Investment in Renewables: From Boring to Sexy; New, Exciting Markets Attract Capital


The following are excerpts from the "Technology Insight—Developments in New and Exciting Markets" panel at the Renewable Energy Finance Forum in London, which was held earlier this month. The panel surveyed emerging technologies and new approaches to renewable energy, and featured: Julia Balandina, vice president, AIG Global Investment Group; Alexander Richter, associate, Glitnir Bank; and David Reid, business development manager, Scottish Development International.


Julia Balandina (AIG): I'd like to start with an observation. I've been investing in energy for 14 years, and even if I look back five years ago, renewable energy wasn't necessarily a very hot investment area. The reasons why people were reluctant to invest in this area were threefold. Energy markets were highly regulated. Renewable energies were not yet necessarily viable without subsidies, and energy was an old economy, it wasn't sexy. It was a boring area. Five years ago, people were much more excited about biotech. If you look at why the current interest in renewable energy is so high, you'll see the same features as before. They are regulated markets with subsidies, but now energy is "key" and "sexy." So, what has actually changed, apart from the perception? If we look to the growth drivers from clean energy, and actually clean sectors also, apart from regulation, those were the drivers that were in existence for the last 20 to 30 years.

But to be fair there were really profound changes and events that forced those drivers into our minds, and forced those regulators, politicians, and businesses to act upon those drivers. It hasn't escaped any of our attention that oil is trading at above $80 per barrel, and it's now the consensus opinion that oil prices will remain high, primarily by huge demand coming from China and India, and they are reducing supplies of this fuel. Energy security is much more in our minds since September 11th, and also there is the war in Iraq and dependency in the European Union. Climate change is a real threat to our society and a viable financial risk to many of the businesses. On the regulation side, we do feel much more comfortable with regulations because we have a precedent of consequence and of compliance regimes. Also, renewable energy became a global market. We don't have to rely on one regulatory regime. So, as a result, wind fuel and biofuel have been growing very extensively in the last year. Actually, $21.5 billion has been invested in new renewable energy generation in the last year—18 percent of the overall deals in energy generation. That is a huge amount that will continue to grow.

My question is, is this the best, cheapest way? One dimension is the societal point of view. Are more pressures the best way to reduce greenhouse gas emissions and to increase green energy security at the cheapest cost? If you look at the abatement cost of CO2, you see that there are very cheap possibilities with negative costs existing in insulation, lighting, water heating, etc. But the majority of subsidies are going to be sold in renewable energy and biofuels, where the cost is much more in terms of what we're trying to do, and actually some of those technologies have questionable sustainability profiles as well. From another point of view, as an investor, what are the possibilities for an investor to get above average return in this sector? If I was in the past, yes, there were QC.Cells, Horizon Wind Energy—a number of very successful deals that achieved very good returns. But wind, solar, biofuel have attracted massive amounts of play, which drives the value high, and ultimately they have matured. So maybe it's time for project finance and utilities. As an investor and as a regulator, we have to look for other ways: technologies, business models, and solutions that will provide us with the highest return on our investment. What do I mean? Highly technical innovations and technologies? Not necessarily.

For example, deep lake cooling: water at depth can be useful for very efficient cooling. This type of project has been used in Canada, in Switzerland, and in the U.S. At the Lake of Ontario system, the water is drawn from the depths of 86 meters at four degrees Celsius. It's filtered and treated for the city's water supply, then put through the energy transfer station. Through heat exchange, the internal heating, closed-loop system is being cooled. The cold water can bypass the cooling plant and go directly to the customer site, where it goes through the heat exchange, and it cools the internal building loop, cooling the water. Then the water is returned to the transfer station and the whole cycle is repeated again.... ...Another technology is high temperature solar thermal. This technology has been used for 30 years in California. The technology is very simple—you have a parabolic reflector or glass that focuses solar energy on a trough, which is a glass tube filled with cold water or oil. It's heated, and as the liquid is brought to a boil, the steam is used for energy generation.

This technology provides energy at approximately ten centers per kilowatt-hour—half the cost of photovoltaic energy. It's been used for 30 years, and it's actually one of the most proven technologies available... ...Those are all simple solutions. Those are all proven technologies. Why are they often behind their potential? Even though the technology's working and the benefits are there, the business model and the model to bring them to the market, is not obvious and it's not easy. Often for the regulators and the politicians, it's difficult to understand and it's difficult to get credit for supporting those types of technologies. Maybe our role should be finding these kind of technologies, helping them develop, and helping create a very exciting capital market.

Alexander Richter (Glitner Bank): Geothermal is not a new technology. One of the first geothermal applications was built in Italy in 1904. I want to briefly explain the different applications of geothermal energy. To utilize geothermal energy in electricity production in an economically feasible way, you need temperatures of 120-150 degrees Celsius, and you drill into a hot water reservoir between 1,500-3,000 meters. But there are new technologies in development by EGS that basically create these hot water reservoirs artificially. They could potentially multiply geothermal dramatically. The other, most important utilization of geothermal energy is for the redirection of heat. There are applications for all industries that need heat. Potentially this is a huge source of efficiency and a great way for us to maximize our energy resources. Geothermal is the only 24 hours, seven days a week renewable resource. On average, you have a capacity rate of about 95 percent, and up to 99.9 percent. To put geothermal in perspective, it is a relatively small renewable energy source worldwide. It has current installed capacity of about 9,000 megawatts; that's primarily in North America, in the United States, in Italy and in Southeast Asia, in New Zealand, and in Iceland.

