This past week, something amazing has happened. Several sources have reported that major financing institutions are embracing renewable energy and seeing it as the way of the future. When the big money moves watch how fast things change.
I’ve been predicting this for some time now. It finally appears to be happening. We may actually be reaching the tipping point.
One highlight:
“UBS surmises that less-expensive batteries, solar PV, and electric vehicles will empower customers to make their own energy decisions, and effectively make traditional power plants irrelevant by 2025.”
I am doing something I have not done before. I am going to copy several articles on this topic. There are a few of you out there that may appreciate the historic significance of this seismic shift in finance and want to read all of this. This is huge. As I always say, “follow the money.” And big money is now starting to go to renewables which will fuel growth beyond conventional wisdom.
The Finance Industry on DERs: Solar and Batteries are Coming
APR 14, 20152
Bodhi Rader
Sr. Associate
We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade.
—Barclays, Utilities Credit Strategy Analyst Report, May 2014
In 2014, a chorus of analyses from major financial institutions—including Bank of America, Barclays, Citigroup, Fitch Ratings, Goldman Sachs, Morgan Stanley, and UBS—found that solar-plus-battery systems pose a real and present threat to traditional utility business models. Many of them directly cited RMI’s report The Economics of Grid Defection, which assessed when and where distributed solar-plus-battery systems could reach economic parity with the electric grid, creating the possibility for defection of utility customers. Their perspectives varied, but all echoed the common theme of increasing challenges for the current utility business model.
However our recently released report, The Economics of Load Defection, shows a much more likely scenario—one that is coming sooner for more customers in more places, with arguably far greater implications than grid defection—the migration of load from central systems to distributed ones, what we call load defection. The customers don’t leave, but their load does, “defecting” from grid supply to behind-the-meter, grid-connected solar PV and batteries. They thus risk becoming phantom customers.
BANKS SPEAK OUT
This is not the lone voice of RMI. If you want to see where the grid is heading, follow the money. And by that measure, the banks have spoken loudly.
A 2014 report by leading investment bank UBS noted, “Our view is that the ‘we have done it like this for a century’ value chain in developed electricity markets will be turned upside down within the next 10–20 years, driven by solar and batteries.” UBS surmises that less-expensive batteries, solar PV, and electric vehicles will empower customers to make their own energy decisions, and effectively make traditional power plants irrelevant by 2025. HSBC, in its report Energy Storage: Power to the People, suggested that deployment of energy storage will accelerate the utility revenue decay trend already started by rooftop solar. And a Morgan Stanley report stated that, “Over time, many U.S. customers could partially or completely eliminate their usage of the power grid. We see the greatest potential for such disruption in the West, Southwest, and mid-Atlantic.”
Though each bank’s analysis has a different cost projection, market focus, and means of comparison—it is clear they expect solar-plus-storage to present a threat to the traditional utility/customer relationship as we have known it until now.
GRID DEFECTED VS. GRID CONNECTED
From the publication of The Economics of Grid Defection and since, we’ve tried to make clear that the economic cost competitiveness of solar-plus-battery systems does not mean they will be adopted en masse by customers overnight. And there are plenty of reasons why we wouldn’t want that to happen, anyway. Adoption will follow its own curve distinct from the economics.
In fact, as Moody’s in January and The Washington Post in March pointed out earlier this year, defection is not an optimal outcome and may not happen as fast as people think. In those points, we agree. This is why our newest report is so important. It shows that people may stay connected to the grid while more and more of their load is powered by customer-sited renewables.
Compared to the off-grid systems analyzed in The Economics of Grid Defection, optimally sized, grid-connected solar-plus-battery systems can reach economic parity sooner, and across more geographies, with likely faster customer adoption. This will herald a marked shift in the relationship between customers and utilities, and between customers and the grid. But since such systems remain grid connected, they can offer value to that grid, rather than be seen solely as load defection from it.
THE NEED FOR NEW BUSINESS MODELS
For utilities to enable and capitalize on these grid-level benefits from customers with solar-plus-battery systems, they will need to change their business models. Banking institutions have not been shy in taking notice and even making recommendations. Overall, the banks see utilities as helping distributed generators succeed by facilitating a decentralized electricity system. From the view of a financial analyst, the final shape of the grid is less critical than the financial impact of that grid; analysts as a whole see this future as DER-rich, requiring additional investment, and facing pressure on traditional pricing and revenue.
