Energy and Environment

Renewable Energy

  • Renewable Energy
    Clean Energy Might Reduce Global Warming, But What Will It Do to Geopolitics?
    This post is co-written by Sagatom Saha, Fulbright Fellow in Ukraine and Visiting Fellow at the Dixi Group. Read Varun Sivaram and Sagatom Saha’s new book chapter, “The Geopolitical Implications of a Clean Energy Future from the Perspective of the United States” in the edited volume, The Geopolitics of Renewables (Springer, 2018, ed. Dan Scholten) here. Clean energy’s explosive growth is good news for the global quest to confront climate change, but its geopolitical effects might not be uniformly beneficial. This should come as no surprise. Fossil fuels have driven not only global economic growth, but also global conflict. For decades, the United States has waged wars and built international institutions to keep a thumb on the scales. As they replace fossil fuels, leading clean energy technologies—wind, solar, hydro, and nuclear energy—as well as emerging ones, such as electric vehicles and batteries, will reorganize power balances between energy producers and consumers and shift U.S. diplomatic interests. Recognizing the massive shifts ahead, this week the International Renewable Energy Agency (IRENA) set up a commission to examine the geopolitical effects of clean energy technologies as they displace fossil fuels. The commission will examine changing trade patterns, cybersecurity risks, and rare-earth mineral access. And in a timing coup, we’ve managed to simultaneously publish a new book chapter on exactly this topic! Our chapter adopts a U.S. perspective and examines many of the same themes that IRENA will take up, as well as several others. We imagine a future in which clean energy has substantially displaced fossil fuels by midcentury, and we describe five ways that the geopolitical landscape could shift as a result. Anticipating these shifts will require farsighted policymaking to safeguard U.S. interests and retain leadership through the transition from old to new energy systems. Here are the five most important geopolitical implications of a clean-energy future: 1. America’s Military Footprint in the Middle East Could Shrink In a plausible future in which electric vehicle sales skyrocket and countries around the world stock up on strategic petroleum reserves, the U.S. economy will require less oil to function and will be more resilient to potential supply shocks. This could clear the way for America to scale back its longstanding strong military presence in the Middle East. This is likely to bring benefits to the United States, which could cut spending or redirect its military elsewhere, for example to the Asia-Pacific region, to address other pressing threats. Importantly, the United States does have regional interests beyond securing the free flow of oil; in a future dominated by clean energy, the Middle East’s oil-producing states might succumb to instability owing to lower oil revenues, posing security threats to the United States. Still, America could maintain a lighter footprint that mirrors its current military posture in sub-Saharan Africa, where its fewer bases focus more narrowly on counterterrorism operations.  2. Russia and China Could Dominate the Nuclear Industry, Thwarting U.S. Geopolitical Goals Although nuclear energy seems to be in secular decline in the developed world, it may well thrive in the world’s emerging economies in the future. Many developing nations may opt for nuclear generation to fuel economic growth while working toward increasingly ambitious emissions reductions plans. And innovative reactor designs might also attract new countries to nuclear energy by lowering financial and geographical barriers to entry. However, the United States, which created and led the global nuclear market for decades, is not positioned to benefit. Instead, Russia and China, America’s two greatest geopolitical rivals, lead the growing market. They may use their dominance in nuclear exports to build up coteries of client states willing to advance their geopolitical interests. In a double whammy, global nuclear security standards—an important U.S. security concern—might degrade under Russian and Chinese leadership of the nuclear industry. 3. A Modernized Power Grid Could Strengthen North American Cooperation but Create Cyber-Threats Clean energy technologies could transform the North American power grid. To balance increasing amounts of intermittent wind and solar generation, Canada, Mexico, and the United States will be tempted to band together to interconnect their national grids. In such a scenario, solar energy from Baja California could power San Diego while wind power from the Oklahoma panhandle could light houses in Mexico City. Such connectivity would require deep levels of intergovernmental cooperation, which could anchor the continent even if other tensions over issues like trade persist. The modern grid will also integrate an exponentially increasing number of internet-connected devices. While these technologies will help grid operators manage the complex two-way, decentralized electricity flows, they also expose the United States to cybersecurity risks. Unless the U.S. government invests in cyber-defense, resilience and deterrence, savvy adversaries like China, Iran, and Russia could credibly threaten the United States. 4. The Rise of Clean Energy Could Provoke Global Trade Wars The clean energy transition could fundamentally reshape the global economy. Clean energy products are not inherently tied to resource rich nations like fossil fuels. As wind turbines, solar panels, and batteries supplant fossil fuel predecessors, trade disputes could become more frequent, as countries seek to stake their claim as the new energy exporters. Indeed, the benefits an energy-dependent nation could yield from domestically producing and exporting its own energy may outweigh any penalty from flouting international trade rules. Yet the slow erosion of trade norms could threaten the global trade order from which the United States has reaped prosperity. 