach, hobbling the economies of the developed world but allowing the developing world free license to emit, will be dead. But that may be a hope too far.

5. Electric vehicles touch the brakes 

When world oil prices were above $100 per barrel this summer, we felt we were set for nearly 400,000 electric vehicle (EV) sales globally in 2015, up from last year’s 290,000. With oil prices languishing around $50 per barrel, the EV market is inevitably going to fall short of those figures.

The biggest impact of cheaper oil, however, is likely to be on sales of hybrid cars, not EVs. Some buyers of electric vehicles, for instance those plumping for the Tesla S or BMW i8, are making their decisions in principle, not based on economics. Even those buying mid-range EVs, like the Leaf and the VW e-Golf, rarely make total cost of ownership calculations – it is just too hard, particularly when no one knows the resale value of these cars. So, while the drop in oil prices makes electric vehicles less attractive in theory, it does not change the sticker price, which is all about those pesky battery costs, less any subsidy.

What we are also seeing is that where EVs are being adopted very rapidly, it is as much to do with driver perks, like the right to share the single-occupant car lane, free use of ferries, exemption from congestion charging and the availability of charging infrastructure. Again these are things which are being offered more frequently, and are not affected by oil prices.

The Chinese EV market has been “challenging”, to use the words of Tesla Motors chairman Elon Musk, but the country nevertheless continues to bet on EVs as one of the main ways of dealing with its desperate urban pollution problem. This is a position likely to be adopted by more and more mayors around the world as the health impacts of diesel pollution are better understood. A landmark ruling by the European Court of Justice in November last year opens the way for any EU citizen to take his or her government to court over failure to address air quality breaches – and it is hard to see any meaningful action in European cities not including increased support for electric vehicles.

Finally, although in the US there are signs that some Americans are once again turning to larger cars, most buyers will wonder how long oil prices will stay below $50.

My forecast, therefore, is for continued growth in the EV market in 2015, but at a slower rate than 2014′s 40%, with the eventual sales total around 15% up at 330,000.

6. Solar solid with 55GW 

Our prediction for solar in 2015 is that the world will add more than 55GW of capacity, and indeed, if the sector gathers steam during the year as we think it might, it could reach as much as 60GW, up from a record of just under 50GW last year. The manufacturing capacity is certainly there, and investors are increasingly happy holding solar assets, as evidenced by the surge of yieldcos during the past two years and the ease with which green bonds are being placed.

The continuing solar success story will be driven mainly by increasing competitiveness, as discussed above, supported by a growing confidence among investors and policy-makers that solar is indeed a cheap source of daytime power. In in the developing world, it can quickly help to close the energy access gap, and in the developed world it can play an important role in meeting peak demand, in particular where there is heavy air-conditioning demand.

As solar gains in market share we will see more territories imposing taxes on rooftop PV, following on the heels of Germany and Austria last year. Other European countries, and some US states, are among the places that might introduce an impost to try to ensure that small-scale solar users contribute to the cost of the grid.

The most exciting change in a business-as-usual year may well be the spread of PV to more and more localities in Africa and India, both rooftop and projects, as the entrepreneurial effort fans out from early-moving countries such as Kenya and Rwanda, and Prime Minister Modi’s ambitious vision for solar takes shape.

7. High winds deliver nearly 60GW 

Last year saw a record 51GW of wind capacity added worldwide, with China, the US, Brazil, Germany and India the biggest markets. In 2015, we expect to see this figure beaten handsomely, with some 58GW added, nearly 55GW of that being onshore and more than 3GW offshore.

Apart from German onshore, where installations will fall back after the rush to take advantage of a tariff that expired on 1 January, most of the other big markets will see growth. The US will see particularly strong activity, with anything up to 10GW added, as projects that qualified for the Production Tax Credit in 2013 or during the short-lived extension at the end of last year, reach the construction stage.

Even though the number of new GW installed will be up, dollar investment in wind is likely to be down in 2015 from the record $99.5bn figure achieved last year. This is because there is a lag of a year or more between investment decision and project completion, and in 2015 policy uncertainty in key markets such as German and US onshore and UK offshore is likely to hold back new financings.

