Introductory Chapter: Sustainable Energy Investment and the Transition to Renewable Energy-Powered Futures
“Sustainable energy investment” is a widely used phrase and concept in the fields of finance, engineering and economics. Typically, it focuses on evaluating renewable power development and includes assessments of political and regulatory risks, energy risk hedging and portfolio diversification. Often publications on this topic contribute to the climate change response agenda: promote investments in solar- or wind-powered technologies in order to realize a more equitable, sustainable and prosperous future; evaluate financial aspects of carbon budgeting and energy asset risk management; and respond to financial and climate risks associated with mitigation and adaptation policy interventions. Policymakers and energy regulators correctly perceive climate change to pose threats to energy assets, research and development (R&D), technological innovation to accelerate energy transitions and these impacts are projected to grow in the coming decades.
Concurrently, the energy sector is experiencing a myriad of challenges, from aging infrastructure, retiring workforces, years of stagnant investment to the need to attract new investment in smart grid resilience, business model innovation reforms, changing customer expectations, and more recently COVID-19 forced disruptions.
To mitigate the worst possible impacts, attention is now shifting to strategies for de-risking energy investments—for example, long-term climate-risk hedging and adaption strategies in energy infrastructure development around financing, costs, and revenue—to foster local, national and supranational systems of resource autonomy and reduce the risks of climate change. Read more>>
Photo credit: IRENA’s World Energy Transitions Outlook
Sustainable Energy Investment: Technical, Market and Policy Innovations to Address Risk
This book examines the technical, market, and policy innovations for unlocking sustainable investment in the energy sector. While finalizing this book, the COVID-19 pandemic is cutting a devastating swath through the global economy, causing the biggest fall in energy sector investment, exacerbating the global trade finance gap, worsening signs of growing income inequality, and devastating the health and livelihoods of millions. What is the parallel between the COVID-19 pandemic and the climate change crisis? The impacts of the global pandemic are expected to last for a few years, whereas those associated with the climate crisis will play out over several decades with potentially irreversible consequences. However, both show that the cost of inaction or delay in addressing the risks can lead to devastating outcomes or a greater probability of irreversible, catastrophic damages. In the context of sustainable energy investment and the transition to a low-carbon, climate-resilient economy, what ways can financial markets and institutions support net-zero-emission activities and the shift to a sustainable economy, including investment in energy efficiency, low-carbon and renewable energy technologies? This book provides students, policymakers, and energy investment professionals with the knowledge and theoretical tools necessary to address related questions in sustainable energy investment, risk management, and energy innovation agendas. Read More>>
The boldest new plan yet to increase electricity generation from noncarbon-producing sources has been announced by California. Highly regarded as a trendsetter and vanguard of progressive energy policies, California became the first state to require solar power installed on all new homes. The requirement makes rooftop solar a mainstream energy source in the state’s residential market. Adopted by the California Energy Commission (CEC) as an update to the state’s 2019 Title 24, Part 6, Building Energy Efficiency Standards, the solar mandate obligates new homes built after Jan. 1, 2020 to include photovoltaic (PV) systems.
These standards represent a groundbreaking development for clean energy. Single-family homes and multifamily units that are under three stories will be required to install solar panels. The biggest impact may prove to be the incentive for energy storage and the expected uptake in energy efficiency upgrades which could significantly cut energy consumption in new homes.
But not everyone is celebrating. Critics warn that the requirement could drive up home prices overall, further exacerbating already high housing costs in the state. For instance, in a letter to CEC, Professor Severin Borenstein of the Haas School of Business at UC Berkeley warned that such a plan would be an “expensive way to expand renewables” to achieve clean energy goals. But in its order, CEC argued that the new rooftop solar mandate would save homebuilders and residents money in the long-term and cut energy-related greenhouse-gas emissions in residential buildings.
Few solar firms, homebuilders, efficiency experts and local governments fully understand the significance of the mandate. Buildings-to-grid integration experts speak of “turning residential solar into an appliance,”—the merging of rooftop solar, home energy management, energy storage, and data analytics into the next generation of high performance buildings that is expected to usher in a new era of sustainable development.
How could this new solar mandate help improve grid management so that these ‘new power plants’—clusters of buildings integrated to the grid—can respond quicker to load signals like water heating or home entertainment and thereby contribute to better system reliability? Of course, there are a lot for stakeholders to grapple with between now and 2020 as they come up with compliance solutions to address these opportunities. But this gap, especially, poses a significant challenge in how the new California’s Title 24 codes will affect the clean energy industry.