5. America’s Stance on Climate and Clean Energy Technology Leadership Could Profoundly Affect Its Global Standing While our chapter lays out grave geopolitical risks posed by a clean-energy transition, there are also important opportunities for the United States. If America leads on climate action and energy innovation in decades to come, it could carve out a new axis of international cooperation. As climate change rises on many countries’ diplomatic agendas, so too would the benefits that America yields from helping other nations address it. Such a strategy would also grease the wheels of diplomacy in other international arenas critical to U.S. interests. By contrast, if the United States cedes leadership to countries such as China, it will not only jeopardize prospects for limiting climate change but also alienate allies and adversaries alike. A transition to clean energy will shake up the geopolitics of energy. IRENA’s commission on the topic recognizes the tectonic shifts ahead. Now it is up to U.S. policymakers to determine whether the shifting energy landscape will serve America’s interests or force it to cede its privileged position at the center of global geopolitics.
    Blog Post by Varun Sivaram January 16, 2018 Energy, Security, and Climate
  • Puerto Rico
    Repowering Puerto Rico with Solar a Worthwhile Goal, But Harder Than It Sounds
    In the wake of Hurricane Maria, there is an opportunity for Puerto Rico to reconstruct its energy infrastructure to be more resilient and efficient. However, if short-term rebuilding is prioritized over long-term restructuring, this critical window will be missed.
    Blog Post by Guest blogger for Varun Sivaram October 26, 2017 Energy, Security, and Climate
  • Energy and Climate Policy
    From Scarcity to Surplus: Geopolitics in the Age of Energy Abundance
    Play
    Speakers discuss burgeoning U.S. energy production and how changing energy markets are reshaping U.S. foreign policy.
    Event with Amy M. Jaffe, Meghan L. O'Sullivan and Edward L. Morse September 13, 2017
  • Paris Climate Agreement
    The Consequences of Leaving the Paris Agreement
    By withdrawing from the Paris accord, the United States—the second-largest global emitter—could undercut collective efforts to reduce emissions, transition to renewable energy sources, and lock in future climate measures.
    Backgrounder by James McBride June 1, 2017
  • Technology and Innovation
    Harnessing International Cooperation to Advance Energy Innovation
    On March 29 and 30, the Council on Foreign Relations convened a workshop in New York to explore how international cooperation can accelerate energy innovation. The workshop, hosted by Douglas Dillon Fellow and Acting Director of the Energy Security and Climate Change Program Varun Sivaram, was made possible by the support of the Alfred P. Sloan Foundation. The views described here are those of workshop participants only and are not CFR or Sloan Foundation positions. CFR takes no institutional positions on policy issues and has no affiliation with the U.S. government. Introduction New and improved clean energy technologies to confront climate change can help countries set ambitious targets to reduce their carbon emissions. Whereas countries have long participated in formal negotiations convened by the United Nations to curb emissions, it was not until the 2015 Paris Climate Change Conference that momentum grew for international cooperation on advancing energy innovation. The election of U.S. President Donald J. Trump threatens to undermine that progress. To take stock of recent events and discuss prospects for the future, CFR convened a workshop, gathering nearly forty current and former government officials, entrepreneurs, scientists, investors, executives, philanthropists, and policy researchers. Participants explored how international cooperation can accelerate energy innovation, which lessons from other sectors are applicable to the energy sector, and what policy options are available to spur cooperation in light of political realities. Mission Impossible The Paris Agreement on climate change was a major breakthrough because nearly every country around the world committed to reducing its carbon emissions. But these individual commitments do not add up to the reductions needed to limit global warming to 2 degrees Celsius or less, the agreement’s stated goal. Fortunately, on the sidelines of the Paris summit, twenty world leaders announced Mission Innovation (MI), a pledge to double public funding for energy research and development (R&D) within five years. At the same time, Bill Gates and twenty-eight other billionaires collectively announced that they would also invest in the next generation of energy technologies, highlighting the importance of the private sector in bringing new technologies to market. These public and private leaders argued that better and cheaper energy technologies could enable even deeper cuts to carbon emissions than countries were initially willing to commit to. Workshop participants expressed concern that the Trump administration would ignore the MI pledge, which had been brokered by the Barack Obama administration. Such a move would be unfortunate, participants noted, because MI, for the first time, focused high-level political attention on the urgent challenge of advancing energy innovation. Already, energy ministers had convened in 2016 in San Francisco and concluded how their countries would cooperate: for example, by sharing data about public and