8. Lots of sizzle, a little steak in connected homes and power storage 

Home energy management, innovations such as smart thermostats and the “connected home”, are really set to catch the consumer imagination in 2015. Nest will continue to run out its slick advertising, Apple and Honeywell are now pushing their Lyric, British Gas is pushing Hive, and so on.

2015 should see progress towards more systematic products – smart thermostats that can talk to the boiler and process a weather forecast – as well as the integration of various services on one platform. US-based security firm ADT has secured one million customers for its connected home platform, leveraging its strong position in burglar alarms.

All this should open up the chance for households to take advantage of time-of-use electricity pricing. Regulators in many countries are looking to require utilities to offer this, and indeed Italy and Ontario already do so. Large-scale uptake of demand-side management technologies is likely to be faster in the US, where air conditioning is a key part of the load, than in Europe. The prize for the power system as a whole will be much greater flexibility to cope with peaks and troughs in demand and in variable generation from wind and solar.

However, although it will become much more common to include smart home products in new-build housing, their overall penetration into housing stock will remain in the single-digit percent in even the most enthusiastic countries. The fact is most consumers are not ready to retrofit their homes with a new and complex system, even if the economics makes sense. And falling utility bills due to lower natural gas prices are not going to help.

So it is with storage. 2014 saw at least one big milestone – the announcement of the Tesla gigafactory – as well as a plethora of reports claiming that grid defection is about to hit utilities in the gut. However, our analysis of Germany and Australia, and an upcoming analysis of the US, show that this claim is premature. It is clear that storage is an area enjoying a lot of research and development activity, corporate dollars, experimentation, policy interest, pilot projects, and very fast price declines.

We predict some big milestones in 2015 – average storage system prices will continue to fall, at least one more 100MW-plus project will be launched, and more major corporations will enter the market. Overall, we expect to see a hefty 400-500MW of new storage capacity added this year, excluding pumped hydro, up from little more than 100MW in 2014. Most of it will be grid-level power storage for transmission and distribution, or residential and commercial storage, rather than bolt-ons to wind farms or solar parks. The US, Japan and South Korea will see much of the growth.

However, those hoping for the arrival of either a GW market for grid storage, or of a mass market in home storage, will have to wait a few more years.

9. Coal gets burnt

2015 looks like being another miserable year for the black stuff, and I do not mean Guinness. Coal is under fire from all directions. The price of its nearest base-load rival, natural gas, is either low (the US) or going lower (elsewhere), as described above; environmental regulations are cracking down on emissions in big economies such as the US and China; and carbon prices in Europe are likely to trend upwards during the year as policy-makers support a Market Stability Reserve to prevent withdrawn allowances returning to the market.

With electricity demand still lagging far behind GDP in developed countries, and rooftop solar helping itself to more of the market, it looks like coal will end up like the child without a seat in a game of musical chairs. Expect to see more coal-fired power station phase-outs and mine closures, hold-ups in building railheads and port facilities, and a growing consensus among climate-aware institutional investors that holding on to investments in coal is simply a risky business. 2015 will likely to see coal identified by the divestment movement as the weakest steer, given that the market cap of publicly quoted coal companies is just $250 billion, compared to around $5 trillion for oil and gas companies.

Of course, this will not be the end for coal. For one thing, there are nearly 2TW of coal-burning capacity worldwide, and some emerging economies will add more, partly for energy security or balance of trade reasons. That capacity will go on firing for many, many years to come. Also, the long slide in the international coal price, from $130-a-tonne in 2011 to $60 now, and perhaps lower still this year, will cushion the competitiveness of this fossil fuel against gas and renewables.

As happened with oil, if you erode its market, then its price will fall and its competitiveness is shored up. And who knows: the world may start talking seriously again about carbon capture and storage in 2015.

10. No sleep for M&A bankers

My final prediction is that 2015 will be the beginning of a record boom for energy mergers and acquisitions. Many of the trends we have been tracking for years are coming to a head, and they will drive a significant restructuring in both the utility and oil and gas sectors.

