Cleantech Consolidates Before the Next Big Push
Cleantech, green energy and sustainable development technology are coming of age, into a changing and difficult world. The conclusion by many analysts at this time is that only those businesses that target a comprehensive and diverse energy strategy, which really balances out the risks and rewards will create and maintain enough competitive advantage and industrial momentum to gain lasting success in the resource-constrained world of today. The rearview mirror image however looks good: 2011 was a record year for investment flows and government support to the very broadly defined "clean energy and sustainable development" space.
According to the IEA, Bloomberg New Energy Finance, and sector analysts such as Allen & York, Ernst & Young, KPMG, and regional cleantech specialists such as Green Purchasing Asia, the combined global total for new investment and subsidies, in 2011, was probably about $300 billion, of which around $65 billion was in the form of subsidies. However, since the turn of the year and in Q1 2012, the combined impact of less investment and lower subsidies has cut the monthly average spending on cleantech to the lowest since the recession low-point of 2009. Regarding state subsidies to fossil fuels, the IEA estimates the total as running at about $409 bn a year, in 2011.
These spending amounts can be compared with global spending on oil and gas exploration and production (E&P), estimated by Citibank to be running at around $275 bn per year as of Q1 2012. The bang for the buck, or barrels oil equivalent for the buck can be compared, from this fossil - non-fossil spending, and shows that while shale gas is a clear winner, and stranded gas/LNG development may also be highly profitable, both in energy yield and earnings, oil investment returns trail well behind leading cleantech opportunities on both these criteria, that is energy and earnings performance.
SHORT TERM CONSOLIDATION
No crystal ball is needed to forecast that new spending in cleantech will again have to hope for state support and subsidies, the rest of 2012, to avoid another 2009. The short to medium term sector outlook is generally downbeat in most leading global regions, and especially Europe with its sovereign debt crisis lurching forward to possibly catastrophic ends: not ironically however, new state spending on cleantech, in Europe, to generate activity and jobs is a highly rational outlook. The only question is when and how much, and what options the investment and spending will choose and favour.
Both in the US, Europe, Korea and even India and Brazil, the sector consolidation outlook for cleantech is the only rational forecast - because of China's push to dominate global cleantech. Why China wants to do this is not only to further garnish its FX reserve pile built from its huge trade surpluses on industrial goods, but much more basic, as we look at below.
Increased competition from China, and to a smaller degree from other Asian manufacturers continues to focus the minds of US and European policy makers and government deciders. The key role of cleantech, in the shape of solar PV panels, in ratcheting up US-China trade disputes does not have to be mentioned. Current US threats on Chinese solar power equipment exports run as high as a 250 percent punitive tariff on this equipment. In Europe, the incoming French government of Francois Hollande has lost no time in having its minister for Industrial Recovery, Arnaud Montebourg, propose EU-wide "carbon dumping tariffs", leveled at China, and specifically covering cleantech items.
Also in Europe, the runaway success of windpower and solar power development in several countries, including Germany, Spain and Denmark is only potentially threatened by the growth in shale gas development on the 5 to 8 years horizon, and decreasingly impacted by political and public resistance to continuing or extending Europe's heavily troubled CO2 emissions permits and trading scheme, the ETS, which has a very low pass-through performance, as a financing source for cleantech.
US equivalent policies and measures to lever up the role of clean energy, including tax credit extensions continue to pose significant challenges, but as shown by the European case, more mature renewable energy source (RES) power generating technologies are moving ever closer to "grid parity". Windpower and solar power, today, can literally produce 'too much power', using free fuel, as shown by Germany's 'free power days', that I discuss in other articles. Grid parity means the RES need subsidies a lot less than nuclear power - as shown in the UK government's failing attempt to secure commitment by foreign builders and future operators for Britain's "new build nuclear" that only ministers want. Power prices, in UK, to finance nuclear power and seal corporate commitment from the French-Russian consortium, the last bidder in play, could exceed $225 per thousand kWh.