Financial institutions thus recommend utilities develop a smart grid by partnering with solar, battery, and smart meter providers; maximizing their relationship with customers through full-service tailored services; and taking advantage of the Internet of Things in a smart connected grid.
UBS sees the potential of pairing solar-plus-battery systems (plus EVs) with responsive demand as a perfect fit for a smarter grid of the future, with nightly EV charging smoothing the demand curve. Stationary storage will store excess solar production during the day and release it in the evening. The utility fills any gaps in supply during the night and early morning hours, which coincides with low prices due to excess base load. Utility power could also be used to charge the stationary battery during that time, so the battery is ready to supply the morning peak.
HSBC makes a similar suggestion, recommending that utilities leverage their relationship with customers and existing assets to become full-spectrum service providers via a smart grid. It thinks utilities could market value-added services to customers or provide backup power.
Citigroup agrees, adding that utilities have the option of boosting their asset base by investing in storage. Alongside vehicles and consumer electronics, Citigroup sees utilities taking advantage of storage as a pillar of growth.
Morgan Stanley similarly highlights the greatest value is gained from a utility integrator model, especially in Europe, to offer energy services including finance, design, and installation of solar-plus-storage solutions. Addressing central generators, the recommendation was fairly straightforward—invest in renewables since fossil plants will lose out due to fuel costs.
COMMON THEMES COME TO THE FORE
The analyst community made specific recommendations, but also laid out some common themes that are especially relevant in a grid-connected solar-plus-battery future.
These technology trends are real, and changes to accommodate them need to start now.
These technologies can improve grid operations and lower overall costs. In particular, utility-scale solar, distribution-level storage, and other innovations can improve grid function and lower costs.
The electric industry should prepare for two-way flow. While specific recommendations vary, the utility at some point will need to work with customers who make distributed investments, allow them to share values on the distribution grid, and provide them new services as well.
THE CHOICES AHEAD
The grid of the future may still be coming, but the trends that will likely define it are already here. But what will be the industry’s next move?
Decisions made today can set markets down extremely different paths. One path leads to grid defection as utilities offer pricing structures, business models, and regulatory environments that favor non-exporting solar and solar-plus-battery systems. The other path leads towards an integrated grid in which pricing structures, business models, and regulatory environments appropriately value distributed energy resources such as solar PV and batteries. At this metaphorical fork in the road, utilities have the opportunity to learn from those outside their industry and partner with their customers in a whole new way. Like the financial institutions point out, solar-plus-battery systems are showing more promise than ever, and will play an important role in the electricity system of the future.
The electricity industry can start acting quickly by developing evolved pricing and rate structures, new business models, and new regulatory models. Those changes should make a win-win situation for all. We don’t pretend that all such changes will be quick or easy, but the time to start making them is now.
‘Green bonds’ gain steam, move toward mainstream
Saqib Rahim, E&E reporter
Published: Thursday, April 16, 2015
NEW YORK — Financial markets are gaining comfort with “green bonds,” according to some market experts, and it may be setting the stage for “hockey stick” growth that vaults this financial oddity into a more mainstream use.
More companies are issuing bonds to raise cash for specific environmentally beneficial projects, and markets have received them warmly. This is inducing banks and other investors to get more interested, building confidence in green bonds and increasing their chances at entering the big leagues of debt finance, said a panel at the Bloomberg New Energy Finance Summit here yesterday.
“We have reached a critical deployment in terms of clean energy,” said Kyung-Ah Park, a managing director and head of environmental markets at Goldman Sachs. “That is enabling poolable, operating assets that then scale to the visible, long-term cash flow characteristics of renewables.”
That is, market participants are gaining confidence that renewable-energy projects, for example, can guarantee a long-term cash stream from a reliable company.
With that foundation of certainty, Park and others said, the investment community can do a lot. “Financial engineering” can be applied to “green” home mortgages, “green” car loans and a wide array of activities that already enjoy the benefit of financing today.
For the moment, it’s important to be modest, the panel said. Narrowly defined, the green bond market reached about $39 billion in issuance last year, according to Bloomberg New Energy Finance.
That was 2.6 times the issuance in 2013. But global fixed-income markets add up to anywhere from $60-100 trillion, depending on who’s counting.
Still, the growth has advocates excited for a potentially explosive area of green finance. “Green” bonds function similarly to regular corporate or government bonds: An institution requests an amount of money, and it promises to pay regular interest payments for a given period. However, green bonds add another aspect: a promise that the funds will be used only for a specific, environmentally beneficial project.
