New opportunities and challenges for business in the renewable energy sector

Prof. Dr. Rolf Wüstenhagen Good Energies Chair for Management of Renewable Energies Director, Institute for Economy and the Environment University of St. Gallen Tel Aviv, 5 June 2014

rolf.wuestenhagen@unisg.ch http://goodenergies.iwoe.unisg.ch

2 Outline

1.  Three challenges to extending the energy status quo 2.  Renewable energy: A case of disruptive innovation 3.  Integration of a high share of renewables in the electricity

market: issues and solutions 4.  Conclusions

3 Why an energy transition? Three challenges to extending the energy status-quo

1. Risk

2. Social Acceptance 3. Cost

4 1. Risk premium of non-renewable energies: Fukushima has turned the concept of external cost into reality

Fukushima 2011

190-230 bn NLS

Kostenschätzungen: Angekündigte Staatshilfe der japanischen Regierung für TEPCO (Mai 2011): 45 Mrd €. Zum Vergleich: Differenz in Marktkapitalisierung binnen 3 Monaten bei TEPCO ca. 30 Mrd. €. *) Update 7.11.2012, http://www.tagesschau.de/ausland/tepco160.html

440 bn NLS

440

7

Insurance Coverage Swiss Nuclear Power

5 Risk of climate change

Zurich Insurance Sees $700 Million of Hurricane Sandy Claims (2012)

Sour

ce: U

nive

rsity

of C

ambr

idge

201

4

www.carbontracker.org www.forbes.com/sites/ashoka/2013/07/29/

divesting-from-fossil-fuels-means-a-cleaner- safer-and-more-resilient-future/

6 Energy import dependence – a significant risk which can partly be mitigated by investing in RE & EE

¾

Energy Intensity of GDP

CH / EU

Energy Import Dependence

Ukraine

Ukrainian gas

Russian gas

7 2. Social Acceptance: Nuclear power‘s approval rates dropped below critical threshold in some Western democracies post-Fukushima

Fukushima 2011

Source: Feb. 2011 public vote on nuclear power plant Mühleberg in canton of Berne; Jan. 2014 survey of representative sample of Swiss population.

2014 Approval Rate for Swiss Nuclear Power

Yes, 51%

No, 49%

Pre-Fukushima

Yes, 23%

No, 77%

Post-Fukushima

8 Social Acceptance is an issue for many large-scale infrastructure projects…

9 …that should be carefully managed for large energy projects, both renewable and non-renewable

Source: Wüstenhagen, Wolsink, Bürer 2007

10 3. Cost: Increases in oil prices have been a driver for renewable energy & efficiency

2.6.2014 109 $ / Barrel

http://www.finanzen.ch/rohstoffe/oelpreis?rd=fn

US

D p

er B

arre

l (B

rent

)

11 Shale gas has reversed price trend in the US in the short-term…

Source: http://ourfiniteworld.com/2012/03/23/ why-us-natural-gas-prices-are-so-low-are-changes-needed/

12 …but the long-term price trend for unconventional oil & gas is uncertain

–  Profitability of shale gas? –  Environmental impacts? –  Water? –  Energy pay-back? –  Carbon price?

„We are all losing our shirts today. You know, we‘re making no money. It‘s all in the red“

Rex Tillerson, CEO, Exxon Mobil Corp. on shale gas in the US

cit. in Bloomberg New Energy Finance VIP Brief Oct. 2012

13 Energy technology learning curves: Countervailing cost trends for nuclear vs solar

Kernenergie FRA / USA Photovoltaics worldwide

A. Grubler / Energy Policy 38 (2010) 5174-5188 IPCC 2011, based on Maycock (1976-2003), Bloomberg NEF 2010

The gap between cost of conventional energy vs. cost of renewable energy is about to close (Grid Parity).

14

Grid Parity Zone

Timely transition to renewables optimizes risk-return profile of future energy supply

Pre-Fukushima

Today 2030 2050

non- renewable Energies

Non-renewable Energies (incl. Risk)

Renewable Energies (high energy efficiency)

Renewable Energies (low energy efficiency)

$

Time

15 Outline

1.  Three challenges to extending the energy status quo 2.  Renewable energy: A case of disruptive innovation 3.  Integration of a high share of renewables in the electricity

market: issues and solutions 4.  Conclusions

16 Renewable Energies: A Broad Portfolio

Concentrated Solar Power

Solar (Photovoltaics)

Hydropower

Geothermal

mature

new

Centralized Decentralized

Step Generator

Biomass

Wind Energy

Wave Energy

17 Investment in new Power Plants in EU 2013

Source: EWEA 2014

18 In 2013, wind and solar accounted for 72% of new EU power generation capacity

Source: EWEA 2014

19 Cost of rooftop PV & retail electricity prices have converged in Germany

From homeowner’s perspective, rooftop solar is becoming an increasingly attractive proposition

20 European solar markets exhibit policy risk, offer diversification opportunities

Source: EPIA 2012

Cumulative total in 2011:

51’716 MW

2008/2009: Spanish collapse absorbed by German growth

2010/2011: Czech standstill more than compensated by Italian growth

21 The “Price of Policy Risk”

0

3

6

9

12

15

0 6 12 18 24

Impl

icit

Will

ingn

ess

to

Acc

ept [

ct/k

Wh]

Duration of Admin Process [in months]

0

3

6

9

12

15

0 1 2 3 Impl

icit

Will

ingn

ess

to

Acc

ept [

ct/k

Wh]

Number of Policy Changes

0

3

6

9

12

15

15 20 25 Impl

icit

Will

ingn

ess

to

Acc

ept [

ct/k

Wh]

Duration of Support [in years]

0

3

6

9

12

15

Tight Cap (1 y.)