EON’s split into two, and NextEra’s acquisition of Hawaiian Electric Industries, are just the first shots in a value-chain revolution that will rip through utilities in the next five years. In justifying EON’s split, CEO Johannes Teyssen explained that electricity retailing and bulk generation are as different as football and handball. “They are both ball sports, but not even Bayern Munich could survive in a handball league,” as he put it. This logic is spot-on, and inescapable. Expect to see many more utilities, or as the Australians call them, “gen-tailers”, separate their generation and retailing assets.

While the generating assets, particularly when they are heavily dependent on coal and nuclear, might look like the power sector’s equivalent of a “bad bank”, the retailing part is where the innovation, and hence perhaps higher margins, are going to be. So while the generation assets look set to be sold off – and perhaps these will be attractive to some – there will also be acquisitions to be made at the retailing end of things, to bring in new services and skills. Where regulation allows it, we may even see acquisitions or mergers between telecoms and electricity companies.

As for the oil and gas sectors, we have already identified that US shale operators are likely to see a few years of forced consolidation, with all the M&A activity that implies. But in the oil sector too we are going to see action. The biggest international oil company, ExxonMobil, is only the fourth-biggest oil company in the world, behind Saudi Aramco, Gazprom and the Iranian National Oil Company. BP and Shell are sixth and seventh. The only other international company in the top 10 is Chevron.

The recent oil price drop, even if it does turn out to be a “flash crash”, is shining a spotlight on the inherent weakness of the smaller international oil companies. They are excluded from access to the lowest cost supplies, so in a world of volatile oil prices, not only are their margins systemically low, but any time the price drops, they are the first to be squeezed off the end of the supply curve. Their investors are receiving a very rude wake-up call. For all the acres of publicity given to the so-called “carbon bubble”, old-fashioned commodity volatility has delivered a far more powerful blow to oil companies’ financeability (it is also worth noting that the recent 22% drop in the NYSE Arca Oil share index has done nothing to unleash the next round of fiscal meltdown, as many in the climate community predicted it would).

This should naturally lead to a surge of M&A activity in the oil industry. Not even the super-majors are immune. Faced with a cost problem and reduced market prices, it is the only available strategy for many players, particularly those without significant gas businesses. Consolidate, cut costs, stop exploring. We have been here before – welcome to the 1980s.
All in all, if you are an energy M&A banker, look forward to short nights and lots of frequent-flyer miles.

* * *

Well, there you have our predictions for the year. Many of the themes I have discussed above, such as oil and gas prices, the dilemmas facing utilities, yieldcos and green bonds, and the whole area of financial innovation, will be vigorously debated at the Bloomberg New Energy Finance Summit. Put it in your diary now: New York, 13-15 April (for further details, see https://about.bnef.com/summit/).

I hope to see you there. In the meantime, a final word to our dinosaur friends: not all of them died out in the extinction event 66m years ago. Some learned to fly and are with us today as birds.

I wish you all the very best of luck and business success in 2015.

The post 10 predictions for clean energy in 2015 appeared first on Corporate Knights.

Just over a decade ago, Stephen Pacala and Robert Socolow of Princeton University published “Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies”. They postulated that if sufficient investment was made in a number of technology “wedges”, a “stabilization triangle” could be created that would prevent damaging increases in CO2 emissions and therefore in world temperatures.

The authors have subsequently updated their work to take account of the sharp growth in emissions since 2004, but the principle remains the same. Princeton’s Carbon Mitigation Initiative website is currently showing the need for eight wedges, and suggesting that these could be any of 15 possible technology options. The 15 include doubling vehicle fuel efficiency, using best efficiency practices in all buildings, increasing wind generation 10-fold, increasing solar generation 100-fold, replacing 1,400 coal plants with gas power stations, capturing and storing the emissions from 800 coal plants, adding double the current global nuclear capacity to replace coal, and so on.

Some of these wedge candidates look as if they are on track to deliver. Vehicle fuel efficiency is advancing, helped by high oil prices over nearly a decade, tighter government regulations and the spread of hybrid and electric vehicles. Energy efficiency is making strides, particularly in developed economies, with LED lighting leading the way, and electricity use falling way behind the economic rebound as countries emerge from the post-2008 recession. Renewable energy continues against the odds to record GW installation figures: according to Bloomberg New Energy Finance forecasts it will make up two thirds of global investment in power generation between now and 2030, and is well on track to deliver one of the required “wedges”.

