Energy & Climate
Renewable Energy
November 1, 2022
Executive Summary
Renewable energy encompasses a variety of sectors and touches on various applications. This thesis paints a broad stroke across market dynamics defining the industry, headwinds impeding development, tailwinds driving growth, and opportunities awaiting disruptive innovation. The goal is to expand knowledge among specific applications and approaches within renewable energy throughout the Notre Dame community.
1. Market Dynamics
Renewable energy is a $950B industry collectively growing at 8.6% CAGR, meaning it will reach just under $2T within a decade. Currently just 7-8% of energy consumption and 38% of electricity production is renewable. These figures will only grow as countries strive to hit climate targets (Europe: 40% by 2030, US: 40-50% by 2030, 100% by 2050 internationally).
The International Energy Agency has stated that “renewables will account for 95% of power capacity growth over next 5 years.” In 2022, 12.2% of US consumption and 20.1% of US electricity generation is renewable. Carbon Tracker predicts 72% of coal-based power will be unprofitable by 2040.
Energy Sources
The renewable energy market can be separated into 6 different submarkets, listed in order of energy-dense to matter-dense fuels. In the majority of these submarkets, market concentration is relatively low. Wind and solar energy are still the most affordable.
Nuclear - CAGR of 5.7% globally. As of 2021, around 450 nuclear power reactors in operation worldwide with installed capacity of about 390 GW. Top countries: United States, France, China, Russia, and South Korea.
Hydro - World’s dominant source of renewable energy. CAGR of 6.6%. 25% of global hydro growth expected from just three projects (2 in China, 1 in Ethiopia). PG&E is the largest player with 13.4% market share.
Biomass - Burning organic materials (wood, agricultural waste) to produce electricity. Many biomass reserves in the US.
Geothermal - High market share concentration. Largest firms: Calpine Corp (26.4%), BHE Renewables (16.4%), Ormat Technologies (11.5%). Capacity will increase 28% to 18 GW by 2024.
Solar - Highest CAGR at 13.5%. IEA says solar will account for 60% of growth in renewables by 2024. Solar energy costs fell 85% in the last decade and will fall another 15-35% by 2024. Top players: Nextera Energy (10.2% market share), Consolidated Edison (6.1%).
Wind - Capacity has increased 10% annually over the last 3 years. Onshore wind will grow 57% by 2024 to 850 GW, offshore wind will 3x. Biden administration aims to increase offshore wind production from 1 gigawatt to 30 gigawatts by 2030.
Customer Segments
Residential - Forecasted CAGR of 8.5%. Residential solar will grow to 142GW by 2024. Solar power installations on homes grew 34% in the last year alone. Three key drivers: environmental consciousness, technology acceptance, and economic sensitivity.
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Green Customers: The environmentally aware/“green” energy customer, showing a high indication of pro-environmental behaviors and a high interest in saving electricity. Customers in this segment choose energy products based on environmental-friendly characteristics, a strong interest in renewable energy, or their high willingness to pay higher prices for it. This group is motivated by a sense of personal responsibility, moral obligation, and a self perception of benefiting the environment.
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Early Tech Adopters: The “modern” and technology-minded customers, who are likely to take on innovations as early adopters and have a high interest in new technologies and preferences for steering, programming, and monitoring services. They are motivated by the novelty of new tech, visual data, self perception, and being innovative. Many tend to be influential with an audience that would perceive their actions to be more modern and popular, effectively advertising the adoption of renewables to the everyday consumer.
Industrial & Commercial - Industrial sector CAGR forecasted at 8.8%. Commercial sector will have the highest CAGR due to larger government subsidies. Together, industrial and commercial sectors energy use will rise to 377 GW by 2024 (3x residential).
Competitive Dynamics
Market concentration within each subsector is relatively low. There will likely be a trend towards consolidation through purchases by big oil and gas companies (BP purchased Archaea for $4.1B). Solar and wind are leading growth due to the drastic drop in their price. Two key competitive factors: regulation and the ability to negotiate with regulators.