On the delivery side, First Solar Inc.—a U.S. panel manufacturer—and Sunrun—the largest U.S. residential-solar installer—could be major beneficiaries of the new building codes considering their established market positions in the state. The U.S. Energy Information Administration’s Annual Energy Outlook 2018 puts the mid-point estimate of installed solar capacity required to meet the state’s ambitious ‘50% by 2030’ renewable portfolio standard (RPS) target at around 32 GW (Figure 1). California currently has an installed solar capacity of 18.6 GW, indicating that it has only until the beginning of the next decade to find technical, business, and policy solutions to realize a 50% increase in installed PV capacity. Considering that the core elements of the requirements are now technically locked in, greater cooperation with solar industry players is needed for the success of this bold energy vision.
Figure 1: AEO 2018 estimate of renewable energy generating capacity and emissions in California (2016-2050)
Here are suggestions of what needs to be done to succeed. Provision of today’s electricity services is fundamentally dependent on its transmission, distribution, and storage (TD&S) systems; these functions include business activities that support construction, operation, maintenance and in this case, overhaul California’s electricity infrastructure. According to the 2018 U.S. Energy and Employment Report (USEER), national employment in TD&S including retail service was approximately 2.35 million in 2017, with nearly 7% growth expected in 2018, mostly in manufacturing, construction, installation/repair, and operation of TD&S facilities. Using these national figures as rough benchmarks for job generation, the new solar building mandate represents a major growth opportunity for the solar industry. However, there are transmission implementation challenges that could occur in the future. Orders 890 and 1000 by the Federal Energy Regulatory Commission (FERC) require transmission providers to treat demand resources comparably with transmission and generation solutions during transmission planning. Which means that a clarification is required of whether onsite generation under Title 24 would count toward compliance with FERC’s orders.
With proper distribution and transmission planning coupled with the fact that new homes will have better efficiency overall, California could reap significant benefits from the solar mandate and pioneer in mainstreaming non-wire alternative business models associated with solar distributed generation systems. Deferring and reducing costs to capacity upgrades for distribution and transmission under a distributed utility regime, is one example. For this reason, California regulators would need to anticipate and address compliance issues that could result during the implementation period, such as concerns regarding flexibility measures, the estimated number of homes that would comply with the codes, and year-on-year market bottlenecks that may occur without rapid change in business models. Further greater stakeholder engagement and partnerships with the building industry, universities and research organizations will be needed to track progress on single–family and multi-family solar development.
Another key step is to improve the revenue model for all generation technologies to reconcile with long-term contracts. In recent years, as solar power grew in the Western Electricity Coordinating Council region, and particularly in California, future prices of solar electricity became uncertain. Today’s electricity prices are set based on the variable cost of the marginal technology. Because technologies like rooftop solar, once built have near-zero marginal costs, this could put downward pressure on long-term electricity prices. Good news for customers and the economy! But payment for TD&S may be of risk. States have been solving this problem by implementing long-term fixed pricing systems, either through power purchase agreements (PPA) or capacity mechanisms, which carry the full-price risk of the technology. California (and New York) has proposed new revenue models that balance the pace of improvement in technology cost and revenue returns. Still, adjustments in the revenue model may be necessary in the future.
The logic behind California’s solar mandate is to reposition the market so that the bulk of generation will increasingly come from customer-sited equipment. This is significant: rooftop solar is one of the most effective customer-sited solutions for accelerating a decentralized grid and greening our electricity supply. Apart from the anticipated long-term cost-reductions to the grid, we can infer that CEC may have been guided by the growing market potential of rooftop solar when crafting the new building code energy-efficiency standards. As to the question of economic viability of the standards to the grid, detailed study is needed to take into account direct and indirect impacts.