private R&D investment. And MI’s second ministerial summit is slated to convene in Beijing in June 2017, when countries will determine its future. MI’s original target—doubling global public R&D funding from $15 billion to $30 billion by 2021—cannot be met if the United States does not live up to its commitment to boost funding from $6.4 billion to $12.8 billion. Trump’s budget proposal slashes R&D funding by over $3 billion, which affects renewable energy technology in particular. Congress is unlikely to approve such a sharp reduction, but the president’s proposal reduces the likelihood that the United States will increase its R&D funding as previously committed. One participant speculated that the best-case scenario would be if the United States boosted funding only for those technologies favored by the Trump administration, such as advanced nuclear reactors or equipment to capture and store carbon emissions from fossil fuel power plants. At least for now, other countries remain committed. One participant noted that countries as diverse as Indonesia, Saudi Arabia, Canada, and various European Union members are all committed to ramping up public R&D spending. And these investment flows will likely be overshadowed by a tidal wave of funding from China, which has pledged to spend $8 billion per year by 2021 and will thus overtake the United States as the largest funder of energy R&D. However, without U.S. financial support, the global MI funding goal would be out of reach. In fact, it is even uncertain whether the Trump administration will continue to host MI’s small staff at the U.S. Department of Energy (DOE). Summing up these developments, one participant lamented, “This is a disappointing, chastening time for clean energy innovation.” Quality Over Quantity There might, however, be a silver lining, some participants noted. Now that doubling global public R&D funding appears improbable, countries could focus on improving the quality of their innovation efforts. Many participants agreed that although the quantity of R&D funding is woefully inadequate today, simply doubling it could be wasteful. For example, one participant noted that India cannot double its public R&D funding because it lacks the institutional capacity to spend that money effectively. Many participants argued that a more promising function for MI could therefore be in enabling countries to share lessons about designing public institutions to fund innovation. The United States, for example, has the Advanced Research Projects Agency-Energy (ARPA-E)—modeled after the military’s funding body for emerging technologies—which funds potentially transformative technologies but cuts off grants to projects that miss their milestones. Though ARPA-E has existed for less than a decade, one participant noted that teams funded by ARPA-E are more likely to obtain patents and private funding than those funded by other arms of the DOE. Another participant proposed Germany’s Fraunhofer Institutes as an important model of “translational infrastructure to bridge the gap between great science and engineering at universities and commercial products produced by industry.” Yet another cited the Low Carbon Trust, which was created by the British government but enjoyed political autonomy to make investments in promising technologies alongside the private sector. Although that institution’s budget was sharply curtailed in 2009 as a result of the financial crisis, participants agreed that it offered valuable lessons for funding innovation. Still, participants noted that institutions “can’t be dropped from a helicopter” into one country from another because of differing national contexts. U.S. universities, federal laboratories, and private firms generate enough good ideas for an institution like ARPA-E to assemble a diverse portfolio of technology bets, but countries that have no such research backing would have no practical or political value for a (low) carbon copy of ARPA-E. For that reason, participants concluded, information-sharing on institutional design and performance would help countries try out elements best suited to their national contexts. Countries could also evaluate and help improve one another’s innovation. This approach has a precedent: Group of Twenty countries have exchanged reviews to help members identify wasteful fossil fuel subsidies to eliminate. Participants concluded that MI should reorient its focus toward enhancing the quality, rather than the quantity, of its members’ innovation efforts (see figure 1). Recognizing that MI might need an alternative home to the U.S. Department of Energy, participants debated whether MI should be subsumed within an existing international institution, such as the International Energy Agency or the International Renewable Energy Agency. Although some supported that route to ensure MI’s survival, others doubted that countries would pay leader-level attention to MI if it were part of a large institution. Either way, most participants agreed, MI should not become a large, bureaucratic institution; it should remain a nimble, bottom-up coalition of countries whose leaders are willing to work together to advance energy innovation. Figure 1. Experts' Assessments of the Future of Mission Innovation Other Opportunities for Cooperation Participants stressed that MI is not the only venue for countries to cooperate on energy innovation. Two other modes offer important benefits as well. Bilateral Research Collaborations In some cases, bilateral collaborations have achieved a similarly high political profile to that of MI. One participant cited the U.S.