If you look at the potential, and I'm only talking about hydrogeothermal of geothermal, the potential is really, really good. We have an estimated potential for hydrogeothermal resources of 150,000 megawatts in installed capacity; again, this is only for electricity purchase. We have huge potential in the United States, Asia, Latin America, and Africa. The geothermal industry is, in many countries, a very old industry. In others, it's a very new one. Basically you have geothermal developers trying to develop geothermal projects, and they are depending on technical services and construction services of companies already working in this field, either specialized companies focusing on geothermal or standard construction companies. The industry depends, as with all renewables, very much on policy, and regulators have played an important role in the development of geothermal. Equipment suppliers are turbine producers and drilling companies. Companies depend very much on human resources and specialized services from engineering firms, basically firms that are capable of estimating resources that tell our companies which site to drill. Geothermal is very sexy, but it has lots of barriers.

It will take about seven years to do a project, which is long term compared to other renewables. Having said that, the potential is so great that we believe that this timeframe is a barrier well worth the consolation. In some countries it goes faster, but it really depends also very much on permitting and enlightened legislation. For example, in Germany, it takes a long time to get the necessary permits for drilling. Another big barrier is drilling; you need to drill 2,000-3,000 meters down. It's just like any mining—you don't know what you'll find. Depending on the geology, the cost can get really big. In Germany, the drilling cost is roughly half of the overall project cost. The other issue is that, at a competitive level, as a mining industry it's in competition with the oil industry for rigs and people. As a banker, we are interested in making the geothermal industry a lot more competitive... ...On a financial note, we recently took a look at the potential U.S. geothermal market. We believe that on the basis of current consumer and industry sales of $1.8 billion, we can go up to $11 billion by 2025...

David Reid (Scottish Development International):One of our major metrics is how we generate jobs, because we recognize that jobs don't happen without finance. Specifically in this space of marine renewable energy, we believe that Scotland can be the world leader in this space. We can generate energy for our own use from oceans around Scotland and create the next strong industry. What drives waves is the wind, and certainly the winds that blow at sea are powerful and really are, from a wind point of view, what we should be looking at. For the potential capacity of the waters in and around Scotland, we're talking 25 gigawatts of offshore wind capacity—14 gigawatts of wave and 7.5 gigawatts of tidal. Adding these all together, there's potentially, around the coast of Scotland, the capability of generating 40 percent of all the U.K.'s electrical energy requirements. Yes, wind is unpredictable, but the tides are very, very predictable.

Talking in monetary terms, the going rate for a megawatt of onshore wind is approximately £1 million, so taking that as the target pick up, potentially that represents £46 billion investments. Does the technology exist to make this happen? There's a lot on the drawing board. The manufacturing capacities to meet the requirements of onshore wind will have to be increased by 1,000. The deployment logistic chain—how will all these offshore wind/tidal/wave devices be deployed? There are approximately four ships that will exist to deploy offshore wind in the North Sea. We are potentially talking about thousands upon thousands of devices to be deployed to make this happen. The ships don't exist; the people to man the ships don't exist; the shipyards to build the ships don't exist. So, in terms of opportunity there for yourselves as financiers, don't just think of the device. Think about all the infrastructure of manufacturing companies, of ships, etc., to make this happen. To give you a picture of the moment, in the North Sea the going rate to hire an offshore support rig to support the North Sea is £100,000 a day. That's the sort of figures we're talking about to make money. Looking at the development cycle: we identified that approximately 200 patents have been awarded around the world for what I would call "drawing board concepts." Typically, to get to that stage, the order of magnitude of investment cost is approximately £100,000. The next stage is to produce a scale model and then test it £500,000, and we've identified approximately 50 of those devices around the world.

Moving forward, you've got to put it in the water, in seawater, rather than a tank. Again, that's about £1 million to get to that stage, and then another £5 million to get approvals to be able to put an approval scale device in the water. Our estimate is that, currently, there are two devices in the commercial development stage. One example, the Pelamis device, is built and designed in Scotland. Three of them are going to be installed just off the coast Portugal and another project where about eight of them are going to be installed off the coast of Scotland. A tidal device is currently being tested at the European Marine Energy Centre. One of the challenges for that device is getting £5-10 million to create a prototype. What we're trying to do with the government here in Scotland is to say, you don't have to find another £5 million to actually test the device. We believe it is approximately a £15 million investment for a developer to take a device and plug it into a cable. We are trying to do things to remove the hardships which will affect the ability of these markets to take off. We have five tidal berths booked for 2009 through 2012.

We've also talked about the risk of a return in this space. Well, certainly at the moment, compared to other sources of renewable energy, marine renewable energy is very expensive. The United Kingdom conceived initiatives to try to reduce some of the costs, the Marine Renewables Fund. That fund has been around for about two or three years.... The investment opportunities are there, but are high-risk. The other thing I'd like to say in summary, it's not just the devices that are investment opportunities. There is a whole new supply chain that has got to be developed; the support system has to be developed; there are people that have to be trained; there's a whole new industry to be built. The analogy I would use is that, about 40 years ago in the oil industry, the technology to find oil and extract that oil didn't even exist.