Indirect Competitors and Viable Substitutes
Alternative sources of energy such as natural gas, coal, nuclear electric power, and petroleum all compete with renewables to provide energy for the world. Through government incentives in the U.S. and incentives from other countries, there may be larger renewable energy projects established which will help to compete with external competitors. Although barriers to entry were previously higher, significant government support for renewables and decreasing input costs have lowered them substantially. Ventures in the renewable space have historically required high initial capital and entailed significant input costs. For instance, solar power generation requires an expensive investment in solar panels and channels to disseminate the solar energy. In the US, incentives have included credits, grants, and tax exemptions for startups aiming to disrupt the renewable energy sector. A few important examples: (1) The Investment Tax Credit (ITC) allows solar operators to write off taxes associated with building plants; (2) the Renewable Portfolio Standard (RPS) requires utility companies to generate energy from renewable sources; (3) the government has enacted extensive property tax exemptions associated with renewables.
External Factors
External factors that affect renewable energy sub sectors include the sufficiency in capital funding for renewable energy technologies and infrastructure, the availability of key inputs for industry operators, the presence of physical assets and infrastructure necessary to support the transition to renewable energy, changing consumer preferences towards renewables, and commitments from the government/society in cutting greenhouse gasses.
Russia’s invasion of Ukraine is creating tremendous problems for renewable energy technology companies. Russia holds key inputs (copper, nickel, silicon) for renewable energy technologies, and the war is reducing their availability. This is adding tremendous stress to the already overburdened supply chains of these operators. Additionally, the lack of effective transmission infrastructure for renewable energy, especially offshore wind, is posing a problem. Approximately 844 GW of energy (90% renewable) is stuck in transmission. Addressing the capacity problems of transmission infrastructure will require increased funding from both the government and the private sector. Finally, fossil fuels are likely reaching their peak in demand. McKinsey estimates that oil demand could peak in the next two to five years due primarily to the massive uptake in the use of EVs (63% annual increase from 2017-2021).
Complications with Scaling Solar and Wind
Electricity from solar rooftops costs twice as much as solar farms. Solar farms and wind farms require a lot of land and transmission line infrastructure. Intermittency of the availability of sun and wind means we get access to their power sources only 10-30% of the time during the year. One solution to the intermittency issue was to convert hydroelectric dams into batteries by pumping water uphill and using it when needed by rolling it over turbines to generate electricity. This still hasn’t been done on a useful scale due to geographical restraints and costs. Also, water is getting less reliable and more scarce due to climate change so better uses of it like irrigation has been taking precedent.
International Adoption
Top 6 countries by capacity: China, USA, Brazil, Germany, UK, and Japan. Asia-Pacific’s renewable energy industry will grow 9.7% per year with 35% market share. China is the world’s largest producer (3x USA). North America has 30% market share and highest CAGR. Europe has 30% market share growing at 8.5% CAGR.
2. Industry Headwinds
Extreme Weather Events
Renewable energy systems depend on the environment and are vulnerable to weather-related natural disasters. Wind and solar energy require 10 times more land than coal or natural gas-fired plants, increasing exposure. Many projects require certain weather conditions (wind for turbines). Even the less severe weather-related perils which are not large enough to cause major destruction still lead to insurance claims. The performance of renewables is critically dependent on local weather conditions.
Insurance Risks
Renewable energy technologies have little historical performance data, creating difficulties for insurers. New technologies require insurance for companies to implement. Insurers may use higher deductibles initially. It is important to manage the relationship between insurers and the customers in a way that allows both parties to understand the design and test the new technologies. Insurers could make use of higher deductibles when first implementing new technologies which will balance out as the technology becomes more widely used over time. Recently, renewable energy technologies have become cost-effective, meaning incentives are becoming less necessary to push growth in this industry as IRRs are naturally attractive. We can expect to see more adoption of state-of-the-art technologies that are cost-effective to both produce and adopt, leaving tailwinds for exciting innovation especially with applications of ML/AI.
