After a fantastic run spanning a few years, the renewable energy sector has taken a number of hits recently, which suggests its inevitable march as the energy source of the future is far from certain.
“It’s pretty bleak — there is no way to sugar coat it. But I wouldn’t call it a lost cause,” says Matt Horne, director of climate change at the Pembina Institute.
While all sectors have ups and downs, there is a fear that renewables’ weaknesses could lead to structural changes, as policymakers no longer have the luxury of supporting and extending subsidies at a time of fiscal austerity.
And much to the dismay of environmentalists, fossil fuels are clawing their way back into the public’s good books. Or at least they are offering a compelling economic case that few can resist at a time of slow economic growth.
A number of factors have turned the tide. Plentiful oil and abundance of cheap natural gas, especially in the United States and Canada, with its promise of high-paying jobs has been an irresistible lure for governments desperate to create employment.
While some North American regions such as Quebec hold the practice of hydraulic fracturing in disdain, many others are warming up to its benefits. Natural gas has taken the pressure off the wider carbons industry as it has displaced coal.
“Of course, natural gas is reducing the use of coal, which emits much more greenhouse gases, so you could argue that is has helped the green movement, but it is definitely becoming an obstacle [to renewables] due to low prices,” says Ann-Louise Hittle, head of macro oil at Wood Mackenzie, an energy consultancy.
The renewable sector’s problems are most visible where it has achieved the most: Europe. The continent is reeling from an economic crisis and policymakers can’t justify extended subsidies in the midst of massive budget cuts. As such, most analysts don’t expect the continent to meet its 2020 target of cutting its emissions 20% below 1990 levels.
The HSBC Global Climate Index, which tracks the market performance of companies best placed to profit from climate change policies, saw a 5% decline last year, according to the bank’s annual climate change index review published in September.
“The global economy continues to face headwinds with the resulting backdrop not being particularly supportive for the climate sector,” the report noted.
Revenues from renewable and alternative energy fell a little more than 12% to US$310-billion in 2011, compared to the same period last year. Geothermal, hydro, bioenergy, solar and wind together posted losses of 10.5% year-on-year, the report noted.
“While the state of the global economy continues to put pressure on the climate sector as well as increased competition places the sector in a state of flux, new market participants will continue to emerge, attracted by the opportunities created by the low-carbon transformation,” HSBC said optimistically.
While no one is writing off the renewables industry, Big Oil and Gas is capitalizing on the weakness and touting the job-creating benefits of the sector — a message that’s resonating with voters during the U.S. presidential elections. In contrast, renewables have been bogged down by failing companies, while biofuel has been blamed for high food prices at a time of great economic hardship for the poor.
The oil and gas sector is extending its lead over renewables by investing about $490-billion this year globally and another US$491-billion in 2013, the highest on record, according to Wood Mackenzie data.
“These [fossil fuel] investments have a lifecycle of 40 to 50 years,” says Mr. Horne, arguing that it would delay investments in alternative energy projects.
Some of the world’s biggest suppliers of oil and gas such as Russia, Canada, the U.S. and Iraq have aggressive plans to raise their output. These are matched by energy consumers China and India who are acquiring hydrocarbons assets across the world and developing their own reserves.
The situation is different in renewables where the industry is losing momentum after a six fold rise in eight years. The United Nations Environment Program estimates the combined renewable energy sector saw investments of US$271-billion last year, a growth of 17% from 2011, but the sector is fast losing momentum.
“The danger … is that hastily made cuts in support might make a serious dent in investment in developed economies in 2012-14 — before wind and solar can reach that goal of competitiveness,” UNEP said in study published over the summer. “That would be a damaging blow not just for businesses in those industries but also for hopes of limiting carbon emissions and climate change, and for those working in the emerging ‘green economy’. ”
The downturn is reflected in a 16% decline in global research and development of renewables energy last year, and a 13% drop in government-led R&D.
In Canada, critics have accused the federal government of weakening environmental regulations and favouring oil sands development. According to UNEP, the country saw US$5-billion in renewable energy investment last year, a decline of 8%. In contrast, oil companies are expected to inject around $18.5-billion in the oil sands sector alone this year.
Pembina Institute, which lauds British Columbia’s carbon tax effort to curb emissions, bemoans the federal government’s lax policy surrounding coal-fired plants, which could have been an easy way to reduce Canada’s greenhouse gas emissions.
“Coal-fired power plants represent seven of Canada’s top 10 polluters,” noted a Pembina statement. “Major changes to the draft rules will allow the oldest and dirtiest coal plants in Canada to run for up to half of a century from commissioning without any limits to their climate pollution. When these standards do apply, they will be weaker than originally proposed.”
Canada is hardly alone in persevering with coal. Germany, the bastion of alternative energy, has seen its coal consumption rise 5% since the government started mothballing its nuclear energy plans. BP’s annual energy review shows coal consumption grew 10% in China and around 11% in India and South Korea.
“Coal still accounts for about 80% of the energy production in China and 45% in Japan, and coal will remain the baseload for Japan even as it moves away from nuclear, so globally it’s not possible to get away from coal,” Jeff Largey, a Macquarie analyst told Reuters.
Meanwhile, nuclear has still not recovered from the Fukushiyama disaster last year, with key consumers such as Germany and Japan cancelling nuclear projects and switching to coal and natural gas. The International Atomic Energy Agency said it expects growth in nuclear energy capacity to slow down, but not reverse.
The green movement is not exactly dead, as consuming countries remain keen to reduce their dependence on expensive hydrocarbon imports, but it would take fairer economic winds to revive interest. It would also take exceptional boldness from policymakers to push the industry forward — and that’s one commodity that’s hardest to find.
Financial Post, with files from Reuters