Renewable Energy 

Definition

The renewable energy sector includes biofuels, solar and windpower.  Renewable energies are becoming available and economically competitive in many locations, and are viewed as a solution to the oil crisis and issues pertaining to  global warming. The industry is poised for Phase II, putting America's 30-year, $15 billion investment in research, development, and demonstration of renewable energy technologies to use in the marketplace.

There are three key drivers pulling markets toward Renewables. The first is national energy security. Current projections show U.S. oil consumption increasing and outpacing flat domestic production curves, leaving the United States increasingly dependent on foreign oil markets. This would make the U.S. economy vulnerable to disruption in oil imports.

Additionally, the rapid growth of developing countries such as China and India places an increasing strain on world oil markets, a problem that is likely to get worse over time. The price of oil has surpassed $70 per barrel in mid-June 2006, up from $30 only a few years ago.

A second driver toward renewable energy is concern about climate change. Renewable energy can help provide for our energy requirements while decreasing our greenhouse gas emissions. Many of these scientists believe that this increase of temperatures portends negative and potentially catastrophic consequences, that the time frame for addressing the issue is now, and that there are actions that can be taken. Use of carbon-free renewable energy is one of them.

A third market driver is the cost of renewable energy, which has been decreasing for decades and is projected to continue to decrease for some renewables. The decreasing costs of renewable energies can be attributed to improvements in the technologies of the renewables. As the industry matures, costs will continue to decrease.

Putting Renewable Energy to Use

The uneven distribution of renewable energy resources across the United States makes it difficult to have a single, sweeping national policy. Solar energy is strongest in the Southwest; wind power is most-used in the Great Plains, on mountain ridges, and offshore; and geothermal energy is available in the West. Biomass is available across the country, but regionally in different forms. Biofuels are being produced in the farming states but consumed in cities that have air quality restrictions.

There are a thousand local markets for renewable energy across America, each with unique resources, economics, culture, and politics. Individual states have taken the lead in the renewable sector. Nearly half of the states employ a renewable portfolio standard (RPS) -- a system of goals for producing renewable energy. The employment of RPSs at the state level requires utilities to provide a particular amount of energy from renewable sources by a specific date, thus creating new demand for renewable energy immediately.

Elsewhere, the European Union has taken steps toward promoting renewable energy use and is a source of policy innovation. Germany, Spain, Italy, and others have implemented feed-in tariffs, which is the price per unit of electricity that a utility or supplier has to pay for renewable electricity from private generators. Meanwhile, Finland, Greece, and the United Kingdom have grants, tax incentives, and mandates for people to produce or use green power.

There have been widespread efforts to deploy renewable energy in the developing countries, with funding by the U.S. Agency for International Development and many donor agencies, and with financing support by the World Bank, European and other regional development banks, and the private sector. India was one of the first to commit to broad-based use of renewables and is active in wind, solar, hydro, and biomass energy. Brazil has been the early leader in sugar-based ethanol. Southern India, Sri Lanka, and Bangladesh have developed markets for the use of solar photovoltaics (PV), getting initial electricity to off-grid homes. China has developed a $3-billion-per-year solar water heating industry.

Wind Power

Wind power is the leader in wholesale renewable electricity production in the United States. Total installed U.S. wind power capacity was 9,149 megawatts at the beginning of 2006, according to the American Wind Energy Association. A large part of this -- 2,420 megawatts -- was installed in 2005, and an estimated 3,000 megawatts is planned for installation in 2006. With recent technological advances, the price competitiveness of wind generation versus natural gas has improved, supporting continued growth. In addition, the U.S. federal government offers companies a production tax credit for wind power equal to about 1.9 cents per watt-hour. This has been a powerful incentive to attract tax-oriented investors, such as utility companies, into wind farm ownership.