General Political and Regulatory Risks
The market is highly regulated by policy or regulatory mechanisms such as government-mandated auction processes. Local and state governments have passed bans limiting renewable expansion. Irrational fears of nuclear power have led to oppressive regulation.
International Geopolitical Situation
Russia’s war in Ukraine has caused profound changes in energy markets, with potential to speed up the transition to renewable energy. However, some countries (Germany) have been forced back into nuclear and coal with gas lines shut. The risk associated with the international geopolitical situation comes from the uncertainty of the future events that will be taking place as the Russian war in Ukraine continues. While countries like Germany have been forced back into nuclear and coal with gas lines being shut, this may spur investment in domestic renewables and have lasting effects.
High Development and Installation Costs
High level of R&D needed, rising costs of electric grids. Renewable energy sources have lower energy efficiencies of only 24-50% compared to traditional plants. Can also be intermittent and idle due to cyclicality.
Grid Challenges
Sometimes electricity from solar farms has to be stopped because too much is generated. Approximately 844 GW of energy (90% renewable) is stuck in transmission. Grid upgrades are becoming increasingly necessary. The current grid infrastructure has forced many clean power projects into a state of limbo, as these projects have to wait several years before they can actually implement their technology to the grid, making it difficult to test their feasibility at a large scale. The US has a challenge where some systems are outdated and very hard to build over or re-do, as it would cause a lot of problems if some systems went down. However, countries in the Middle East like Uzbekistan and Kazakhstan are innovating faster through a process called leap frogging, building on top of or adopting existing tech from around the world rather than trying to change existing tech to accommodate needs. Both the Asian Development Bank and Green Climate Fund are involved in projects there.
Effects on the Environment and Wildlife
Solar panels and wind turbines have long product life cycles (25+ years), but there is concern about harmful waste. Solar panels will be shipped to third world countries for disassembly. Wildlife advocates condemn wind turbines for deaths of endangered bird species and bats.
3. Industry Tailwinds
Next-Generation Clean Energy Technologies
The industry is moving towards alternatives such as green hydrogen and advanced batteries. A bipartisan $9.5B bill for clean hydrogen projects was proposed. The DOE’s Earthshots Initiative aims to reduce green hydrogen and long-duration energy storage costs by up to 90% by 2030. Form Energy revealed iron-air batteries providing over 100 hours of energy at $20/kWh (10% the cost of lithium-ion). Energy Vault, led by ND founder Robert Piconi, is also a notable player.
Companies Setting Net-Zero Targets
Companies have been working with the Science-Based Target initiative (SBTi). Over 1,000 companies worldwide have gotten on board. Shareholder pressure to implement ESG initiatives has caused rapid increase in net-zero target-setting.
Electric Vehicles
EVs are approaching 8% of all car sales in the US and 18% in California. Consumer sentiment is increasing in favor of EVs over gas-powered vehicles. Notable brands aiming for all-electric fleets: GM, Lexus, Honda, Bentley, Audi, Volkswagen, and Volvo. Commercially, companies are considering electrifying Class 8 vehicle fleets through hybridized retrofitting (Hyliion) or simple electric add-on technologies (SixWheel).
Inflation Reduction Act
In August 2022, President Biden signed the Inflation Reduction Act, providing $369B to producers of clean energy. State policies have attracted investors to public benefit funds for clean energy projects.
4. Investable Opportunities
Energy Storage Technologies
Batteries and energy storage receive the majority of funding - $650M poured into startups in August 2021 alone. However, improvements have been incremental. Solid state batteries stand to disrupt this space. Long-duration energy storage is key to solving the intermittency issues of solar and wind. Finding ways to address the shortage of lithium without harming the environment is crucial.
Carbon Capture
VC investment has reached an all-time high of ~$882M this year. The Inflation Reduction Act significantly increased tax credits for carbon capture companies. JPM Morgan spent $500M on a 250k acre forest to initiate their entry into the carbon offset market. Decarbonizing hard-to-disrupt sectors (long haul trucking, aviation, locomotives, shipping) is one of the best areas. A partnership with the US Department of Defense is a huge target customer - the DoD is the largest producer of emissions in the US.