Two once-promising wedges, however, have been big disappointments: carbon capture and storage (CCS), and nuclear power.

This month saw commissioning of the 110MW SaskPower plant at Boundary Dam in Canada, the world’s first large-scale pure CCS project to reach the operating stage. Behind it, however, are only a few more single projects, not the pipeline of projects that would be required for the technology to reach its potential and deliver one of the required “wedges”. CCS technology has not progressed as quickly as hoped, but the real problem has been a failure of political leadership. Other than the minority of projects which can deliver CO2 useable in enhanced oil recovery, there is no justification for CCS other than to mitigate greenhouse gas emissions, and politicians have shied away from making massive commitments to solve a problem the majority of their electorates simply does not see as of vital urgency. In the US, cheap gas and Environmental Protection Agency regulations have dealt coal-fired generation what looks like a mortal blow, with the reduced cost of solar and wind playing their part, and there seems little support for massive spending on CCS.

The failure of CCS to deliver a “wedge” puts the spotlight back on other technologies, particularly on the generation side. If the world is not prepared to make its fossil-based – particularly its coal-based – power stations carbon-neutral, then it is going to have to replace them with something else.

The stalling of the nuclear renaissance in the wake of Fukushima is therefore of particular concern.
OK, the nuclear star has not faded to the same extent as CCS. It remains an important current source of global electricity, accounting for 11% of world generation according to the International Energy Agency. There are even 72 nuclear projects under construction led by China with 27, and many more planned or proposed. The last time as many reactors were under construction was the early 1980s. However, nuclear is not on track to deliver one of the much-needed “wedges”, and certainly not on track to pick up any of the slack from the failure of CCS.

..

The nuclear landscape

Japan’s decision in the wake of the Fukushima accident to take all of its reactors off-line was understandable, given the need to assess damage and review the vulnerability of other nuclear stations. The fact that the country’s electricity system coped with the loss of capacity accounting for a quarter of its generation, without any forced black-outs, is a testament to the resilience, solidarity and inventiveness of the Japanese energy system.

However, three and a half years later, the country has been left with a giant gap in its generating capacity, fossil fuel emissions far above where they would otherwise have been, and a black hole in the balance of payments – as it is forced to buy large volumes of natural gas at a price 50% above European levels and 200% above US levels.

Japanese industry, backed by many politicians, is pushing to resume generation at several mothballed nuclear stations (though the country’s giant trading houses are doing very nicely out of the gas import business). However, public opposition remains strong – at some 70% according to certain polls – and it is by no means clear that even the half of Japan’s nuclear fleet that looks set to pass all safety tests will ever be able to restart. It is vital that it does – it is hard to see how Japan’s economy can maintain its stuttering growth while so dependent on high-cost energy imports, and impossible to see Japan returning to the leading role it used to play in the climate negotiations.

While Japan’s nuclear woes result from the Fukushima natural disaster, Germany’s are wholly self-inflicted. In 2011 Angela Merkel reversed her former determination to prolong the life of Germany’s nuclear fleet, quickly shutting eight of the country’s 17 reactors and returning to the previous policy of full nuclear phase-out by 2022. This left fossil generation’s contribution to the German electricity system largely unchanged until at least 2020, and possibly 2025. Combined with the collapse of the EU-ETS carbon price and a flood of cheap coal being squeezed out of the US by the glut of shale gas, and the result is Germany burning more coal and generating higher emissions.

Anyone who promotes the Energiewende as Germany’s solution to climate change needs to understand that it is first being used to retire Germany’s zero-carbon nuclear fleet, and only when that has been completed will it start to squeeze fossil-based power off the grid. Germany has given nuclear retirement a higher priority than climate action, pure and simple.

To anyone not ideologically anti-nuclear power, this is a manifestly wrong-headed policy. The arguments about nuclear waste and proliferation hardly apply to existing nuclear power stations. The problems are real, but they are not worsened by continuing operation. Nor are they mitigated by early shut-down. They may be powerful arguments against building nuclear capacity in new countries, but are poor arguments in the case of Germany or Switzerland.