In the wind power sector, back orders for the large turbines needed to power the equipment have led to a slowdown in the financing of new wind farms and an upward tick in merger and acquisition activity. Suzlon, one of India's largest wind energy firms and a manufacturer of wind turbine generators, for example, bought Belgium-based Hansen Transmission from two private equity firms for $ 565 million in May.

The original markets for wind power were Denmark in the late 1990s, followed by Germany. Today, the hot markets are Spain, Italy, France, the United Kingdom, and India. But wind power is available almost everywhere.

Liebreich says the clean energy industry's growth is being tempered by temporary bottlenecks in manufacturing capacity as demand outstrips supply for wind turbines and the silicon used in solar energy as well as biofuel plants. He expects growth to register at 15% to 20% in most areas. "There's been an enormous surge in demand, and the industry has to catch up," he says. "The industry is not going to slow down, but there is a limit to how fast it can grow right now."

Solar Energy

Solar PV, a $12 billion global industry, is the leading renewable power source for distributed power generation (consumers who generate heat or electricity for their own needs and send surplus electrical power back to utilities), with recent growth in Japan, Germany, and Spain.

In 2005, the U.S. Energy Policy Act established a 30-percent federal tax credit for solar systems purchased for both residential and business applications in the United States, on top of substantial subsidy programs in states such as California and New Jersey.

In the developing countries, PV has great opportunity but has proven difficult to implement because it requires a local infrastructure of companies to sell, install, and service the equipment, and needs financing, which often is not available. Yet, markets are growing in India, Sri Lanka, Bangladesh, Morocco, Kenya, South Africa, and elsewhere.

Biofuels

Biofuels, principally maize-based ethanol, present the biggest investment opportunity in renewable energy in the United States for the next several years. Recent evidence assembled by Lawrence Berkeley Laboratory rebuts outdated beliefs from the 1970s that, because of the energy-intensive production, environmental benefits from maize-based ethanol are non-existent. It now appears that producing maize-based ethanol requires much less petroleum than producing gasoline and that greenhouse gas emissions from such an ethanol are about 15 percent to 20 percent lower than from gasoline. New cellulosic ethanol technology reduces both greenhouse gas emissions and petroleum inputs even more substantially. With ethanol replacing methyl tertiary-butyl ether (a chemical compound used as a fuel component in gasoline that has been banned in 22 states), demand has grown rapidly. In 2006, more than 4.7 billion gallons (17.9 billion liters) of ethanol will be produced, and there are 2 billion gallons (7.6 billion liters) per year of new processing capacity under construction in the United States.

The U.S. auto manufacturers have taken notice of the recent interest in biofuels. General Motors, for example, currently produces nine models that can run on E85, a mixture of 85 percent ethanol and 15 percent gasoline.

The biofuel industry needs more trained engineers to keep pace with the appetite for manufacturing plants that can turn out ethanol or biodiesel. Cabraal of the World Bank notes that the growth in wind power has temporarily outstripped the industry's capacity, and General Electric, for example, cannot deliver orders for wind turbines until 2008,

Growth

Large investments are being made in renewable energy companies and projects. Venture capitalists invested close to $181 million in alternative energy companies in 2005, an increase of $78 million from the previous year, according to PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association.

Major industry leaders have begun to take notice of this growing market opportunity and are showing their support. For example, General Electric recently invested $51 million in a 50-megawatt wind project in California, and Cascade Investment LLC placed $84 million into Pacific Ethanol, which produces and markets renewable fuels. The accelerated market growth has created a favorable environment for investors, with opportunities for substantial profits, as well as risks, in this now $50-billion-a-year industry.

National and Global Benefits

Renewable energy is a broad category of sources that draws from the naturally available energy around us. While not a silver bullet, the more we use it, the better off we will be in terms of reducing oil imports, reducing pollution and greenhouse gas emissions, and increasing jobs.

Renewable energy can provide significant opportunities for developing countries and rural areas. For example, by providing new jobs and new sources of income for farmers and ranchers, the Colorado Green Wind Farm in Lamar, Colorado, boosted the local county tax base by 29 percent, increased the school general fund by $917,000 per year, and increased funding of the county medical center by $189,000.

