Mobilizing Public and Private Capital for Clean Energy Financing
Innovative financing, increased capital investment and technological improvement are catalyzing renewable energy growth
The energy market in the United States is undergoing a dramatic transformation, driven by technological advancement, market dynamics, and better policies and laws—none of which was a decade ago. Venture capitalists made huge profits from the computing boom of the 1980s, the internet boom of the 1990s, and now think the next boom will happen on the back of energy. These past booms, however, were fed by cheap energy: coal was cheap; natural gas was low-priced; and apart from the events following the 1973 Arab oil embargo and the 1979 Iranian Revolution, oil was comparatively cheap. However, in the space of the past decade, all that has changed. New resource finds, primarily shale resources from states such as Texas, Oklahoma, North Dakota, and Pennsylvania, exert pressure on the prices of oil and gas. At the same time, there is a growing concern of negative externalities associated with these fossil fuels.
Hybrid vehicles are doing more to fulfill their technological promise. Wind-and-solar powered alternative no longer looks so costly by comparison to natural gas—whose low prices due to increased shale production have shaken up domestic and global energy markets recently. Coal remains relatively cheap, however, its extraction damages ecosystems by destroying ecological habitats. Additionally, the combustion of fossil fuels pollutes the air by emitting harmful substances into the atmosphere, such as carbon dioxide, methane, and nitrous oxide that contribute to global warming.
Oil spills, such as the 2010 Deepwater Horizon spill in the Gulf of Mexico and leakages at exploration and extraction points destabilize marine ecosystems, killing aquatic life. Utility firms seeking to avoid political and capital costs of the U.S. Environmental Protection Agency’s (EPA) Clean Power Plan and Mercury and Air Toxics Standard on existing plant performance have begun to invest more in energy efficiency and low-carbon technologies that guarantee less harmful emissions. As a result, the industry is accelerating the modernization of its generation fleet. These underlying factors, including innovative financing options, increased capital investment, and market incentives, have opened up a capacity gap from conventional plants and an opportunity especially for solar, wind, and other low-carbon technologies.
A key driver of recent renewable energy growth is cost.
As a mass market develops and the technology improves solar and wind power have become more competitive.
Innovative financing options: A key driver of recent renewable energy gains is cost. As a mass-market develops and the technology improves solar and wind power have become more competitive. In California and New York, a surcharge paid by utility customers to help finance clean energy projects in the two states has generated substantial sums of money, which is being invested in energy efficiency and renewable projects. In Connecticut, the Clean Energy Finance and Investment Authority (CEFIA), a successor of Connecticut Clean Energy Fund (CCEF) has funded over $150 million of clean technology projects and awareness programs statewide.[1] As more states adopt these kinds of programs, they continue to subsidize investment in clean energy programs. Financing clean energy projects, nevertheless, continues to face stiff competition from non-renewable sources. The cost of fossil fuels is still relatively low, mostly because social costs and the price of ecological damage are not factored into existing market prices. Renewable energy development also continues to experience high transactions costs, such as in negotiating power-purchase agreements which can make them more risky to investors.
Capital costs: In the long run, however, real gross domestic product and carbon emissions are likely to be the primary drivers of clean energy consumption, because governments will try to prevent the price of energy from rising too fast or decreasing overly quickly as it can have a negative effect on overall economic growth. Thus the price of fossil fuels could have only a small negative effect on the demand for clean energy. The main barrier to large-scale wind and solar projects is obvious—high upfront capital costs. Accordingly, some investors in certain parts of the country continue to demand high premium lending rates to offset the upfront capital risked up to fund clean energy projects than other conventional energy projects. At the same time, technology improvements, especially with regard to solar, and promising much lower future capital costs, which explain why solar energy is the fastest-growing source of new energy simply in the U.S. and worldwide.2
Secondary effects: According to the Energy Information Administration (EIA) Short-Term Energy Outlook February 2015, utility-scale solar power generation in the U.S. will increase by more than 60% between 2014 and 2016, averaging almost 80 GWh per day in 2016.[2] Half of this new capacity will be built in California. The World Energy Outlook 2014 estimates a 37% increase in the share of renewables in power generation in most OECD countries by 2040.[3] However, growth in renewable energy generation in non-OECD countries, led by China, India, Latin America and Africa, will more than double, according to the report. A change in energy policy or regulations in these markets could have even wider secondary effects on energy supply: positive impacts on emission reductions, accelerated substitution effects, and improved cost-competitiveness of renewable energy.
Market incentives and carbon tax: In the absence of fossil-fuel subsidies, which in 2013 alone totaled $550 billion, renewable energy technologies would be competitive with fossil power plants.[4] The effect of fossil-fuel subsidies on renewable electricity generation is fourfold: they weaken the cost competitiveness of renewable energy; boost the incumbent advantage of fossil fuels; lower the costs of fossil-fuel-powered electricity generation; and make investment in fossil-fuel-based technologies favorable over renewable alternatives. For instance, a phase-out of coal subsidies could further limit new construction and use of least-efficient coal-fired plants, thus incentivizing investment in clean energy.
Finally, if new policy causes the marketplace to internalize the risks of climate change, there would be no need for renewable energy subsidies and mandates in order for these sources to reach market parity.
Notes
[1] Connecticut Clean Energy Finance and Investment Authority: https://www.ctcleanenergy.com/Default.aspx?tabid=62
[2] Energy Information Administration’s (EIA) Short-Term Energy Outlook February 2015: https://www.eia.gov/forecasts/steo/pdf/steo_full.pdf
[3] World Energy Outlook (WEO) 2014: https://www.iea.org/publications/freepublications/publication/WEO_2014_ES_English_WEB.pdf
[4] Ibid, WEO, p.4
