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by Lisa Franizis, Forest Small and Matt Stanberry, Navigant Consulting
The U.S. renewable energy market is large—and growing—and many international investors are starting to view it as the next hot global opportunity for investments and business expansion.
Cumulative installed renewable energy capacity represents only about 2.4 percent of U.S. generation capacity, excluding large hydro, but U.S. markets will continue to experience significant growth, spurred by state government support, concerns about climate change, increasing conventional power costs, and improvements to renewable energy performance and economics. With key global markets like Germany and Japan slowing over the past few years in terms of renewable energy market growth, the U.S. is positioned for significant investment.
How strong is the market?
The U.S. market for renewable energy technologies has experienced a 31 percent compounded annual growth rate from 2003 through 2007, compared to almost no growth in the overall power sector. Excluding large hydroelectric plants, the annual revenue from total installed renewable energy equipment in the U.S. for 2007 reached $13.6 billion, and Navigant Consulting Inc. expects the industry to grow to $30 billion by 2013 (see Figure 1.) Much of the growth is likely to be with several of the renewable energy technologies, such as wind, photovoltaics (PV), solar thermal electric and biomass. Plus, technologies such as wind power are currently price-competitive with natural gas-fired power in locations where the resource is good (class 3 or better). Other renewables such as landfill gas, biomass and geothermal are also at or near competitive pricing levels. (See Figure 2.)
Figure 1. U.S. Renewable Energy Market Size and Growth
Source: Navigant Consulting Inc., July 2008 Click here to enlarge image
This trend will only continue, making renewable energy technologies a sound investment for portfolio diversification and profitable U.S. investments.
Figure 2. Economics of Wholesale Renewable Energy Power Options
Source: Navigant Consulting Inc., July 2008 Click here to enlarge image
Drivers of this attractive market
A confluence of factors has made the U.S. one of the strongest and most attractive renewable energy markets in the world over the past five years. These drivers generally fall into three categories: economics, policy and environment.
The last decade has seen an improvement in the relative economics of renewable generated electricity relative to the market price of electricity, which is principally driven by traditional forms of generation. As renewable energy technologies have experienced cost reductions over the past five years, many renewable technologies such as wind, geothermal and small hydroelectric have moved into the mainstream and become part of the utility portfolio mix. Although recent increases in commodity prices have offset some of the renewable cost reductions over the last few years, the long-term trend of cost reductions remains.
Maturation of renewable technologies has allowed for increasingly effective development of the tremendous renewable resource base in the U.S. The country has some of the largest and most accessible renewable resources in the world—the Mojave Desert, for example, has some of the world’s best solar insolation in an area that is simultaneously wide-open and relatively close to major load centers. Equally important, the U.S. has very diverse renewable resources: the Midwest contains a significant wind resource; the Southwest has a major solar resource; the Southeast, Northwest, and Northeast harbor a large biomass resource and massive coastlines providing access to excellent offshore wind as well as wave and tidal resources. Solar, on-shore wind, biomass, geothermal and small hydroelectric facilities are in operation throughout the U.S., but incentives, public acceptance, and technological improvements are still needed for resources such as offshore wind, wave and tidal power.
The improving competitiveness of renewable generation has also benefited from the challenges facing traditional forms of generation: increases and volatility in conventional fuel prices; challenges in siting and building new coal, nuclear or large hydro stations as a result of public pressure; and added emission control costs.
Despite their improved competitiveness, several renewable technologies require government policies to encourage market adoption, which is happening at the federal level but more significantly at the state level. Underlying the policy support are rising concerns about energy security, a desire for energy independence, reduction in greenhouse gas emissions, and consumer demand for clean energy. The U.S. has a particularly valuable set of federal incentives for renewable energy that include the production tax credit (PTC) and investment tax credits (ITC). The impact of these incentives on a project balance sheet is large, with the PTC reducing the cost of wind projects, for example, by roughly 25 percent and the ITC cutting the installed cost of other renewable energy projects by 30 percent. (Although the impact of these policies on the market is large, it is somewhat offset by uncertainty surrounding the duration periods, especially in the case of the PTC.) The ITC and PTC are in danger of expiring at the end of 2008, which could lead to a period of short-term pain and a down year in 2009, but most market observers believe these incentives will be extended in 2009 with the new American administration, whether Democrat or Republican.