-China Clean Energy Research Center (CERC), which U.S. President Barack Obama and Chinese President Xi Jinping discussed on several occasions. CERC’s priorities include developing technologies to reduce energy use in buildings, to capture and store emissions from coal plants, and to design cleaner vehicles. The participant conceded that U.S. and Chinese research teams have not yet obtained joint patents. One possible reason is that theft of intellectual property (IP) remains a concern for U.S. researchers and companies. But CERC has clear IP rules, and as teams get more comfortable designing joint research projects, joint IP ownership will likely follow. Participants cited CERC’s ability to attract private-sector firms to work alongside academic researchers as an important strength. Participants also noted that the United States would benefit from continued participation in CERC, because U.S. firms can demonstrate their technologies in China and thus gain access to a massive and growing market for advanced energy products. Other participants cited the U.S. research partnership with India as a successful example of collaboration that combines the research expertise of industrialized countries with the technology needs of developing ones. For example, one participant noted that developing energy-efficient ceiling fans is an important priority for India, even if it is not one for the U.S. market. The United States stands to benefit from such partnerships if its firms can design better products for fast-growing emerging economies. International Technology Standards Given that almost six hundred standards apply worldwide to renewable energy technologies, and more apply regionally or domestically, countries could collaboratively develop future standards for shared benefits. Participants did not see the need for new international institutions to develop and help implement standards across borders. However, some argued, existing institutions could take a systemic approach to setting standards. Such an approach would mean, for example, setting standards for not only how well a solar panel should work in isolation but also how it should interact with the power grid. “Standards play a critical role for technology markets, as they contain technical specifications or other precise criteria designed to be used consistently as rules, guidelines, or definitions,” one participant noted. Participants explained that standards matter for three reasons. One, they increase the size of the market for energy products by, for example, making it possible to use the same energy-efficient lightbulbs all over the world. Two, they help customers and investors trust that new technologies will work as advertised. And three, standards can improve the performance of energy products. A participant noted that the first two advantages arise from scalar standards that simply standardize product specifications; the third advantage arises from vector standards that impose a directional requirement that products get better over time. Another participant offered an example of how standards could popularize cleaner energy technologies. In colder parts of North America, Europe, and China, the burning of fuel oil or coal to heat homes and businesses is a major source of emissions. Electric heat pumps offer a much cleaner alternative. Developing standards on equipment performance and installation practices could make it attractive for customers to use heat pumps. The participant noted further that Canada and the United States had already started to cooperate on setting such standards. Working With the Private Sector Several participants stressed that successfully bringing new energy technologies into the marketplace will require far greater investment in innovation by the private sector. Therefore, a primary objective of international cooperation should be to catalyze private investment flows. Other sectors offer important examples of how to accomplish this goal. Participants noted that the semiconductor industry, in which private R&D investment far outstrips public R&D funding, offers an aspirational example for the energy sector. One expert from that industry explained that corporations, rather than governments, drive international cooperation, often joining forces with international rivals on research and manufacturing ventures. The expert noted that nonprofit standards-setting bodies play an important role in coordinating the global industry and pushing firms to innovate rapidly. And when governments enact strict IP protections, remove trade and capital barriers, and invite talent from abroad, firms cooperate across borders and invest heavily in innovation. Another participant shared lessons from the global health sector, in which pharmaceutical companies invest heavily in R&D for new drugs. Some drugs, particularly vaccines that target tropical diseases such as malaria that are endemic to lower-income countries, are not lucrative to develop. For some such cases, governments around the world pool funds to purchase large quantities of vaccines and create markets for otherwise unprofitable drugs. Participants reasoned that this strategy could apply to the energy sector, in which some clean energy products for developing countries would be profitable for the private sector to develop only if governments were to create the right incentives. A participant noted that universities could also play an important role in spurring private sector investment; they could tailor programs for corporations to invest in breakthrough energy research on campus. Finally, although participants generally agreed on the need for far greater private investment in energy innovation, some energy entrepreneurs and venture capital investors reported on exciting examples of ongoing breakthroughs in developing the vehicles of the future, designing cleaner power grids, and bringing electricity to millions who lack it. Innovation is inevitable, they argued; the challenge is to accelerate it.
