Unraveling Renewable Energy – Identifying Opportunities

Renewable energy seems a muddle and understandably so. At the birth of every industry things get a little messy. Corporate leaders charged with deciding strategy and tactics find it a challenge to identify the most promising opportunities for investment. This article puts renewable energy in perspective including what technologies are emerging and where to look for opportunities.

The auto industry is an appropriate analogy for what is happening in renewable energy today. This industry was born in the late 1890s from the hybrid creations of a thousand entrepreneurs who crossed bicycles and buggies with engine power. Car companies popped up like weeds across the country and raced to find the winning balance of product design, production technology and supply chain efficiency. While in the early years companies came and went at a dizzying pace, it took fewer than two decades for the modern auto industry to take form.

Renewable energy is much the same as the auto industry with one major exception – the pace of change is accelerated as corporate decisions are played out globally in real time. One thing seems certain, the manufacture and deployment of renewable energy products and services will be the dominant industrial sector of the 21st century. Renewable energy is the world’s next auto industry.

Defining Renewable Energy

What is “renewable energy”? Renewable energy is derived from natural processes that are replenished constantly. In its various forms energy comes directly from the sun or from heat generated deep within the earth. The U.S. Department of Energy National Renewable Energy Laboratory (NREL) defines seven categories of renewable energy – solar, wind, ocean, hydropower, biomass, geothermal, and bio-fuel and hydrogen derived from renewable resources.

Significant technologic advancements will likely lead to the deployment of systems in all seven categories over the next century. And as this happens, humankind will gradually wean the world of our dependence on non-renewable energy, particularly fossil fuels. In the near term however, widespread adoption of renewable energy generation technologies will center on wind and solar with bio-fuels following close behind.

Emerging Technologies

Much is made of the growth potential of a green economy. Germany, Japan and China have, for nearly 20 years, promoted investment in wind and solar yielding large and robust industrial sectors. While in its infancy in the United States, tens of thousands of jobs have already been created.

Business leaders are keen to understand where future renewable energy dollars will be spent in North America. In particular, leaders wish to understand geographic patterns of manufacturing and system installations.

Widespread adoption of a given renewable energy technology is dictated by market forces. If the price of energy is competitive, then a market will develop. Promising research has led to early stage products in ocean, biomass, geothermal, bio-fuel and hydrogen. However, in general these technologies do not currently produce competitively priced energy. As a consequence, investment is not widespread.

A promising technology is in the area of bio-fuels. The on-again, off-again cycles of investment in ethanol production from agricultural feedstock is unlikely to stabilize and consequently will not be part of a long term bio-fuel solution. The real opportunity lies in bio-fuel produced from cellulose, principally forest products and from algae.

While promising algae and cellulose technologies are in the pipeline, technical challenges surrounding production scale-up are holding back full commercialization. Once these gaps are bridged, we can expect to see significant large scale cellulose bio-fuel production in the pine forests of the southern and southeast United States and northern forest regions in the U.S. and Canada. Algae have the potential to be produced in all parts of North America.

The supply chain for manufacturing of bio-fuel production equipment will likely be extensive and geographically dispersed. Low cost manufacturing is a location consideration but access to markets will favor North America for many products. Expect to see bio-fuel product design, equipment manufacturing and service activities spring up across the U.S. and Canada over the next two decades.

Solar and Wind Dominate

Solar and wind will likely see 80 percent all capital expenditures on renewable energy over the next 20 years. Expenditures will be fueled by competitively priced electricity generated from wind and solar. Where renewable energy is not competitive, the desire by consumers to purchase “green” energy, even if it costs more, is also stimulating the market.

When it comes to understanding investment opportunities it is important to know that wind and solar sectors follow very different trajectories with regard to value chain and deployment. Today wind energy is competitive in many U.S. markets, costing in the range of 5¢ to 8¢ per kilowatt hour (kWh). This compares to a U.S. average industrial rate of 6.9¢. National industrial rates generally range from a high of 20¢/kWh in Hawaii to just over 4¢/kWh in Wyoming and Kentucky. The current cost of solar photovoltaic (PV) generated electricity is 18¢ to 23¢ per kWh.

Wind’s manufacturing trajectory is more about capacity than new technologies.  Advances in wind turbine design are largely relegated to incremental improvements in materials and scale. For example, sophisticated polymer materials are being used to increase the size and durability of blades while reducing weight. Turbine output has yet to plateau. Once an industry standard, 1.5 MW units are being overshadowed by units as large as 6 MW now being deployed.

At the center of the wind turbine supply chain are large components including turbines (also referred to as nacelles), blades and towers. Feeding these factories are hundreds of raw material and OEM component manufacturers.

Large components are logistically challenging because of size and handling characteristics. Ocean, barge, rail and oversized trucks are commonly used, often in combination, to transport components for installation.

Most wind turbines are installed as wind farms that supply the power grid. Consistent wind speed and proximity to transmission lines with excess capacity guide location decisions. Coastal areas, mountain passes and the Great Plains dominate North American wind resources.