Recently, there has been mention of the mounting problem widely known as the “duck curve”—that is, the sun shines only during the day which means that the solar energy cannot meet the system’s demands when the sun goes down or cloud cover disrupts solar energy system output. This phenomenon can force utilities to ramp up non-solar generation, thereby undermining some of the benefits of a low-carbon strategy. This concern raises a question: What happens to the value of solar energy produced as new additional capacity grows? Over-generation? Because retail competition is still limited in volume to support the anticipated market growth under the new standards, the value of the additional solar generation could decline. Furthermore, the grid would need to be prepared to anticipate and handle any over-generation. CEC is aware of the duck curve problem and included a compliance credit for energy storage in the Title 24 codes to address the issue. But this may not be enough. Options for maximizing on-site solar use should be sought as capacity grows. In addition, while greater electrification of buildings is noteworthy for the utility business model, without offering incentives to residential solar producers, for instance, in the form of affordable construction materials that socializes costs over all ratepayers and introduces new products and services that guarantee long-term profitability, the latest round of CEC building codes could raise significant grid management issues and market uncertainties thus exacerbating the duck curve problem. In brief, the role of utilities in interconnecting these ‘power plants’ and managing any over-generation issues will become more critical.
Growth from the new solar mandate and steps taken to incentivize storage and energy efficiency upgrades may not produce profits for utilities in the short term. But adoption of the Title 24 codes offers utilities opportunities for greater electrification and enables them to search for cost-effective pathways to reduce carbon emissions. In a study of grid decarbonization strategies in California, Southern California Edison (SCE) found that a clean power and electrification path can provide an affordable and feasible approach to achieving the state’s climate and air quality goals. While the cost of managing the grid is an important consideration for utilities like SCE, approval of the new solar mandate is an important reminder of the changing utility industry. Power companies are developing new ways to extract value from emerging distributed solar technologies and expand customer choices. The success of the Title 24 codes will depend to a significant degree on supportive regulation. With billions of investments required for grid modernization to address the aging infrastructure issues, finding a sustainable operating model that enables utilities to recuperate costs through rates is fundamental. This is a long-term proposition and power companies should treat it as such.
Despite the challenges discussed above, California’s new Title 24 mandate represents the boldest and most inspiring building energy efficiency standards by any state to date. No doubt the questions surrounding future electricity rates, grid management issues, retail competition, investments in TD&S, design of long-term contracting via PPA mechanisms, and the impact on housing prices require significant attention. But this solar mandate can be an unprecedented energy-problem solving strategy that turns every home into a power plant as solar becomes more mainstream.
A new paper strategy by the World Bank Group sets a new direction for energy sector investments focusing on expanding energy access and sustainable energy. Along with expanding access to energy, the Energy Sector Directions Paper focuses on accelerating energy efficiency and renewable energy development as per the Sustainable Energy for All initiative’s 2030 goal for doubling global energy efficiency measures and the global renewable energy mix share.
“As part of a drive for universal access, financial solutions or guarantees will be made available for the most feasible energy options for the poor and for people living in fragile and conflict-affected states. If short-term options include those with moderate or high greenhouse gas emissions, complementary support will also be provided in the medium term to harness lower-emission options.
In rural, remote or isolated areas, off-grid solutions based on renewable energy combined with energy- efficient technologies could be the most rapid means of providing cost-effective energy services. Engagement in cleaner cooking and heating solutions will grow.”
“The WBG will provide financial support for greenfield coal power generation projects only in rare circumstances. Considerations such as meeting basic energy needs in countries with no feasible alternatives to coal and a lack of financing for coal power would define such rare cases.”
The centre of clean energy gravity is fast shifting to Asia, with China taking the lead. In a new report developed by Australian think tank The Climate Institute and GE, China has improved its global low-carbon competitiveness index significantly.
The report ranks France, Japan, China, South Korea and the UK in the top five positions. China has leapt ahead of its previous ranking from 7th to 3rd while U.S. is now 11th down from 8th position. Australia is ranked 17th. The report attributes the latest decline in U.S. ranking to “lower public equity investment in clean energy, shrinking high-tech exports and a surge in reliance on emission intensive air freight.”
China’s growth in cleantech investment is boosted by high-tech exports and a rise in global public equity investment in clean energy. Read more
A new report by Climate Policy Initiative finds that institutional investors may not be able to fully cover the needed investment in renewable energy. The investors include insurance companies and pension funds, with a combined portfolio of over $70 trillion in assets.
The report titled, “The Challenge of Institutional Investment in Renewable Energy,” identifies a series of constraints especially policy barriers that hinder regulation of pension plans, investor practices and insurance companies.
