Fossil Fuels Under Siege?

One question I am often asked is about the relative threat of various renewables to the global fossil fuel-dependent economy. It’s a complex question with answers that are dependent upon many variables, one of which is the unpredictable nature of government subsidies aimed at renewables.

Generally speaking, there aren’t a lot of renewables that pose a threat to oil or natural gas. Oil is a liquid transportation fuel and chemical feedstock, and there isn’t a scalable replacement on the horizon. This is why oil demand has continued to grow even as the price increased by an order of magnitude over the past decade, and why I consider oil companies to be great long-term investments for just about anyone.

Natural gas and coal are used mostly in power production (albeit natural gas for transportation is growing), which puts them in competition with renewables like wind power, solar power, geothermal power, and hydropower. However, natural gas and coal produce power on an enormous scale, and both are “firm power.” This means unlike wind and solar power, they can be called upon as needed.

But coal is also the most polluting power option, and recently proposed EPA regulations would phase out its use in the US. Renewables stand to gain, but natural gas will gain even more from coal’s demise since it can scale up to replace coal with firm power (something renewables can’t do for the foreseeable future).

We have spent a lot of time covering the natural gas story here at The Energy Strategist, and hopefully readers have taken our advice and profited. But what about renewables? What are the opportunities there?

The Last Word on Renewables

This past week the Renewables 2014 Global Status Report (GSR) was released by REN21, the Renewable Energy Policy Network for the 21st Century. I believe that this is the most comprehensive report available when it comes to the global renewable energy picture, but I may be somewhat biased as I have been a contributor to the report for the past five years.

What is REN21 and what are they trying to achieve? From the foreword to the 215-page report:

REN21 is the global renewable energy policy multi-stakeholder network that connects a wide range of key actors. REN21’s goal is to facilitate knowledge exchange, policy development and joint action towards a rapid global transition to renewable energy.

REN21 brings together governments, nongovernmental organisations, research and academic institutions, international organisations and industry to learn from one another and build on successes that advance renewable energy. To assist policy decision making, REN21 provides high quality information, catalyses discussion and debate and supports the development of thematic networks.

Following last year’s release we took a deep dive into the solar sector and came up with a gem for subscribers in First Solar (Nasdaq: FSLR), which returned 88 percent in under seven months before we advised subscribers to take some money off the table (and it’s down 8 percent since we provided that advice on March 20). So let’s see what we can glean from this year’s report.

Global Renewables Overview

Despite declining policy support and uncertainty in many European countries and the US, renewables continued to grow globally. In the power sector global capacity exceeded 1,560 gigawatts (GW), up more than 8 percent over 2012. Hydropower rose by 4 percent to approximately 1,000 GW, and other renewables collectively grew nearly 17 percent to more than 560 GW.

Solar photovoltaics (PV) continued to expand at a rapid rate, with growth in global capacity averaging almost 55 percent annually over the past five years. Even as global investment in solar PV declined by nearly 22 percent from 2012, new PV capacity installations increased by about 32 percent as a result of sharply falling costs. For the first time ever, the world added more solar PV than wind power capacity in 2013.

However, growth rates for wind power, solar PV, and concentrating solar power (CSP) all slowed relative to their five-year average growth rates. On the other hand, additions of geothermal power, hydropower, and solar heating applications were above the five-year average growth rates.

After a few years of uneven growth, global ethanol and biodiesel production both increased in 2013. By early 2014, at least 63 countries used regulatory policies to promote the production or consumption of biofuels for transport — up from the 49 reported in GSR 2013.

In the European Union (EU), renewables represented the majority of new electric generating capacity for the sixth consecutive year (72 percent of new capacity in 2013), and in China new renewable power capacity surpassed new fossil fuel and nuclear capacity for the first time. In total, renewables accounted for more than 56 percent of net additions to global power capacity in 2013.

At the end of 2013, China, the United States, Brazil, Canada, and Germany were the top five countries for total installed renewable power capacity. China ranked first in total renewable energy investments, hydropower capacity, solar PV capacity, wind capacity and solar water heating capacity. The US ranked first in concentrating solar power capacity, ethanol production and biodiesel production.

Global new investment in non-hydropower renewable power and fuels was an estimated $214 billion in 2013, 53 percent of which went into solar power. The total was down 14 percent from 2012 and 23 percent lower than the current peak investment year of 2011. (Japan was a notable exception, with an increase in renewable investments of 80 percent over 2012.) Part of the decline in investment can be attributed to declining government subsidies in some countries, but some of it is likely the result of falling technology costs. Solar PV, for example, saw record levels of new installations in 2013, despite a 22 percent decline in dollars invested.

In 2013, Asia accounted for 87 percent of global production of solar PV modules (up from 85 percent in 2012), with China producing 67 percent of the world total. Europe’s share declined to 9 percent in 2013 (from 11 percent in 2012), and Japan’s share remained flat at 5 percent. The US share was 2.6 percent. Thin film solar accounted for 39 percent of US production, up from 36 percent in 2012.

The top 10 solar PV manufacturers in 2013 were Yingli Green Energy Holding (NYSE: YGE) in China, rival Chinese producer Trina Solar (NYSE: TSL), Canadian Solar (NASDAQ: CSIQ), Jinko Solar (NYSE: JKS; China), ReneSola (NYSE: SOL; China), Sharp Solar, a subsidiary of Japan’s Sharp (Tokyo: 6753, OTC: SHCAY), First Solar (NASDAQ: FSLR) of the US, Hanwha SolarOne (NASDAQ: HSOL; China), Kyocera (NYSE: KYO, Tokyo: 6971; Japan), and JA Solar (NASDAQ: JASO; China). Investing in some of these companies is not straightforward, as some either have significant operations unrelated to solar power or trade as a holding company that may include unrelated operations. Read on for a new recommendation of a rising solar player that’s moving up the value chain from manufacturing.

Conclusions

The new Renewables 2014 Global Status Report confirms that renewables continue to grow globally, but that growth has slowed for major sectors like wind power and solar power. This slowdown was caused in part by a shift in government policies in some EU countries like Germany. Regionally, Asia is beginning to take a more dominant role in renewable energy investments, as China invested more in renewable energy in 2013 than did all of Europe combined.

While growth in solar power slowed, solar power’s growth rate has been substantially higher than wind power’s over the past five years. In 2013, new capacity additions of solar PV surpassed wind power capacity additions for the first time. I expect this trend to continue, and for solar to be the best long-term bet in the renewable energy space.

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