The fact is, as I showed in the statistics I presented in my BNEF Summit keynote in April 2012, nuclear power is far safer than coal-fired power generation. Deaths per TWh are around 15 times lower for nuclear power than for coal-fired power in the developed world, and 300 times safer than coal-fired power in China. And this is including the impact of Three Mile Island, Sellafield, Chernobyl and Fukushima, but before taking into account the appalling toll inflicted on the wider population by coal-driven air pollution and smog. The tsunami that hit Fukushima killed nearly 16,000 people; however, so far no one has been shown to have lost their life as a result of the nuclear disaster.

So much for those countries that have – illogically and to the detriment of the climate – decided to shut their nuclear fleet prematurely. What about the countries that are pushing ahead and replacing aging nuclear plants?

In the UK, the government has done a deal worth $24.7bn in 2012 money with EDF to build the 3.2GW Hinkley Point reactors, promising an electricity price of GBP 92.50 per MWh for 35 years, reducing to GBP 89.50 if a second project at Sizewell proceeds. The deal was this month approved by the European Commission, with the proviso that there be a mechanism to claw back more for the public purse if the power station proves more profitable at that price than projected in the business plan.

This looks like desperately poor value for the UK consumer. Areva’s European Pressurised Reactor (EPR) proposed for Hinkley has experienced huge cost overruns and significant delays in both Finland and France. It will cost more per MWh than onshore wind projects will get (GBP 90 per MWh) four years earlier than Hinkley’s scheduled completion date in 2023, and it will continue to rake in these elevated rates for 35 years, rather than the 15 years that renewable power technologies will have under the Contract for Difference support mechanism. To the argument that nuclear provides baseload power, first there always has to be back-up for planned or unplanned maintenance, and second, it is hard to imagine a supplementary 3.2GW of energy efficiency could not have been found between now and 2025, if it was given a $24.7bn budget.

In Turkey, national prestige is being invested in an ambitious nuclear programme that aims to build eight reactors within 10 years, the idea being to complete a reactor in time for the 100th anniversary of the establishment of the nation in 1923. Turkey has plumped for different designs at two different sites: at Akkuyu, on the Mediterranean coast, Russia’s Rosatom is to build four AES-2006 1200MW reactors for $20bn; and at Sinop on the Black Sea, Areva and Mitsubishi are teaming up to build four ATMEA 1000MW reactors at a proposed cost of $22bn using a new design from the French and Japanese firms that has yet to be built anywhere – always a risky proposition as the Finns have learned with their EPR experience. The danger for Turkey is that the rush to meet the symbolic deadline will drive up costs and risks.

China is not in the same boat in terms of cost as the UK. The rumour is that it may be able to build eight AP1000 reactors (of 1.1GW each) for $24bn, roughly the same price that the UK is building its two EPR 1.6GW plants. Some of that cost difference relates to a less onerous planning system, to lower-cost labour and subsidised finance, but the worry must be that China’s 27 reactors under construction – almost half the world total – may be vulnerable to performance or even safety problems.

China’s current new build is largely its Generation II, CPR-1000 reactors, though it is presently building newer Generation III+ designs like the four Westinghouse AP-1000s and two EPRs. Future new build will likely be all advanced Generation III+ technologies. What is fascinating is that despite China going all-out to build nuclear power at an unprecedented rate, the technology is set to lose market share to renewable energy. Meanwhile, next door in Taiwan, two reactors are almost complete, but they may never be commissioned and operated because of seismic and political concerns.

In the US, despite Fukushima and low natural gas prices, five reactors are under construction, with the first reactor in nearly 20 years expected online by 2016. Future nuclear new build may be limited for economic rather than social or political reasons as low natural gas prices are likely to persist though the next decade. It also remains uncertain to what extent the growth of small-scale solar and PTC-supported wind energy will put the squeeze on nuclear running hours and push operators such as Exelon towards nuclear retirements, rather than new build.

Surveying the international scene on nuclear, then, it is clear that an industry clearly capable of delivering an important “wedge” in the fight against climate change is off-track in almost every country in which it operates.

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Clarity on costs

What should governments and the nuclear industry, be doing? I would argue that they need urgently to address three issues.