THE CHINESE GOLIATH
Speaking at the May 3 EU-China Urbanization Cooperation Forum in Brussels, vice premier Li Keqiang said that China will invest at least 5 trillion yuan ($795.5 billion) in energy saving and
environmental protection projects and called for closer collaboration between China and the EU. He noted that more than 75 percent of buildings in China's cities are not energy efficient and need renovation. Taking account of ongoing urbanization and related infrastructures, China's total spending on cleantech and green energy, through the next 8 years, will be more than 5 trillion yuan, China Radio International quoted Li as also saying.
This in no way is unrelated to China's serious real estate financial problems - shoring up property prices and maintaining foreign and domestic financial inflows to urban development are very high up China's wishlist and needlist, but the sheer scale of funding for broadly based cleantech is a sombre warning for competitors and rivals. This extends right across the spectrum, but China's go-fast strategy has many underside weaknesses for the goliath: green technology acquisition is also high up the needlist.
Sectoral analysts highlight other shortfalls for China, often neglecting that these weaknesses apply in all other countries and regions. National renewable energy markets, existing and needed RES infrastructures, their suitability for individual technologies, energy system integration and a host of other challenges already exist, and will increase. Examples are everywhere: windpower development in Germany, Spain and Denmark could be described as "already critical", making it obligatory to develop smart grids and/or super grids or slow down the pace of development. The growth of China’s wind sector is also hitting these limits, making it necessary to separate grid-integrating, and off-grid windpower development, in China, which the PRC and its party system can decide a lot easier than in market liberal Europe.
China's dash for industrial and then market supremacy in solar photovoltaic technology has already crashed the earnings and financial survival capability of its smaller solar PV producers, and the betting is the PRC will simply force all Chinese producers into 5-only major corporations, possibly by 2014. Lacking this bulldozer deciding power, the market liberal countries can only play out boom-bust scenarios, one of which has probably already returned to the US cleantech sector, where Federal and state subsidies handed down from on high, for producer companies, called free market, are the deciding factor for their survival or extinction. In Germany, Spain and Italy, among others, feed in tariff cuts which are sometimes rescinded or pushed forward to a later date, at the last moment, and power grid integration challenges have heavily cut investor confidence in both windpower and solar power, while India's government decision to reduce subsidies to wind and solar power are almost certain to dampen sectoral growth in 2012.
SPENDING MORE OR SPENDING RIGHT?
According to Ernst & Young's most recent sectoral spending survey, US spending on cleantech and green energy rose by 33 percent in 2011 on the year previous, to reach $55.9 billion, while China's total spending using Ernst & Young metrics was well behind, at $47.4 billion in year 2011. The critical factor of bang for the buck is however underlined not only by Chinese state-controlled and state-directed spending in cleantech, but also, for the special reason of the Fukushima nuclear disaster, by Japan.
Japan now has both state- and private-initiated RES development targets easily comparable with Germany's Energiewende or energy transformation plan. In contrast to all other countries in the ranks of the largest global players in cleantech, Japan has more focused targets. While reducing energy costs through energy efficiency measures is often the foremost objective of national energy strategies, the other or subsidiary goals which also drive cleantech strategy, such as energy security, carbon reduction, price stability, job creation and market dominance are bundled together for Japan, by the Fukushima disaster. The national need is large and simple to describe: quickly cut electricity demand and quickly replace the near-30-percent of national power that was supplied by nuclear power.
The Japanese profile for cleantech development and spending is likely to diverge from that in other main players, both by type and the sectoral goals. While global spending dropped to an estimated $21.7 bn for RES transactions in Q1 2012, and featured large biomass and waste energy projects, including renewed Brazil-focused spending, Japan's new and urgent needs will surely focus spending on solar and wind electricity. With all 54 of its reactors likely to stay out of service, and 30 percent of its power supply capacity missing, Japan has very clear goals. Its landmark renewable energy bill, passed in August, is modelled on pre-crisis feed in tariff laws in Germany and Italy. More than 8 months later, continued haggling over these FITs is still delaying groundbreaking work, but Corporate Japan, from Toyota and Mitsui, to NTT DoCoMo and Hitachi are poised to develop a range of large-scale projects.