    Report by The Council on Foreign Relations May 24, 2017 Energy Security and Climate Change Program
  • China
    Can China Become the World’s Clean Energy Leader?
    China seems poised to surpass the United States in leading clean energy innovation and climate change response, but Beijing faces internal challenges to energy reform.
    Interview with Francesca Regalado and Jennifer L. Turner April 28, 2017
  • India
    India Makes Progress on Solar, But Barriers Remain
    This guest post is co-authored by Sarang Shidore, a visiting scholar at the LBJ School at the University of Texas at Austin, and Joshua Busby, associate professor of public affairs at the Robert S. Strauss Center for International Security and Law at the LBJ School at UT Austin. India’s ability to limit its future greenhouse gas (GHG) emissions is critical to achieving the Paris Climate Agreement’s target of containing global temperature rise to 2 C or below in the coming decades. And as we examined in our last blog post, deploying solar energy at scale is critical for India to curb its rising GHG emissions, as well as to enhance its energy security and air quality. Last time we had identified four barriers obstructing solar’s rise in India: too-aggressive bids in auctions for solar power projects, poor financial health of Discoms (power distribution companies, mostly owned by state governments), inadequate grid capacity, and relative neglect of the rooftop segment. Now that a year has passed, what progress has India made on each of these four barriers, and what are the prospects for solar growth, going forward? The Good News: India’s Government Is On It First, the good news. It is now clear that India’s solar capacity additions have been solid. Net capacity installed stands at over 9 GW, with 4 GW added just in 2016, with a further 9 GW slated to be added in 2017. To put this in perspective, the historical pace has been 1 GW per year. In international comparative terms, China led the field by adding 34 GW, followed by the United States, which added 13 GW, Japan 9 GW, and Germany 1 GW in 2016. And the scope of Indian solar auctions has recently widened, as new states from the south have led solar deployment.  Tamil Nadu now leads all states in installed capacity with 1.6 GW, with early movers Rajasthan and Gujarat at second and third place respectively. Rooftop solar has finally begun to take off, with net capacity at 1 GW. As a promising step toward integrating intermittent solar power, India had its first-ever auction for grid-scale storage., Last but not the least, the Indo-French led International Solar Alliance promises economies of scale for innovation, financing, and energy access. A big reason for the successes in the past two years has been the sustained focus of the Indian central government, which has put in place an array of proactive policies to boost the sector. These include capital subsidies, a 10-year tax holiday, credible public sector enterprises as facilitators of central government auctions, a “must-run” status (i.e., preferential dispatch over coal) for all renewables), and the goal of building 33 solar parks which eliminates the problem of land acquisition for project developers. Though the latest budget had only a few new renewables initiatives, market sentiment in Indian solar remains optimistic. Coupled with significant interest from the private sector (much of it domestic), proactive government policies have improved access to finance, at least for the larger solar park projects. Still, high interest rates are cutting into the sector’s potential profitability and large volumes of finance will be required in the future. Obstacles: The Sequel Despite the Indian government’s commitment to solar, the quantity of solar electricity generation in India remains small—only 1% of the total. Achieving the Modi administration’s 100 GW target by 2022 is unlikely. The consultancy Bridge to India projected that, given current trends, India will only reach 57 GW.  Granting that the target was too ambitious to begin with, multiple challenges remain if solar is to make an appreciable contribution to India’s energy security and environmental goals. Competitive Bidding: The Down Side of Down We identified several barriers to scaling up solar last time. The first was the potential for competitive auctions for solar power projects to yield too-aggressive bids. In theory, the framework of competitive bidding for commissioning solar projects is advantageous in two ways. First, it is a rational price discovery mechanism that promises to deploy solar at the lowest costs. Low costs are critical as the Indian electricity sector is highly tariff-sensitive, and solar still costs more than domestic coal. Second, it is aimed to eliminate rent-seeking—an important consideration in India with major corruption scandals in coal mining and telecommunications