First, there needs to be clarity over current and future costs of nuclear. In renewables, it is clearly understood by everyone who is paying attention that the costs of solar, wind and other clean energy technologies have been falling steeply, and that they are likely to continue to do so. Most analysts, including mainstream ones like the IEA, the Energy Administration Administration, Shell, Exxon and BP accept that further, steady cost reductions for these renewable power sources are likely, though there is a strong sense that they are being overly conservative in their forecasts.

Nuclear, by contrast, is shrouded in fog when it comes to costs. Stated figures are highly project-specific. In Belarus, two 1.2GW AES-2006 reactors are under construction at a stated cost of $10bn, which equates to $4.2m per MW. Turkey’s 2010, $20bn contract with Rosatom of Russia to build the 4.8GW Akkuyu nuclear project came in at a similar $4.2m per MW. New nuclear projects in the United Arab Emirates and Pakistan, as well as in China, have been proposed with budgets of $3m to $5m per MW. However, in the US, two new units at the Vogtle plant in Georgia, totalling 2.2GW, are under construction and the mooted cost is $14bn – some $6.4m per MW. Hinkley’s 3.2GW are expected to cost GBP 16bn, which works out at $24.7bn or $7.65m per MW.

Some of these disparities will reflect different accounting treatment. For instance, project costs may be stated in current dollars, or they may be adjusted to take account of inflation over the project development and construction period. The cost of capital may be government-subsidised or it may be private sector. The cost of decommissioning and of waste storage for a period may be included – or not. Disparities may also reflect different building standards and planning system expenses. The industry and its supporters need to settle on standard methodologies for how costs are calculated. If the only way to make nuclear seem economically attractive is to hide costs and play tricks with discount rates, the industry will never gain public trust.

While it is understandable that different nuclear projects have different costs, there really is no excuse for the gross cost over-runs and delays that have plagued many recent nuclear new-build projects. The public can have no confidence in a technology that can cost twice as much and take twice as long to deliver as planned.

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Give new a chance

The second issue that needs to be addressed is new technology. There are promising nuclear technologies that could bring improved cost-competitiveness relative to renewable and fossil fuel generation sources, lower the risk of construction delay, or help manage the issues of nuclear proliferation and waste. However, those new technologies are finding disappointingly little traction around the world, as governments plump for mature (not to say decades-only) designs such as the EPR.

Small modular reactors have been promoted as more nimble, quicker-to-build, flexible-in-size successors to the old behemoth plants. Unfortunately, this promotion has been going on a long time. Commissioning of the first SMR in the US was predicted for 2020, now that has slipped to 2023 or 2024. The technology is American, but the US is in thrall to cheap gas and two of the four SMR makers (Westinghouse and Babcock & Wilcox) have slowed development. The UK could have taken on the role of pioneering SMRs, and perhaps built a local supply chain, but decided not the take the opportunity. Argentina is making the high-profile move at the moment, having broken ground earlier this year for 25MW prototype based on local technology, although there are other efforts in China, Korea and Russia.

Thorium and other molten salt reactors are the other great hopes of nuclear fission. Thorium’s advantages over uranium are that it is four times as plentiful, and its processing does not lead so directly to the production of plutonium, so it is seen as carrying less danger of nuclear weapon proliferation. Sweden and Norway have been testing thorium technology, but are a long way from building a reactor. The best chance for the use of this material may be India, which has an ambitious nuclear programme of its own plus big domestic supplies of thorium, and China, which recently announced it was pushing ahead on research into thorium reactors.

The point here is not to endorse any particular new design. It is to point out that if new designs are to be part of the nuclear solution, then one would need to see first of all a much clearer statement of intent to that effect by government and industry, then much more money being invested in their development by all stakeholders, and a system of technical approval that is far more accelerated than is currently the case. You do not achieve a moon-shot by spending one decade in debate and another decade in theoretical discussion about whether the moon is made of cheese.

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Waste

The third issue that governments and the industry need to address is the disposal of spent fuel. Countries are adopting different strategies on this, none of them convincing. Japan has spent $20bn on its Rokkasho reprocessing plant, due to open Q4 2014. In the reprocessing of spent fuel, however, the plant will produce plutonium and a new set of problems. The US has opted to put the waste in concrete casks on site for 100 years, but this looks like an interim solution given that the fuel remains dangerous for many thousands of years. The proposed $6bn vault at Yucca Mountain seems on permanent hold.