Loose Cap (4 y.)

No Cap (unltd.)

Impl

icit

Will

ingn

ess

to

Acc

ept [

ct/k

Wh]

Sou

rce:

Lüt

hi &

Wüs

tenh

agen

201

2

Policy risk increases cost of capital for renewable projects

22

www.solarsiedlung.de

Marché International in Kemptthal/ZH www.neuemonterosahuette.ch

Schwyz

“Solar prosumers“: Net positive energy houses disrupt existing business models

23 Wind Power Generation

24 Worldwide Growth of Wind Energy Market

Source: GWEC

Cum

ulat

ive

Inst

alle

d C

apac

ity [

MW

]

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Top 5 in 2010: 1) China, 2) US, 3) India, 4) Spain, 5) Germany

50 %

25 U.S. Wind Turbine Prices – from near grid parity to rebound and back

26 Wind energy in 2011: up to 25.9 % of power generation in European countries

0.2% Source: EWEA 2012

27 Outline

1.  Three challenges to extending the energy status quo 2.  Renewable energy: A case of disruptive innovation 3.  Integration of a high share of renewables in the electricity

market: issues and solutions 4.  Conclusions

28 Do the lights go out if the wind does not blow and the sun does not shine?

29 Germany: solar & wind = the new “baseload”

Solar ~ Peak Demand

Electricity generation in Germany 3.5.-3.6.2014

http://www.agora-energiewende.de/service/aktuelle-stromdaten/stromerzeugung-und-verbrauch

Sun May 11, 1 p.m.: 74 % Renewables PV 15 GW (15%) Wind 21 GW (35%)

Mon May 5, 2 a.m.: 16 % Renewables PV 0 GW (0%) Wind 1 GW (2%)

30

Source: Wolfram Krewitt † (2008)

Understanding the problem conceptually: Key challenge of electricity supply has always been to match demand and supply in space and time

The New Energy World

Supply Demand

The Old Energy World

Supply Demand

From „Base Load“ & „Peak Load“... ...towards Smart Grids

31

-40 -30 -20 -10

0 10 20 30 40 50 60

0 2 4 6 8 10 12 14 16 18 20 22

Day

-ahe

ad m

arke

t pric

es [d

evia

tion

from

dai

ly a

vera

ge in

€/M

W]

Apr.-Sept. 2006 Apr.-Sept. 2007 Apr.-Sept. 2008 Apr.-Sept. 2009 Apr.-Sept. 2010 Apr.-Sept. 2011

Growth of wind and solar power generation has changed electricity trading patterns

Day-ahead

• Auction by EPEXSpot at 12:00 noon

• Products: hours

Intra-day

• Continues trading at EPEXSpot

• Up to 45' before delivery

• Products: 15 min., hours

Control reserve

• Primary (0.5 – 5 ')

• Secondary (5 – 15 ')

• Tertiary (> 15 ')

Source: adapted from Josef Janssen, BKW (2014)

32 Demand for control reserve is not increasing, due to portfolio effects and better forecasts

- Forecast error solar DE -

- Forecast error wind DE -

Source: Josef Janssen, BKW (2014)

- Balance of control reserve DE -

33 Geographical diversification reduces volatility

Even on a cloudy day, the sun tends to shine somewhere

http://ww

w.sm

a.de/unternehmen/pv-leistung-in-deutschland.htm

l

34 What did wind and solar do to electricity prices? Sum of EEG surcharge + wholesale electricity prices = nearly constant

Source: Christian Friege 2014

35 Ownership diversification: Market entry of new investors, especially in PV

Ownership of German RE capacity 2010 (total 53 GW) Source: trend:research 2011

36 Outline

1.  Three challenges to extending the energy status quo 2.  Renewable energy: A case of disruptive innovation 3.  Integration of a high share of renewables in the electricity

market: issues and solutions 4.  Conclusions

37 Conclusion –  The world is at a crossroads – we are facing the transition from

non-renewable to renewable energy supply. –  Risk, social acceptance and cost are three important challenges to

extrapolating the energy status quo –  With countervailing cost trends and increasing internalization of

external cost, “grid parity” has started to transform markets – renewable energy is a case of disruptive innovation.

–  Experience in Germany shows that solar and wind are profoundly transforming the electricity market, with expected and unexpected effects. This has resulted in a creative destruction of established business models, and opened up opportunities for new players.

–  Building up a balanced portfolio of renewables allows to diversify key risks of current energy supply.

38

Executive Education Programme

Renewable Energy Management

http://www.es.unisg.ch/rem

Questions?