Beyond these federal credits are the states’ Renewable Portfolio Standards (RPS), another key policy driver. There are currently 32 states, plus Washington, D.C., and Guam, that have RPS targets or goals that require a certain percentage of new generation to come from renewable energy.
Several factors drive foreign investors to this booming market.
Revenue growth and profitability. Established international companies are driven to grow, so these entities are always looking for the next investment opportunity. Flanked by a robust set of drivers, the rapid growth of the U.S. into one of the biggest markets in the world for renewable technologies presents an obvious opportunity. Growth in key markets such as Germany and Japan are slowing as a result of reduced incentive support, while key states and utilities in the U.S. are providing very favorable incentive levels, in addition to the federal incentives, to help drive profitable project developments.
Revenue diversity. Over the last five years, the market for renewable energy has become truly global, with China and India joining the traditional European and North American countries as booming markets for both solar and wind. However, government incentives remain an important factor in stimulating demand for these technologies. Since these policies are always subject to change according to the prevailing political environment, there is some policy risk associated with investments in this sector. As a result, there is an inherent advantage to be found in spreading revenue centers across multiple countries, including the U.S., which typically is a less risky area of the world to do business.
Business climate. The U.S. market is an attractive opportunity for international firms because the stronger currencies outside of the U.S. provide more purchasing power against the U.S. dollar. There is a phalanx of U.S. entrepreneurs developing new technologies that can be licensed, and there are also a range of smaller companies operating across the market spectrum and renewable energy projects that can be purchased for a reasonable price compared to opportunities in Europe and Japan.
In the private sector, two kinds of investors are active in renewable energy: financial investors and strategic investors. Regardless of the markets in which they make investments, there are two general approaches: invest in companies with renewable energy assets or invest in projects to develop renewable energy assets.
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Financial investors from the private equity, venture capital and banking community have ready capital and are looking for opportunities to apply it. Strategic investors are operating companies that invest because renewable energy addresses their key business needs in some way and complements existing business strategies.
The players are numerous and diverse
Many European and Asian companies are entering the U.S. renewable energy market, more significantly over the past five years. BP was an early entrant in the U.S. renewable energy sector many years ago, with its acquisition of Solarex in solar PV and then more recently with its expansion into the wind sector with the investment in Clipper Wind, a wind turbine supplier, and then Greenlight Energy, which provided BP access to wind development projects. BP is now viewed as one of the leading renewable energy players in the U.S.
In 2007, to help meet strong demand for wind power in the U.S., Siemens Power Generation completed construction of its Fort Madison Blade Plant in Fort Madison, Iowa, to manufacture wind turbine blades. Initial production from this plant was delivered to the Sweetwater Wind Farm, west of Abilene, Texas. In June of this year, the company announced that it will establish its U.S. wind turbine R&D competence center in Boulder, Colo., which will focus on atmospheric science research, aerodynamic blade design, structural dynamics, and wind turbine dispatch prediction and reliability.
Early in 2007, Vestas, a leading Danish wind turbine manufacturer, announced that it would invest $60 million to locate a wind turbine blade manufacturing plant in Northern Colorado near Windsor. In addition, Gamesa, a leading Spanish wind energy manufacturer, located its U.S. headquarters in Pennsylvania, along with a wind manufacturing facility in Ebensburg that has created more than 1,000 jobs. The attraction of the state was the RPS target, the $1 billion in tax free bonds for financing clean energy projects, and support from utilities such as PECO Energy that began selling wind energy products to residential and business customers in 100 kWh blocks for about a $2.50 premium per month.
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Another entrant to the U.S. market is Babcock and Brown, a global investment and advisory firm based in Sydney, Australia. The company has leveraged the value of investments across the wind value chain to become a leading manager-owner of wind energy installations in the U.S.