For the mass market to be comfortable, those promises should be vetted by an outside party. And Peter Sweatman, one of the original proponents of green bonds, said that is becoming more and more true.
Sweatman, CEO of consultancy Climate Strategy & Partners, said 81 percent of green bonds to date have been verified by an external party. These reports give investors — and the broader market — confidence that the cash will be used as promised.
Companies buy in
Companies are gaining confidence too, said Suzanne Buchta, managing director and global co-head of green bonds at Bank of America-Merrill Lynch.
She said more companies are issuing their second or third green bond, indicating that investors liked what what they saw from the first. The bonds are drawing regular investors — who don’t care about the “green” label as long as they make money — as well as investors with an environmental bent.
Asked where the green bond market could be in five years, Buchta said it could reach some $500 billion. She said a growing market will attract financial innovation. More areas, green cars, energy-efficient homes and buildings, even waste disposal could become more standardized and then scaled up.
One risk: interest rates. Today’s low interest rates have driven investors to look increasingly afield for ways to make money where their government bonds aren’t. That has encouraged green bonds as well as other vehicles.
Eventually, interest rates will have to be raised. So an enduring question, the panel said, is how green bonds will react at that point. Investors could flee, imploding the sector.
Alternatively, green bonds may have grown such deep roots by this point that they are spared. The panel hoped that eventually, clean energy and energy efficiency will be market darlings, able to raise cheap cash as easily as anyone else in business.
While today’s financial conditions are odd and temporary, Park said, she believes the fundamentals of clean energy “are here to stay.”
Twitter: @SaqibSansU | Email: srahim@eenews.net
Global green bond funds hit half-trillion-dollar mark
Benjamin Hulac, E&E reporter
Published: Thursday, April 16, 2015
Institutions aiming to raise money for environmentally friendly projects issued $7.15 billion in green bonds during the year’s first quarter, bringing the total amount of outstanding green bonds to a little more than $500 billion worldwide.
Last year, the green bond market tripled in size, with buyers snapping up $36.6 billion worth of assets.
But this environmental market is still too small to meet the investment and policy objectives to keep global temperatures below the goal of 2 degrees Celsius above preindustrial levels, according to a report published yesterday by the European Commission and written in order to provide E.U. lawmakers suggestions to buoy climate-focused investment.
“This gives E.U. policymakers more than enough options to give a boost to sorely needed green infrastructure in the E.U.,” said Sean Kidney, chief executive of Climate Bonds Initiative, one of the nonprofit organizations that compiled the report.
Green bonds are profitable investments designed to generate climate change benefits, but only between 1 and 2 percent of all E.U. investors have climate-friendly investments — bonds or other instruments — in their portfolios, according to the report.
E.U. member nations alone will require €200 billion per year beginning in 2020 and €780 billion globally, the authors forecast. Labeled green bonds are “regularly oversubscribed 5 to 6 times” — meaning that there are often more interested buyers than there are available bonds, the report said.
But hurdles to speed green investments, bonds and otherwise, remain.
More of everything is needed, including uniform rules
Stock markets lack “blue-chip” climate-friendly equities, and the economic risks associated with climate change are not integrated with financial managers’ “fiduciary duty and engagement practices,” the report reads.
Institutional investors, such as pension funds and other large-pool money managers, also are bound to follow short-term strategies, which limits investors’ capacity to plan years ahead for financial losses linked to the effects of global climate change.
In response to these challenges, the authors propose that the E.U. regulators should boost the volume, understanding and acceptance of green bonds with help from the European Investment Bank and other financial bodies.
The report advocates for more securitization — the process of converting an asset into something that can be bought and sold on a marketplace — in the environmental investment market, and pushes for universal standards and requirements that a debt security must meet in order to be labeled a green bond.
After a Swedish bank issued the first green bond in 2008, development banks — namely the World Bank, the European Investment Bank and the Asian Development Bank — were among the first significant issuers in the market.
Recently, corporations, universities and municipalities have begun creating their own environmental bonds.
Toyota issued a $1.75 billion bond in March; the University of Virginia and Arizona State University each issued multi-decade bonds worth $98 million and $183 million, respectively, yesterday; and Connecticut issued a $60 million bond in December to fund drinking water systems.
Twitter: @benhulac | Email: bhulac@eenews.net