What chance is there of addressing these three challenges for nuclear – clarity on costs, technology and waste? The short-term outlook may not look positive, but I would not write off the nuclear industry. Companies and policy-makers involved in renewable energy have proved surprisingly effective over the past three years at putting aside their differences and presenting a coherent vision of future potential. Nuclear could do the same.

Clearly the nuclear sector took a huge blow with the Fukushima accident, which took the wind out of the sails of a patiently-built narrative of nuclear renaissance. In many ways Fukushima was sui generis: an accident that could not happen in a more modern reactor, and certainly not under a modern, capable regulator.

Bloomberg New Energy Finance’s 2030 Market Outlook, published this summer, sees strong growth for nuclear, forecasting a 69% expansion in capacity worldwide from 345GW in 2012 to 583GW by 2030. Even then, and with $5 trillion in 2013 money being invested in renewables including hydro, global emissions will still not peak until the second half of the 2020s.

If nuclear is to deliver a full climate “wedge”, particularly in a world in which CCS fails to launch, the world needs it do much more.

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In most sunny parts of the world it is cheaper to generate power from photovoltaic modules on your roof than to buy it from your utility. The best newly built wind farms are selling power at the equivalent of 5 cents before subsidies, which neither gas, coal, or nuclear power can match. LED light bulbs can be bought for a few dollars, providing homeowners a quick and cheap way of cutting their utility bills.

The fact is that wind and solar have joined a long list of clean energy technologies – geothermal power, waste-to-energy, solar hot water, hydropower, sugar cane-based ethanol, combined heat and power, and all sorts of energy efficiency – which can be fully competitive with fossil fuels in the right circumstances. What is even more important is that the cost reductions that have led to this point are set to continue inexorably, far out into the future.

For the past 10 years, my team at Bloomberg New Energy Finance has been documenting “experience curves” for clean energy technologies: the rate at which their costs drop for each doubling of cumulative installations. We have had privileged access to data from clients, many of whom are manufacturers and project developers. What this data tells us is that all clean energy technologies, without exception, benefit from strong experience curves. Where Moore’s law has given us dirt-cheap electronics and phones, Liebreich’s law is going to give us abundant, cheap clean energy.

Meanwhile, over the past decade, the world has been waking up to the true cost of fossil fuels. It’s not just the half-a-trillion dollars a year or more of direct subsidies to fossil fuel consumers. What is becoming increasingly clear is that further hundreds of billions of dollars in energy costs are borne not by the fossil fuel industry or directly by energy consumers but by the general public. These so-called externality costs include medical costs of air pollution, negative economic impacts resulting from commodity price spikes and the cost of defending our energy supply chains. They pop up in our medical bills, our unemployment figures, and our defence budgets. And that is before bringing the environment or climate change into the equation; or the heightened geopolitical risk caused by dependence on some of the world’s most volatile countries; or the corrosive effect on our political life caused by fossil fuel stakeholders fighting to preserve the status quo.

No silver bullets

So we have ever-cheaper renewable energy versus increasingly obvious costs and down sides to fossil fuels. Are there any game changers on the horizon? Shale gas has certainly been an astonishing success story in the U.S. and looks promising in the U.K., Poland, Mexico and China. Gas has a lower carbon footprint than coal, and domestic production offers significant economic and geopolitical benefits over imported resources. But there are economic caveats, aside from any environmental concerns. The U.S. natural gas price has already more than doubled from its historic lows in 2012 to over $4 per mmBtu; operators will need a long-term price of around $5 per mmBtu to justify continuing to drill, frack and build pipelines. And that is in a country where conditions are ideal. Elsewhere in the world, it is hard to see shale gas coming to market much below $8 per mmBtu, around the same as the wholesale prices which have been driving up European utility bills so sharply over the past few years.

Before the Fukushima accident in 2011 there was much talk of a nuclear renaissance, and some countries remain committed to building new plants. However, the U.K. experience is instructive: the government had to offer a power price of $155 per megawatt-hour, adjusted for inflation over 35 years, to get new nuclear power stations built. Nuclear power works and it is low carbon – but it’s not cheap and most likely never again will be.