The report proposes policy and institutional solutions to address these challenges, including: (i) encouraging utilities and other corporations to invest in renewable energy, (ii) fixing institutional policy drawbacks that discourage investors from the sector, (iii) modifying regulations of pension and insurance to promote renewable energy investment without creating new risks for institutions, (iv) improving institutional investor practices through capacity building in evaluating investments in the renewable energy sector, and (v) developing better pooled investment vehicles that fits institutional investors needs. Read more
The question of efficiency when comparing wind and solar forms of alternative energy is on the minds of many people these days. Government officials, state legislatures, entrepreneurs and average citizens want to know the answer to this question. The general feeling is that wind is more efficient, though the answer turns out to be dependent on the scale of operation involved in a comparison.
For a homeowner in a rural area who already has tall buildings, such as barns or grain silos, or even an existing old windmill, wind is easily more efficient. For larger applications, such as commercial generation of electricity to provide power for urban areas, the answer might surprise you.
Ending in 2011, a comparison test, between solar and wind powered energy, ran for 14 months. The comparison showed that solar power is more efficient.
To make sure the test was a fair comparison, a wind turbine set at an elevation of 35 feet was compared with a panel of solar collectors. As a control, it was verified that both could produce an identical amount of electricity at conditions considered optimal. The cost of each system was identical.
The result of the test was rather surprising. Over a number of testing periods, the solar powered generator was able to produce a total of 500% more electrical power than the wind powered generator. This was not expected, due to the fact that the solar system was dependent on the appearance of the sun to begin generation. It was determined that the intermittent and varying intensity of wind was the reason for the wind powered generator to produce less power.
Considering the vast amount of research being conducted worldwide on both types of alternative energy generation, it can be expected that the efficiency of both systems will increase in the future. There are several new designs of wind powered generators under development that require less wind to start operation and continue to generate electrical power. For solar technology there are also exciting developments. In addition to the development of much more efficient solar collectors, research at MIT has discovered a way to place solar collectors in non-horizontal arrays. The discovery is based on the natural way a tree develops leaves as it grows, and the mathematical principle of Fibonacci numbers. Tests are underway that could more than quadruple the amount of electrical power per square foot of solar panel installation that can be achieved.
Because of the exciting developments in both forms of alternative energy sources, it is hoped that government, private industry, such as Texas energy providers, and individual citizens, will continue to explore, research and discover even more ways to improve the efficiency of these two important non-oil sources of electrical power.
We all remember the notable story that opens Daniel H. Pink’s Drive: The Surprising Truth about What Motivates Us. Harrow, a psychology professor, and two colleagues gather eight rhesus monkeys for a two-week experiment on learning. They’re surprised to see the primates—without any urging or coercion—begin to play with their specially devised puzzle with focus, determination, and enjoyment. The shock deepens when the experimenters observe the monkeys crack a code on how to remove a pin, slide a hook, and open the cover of the mechanical puzzle, each time, even without a food reward, affection, or applause. Conversely, when the primates are rewarded with raisins for solving the puzzle they make more errors and less frequently solve the puzzle. The reason, Pink concluded, was that the monkeys solved the puzzle repeatedly because it was gratifying to do so. That is, the intrinsic benefits of solving the puzzle outweighed the extrinsic rewards.
In view of Harrow’s dilemma, I find the description of what motivates us presented in Pink’s book to be an apt description of global sustainability today. And the example that perfectly fits this description is the self-organizing aspect of sustainable initiatives. I find that many people still see sustainability as a carrot or stick dilemma; they are pretty convinced their choices are the best and it’s other people who aren’t doing the right thing. Their reasoning takes this line: “Nature has a unique way of maintaining equilibrium and regenerating itself. Our company is not a big polluter like other big companies and if it means that we have to give up our current production processes, we probably won’t do it.”
We sometimes think of sustainability practices as bootstrapping themselves into existence. We fail to connect the dots between our lifestyle choices and the resulting macrobehavior. One Wall Street Journal article documents why, despite government efforts to encourage consumers to adopt zero-emissions vehicles, electric cars are not yet creating much spark. As one researcher observed, “Until battery technology improves and people can drive further, I don’t see significant growth in electric vehicles.” Other consumers have expressed interest in electric cars, but acknowledge that it is going to take time before an effective solution to the range anxiety problem is resolved. How about if government paid new electric car owners? Try to nudge car owners to buy zero-emission cars by paying them for each unit bought—and they’ll become more diligent in the short term and lose interest in the long term.
