Much of the current political debate in the United States and other countries is centred around the role of government and the need for stimulating private economies, and this debate is playing out directly in relation to the renewable energy sector. It is still the case that current technology for renewables projects is not competitive with conventional fossil-fuelled generation sources (although the gap is narrowing) and, consequently, renewables projects continue to rely upon governmental subsidies and policies (in the form of renewable portfolio standards, feed-in tariffs or otherwise) to be commercially viable.
In the United States, in particular, the general historical theme has been that as government support (tax credits, cash grants, government guarantees) goes, so goes the renewables industry. It was not surprising, then, that the passage of the American Recovery and Reinvestment Act in 2009 (ARRA), which stimulated the United States renewables sector by providing cash grants to projects in lieu of tax credits – lengthening the time periods for obtaining government support and re-energising the United States Department of Energy (DOE) Loan Guarantee Programme for renewables projects – pushed forward a surge of development in the United States in 2010. As the ARRA programmes and incentives begin to wane, the question rises again as to whether that surge will continue after 2011.
In Latin America, while subsidies and incentives played less of a direct role in the recent renewables sector growth, 2010 saw the rise of governmental, quasi-governmental and multilateral lenders stepping in when international lenders otherwise continued to stay away.
While there were different forces driving the renewable energy sector throughout the Americas, a common theme continued to be the need to diversify the generational mix and to address climate change.
Prior to the passage of the ARRA, the United States renewables sector was mired in the financial crisis of 2008 and 2009, when the historic base of investors interested in financing projects because of available tax credits significantly declined together with their tax base to use such credits. The ARRA provided two important incentives to address this issue. The first was a 30 per cent cash grant provided to projects in lieu of tax credits, and the second was the expansion of the DOE Loan Guarantee Programme to provide guarantees for more typical, commercialised technology, known as the 1705 Programme. The introduction of the ARRA, however, came at a time when a consistent energy policy in the United States, particularly as it relates to greenhouse gas legislation, was becoming increasingly uncertain. This uncertainty was a factor leading utilities to be less willing to sign up above market renewable energy power purchase agreements which they had previously done in anticipation of pending greenhouse legislation. Even with the stimulus provided by the ARRA, the uncertainty of energy legislation was one reason why wind projects in the United States in 2010 were approximately half of the 10,000 MW for 2009.
While wind projects stalled somewhat in 2010, solar projects were on the rise. The ARRA and 1705 Programme precipitated the development of larger utility scale solar projects and solar panel manufacturing facilities, an area where the United States was recognisably lagging against China.
With wind and solar being intermittent resources and typically located away from major load centres, there was and continues to be an increasing need to improve the United States electric transmission system. Again, the 1705 Programme played a part in this effort in 2011 by providing the first loan guaranty to a transmission project when it closed on the LS Power/Nevada Energy On Line Project being developed to deliver renewable energy north to south in Nevada. Additionally, individual state incentive programmes, such as the Competitive Renewable Energy Zone (CREZ) projects in Texas, are assisting transmission development.
The importance of the ARRA and 1705 Programme in 2010 and the first half of 2011 may become further evident as the programmes expire. The cash grant provided by the ARRA is set to expire at the end of 2011 for renewable energy projects that have not commenced construction by such date, and the 1705 Programme will end on 30 September 2011. With the end of the programme so imminent, the DOE has publicly stated that it will cease to accept any further applications with respect to the 1705 Programme. How well the United States renewable energy sector does in the absence of these programmes remains a pertinent question. Additionally, further slow down in renewable projects may be seen if already low natural gas prices are further exacerbated by the expected development of sizeable domestic shale gas deposits.
In Latin America, the availability of financing from multilateral, national development and export credit agencies, as well as local banks and capital markets, ensured the availability of long-term financing for renewables projects during the financial crisis when the lending capacity of the international banks was severely constrained.
The range and diversity in size, technology and location of recent and current renewables projects throughout Latin America bodes well for the future, reflecting the political will to diversify the generation base in an era when elevated oil prices are expected to continue in the medium-term, the growing sophistication of the region with respect to the industry (with increased focus on the development of biomass, geothermal and solar projects, and not only the more traditional hydro and wind resources) and heightened concerns over climate change.
Also, the growing focus by Chinese corporations on the Latin America power markets – the US$1 billion investment by China’s State Grid Corporation in seven Brazilian transmission companies – will likely result in more investments, particularly in the wind sector, where in 2010 China became the largest wind energy producer in the world and has a very sizeable wind turbine manufacturing industry (the end of government subsidies to Chinese wind turbine manufacturers when they purchase parts from domestic suppliers being unlikely to materially curtail the expansion of Chinese wind turbine manufacturers into the Americas).
Challenges remain, of course, for the renewable industry to continue its growth in the coming years.
Scrutiny over environmental and social impact and nimbyism (not in my back yard), particularly for the larger projects, as demonstrated by the challenges to the Belo Monte hydro project in the Brazilian Amazon and the HidroAysen project in Chile’s Patagonia region, are likely to grow over time. The growing affluence of the region will also likely result in greater concerns over such matters by the local population, whereas economic growth (and the need to develop electricity production to fuel such growth) was previously often the determining consideration with regard to potential investments.
Political uncertainty may also be an issue. The markets are still concerned over the recent election of Ollanta Humala in Peru and with respect to upcoming presidential elections scheduled for 2011 in Argentina and Nicaragua and for 2012 in Mexico. Also, growing security concerns in Mexico and certain Central America countries may also hamper the development of renewable resources in the more remote areas.
Uncertainty regarding the validity of carbon offsets under the Kyoto Protocol’s Clean Development Mechanism, or the potential for a gap between the old and new market mechanisms when the protocol expires in 2012, will also be on the mind of investors when considering renewables projects in Latin America.
Notwithstanding the above pressures on the development of renewable energy, renewables projects in the Americas have demonstrated significant resilience in the face of severe turmoil in the credit markets and shifting regulatory policy landscapes. Indeed, renewables projects throughout the Americas suffered a smaller decline, in terms of both number and value of projects, than conventional power projects during and since the financial crisis. The renewables sector also experienced the most accelerated recovery.
Given the concerns over global warming, the improvements in technology and transmission, the growing demand for energy and electricity in the coming years and the recent set-backs for the nuclear power industry after the incident at Fukushima, Japan, the outlook for renewables in the long-term remains bright.
Indeed, the potential for the very significant role for renewable energy in the future was bolstered by the finding of the Intergovernmental Panel on Climate Change (IPCC). Endorsed by representatives from 194 countries, the IPCC released its summary report in May 2011. In this report, the IPCC concluded that as much as 77 per cent of the world’s energy demand could be met by renewables by 2050 if supported by consistent climate and energy policies. Perhaps even more encouraging the IPCC found that it is not the availability of the resource, but rather public policy, that will either grow or constrain development of renewable energy in the coming decades. If so, the outlook for the renewable energy industry and our ability to control global warming, as is often the case in such matters, rests in the hands of us all.
*While author Robert Freedman represents the United States Department of Energy (DOE) on a number of loan guaranty transactions, including the On Line transmission deal referred to in this article, the views expressed herein are solely those of the authors and do not reflect any views of the DOE.