Changing the game of the renewable power industry
Alternative thinking 2016
Renewables are increasingly being chosen over fossil fuels. Wind turbines, rooftop solar panels, and/or electric vehicle charging stations have gained territory and multinational companies are embracing renewable energy. What game-changers are impacting the renewable power industry?
Jeroen van der Wal - 27 october 2016
A march forward
Three years ago, Deloitte published the first edition of ‘Alternative Thinking’. Since then, much has occurred in the world of energy. While the International Energy Agency reports that renewables account for only a small portion of total global electricity generation, this is about to change. In ‘Alternative Thinking 2016’, Deloitte discerns ‘a march forward [that] is likely unstoppable’ and five developments that are changing the game in the power industry.
#1 Regulatory reform and public policy support
The first game-changer is regulatory reform and public policy support. At the United Nations Climate Change Conference in Paris, December 2015, more than 175 countries endorsed the UN Paris Climate Change Agreement. This is an all-time record for the highest number of countries signing an international treaty. Their collective goal is to keep global warming below 2°C compared to pre-industrial times, and to pursue efforts to limit the temperature rise to 1.5°C. All countries are required to submit plans for climate action and to update them every five years. Even though these plans are not legally binding, they are still an important step in the right direction.
In the Netherlands, parties have agreed that in 2020, 14% of all energy must be renewable. For instance, offshore wind farms are being built at several locations, improving the capacity for sustainable energy, while coal-fired power stations are going to be shut down, reducing the production of fossil fuels. Environmental organizations have successfully sued the Kingdom of the Netherlands about the actual implementation of environmental-friendly policies, and public opinion has definitely changed over the years, acknowledging the urgency of regulatory reform.
#2 Corporate commitment
Corporates are also encouraging change. One of the most notable initiatives in this area is the RE100, which is a collaborative, global initiative of influential businesses committed to 100% renewable electricity. The RE100 consists of companies from all over the world, including India and China. Many of these companies are choosing to self-generate a portion of their electricity supply to better manage their electricity costs, support sustainable goals, and improve resiliency. The energy industry itself is also going through a transition. Some of the more traditional energy companies have even carved out their renewable energy division as a separate listed company.
#3 Financing innovation
The willingness to invest in renewable energy is definitely increasing. Investors, including corporates from other industries, now consider renewables as an asset class and feel more confident in investing in them. Last year, Deloitte advised a Dutch financial institution in a contemplated acquisition of a wind farm. Also, ‘green’ companies such as Tesla are very successful in approaching investors and future clients to further develop their products. At the same time, new financing vehicles such as YieldCos and green bonds have lowered the cost of capital and improved access to it. Green bonds are essentially corporate bonds with proceeds ring-fenced for clean energy investments.
#4 Energy storage
Energy storage refers to a wide range of chemical technologies, mainly batteries, along with mechanical/thermal technologies such as flywheels, compressed air, and pumped hydro. Although some people still believe that energy storage technologies are neither viable nor affordable, these technologies are in fact an effective tool for regulating and managing intermittent power sources. More and more, energy storage is considered to be the ‘holy grail’ of the energy industry. On the one hand, an increasing number of consumers use solar panels and batteries. On the other hand, companies are showing more interest in more efficient cooling and heating techniques, which are improving rapidly.
#5 Grid integration
A host of new technologies – e.g. batteries, flywheels, advanced analytics, grid-control gear, and smart technologies - are making existing electricity grids more flexible. This means that intermittent power sources can be more easily integrated, including renewables, which is especially interesting for developing countries that do not have an extensive energy network yet. For more developed countries, grid integration will be less urgent as the current grid works well with the current mix of energy production. However, a larger share of renewables such as solar energy and wind energy, will require grid integration.
New business models
Renewables might not – yet – be able to completely replace fossil fuels. Even if renewables become our main energy source, fossil fuels will probably still serve as a back-up. But the business models of power stations will certainly change. For instance, it is very likely that in the near future, consumers – and businesses – will be able to choose whether they want a 100% power guarantee – at a higher tariff – or whether they are willing to pay less for less certainty. Moreover, a perceptional shift concerning alternative energy has occurred. Leading companies have embraced renewables and are incorporating them into their strategy.
Reshaping the industry
Deloitte is eager to help clients position themselves to prosper amidst the enormous changes that are reshaping the energy industry. We can help with grants or tax strategies for new technologies in the field of renewable energy. Also, we can analyze new developments and opportunities in the renewables industry and help with financing, developing business cases, and implementing transactions and partnerships.