May 23, 2012

S&P: CONVENTIONAL ENERGY GROWTH MAY OUTSTRIP RENEWABLES EXPANSION

UAE Weekly Energy Brief

By Andrew Engblom

The expectation that renewable energy sources will play a big role in meeting the new demand for energy over the next decades may be wrong, according to a May 16 research note issued by Standard & Poor's.

With energy consumption worldwide projected to roughly double in the next 35 years, Standard & Poor's Senior Economist Beth Ann Bovino said in the note that Europe, the United States and Asia all seem on a path of continued reliance on fossil fuels.

Global energy consumption is projected to increase by roughly 2% per year through 2030, making it difficult for renewables to catch up given that they are coming from such a small base. In the United States, for example, wind energy, the fastest growing renewable energy sector, has only now reached about 3% of energy generation after decades of expansion.

"Conventional wisdom says renewable sources of power will play a big role in meeting demand," Bovino wrote in the note, "Support for Renewable Energy Inches Ahead While Global Energy Demand Grows by Leaps And Bounds." "The conventional wisdom may be wrong."

In particular, cost, feasibility and "political wrangling" now stand in the way of near-term renewable energy expansion, she said.

For example, reaching the U.S. Department of Energy's goal of supplying 20% of U.S. electricity from wind by 2030 likely requires the development of offshore wind capacity, but as yet no offshore wind infrastructure exists. Other challenges include a transmission build-out that the National Renewable Energy Laboratory estimates could cost $93 billion.

There are also major macroeconomic factors that point to reduced support for renewables. In the United States the renewable energy sector is facing a slow economic recovery and historically low natural gas prices, while in Europe the sector is facing "a wave of austerity." Meanwhile, Asia is growing faster, and fossil fuels continue to be the fuel source of choice.

All these factors are increasing opposition to renewables, making it more difficult for renewable energy proponents to secure an extension to the production tax credit for wind.

Separately, S&P says solar needs 'plentiful' funding

In a separate May 16 research note, S&P Credit Analyst Terry Pratt wrote that budget constraints and financial crises have introduced a "new uncertainty" into the future of renewable energy.

This could cause government to reshape how it funds energy, focusing on some asset classes while backing away from others. "Limitations on the government's ability to provide suggest that it will be reallocated to more efficient, larger-scale technologies," Pratt wrote.

The note, titled "Renewable Energy Requires Renewable — and Plentiful — Funding to Meet Global Policy Goals," said state renewable portfolio standards are likely to remain in effect even if federal support for renewable energy wanes.

In general, solar faces less risk than wind in the U.S. as the investment tax credit runs through 2016 and prices for solar PV panels are declining rapidly.

Beyond the production tax credit in the U.S., S&P sees increased regulatory risk for solar in Spain and the Czech Republic, as those governments have altered support frameworks for projects that were already financed.

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