But those who drive electric cars, or use energy saving bulbs, or incorporate ISO 14000 standards into projects, or weatherize their homes, for instance, aren’t setting out to solve global sustainability challenges; they are solving personal or business—and indeed local—problems, such as how to drive to their workplaces, or what to use in lighting their homes, or how to set a framework for continual improvement of environmental performance of their business, or how to maintain a certain in-house temperature. And yet those personal and local decisions combine—and self-organize—to form the macrobehavior of their homes, companies, businesses, states and nations. As a result of this self-organization, new pockets of successes emerge: home energy bills are reduced, corporate image among regulators, customers and the public is improved, clean air is restored, cases of chronic pulmonary diseases are reduced, and the equilibrium is restored.
“It takes a village” is a cliché. And yet I see its dynamics are at play everywhere in addressing sustainability. The correlation reinforces the notion that global sustainability requires a trade-off driven by intrinsic rewards: we all have a role to play in improving the environment and we will have to sacrifice something (e.g., our backyard for wind farms, preference for mass transit, or inexpensive transportation). And while some people are willing to make this trade-off, many others are not. As a result, the notion of global sustainability may need some nudges, including peer pressure.
The interaction is two-way: the project manager who incorporates ISO 14000 standards into the project influences other project staff in his or her team, and vice versa; the new homeowner who buys, retrofits and weatherizes his or her home next to an existing homeowner influences the behavior of that homeowner, which in turn influences the behavior of the new comer; the quality assurance specialist who applies exactitudes rather than generalities in project cost, project quality, and project time trade-offs, and educates, trains, and holds project staff responsible for sustainability, influences the behavior of those staff, who in turn influence the behavior of the project manager. In other words, the relationships are mutual: you influence your peers and your peers influence you, and a ‘flow,’ which enhances intrinsic benefits, is maintained and enhanced.
More prosaically, Pink addresses the complexity of these interactions, both in personal decisions and corporate environments, and advises those who prefer a reward-and-punishment route that: “Building our businesses in sync with these truths won’t be easy. Unlearning old ideas is difficult, undoing old habits even harder. And I’d be less sanguine about the prospects of closing the motivation gap anytime soon, if it weren’t for this: The science confirms what we already know in our hearts.” That is his swanky way of saying that decisions on global sustainability will come down to our deep-seated desire to direct own lives, expand our abilities, and to continue to live a life of purpose.
I will admit that, in that sense, Pink’s work gives us hope. And to make progress with global sustainability we will have to come to terms with the fact that real headway will only be realized when we adopt sustainability practices because it is gratifying to do so. Success will be possible when the collective action to create more profitable, healthy, and sustainable businesses, communities, and nations, is bottom-up, and enjoyable. That is, when the intrinsic benefits outweigh the extrinsic rewards.
Harrow’s primates have cracked the code and solved the puzzle without any raisins, and the ball has now been tossed to the bigger-brained, less hairy human beings. I will bet on intrinsic motivation and kaizen—continuous improvement—to get us there.
A new X Challenge to clean up the oil in the Gulf Region has been announced. The Wendy Schmidt Oil Cleanup X Challenge is a $1.4 Million prize to promote highly efficient methods for cleaning up crude oil on the ocean surface. “The goal of the Wendy Schmidt Oil Cleanup X CHALLENGE is to inspire entrepreneurs, engineers, and scientists worldwide to develop innovative, rapidly deployable, and highly efficient methods of capturing crude oil from the ocean surface” X PRIZE Foundation said in a statement. “The devastating impact of the Deepwater Horizon Oil Spill will last for years and it is inevitable that future spills will occur – both from wells and from transport tankers,” stated X PRIZE Chairman Peter H. Diamandis.
The competition begins on from August 1, 2010 and will close in April 2011. An expert panel of judges from industry and academia will evaluate all of the proposals along the following criteria: a) Technical approach and commercialization plan b) No negative environmental impact c) Scalability of and ability to deploy technology; cost and human labor of implementation and d) Improvement of technology over today’s baseline booms and skimmers. The winner will be announced at the National Oil Spill Response Research & Renewable Energy Test Facility (OHSMETT) in New Jersey and will receive the $1 million Grand prize. Second place will win $300,000 and third place will win $100,000 in purses.