The bottom line is that there are no silver bullets on the horizon. The electricity system of the future will be based on a mix of super-efficient appliances, renewable energy, natural gas and nuclear power. Our cars will either have to be vastly more fuel-efficient or else they will be electric.

We will, of course, have to learn how to manage the intermittency of renewable energy. That means improving resource forecasting and interconnecting the power grid over larger areas to smooth out the variability of individual renewable energy assets. It means power storage, currently mainly in the form of pumped hydroelectric power but in the future most likely in the form of batteries for electric vehicles.

But the killer app is a digitally-controlled smart grid, which will provide the ability to shift demand to match supply in ways either imperceptible to the consumer or else remunerated by the energy provider.

Right missteps

This energy system of the future is not a pipe dream. Worldwide, over a quarter of a trillion dollars a year is being invested annually in renewable energy, energy efficiency and supporting technologies. Germany derives over 25 per cent of its electricity from renewable energy. Texas, synonymous with the oil and gas industry, generated nearly 10 per cent of its electricity from wind last year. China is the world’s largest player, with around half of its new power capacity over the next 20 years expected to be renewable, rather than coal, gas or nuclear.

The problem for the political right is that this epochal shift to clean energy has completely wrong-footed it. For too long it has allowed the left to claim ownership of the environment, despite its own achievements in the area. For the left, being pro-environment and anti-business are one and the same: its approach to environmental protection is based mainly on controlling or blocking enterprise. The mistake of the right has been implicitly to accept that protecting our environment is in opposition to achieving a prosperous and free society.

In particular, the right has allowed the left to make all the running on clean energy. Feed-in tariffs are nothing less than state price controls. Renewable energy targets are indistinguishable from Soviet five-year plans. Over-regulation and complex planning requirements add costs, slow projects, reduce transparency and increase risk. Green Investment Banks are the very embodiment of state capital allocation. Capacity payments and carbon price floors are evidence of failure in the design of markets. Don’t get me started on price caps.

We have seen the results of these approaches. Germany may have reached over 25 per cent renewable electricity, but at what excessive cost to its household energy users? Spain reached 42 per cent, but its retroactive policy U-turns have left its entire economy uninvestable. Around the world the energy industry – fossil fuels as well as clean energy – is in the grip of a pandemic of rent-seeking, subsidy-farming, inefficiency, misallocation of resources, and the inevitable picking of losers.

The big mistake of the right has been to leave unchallenged the assumption that leftist tools are the only ones available to manage the transition to clean energy, instead of coming up with good conservative solutions – ones which have improved services, lower costs, competition, wealth creation, pricing in of externalities, personal responsibility and freedom at their heart.

Regaining mojo

Wind power in Brazil is among the lowest-cost sources of electricity in the world. Why? First, a reverse auction system forces providers to compete on cost. Second, Brazil has a grid which, if superimposed on Europe, would allow a Portuguese wind farm to sell its electricity to a client in Moscow. In Europe, a Portuguese power producer can’t even sell its electricity in France. Meanwhile, the European Union is trying to impose more top-down renewable energy targets on member countries rather than focusing on creating a single market for energy and related services.

When it comes to energy, the right has to regain its reforming mojo. It has retreated into corporatism – hunkering down with its corporate funders and resisting change instead of taking up the cudgels on behalf of the individual, the consumer, and then reaping the electoral benefits.

Where is the self-confidence with which it transformed the world’s other major industries? Time and again we were told that telecoms, airlines, steel, cars, mainframe computers, yogurt – or whatever – were natural monopolies and strategic industries which had to be protected from competition; and that only central planning could provide stable outcomes. In short, that leftist, statist solutions were the only ones available. Luckily, Thatcher, Reagan and their successors rejected that narrative and the results are history.

The time has come to apply this sort of rigour to the energy sector. Where is the EasyJet of clean energy, or the Virgin Atlantic? Where is the Vodafone, the Safaricom? Where are the new services, the new providers? The answer is they don’t exist because policy is being written with the state and industry incumbents in mind, using mainly the tools of the left. Only by releasing a maelstrom of entrepreneurial and competitive activity will the world be able to build a high-performing clean energy system without driving costs to unacceptable levels. And only by leading the process will the right find its natural voice on energy and the environment.

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