still fresh in public memory. However, competitive-bidding can also trigger an unhealthy race to the bottom, in which bidders with less-than-stellar project credentials pull out all stops to win bids with the aim of cornering market share or banking land. Although many bids do have penalty structures in place for project overruns, they may still ultimately fail to deliver. Two ameliorating factors have somewhat lessened concerns over the viability of competitive bidding. The first is the continuing trend of falling module prices. Imported Chinese panel prices have fallen 30% in 2016, more than anticipated. This means that projects bid earlier in 2016 or before have their real profit margins enhanced. The second factor is on-going market consolidation. This allows for cost savings through scale and again makes lower bids more robust. On the flip side, however, on-going court battles in the coal domain may have adverse knock-on effects in the solar space. In 2014 India’s top electricity regulator had allowed two major generating companies to raise tariffs retrospectively for coal-fired plants running on imported coal, claiming expansive powers derived from its regulatory role. The generators had gone to court, in the wake of the rise in the price of imported Indonesian coal, to seek modifications to tariffs arrived at through competitive bidding. The key Indian judicial body in electricity matters, the Appellate Tribunal for Electricity (APTEL), allowed the tariff hike, but under the narrower Force Majeure clause (normally invoked due to extraordinary events such as war, riots, or natural disasters) in the contract. The Indian Supreme Court will issue a final ruling soon on whether retroactive tariff hikes are permissible—a ruling that could have implications for whether solar developers can change their bids after winning contracts at rock-bottom prices. However even if the court rules in favor of the more restrictive APTEL judgement, the viability of the competitive bidding framework may be weakened. If contractual prices discovered by bidding are subject to change downstream due to input cost increases, even if narrowly defined, the market potentially gets neither the upfront security of feed-in-tariffs nor the consumer savings of sustained lowest costs. India needs a better bidding process that discovers truly sustainable prices that are not subject to re-litigation downstream. UDAY: Will Discoms Rise from the Depths? We had identified the financial health of Discoms as another major demand-side challenge; indeed some analysts consider this as the primary challenge in the entire electricity sector. Poor Discom health leads to adverse climate and air quality impacts for two reasons. First, low demand due to under-buying has reduced the Plant Load Factor (PLF) of coal-fired plants to below 60%, well below normal levels of 80-85%. Operation at such sub-optimal levels produces more pollutants and carbon per unit of electricity generated. Second, Discoms are forced to seek power at the lowest possible cost to stem their losses. This makes solar electricity less competitive. The central government has unveiled a bailout plan with the acronym UDAY, aimed to fix Discom financial health. This is the third such plan over the past fifteen years. The plan is an improvement over previous attempts. It gets the states to take over 75% of the Discom debt, which they will then issue as interest-bearing bonds. Effective interest rates of repayment will be reduced from 14-15% to 8-9%. Discoms will eliminate the gap between cost and revenue to zero by 2018-19 through quarterly tariff revisions and a reduction of operating losses to 15%. The central government will provide some incentives for states to comply with their commitments and deadlines. However, UDAY does not provide for any penalties to states for non-compliance. Levying penalties is constitutionally difficult as distribution companies are under the purview of state governments, which in India’s federal system zealously guard their powers. UDAY also does not provide any upfront funding for investing in India’s creaky distribution infrastructure. This is critical to reduce technical losses, or the losses in power as it travels through the dilapidated power grid, as UDAY has targeted. UDAY also does not concretely address the fact that financial losses at the Discom end of the electricity chain are partially a reflection of inefficiencies further upstream – specifically, in coal mining, transport, and electricity generation – and a more holistic approach is required to solve the insolvency problem. Early results from UDAY are mixed. Of the five biggest loss-making Discoms, two have missed their targets by wide margins. Two others have shown improvements, while the fifth has been poor at providing timely data. If states don’t eliminate Discom deficits by 2018 as planned, the debt will appear on their books, substantially damaging some of their balance sheets. 