2018 Renewable Outlook Stable: Renewables Can Now Self-Sustain

February 15, 2018, by Gregory Remec

(Renewable Energy World)

The Trump administration is not likely to stop the growth of the renewables market in the U.S. The tax incentives rolled out during the Obama administration have served their purpose and the lion is now out of its cage. Renewables are here to stay.

Renewables have been growing in developed and developing markets over the last decade. Why? Falling costs thanks to advancements in technology, first with wind power and evolving with solar in recent years. In fact, more efficient technology has made renewables competitive to the point that the phasing out of incentives has begun. Over the past decade, investors have gained confidence in how these sources of energy can be predicted. And the more costs continue to decline for renewables, the more they will take market share away from the traditional energy markets.

Proof of the sector’s staying power, and solar in particular, rests with the very ratings Fitch assigns to these projects and how stable they have performed over time. Whereas the somewhat uneven rating performance of wind projects belies a market very much in its infancy and trying to find its footing, Fitch-rated solar projects have been upgraded over the last year and are emblematic of a renewable energy source that has ironed out the proverbial kinks in recent years.

So with renewable energy undoubtedly entrenching itself as a global industry over the last decade, what will the next 10 years bring? The short answer is “more growth” and notably, “self-sustaining growth.” As the market evolves, growth will this time be supported by advancements in battery storage technology. While developing markets will see demand for power continue to grow, the same trend will likely flatten out for developed markets, though the expected roll-out of electric vehicles could add to demand.

Solar installed capacity in Western Europe and North America is expected to advance steadily through 2026. Credit: Fitch

Power consumption will also become more dynamic over the next decade. The roll-out of smart meters in developed markets will allow for better real-time demand and price signaling, with digital integration within households likely to accelerate this process. Self-generation may culminate in a move toward local distributed systems in some locations, though self-generation is not universally achievable. Gas-fired generation is still very important and may in fact increase thanks to the abundance and flexibility of global liquefied natural gas. Even coal, deemed by many to be a globally obsolete form of energy generation, will remain in countries with domestic coal resources, though its slow and inevitable decline is continuing in developed markets.

Below are five notable trends worth keeping an eye on over the next 12 months:

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Renewables Will Become More Self-Sustaining: Subsidies and tax incentives enabled renewables to gain traction with investors while capital cost decreases are making renewables competitive on their own. Tax policy changes in the U.S. would likely reduce benefits for renewables projects, though overall costs for renewables are likely to continue declining as global demand increases. The overall cost of electricity for renewables will be even more competitive with or without their own subsidies especially if carbon emissions become taxable and increase the cost of thermal power generation relative to renewables.

Technology Will Be Key: Advances in technology are a main driver behind cost decreases for renewables. Increased wind turbine capacity from the same footprint and better efficiency of PV systems are reducing the cost per unit energy generated. Manufacturing cost decreases driven by higher demand and competitive pressures are also helping to cut equipment costs. Similarly, operating costs are falling for renewables as the number of qualified operators and technicians grows. Battery technologies, in early stage development, are likely to mirror the same cost reduction curve as solar panels as cheaper and more reliable battery systems are developed. This will make battery technologies alongside solar generation a viable and economic alternative to grid-based power.

Slow Power Demand Growth: Demand for power has stagnated in developed markets and is growing in developing markets. Advances in energy efficiency and consumption management have effectively offset organic growth in energy demand in the largest markets, and those trends are not likely to change. Market forces are replacing the oldest and most costly utility scale thermal plants with gas-fired and renewables capacity in greater numbers. Sustained economic growth may allow energy demand to outpace efficiency-driven demand reduction, but the vulnerability of the currently favorable phase of the economic cycle increases with time.

EV Charging Infrastructure Will Need Investment: Electric vehicles are a potentially disruptive technology that could dramatically increase demand for electricity. Not only will massive EV fleets require power to charge their batteries, those same batteries can be leveraged while plugged into smart networks to help act as distributed resources to balance supply and demand. The main impediments are infrastructure (which is not yet built) and the considerable investment needed ahead of the expected onslaught of EVs. While growing rapidly, the EV market has still not materialized to levels predicted by earliest investors; rapid growth may follow the introduction of exciting and affordable new vehicles promised by cutting edge manufacturers.

Power Prices Remain Stagnant: Many competitive power markets are saturated with oversupply. As a result, they have some of the lowest real electricity prices in history, with some markets regularly exposed to negative wholesale power prices. Modern gas-fired plants are helping to keep prices low even when renewable resources are not available. And markets or regions with relatively higher prices will attract those same competitors and technologies, likely leading to similar price pressure. Power prices are vulnerable to many potential shocks be it new emissions regulations, changes to tax codes, technology disruptions, political turbulence or environmental activism, though any pricing jolt may only be temporary.

The Trump administration’s rejection of the Paris Accord is not likely to stop the growth of the renewables market in the U.S. The tax incentives rolled out during the Obama administration have served their purpose and the lion is now out of its cage. Renewable energy is here to stay. And with much of the buildout in renewables coming from state government incentives that far supersede any efforts at the Federal level, renewables are in a position to self-sustain growth over the next decade.

Gregory Remec is a senior director in Fitch Ratings’ project finance group. His responsibilities include credit analysis and ratings, primarily for power and energy transactions. Prior to joining Fitch, Gregory was vice president of analytics at Marathon Capital, LLC, where he was responsible for structuring renewable energy and power transactions.