While North America has abundant wind resources, areas efficiently served by transmission lines limit the number of sites suitable for farms. Initiatives now underway to develop new transmission lines will significantly increase the number of areas available for wind farm development.

Wind turbines are being deployed at a brisk pace. Approximately 1,000 turbines and 1,800 MW of power were installed in the U.S. in 2008 (for comparison, the average nuclear power reactor in the U.S. is approximately 1,000 MW). More than 7,000 turbines are expected to be installed annually by 2015.

Locating Wind Products Manufacturing

Some industry strategists argue manufacturing of large wind components should be located in proximity to wind farms in order to avoid transportation difficulties. To-date, global logistic capabilities have met the transport challenge and the oft predicted rush to manufacture turbines, towers and blades in the Great Plains has been more of a modest flow than a flood. General Electric, for example, manufactures turbines in Pensacola, Florida, far from the wind fields of the near west.

One outcome that seems likely is that manufacturers and service providers will cluster where ever large component manufacturing sets up shop. A good benchmark is Germany. Germany leads the world with an advanced wind supply chain that includes hundreds of companies. These companies are increasingly finding their way to North America, often led by large vertically integrated companies like Nordex AG. Nordex recently announced a $100 million/700 employee turbine manufacturing plant for Jonesboro, Arkansas. Danish manufacturer Vestas has invested in a number of U.S. facilities including two new plants now under construction in Colorado.

Economic development officials in Colorado, Arkansas, Iowa and Kansas, among others, are aggressively pursuing companies, both large and small, with development incentives and other inducements.

Solar’s Unique Path

Recognizing that the long term growth potential for solar outshines wind, economic development organizations representing all areas of North America are pursuing companies in this sector. Wind installations are limited to areas that have the right climatic and environmental conditions and they are capital intensive. Solar, by contrast, is easily developed at multiple scales and can be deployed virtually everywhere on the planet

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Residential, commercial and industrial rooftop installations, and large scale solar farms will increasingly dot the landscape as the price of solar generated energy continues to fall. In Germany, for example, government subsidies of residential and commercial solar dating back to the early 1990s have stimulated a vast industrial sector. Traveling the German countryside it is easy to find homes, commercial buildings and factories with solar PV and solar thermal installations.

Solar is already competitive in some U.S. markets including areas of California and Arizona. The current cost of PV generated electricity is about 18¢ to 23¢ per kWh. Coming advances in solar manufacturing and product technologies combined with a more competitive landscape resulting from larger and more efficient solar manufacturing plants could yield solar electric costs at 10¢ per kWh by 2015.

While solar costs decline, the cost of conventional grid electricity is expected to increase an average of 2 percent per year. Part of this increase will stem from regulation of greenhouse gases likely through market-based economic instruments such as a "cap-and-trade" program.

As pricing changes, so will the location of manufacturing plants. Solar modules can be moved easily around the world, a fact that has helped make China, Japan and leaders in production. Healthy profit margins have, until now, negated the need for a cost saving supply chain. This is about to change.

With explosive market growth expected over the next five years there is now a rush to enter the North American market by global and domestic producers alike. This will drive profit margins down and force producers to adopt competitive location strategies.

With the U.S. solar supply chain barely on its feet, industry strategists envision U.S. manufacturing to develop around regional clusters. Clusters will optimize inbound logistics for things like volatile gases, sheet glass and back panels, and outbound logistics of finished products. Component suppliers less sensitive to logistics will be free to locate away from these clusters.

The North American market can support perhaps 12 to 15 solar manufacturing clusters at maturity. This is based on a formula that balances distance to customers, market size, local operating costs, government incentives and tax policies, plant output capacity and competition.

There are currently five emerging manufacturing clusters in North America, maybe more depending on who defines them. These include Portland, Oregon; San Francisco (Bay Area); Albuquerque, New Mexico; Boston, Massachusetts; and Toledo, Ohio. All but Toledo have links to the local semi-conductor industry (solar PV and semi-conductors have ultra-pure silicon technologies in common). Toledo’s roots are in automotive glass manufacturing. Ironically, not all of these locations are likely to remain viable over the long term because of sub-optimal logistics and high operating costs.

The Era of Renewable Energy
The United States has not come gently to renewable energy. The economic and political landscape has not favored smooth development. Instead, decades of volatile energy markets and geo-politics has created unfavorable conditions for R&D needed to propel the industry forward. This has changed dramatically in recent years.

The Obama administration has certainly brought to focus a widely held belief that energy independence for the U.S. is achievable. Government tax policies, funding programs, and energy policies are realigning market forces toward this goal. Debate over climate change certainly adds fuel to the fire.

As a consequence industry is in the process of unleashing the power of the market. Investment levels in solar and wind and other renewable technologies are at record levels. For those who are prudent in assessing patterns of investment, significant rewards await.