Nuclear Power
Nuclear power is much more reliable than solar, generating consistent power with no intermittency throughout the year. The IPCC reported that nuclear power produces four times less carbon emissions than solar farms and provides twice as much electricity for the same amount of land. 450 times more land is also needed for solar to generate the same amount of power as nuclear. The uranium used in nuclear power is extremely energy dense - a tennis-ball sized piece of uranium can power all the energy the average human uses in a lifetime. In terms of environmental impact, nuclear waste is the only waste from energy production that is safely contained and internalized. Every other method emits waste as pollution or material waste, and solar panels need 17 times more materials than nuclear plants in the form of glass, cement, steel, and concrete. According to British medical journal Lancet, nuclear power is the overall safest compared to coal, petroleum, biomass, and natural gas in terms of air pollution.
Nuclear power does come through the process of nuclear fission which produces radioactive waste that must be safely stored for potentially hundreds of years, but the recent nuclear fusion breakthrough by Lawrence Livermore National Lab that proved to generate more energy than was used to start the process shows some early promise, as the waste from fusion is less radioactive and decays much more quickly.
On a global scale, France gets twice as much electricity from clean energy sources than Germany but pays half as much because 75% of their electricity is generated by nuclear power. The South Korean citizen’s council recently decided to vote on expanding nuclear power and the same thing just happened in Arizona. Germany is about to follow suit. The US should consider nuclear power and reevaluate its potential for clean energy generation, although the saliency bias of nuclear disasters being widely known and publicized threatens public confidence in this transition since many citizens don’t want to live in close proximity to a nuclear power plant.
Regional Sourcing Potential
There is a vast untapped generation potential. For example, for hydropower developers, Alaska is the ideal place to venture into new hydropower projects because of its unmatched natural resources and supporting state policies — nearly 200 possible sites exist for hydropower generation but the technology needs to be developed enough to withstand the harsh turbulent conditions of Alaskan rivers. Similarly for solar, the world’s sunniest places have the least amount of solar infrastructure or support due to geopolitical headwinds and economic instability. The same applies for wind power — the world’s windiest places have the least support or infrastructure for harnessing wind energy. Providing access to these regions of the world could take the growth in solar/wind to the next level. The main question lies in how the infrastructure can be built in these regions so the generated energy can reliably be transported to its destination.
Green Hydrogen
Green hydrogen refers to hydrogen that is produced using renewable energy sources or low-carbon power, resulting in significantly lower carbon emissions compared to gray hydrogen. Gray hydrogen is predominantly derived from natural gas through steam reforming, and is currently the primary source of hydrogen in the market. Green hydrogen is an excellent technology for startups to continue to explore and a driver behind its growth has been the decreasing costs of renewable energy. 90% of the hydrogen currently produced is used for industrial processes, so as the industrial sector attempts to decarbonize, green hydrogen will be the natural power source to utilize. KPMG estimates that demand for hydrogen in the ammonia industry will increase 11% by 2030. Additionally, the underlying technology, electrolyzation, is expected to be optimized substantially through capacity increases.
Resources
IEA (2022). “World Energy Outlook 2022”. International Energy Agency. https://www.iea.org/reports/world-energy-outlook-2022
Lloyd’s. “Renewable energy risk and reward”. Imperial College London Consultants. https://assets.lloyds.com/assets/pdf-renewable-energy-renenergy-execsummary/1/pdf-renewable-energy-RenEnergy_ExecSummary.pdf
McKinsey and Company (2022). “Renewable Energy Development in a Net Zero World.” https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/renewable-energy-development-in-a-net-zero-world
Bloomberg. “Clean Power Isn’t Reaching Those Who Need it Most.” https://www.bloomberg.com/graphics/2022-wind-solar-maps-renewable-energy-equity-data/
Additional Sources: IEA, Forbes, Deloitte, Bloomberg, IBIS World