European utilities getting in the game
In recent years, European electric utilities have become increasingly interested in expanding their energy delivery operations into the U.S. Notable examples are National Grid’s acquisition of utilities in the Northeast, including New England Electric System, Eastern Utilities Associates, Niagara Mohawk and KeySpan; Scottish Power’s purchase of PacifiCorp; and the acquisition of Louisville Gas & Electric by PowerGen and then E.ON. (In 2005, Scottish Power sold PacifiCorp to Berkshire Hathaway’s MidAmerican Energy, but retained PPM Energy.) In these cases, the acquiring utility was gaining scale and opportunities to increase overall operating efficiencies.
For some utilities, renewable energy is a key driver for interest in the U.S. Spanish utility giant Iberdrola is a leading player in wind energy and has made two strategic acquisitions that give it a strong U.S presence. In 2005, the company bought Scottish Power, which brought U.S wind producer PPM Energy (formerly part of PacifiCorp ) into its portfolio. Last year, Iberdrola announced that it would acquire Energy East, giving the Spanish utility electric and gas assets in the New England and New York markets. Not only does this deal expand the company’s energy delivery business in the U.S., it does so in a market with high electricity prices and a market for renewable energy in which Iberdrola can leverage and expand its wind business. The company has indicated that it intends to build additional wind resources in New York.
Other European utilities are focused more squarely on the development, ownership and operation of renewable energy assets in the U.S.:
- enXco, a subsidiary company of France’s EDF Group, has developed, constructed, owned and operated wind plants through the U.S., including facilities owned by utilities.
- In 2007, Energias de Portugal (EDP) acquired Horizon Wind Energy from Goldman Sachs in a deal worth $2.2 billion, expanding its base in renewable energy, and giving it a position in the U.S market.
- Also in 2007, Germany’s E.ON announced the $1.4 billion purchase of Airtricity’s North American wind assets.
- Enel North America, a subsidiary of Italy’s Enel S.p.A, has a presence in 20 states, operating or developing renewable energy projects with hydro, wind, biomass and geothermal.
- Suez in late 2007 acquired Ventus to obtain 25 wind development projects in Eastern Canada that will be able to sell wind power into U.S. markets. They also have biomass plants in eight states, and a hydroelectric facility.
The overall market in the U.S. for renewable energy technologies is getting more favorable, and European utility companies as well as other international investors are moving quickly on the opportunity. As Figure 3 illustrates, some of the leading corporations are already in the renewable energy space, so utilities and other investors will be competing with entities that have deep pockets for attractive deals.
Competition is intensifying and the “low hanging fruit” and attractive deals are disappearing. There are many good investments in the U.S. renewable energy marketplace, but investors need to move quickly. With the anticipation of a changing administration that is likely to be even more favorable to clean energy, with states taking actions to provide additional incentives for renewable energy implementation, and with renewable energy technologies becoming mainstream and accepted in the marketplace, the window of opportunity appears to be now.
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Lisa Frantzis is managing director of the renewable and distributed energy practice at Navigant Consulting. With 29 years of experience in managing technical, market and economic analyses of renewable energy systems, her clients include utility companies, governments, equipment manufacturers, oil companies, developers, and investors. You may contact her at email@example.com.
Forrest Small is a director in the energy practice of Navigant Consulting. He helps clients make strategic decisions related to advanced electric power technology, with a focus on the convergence of the smart grid and renewable energy resources, and how these complementary platforms can be leveraged to meet energy and business challenges. You may contact him at firstname.lastname@example.org.
Matthew Stanberry is a senior consultant in the renewable and distributed energy group of Navigant Consulting. He works to ensure that client decisions related to renewable energy and greenhouse gas emissions are informed by the latest information and analyses. His focus is on wind and concentrated solar power technologies and carbon policy. You may contact him at email@example.com.
Navigant Consulting’s renewable and distributed energy practice helps clients create value from renewable energy technologies and businesses, and is a leader in providing renewable energy management, technology, and operations assistance to a diverse set of private and public-sector clients.