The potential of renewable energy is vast. It contributes to America's needs for security of supply, a cleaner environment, good jobs, and investment opportunities. The rural sector of America stands to receive the most benefits from renewable energy development.

Such development also offers opportunity to the rural people of the world everywhere to gain access to modern forms of energy. Wind, solar, geothermal, biomass, and small hydro plants can generate electricity for rural utilities and villages. Solar PV and solar water heating can bring modern energy to homes.

Outlook

The outlook for renewable energy in the United States and around the world is positive and accelerating. The official U.S. forecast from the Energy Information Agency shows renewable energy contributing only about 10 percent of U.S. energy supply in 2030, various industry groups are more optimistic. The Energy Future Coalition is calling for 25 percent by 2025, and ACORE sees the potential for 20 percent, 30 percent, and 40 percent by 2020, 2030, and 2040, respectively.

To make this happen, conventional energy prices must continue to stay high, renewable energy costs must continue to come down, and government policies must be stable and predictable to encourage commitment of lenders and investors to the financing of renewable energy systems. There also must be international collaboration to transfer the technologies to the developing countries.

Rising oil prices and escalating concerns over climate change and national security has motivated global investors are expected to sink $ 60 billion in clean energy sources this year, doubling the tally of only two years ago. While still a small proportion of the nearly $ 600 billion overall energy market, experts say the declining costs of renewable energy coupled with rising costs of traditional sources will drive strong growth in the market for industries such as wind power, solar energy and biofuels like ethanol.

This year, two events further opened investors' eyes to the money-making opportunities lurking in clean energy. One occurred on January 1 when China's landmark Renewable Energy Law came into force and the government outlined a commitment to invest $ 180 billion in renewable energy by 2020. Enacted in February 2005, the law aims to boost China's renewable energy capacity to 15%, now at 7%, by the year 2020. The government is now authorizing financial subsidies and tax incentives for the development of wind power, solar energy, biomass and other alternative sources throughout the giant nation.

Meanwhile, on the other side of the planet, US president George Bush said the United States was "addicted to oil" and highlighted the importance of ethanol technology in his State of the Union address at the end of January. Investors took note. Researchers at New Energy Finance expect investment in renewable energy and low-carbon technologies to tally $ 60 billion this year, up from $ 48.9 billion in 2005 and $ 30.1 billion in 2004. Investment in the first half of this year totaled $ 19.3 billion. That was up 12% from the $ 17.2 billion placed in clean energy during the first half of 2005, but down slightly (1.5%) from the $ 19.6 billion invested in the latter six months of 2005, Liebreich says. The $ 19.3 billion figure for the first six months of 2006 includes $ 3.8 billion of venture capital and private equity, $ 5.6 billion raised in public markets and $ 9.9 billion of project and other asset financings.

 Investment in Renewable Energy Companies

Meanwhile, a wide range of companies, from traditional energy producers like BP to start-ups, are investing in renewable energy. A conference on renewable energy finance that was held in New York in late June drew more than 600 executives, investors and developers from the renewable energy arena. Two of the most attractive sectors are solar power and ethanol. "Ethanol is blazing hot right now," says Evans of Citigroup.

James Nappo, managing director at UBS in Chicago, says the solar energy arena drew $ 3.7 billion in equity, private placements and other financing deals over the past 19 months and is expected to lure more than $ 1 billion in the coming year. Worldwide equity investments in ethanol tallied $ 1.6 billion since November 2005 and are expected to total $ 2 billion in the next 12 months.

"There are not many sectors in the economy with renewable energy's growth potential, which is why we are seeing so much investor enthusiasm for the space," says Nappo, adding that the combined market capitalizations of the publicly listed solar and ethanol companies represent less than 2% of the combined market capitalizations of the top-five oil companies. He notes: "That leaves a lot of room for upside."