Citibanker: the age of renewables is here

By Bryan Walker 17/04/2014


Kathryn Ryan’s interview earlier this week with Michael Eckhart, Managing Director and Global Head of Environmental Finance and Sustainability at the giant investment bank Citigroup was arresting. He was in New Zealand as a keynote speaker at the Wind Energy Conference and Ryan asked him about a recent report from Citi, Energy Darwinism: The Evolution of the Energy Industry, which claimed the world is entering the age of renewable energy and explored the consequences for generators, utilities, consumers and fossil fuel exporters. There’s a good exposition of the report on this blog post.

Eckhart explained the three big costs in producing electricity – the fuel, paying off the loan for the plant, and operational maintenance. In the case of coal and natural gas generation all three costs are involved and there’s no way of knowing what the cost of the fuel will be in the future. With wind and other renewables “there is no fuel cost at all: none”. Once the loan for the plant is paid off there are no further costs other than operational.

Ryan asked why investment in renewables is dropping as the costs are coming down. Eckhart in reply spoke of an anomaly:

“We had a very successful industry emerging coming out of the United States, Europe … manufacturing these solar cells, these solar panels, and  along  came China, and China just produces things at a lower cost and China made a priority – this became a priority industry under the government of China … and they came out with panels costing half as much.”

Investors in Western companies consequently took a hit and investors in the new Chinese companies did very well “and it’s all a big mix now”. The surviving Western companies are still there and very successful though many companies have closed. The industry has a new profile. Japan and the Middle East are also now part of the picture. The industry is evolving all the time.

Ryan then mentioned the difficulties wind energy is facing in the US with the emergence of cheap shale gas and the withdrawal of subsidies leading to a real hit to investment.

In response, Eckhart spoke in general terms of the world being 40 years into a 100-year transition to clean energy. Renewable energy is on a large scale around the world. “It’s a 250 billion dollar per year industry – that’s how much capital’s being invested in it”.  It’s a big industry competing with conventional power “better and better all the time”. In the US right now low-cost natural gas is gaining some share against renewables, but that’s not going to be a long-term trend. He spoke of the big forcing functions like climate change, environmental protection, human safety and stabilisation of energy costs. He stressed that stabilisation is one aspect of renewable energy that is often overlooked. Once a wind or solar project is built and financed the cost of its electricity is fixed for the life of the plant. Stabilisation of energy costs is important for countries.

When Ryan pressed the question of subsidies for wind and the pressure they are coming under in some countries Eckhart replied that subsidies are better seen as incentives, or compensation for public benefit. Non-pollution from renewables is a public benefit. But there’s nothing in the market to pay for that.

Solar presently counts for a quarter of a percent of the US electricity supply. How, asked Ryan, do you get a big transition moving from that small base?

Eckhart instanced Bill Gates making a fortune from the point when PCs were at only two percent of the computing power in the world. It’s the future that matters. He distinguished the three layers of the industry. First, the technology and manufacturing companies who produce the equipment to harvest the natural energy. Second, the developers, owners and operators of the renewable power plants. Third the utilities that buy that electricity to sell it to us. The profitability of the manufacturing layer might for the present be bad because of the Chinese dominance of the space. However the drop in prices has benefited the developers who are buying the panels and putting them to service. That’s where the fortunes are currently being made. The utilities have been taken somewhat by surprise and are still figuring out how this impacts their business.

Market adjustment is called for. Those who adjust fastest are going to benefit. Those who stand still might be impacted negatively. The world is changing. We are in a century of massive technology innovation and adoption.

I appreciated Eckhart’s forthrightness, all the more because of the investment banking environment from which it comes. But the question the interview left me pondering was whether the forcing function of climate change that Eckhart refers to will be felt strongly enough to speed up the process that he sees as inexorably under way. Forty years into a hundred-year transition doesn’t sound far enough from a climate change perspective. Our own government is happy enough to look forward to fully renewable energy in the long run, but only after as much profit as possible is taken from fossil fuels. The remaining sixty years of Eckhart’s hundred need to be condensed to thirty before we can safely take heart from the kind of analysis he makes.