Tag Archives: Factors
Critical Factors for Achieving Commercial Breakeven in Renewable Energy
Critical Factors for Achieving Commercial Breakeven in Renewable Energy(Abhishek Uppal)There are a number of key sensitivities that affect the point at which renewable technologies hit the commercial breakeven points. In their research, analysts have pointed out how four sensitivities are particularly important: The regulatory frameworkRegulation is important for low carbon technologies. These technologies can be expensive and costs need to be brought down the learning curve. There are a variety of policy levers that can be employed to do this – with the rate of learning tied to how effective policy is in encouraging the development and deployment of the technology. Local electricity priceThere is significant geographic variation in electricity price due to differences in fuel prices and in conventional power production methods. There are also variations between peak power and off-peak power prices, which is important to consider when evaluating the competitiveness of renewable technologies. Solar:If capital costs of solar PV could be lowered to the region of $2,500/KW and natural gas stays above the $8/MMBtu mark, solar PV could be competitive with traditional peak power. The US has variable electricity prices that will result in different regions exhibiting different electric grid parity bands as peak retail rates in some regions have already gone above $150/MWh. Citigroup notes that, as a whole, rising electricity prices in the US are likely to drive demand for solar PV installations. High electricity prices in markets such as Spain and Italy in Europe have supported growth in solar in these countries. Wind:At current gas prices, wind is cost competitive with conventional gas in regions such as the UK and California. Despite supply chain issues, which we discuss below, onshore wind is an established form of power generation that can respond profitably, and is ready to be scaled up within favourably high gas price economies. Natural resourcesThe theoretical resources available for the exploitation of solar PV power and wind power are far larger than any practical means for development. Nevertheless some regions exhibit particularly favourable conditions, which help to explain why geographic growth pockets have emerged. Solar:Electric grid parity without carbon pricing or subsidies is dependent on location as a result of variation in insulation (solar intensity). Areas such as Southern Europe and California benefit from above average hours of sunlight and some island economies such as Hawaii have already achieved electric grid parity without carbon pricing or subsidies for solar PV, in part because of high sun resources and in part due to high fossil fuel costs. The potential for developing countries, such as India, to utilize the natural resource of the sun is high, but barriers of connectivity to electric power grids will need to be overcome. Wind:Wind power is driven by the nature of the resource. A doubling of wind speed means about an eight-fold gain in electricity production. The UK is the best region in Europe for wind power owing to high wind speeds. Similarly, the Midwest US is rich in wind energy resources. Research and development in technology may enable wind power at higher elevations, offering more wind extraction. Supply chain bottlenecksMaterial supply chain bottlenecks may potentially delay the competitiveness of both solar and wind. Solar:Severe shortages of silicon have plagued the solar PV market for the past two years and thus, the cost of supplying the modules required for solar PV has remained high. The market is currently in tight supply, a state that is expected to ease up in 2009/2010. When the silicon bottleneck does eventually clear, costs will decline as a result and the overall cost of solar PV is likely to come down the curve, moving the technology closer to commercial breakeven without carbon pricing or incentives. Goldman Sachs notes that going forward there will be cheaper silicon prices due to significant production capacity coming online, which will move solar PV towards electric grid parity without carbon pricing or subsidies. Lehman believes that the availability of polysilicon will remain a bottleneck until 2010 as a result of greater capacity expansion plans from cell manufacturers than poly suppliers. Wind:Strong regulatory incentives, pockets of high wind resources, the push from high conventional fossil fuel prices and continued improvements in wind technology and performance have enabled wind to reach electric grid parity without carbon pricing or subsidies in some geographies. However, there are a few potential bumps in the market that could delay broad electric grid parity without carbon pricing or subsidies. The turbine market is currently in tight supply, and steel prices that are integral to turbine manufacture have increased significantly. Major capacity investments in manufacturing are needed to ease this lag in supply. In addition there are challenges of skills shortages in the sector. Both drawbacks are inherently the result of strong demand in the sector and consequently, as long as they can be overcome, the wind industry should be positioned to grow rapidly. Beyond breakeven: The special case of biofuels: A renewable that is actually reducing the costs of conventional energyWhile biofuels have suffered a lot of criticism for being unsustainable, causing deforestation, harming indigenous people and being net carbon emitters, we believe that there are good biofuels out there. We consider 2nd and 3rd generation biofuels, along with a limited number of 1st generation biofuels (sugarcane ethanol and jatropha-based biodiesel) to be worthy parts of the climate change investment universe. Biofuels compete in the road transport fuel market rather than the electric power market. However, their special story deserves attention as a sign of what may be coming down the road. More so than any other renewable, the economic influence of ethanol has been felt in the conventional energy markets. Research from Iowa State University indicates that blending ethanol with gasoline has kept fuel prices $0.29-$0.40 lower than they otherwise would have been in the US; McKinsey analysis indicates additional upside for blending up to E10, with the potential to decrease retail gasoline prices by $0.43-$0.65. Biofuels in the US are now “beyond breakeven.” We recognise that the sustainability of much of the ethanol for sale in the US is debatable. This is problematic, and will need to be addressed. However, economically, US ethanol has reached the final goal of renewables – becoming lower-cost alternatives to fossil fuels, unlocking cheaper energy costs and a wave of low-carbon prosperity. The reason that ethanol is having this material impact on the price of retail gasoline in the US is that blending permits the replacement of expensive gasoline imports with a lower-cost substitute. Biofuels have demonstrated their potential to reduce the cost of energy – and we see a promising future for them, as long as they are produced with respect to the highest standards of sustainability. This may mean that tariff regimes need to be eased to allow increased imports from tropical climates that are naturally disposed to produce biofuels, such as Africa and Brazil. In any case, the story of ethanol’s impact on US gasoline prices may become more familiar in other energy markets going forward – ethanol may be the very first of a number of renewable technologies that unlock a low-carbon revolution, where consumers pay less to consume clean, renewable fuels. Abhishek Uppal college graduate from Cornell University.