Central to the task of decarbonising the world is the production of significantly more renewable electricity. Faced with 80% of the world’s energy still coming from fossil fuels there is a determined push by the leading advanced countries to expand the role of renewables in power generation. There is also a push to expand the use of electricity for everything from heating and transport to industrial processes. The latest edition of the Statistical Review of World Energy from the Energy Institute has the following use pattern for 2022 worldwide.
The rise of renewables
Oil, coal and gas accounted for more than 80% of the energy used, whilst all renewables combined delivered 7.4%. The pace of increase on a small base is fast. The need for far more renewable power to meet ‘net-zero’ requirements is obvious.
The Global Wind Energy Council reports 78 gigawatts (GW) of extra theoretical capacity for wind added in 2022. It forecasts 680 GW to be added to the total by 2027, with 1221 GW by 2030. This is on a base of 906 GW worldwide in 2022. Solar has been increasingly quickly as well – to 241 GW of new capacity in 2022. Solar power now exceeds 1,000 GW. Were they to more than double capacity by 2030 it still leaves renewables as a minority source of energy.
On a global basis, there is usually sun and wind in some places to keep the panels and turbines contributing to world electricity. In any one country or region there can be difficulties with periods of no sun and little wind. Some of these variances could be handled by exporting and importing more across frontiers, but it is still necessary to have fossil fuel or other back up for times when the weather lets you down.
There are various ways that the producers of renewable electricity or related businesses could assist by storing power when the weather is good to them and selling it on when the wind and sun lets you down. Some think the answer is to put in large battery farms to store the power in batteries. Some think the answer is to make green hydrogen out of the power when it is plentiful and use the hydrogen and its derivatives as fuel to heat homes and drive transport. It is possible to use the power to drive water up hills or into containment areas to release later when you need the power. Hydro power overall is a very useful contributor to world output – at 6.3%, more than wind and solar combined.
China leads the field
China is by far and away the largest installer and user of renewable power. Despite these efforts such has been the increased demand that it has also expanded its use of fossil fuels to keep pace with industrial and domestic requirements. On a wide definition of renewables, China has almost twice as much generating capacity as the US and more than five times Germany. China, the US, Germany and India are the four largest renewable generators.
China is the dominant force in making the wind turbines and solar panels to sell to the world. Its determined industrial policy saw the opportunity of supplying the world with the new generating machinery of the electrical revolution, acquiring access to the crucial minerals and raw materials and putting in the factory capacity. China is the main producer of the nacelles, the working parts of a wind turbine including the gears, shaft, brake and generator components that the blades drive.
A wind turbine typically starts to turn at quite low wind speeds and may reach maximum output around 30 miles per hour (mph). It needs to be stopped above 50 mph as high speeds can damage the machinery. Storms and hurricanes are not good news for windfarm owners. Steel is needed for the main structure, with cables and grid pylons to handle the electricity.
China’s dominance is also strong in solar panel making. With around 80% of the world's polysilicon output, 97% of the wafers, and 85% of the cells that go into panels, China has been the main supplier behind the rapid expansion of solar installations worldwide. The panels need silver, with much of the high-grade quartz for the polysilicon available from the US and Australia.
Future investment opportunities
There is bound to be an advance in investment in wind and solar power for the rest of this decade. The increasingly exacting net zero targets will require many countries to put in more renewable generating capacity. Advocates of renewable power also suggest it will prove cheaper than electricity from fossil fuels, though that depends on the trend of fossil fuel prices and how you account for the back-up generation and storage technologies that will be needed.
Investment in wind farms depends on how many days a year you get the right amount of wind to run at capacity without having to switch off. The output achieved can vary between around 33% and 40% of rated capacity. Solar too is variable though it will not be available at night. The rates of return on these investments are sensitive to the initial capital cost, the maintenance costs and to the useful life. These are all things the owner or manager has some control over. They are also affected by tax changes and may, under some contracts, be directly related to energy prices generally which are volatile.
The problem with backing the manufacturers of the solar panels and nacelles of the wind farm boom is so many are in China with considerable state intervention.
In the gold rush, some said it was better to invest in the provision of picks, shovels and pit props, as these provided reliable business. You would not hit the highs of a major gold discovery but would not suffer from all those aborted attempts to find a decent mine. The problem with backing the manufacturers of the solar panels and nacelles of the wind farm boom is so many are in China with considerable state intervention and the attached wider governance risks. It is probably better to evaluate the ownership of a well-run spread of renewable assets to take advantage of the general growth of the sector.
Valuations will be under some upwards pressure from the weight of new money being invested and from policy support and enthusiasm. As the sector matures, they will also experience more negatives including some adverse regulatory controls and tax impositions that investors expect from investing in fossil-fuel based electricity utilities. There have been periods of weak performance in response to rising interest rates and tax changes. Some will be more directly exposed to the oil and gas price than others depending on the pricing system adopted.
The electrical revolution will require substantial increases to grids and cable systems to carry all the extra energy the transition envisages. There will be plenty of work for the copper cable makers and the pylon manufacturers as countries are wired for the changes. Much of this investment is eligible for financial help from the US’s Inflation Reduction Act and from the European Union’s green programme.
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