Due to the short-fuze need to replace lost nuclear power supplies, and the present additional LNG and oil imports driven by this loss - estimated at about 500 000 barrels oil equivalent per day - the pure economic benefit of moving rapidly ahead is clear, in Japan. Masayoshi Son, the billionaire founder of the Japanese telecom, Softbank, who has set up a renewable energy foundation, has with other major players like Toshiba's CEO Hitoshi Otsuka called for a pan-Asian super grid, maximising the use of RES, in the same way as European promoters of energy transition. Japan's new and increased reliance on LNG has also triggered widespread moves by Japanese corporate investors in the whole gas value chain outside Japan, with the transition to clean fossil energy featuring as large as further transition to RES in corporate and Japanese governmental energy policy and strategies.
The bottom line, at least in the next 12 months, is that further consolidation in the global solar and wind supply chain will certainly occur, but the number of outbound deals expected from Asia will very surely increase. Given that access to capital will remain the single biggest differentiator for companies in both the technology and infrastructure markets, this major new trend will be powerful.
As recently as the start of 2012, companies operating in the energy intensive sectors continue to forecast that energy costs will rise by at least twice the rate of inflation, rationalising and reinforcing the corporate majority strategy of investing in energy efficiency, increased use of RES, and increased company energy self-sufficiency. This strategy mix can however be heavily impacted under special conditions - which apply almost everywhere. China, Japan, the US and Europe all have special factors trimming the number of strategic drivers in play, in an overall context of converging goals.
The basic challenge is simple: transforming and migrating to a low-carbon resource-efficient economy, where a variety of technologies can be deployed to achieve energy efficiency objectives, economy wide, and in sectors of key significance - the urban sector for China. In-company or "self generation" action, again on the crossover from fossil energy to RES, can be sharply faster and different from national goals and programmes decided at political level. Germany's Energiewende transformation plan has for example already triggered a large range of corporate self-generating and energy saving plans and programmes in the key carmaking industry. This action could or might make it less, or unnecessary for Germany to build a massive number of new power transport grids to handle further rapid growth in the output from its windfarms and solar power plants.
Worldwide and for the next 12-18 months forecasts by sector specialists including KPMG and Ernst & Young look forward to corporate energy demand management spending becoming the leading category, inside which building energy management and energy-efficiency lighting, heating and cooling will take about 85 percent of total spending. The shift to DMS or Demand Side Management itself shows how rapidly cleantech and green energy have matured, for corporate deciders, at this time.
In Europe this 'biggest bang for the buck' strategy is easy to explain. The sovereign debt crisis continues to stifle upstream RES investment in the Eurozone and outside it, but in part due to the success of RES development to date governments are scaling back their subsidies and their targets for the sector. Both increased needs and competition, from Asia, will further pressure the OECD in cleantech, leading to another new, but likely permanent feature in cleantech business: alongside the inevitable consolidation there will be increased vertical integration, with a flurry of Asia-Rest of World joint ventures and operations seeking ever more innovative and wider routes to market for industrially mature products.
These markets will surely include 'new regions' for RES and cleantech development, outside the China-Europe-US axis, including the MENA (Mid East & North Africa), the rest of Africa and South America, and other G20 heavyweights, especially India and Indonesia. Capital shortage in the US and Europe, made worse by investor uncertainty and growing signs of market saturation in some subsectors, has its counterpart in capital surplus China, but China will almost certainly favour China-Western cooperative ventures seeking fast-growing third-party markets in regions and countries where catch-up growth in cleantech is sure and certain, such as the MENA.
Access to capital is likely to be the make-or-break feature throughout 2012, for global cleantech. Previous attempts, by the IMF, the G8 and UN agencies and organizations to spearhead economic development in lower income countries, using "climate and carbon finance" have been a major failure, making it likely that bilateral and private corporate action will now take over. Often a straight choice between distressed asset sales and forced consolidation, and creative joint ventures and partnerships, the path forward is clearly tilted to the second.
About Andrew McKillop
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