2017 will be critical to assessing whether UDAY is working as planned. The Grid: Will Slow and Steady Lose the Race? Ultimately, ambitious expansions of solar supply will be of little value until there is requisite demand to buy all this power. We had identified grid integration as a major demand side barrier for scaling up solar. The geographies of solar in India are distinctly skewed. Only seven states account for more than 80% of generation, but those states represent less than 40% of demand, which leads to localized power surpluses that cannot be easily transmitted to external sites of consumption. The ambitious Green Energy Corridor (GEC) project is aimed to strengthen both inter-state and intra-state transmission, with loans of $1 billion and Euro 1 billion from the Asian Development Bank and Germany’s KfW respectively. The project includes not just new transmission lines but also Renewable Energy Management Centers to better forecast the actual generation from a given solar site. The project completion deadline is March 2020, with all inter-state transmission lines to be commissioned by the end of 2018. However, according to the market research firm Mercom Capital, progress in the Green Energy Corridor has been disappointing. There is poor coordination between government agencies and regulatory commissions, and the build-up of new grid capacity is simply not keeping pace with the large infusions of new supply coming online. The central government, however, has insisted that the GEC is on track to meet its deadlines, while admitting land acquisition delays in some states. The history of most large infrastructure projects in India is one of delays and inconsistent execution. Therefore, it is more likely than not that GEC will miss its targets, and curtailment issues with solar may persist for several more years. Rooftop Solar: The Sun Begins to Shine 40% of India’s solar target is in the rooftop segment, and when we examined it in our last post, the sector was sluggish with myriad problems. 2016 however may have been the turnaround year, with net rooftop capacity now at 1 GW, most of which was added this past year. An additional 1.1 GW forecast is to be added in 2017, an appreciable portion of it from central government institutions. Most of the rest is likely to be in the Commercial & Industrial (C&I) segment, dominated by the third-party ownership model in which third-party developers own and operate the system on the customer’s premises and realize steady revenue streams. Net metering, in which owners of rooftop solar systems can offset their bills by exporting solar power to the grid, is formally in place in most states but is still failing largely due to state government resistance and poor Discom health. A recent modest incentive scheme is unlikely to be adequate. The failure of net metering has not deterred C&I firms from installing rooftop solar, but is a serious barrier for scale-up in the residential segment of rooftop market. Ironically, if C&I rooftop solar continues to grow, it will further degrade Discom finances because C&I customers pay the highest tariffs. Debt financing also remains a concern in the rooftop space. Miscellaneous Challenges Finally, there are various miscellaneous challenges that also obstruct the rise of solar in India. For example, the roll-out of solar parks has been plagued by delays,  there is ongoing uncertainty over the Ministry of Environment’s order on shutdown of old coal plants, and debt financing for solar projects is not always easy. There are also concerns over the quality of solar panel imports, some of which are from lower-tier Chinese manufacturers. A draft regulation on testing the quality of imports has been released by the government, but it needs to be implemented robustly. Conclusion The bottom line in India’s push to deploy solar power is that a commendable push by the central government has not yet been able to overcome a number of serious barriers. The most critical areas to watch are government efforts to restore Discom solvency and those to shore up the health of the grid. Solar will continue to expand in India at a solid pace, but unless further major policy initiatives are implemented, India will fall well short of its ambitious targets.            
    Blog Post by Guest blogger for Varun Sivaram February 17, 2017 Energy, Security, and Climate
  • Global
    Solar Power and Clean Energy Innovation
    Play
    Experts discuss innovations in solar technology, investment opportunities in the renewable energy industry, and the effects of solar power innovation on the U.S. energy portfolio.
    Event with Varun Sivaram , Charlie Gay, Shayle Kann and Tracy B. McKibben January 24, 2017 Emerging Technology
  • United States
    The Future of U.S. Energy Security: A Conversation With Elizabeth Sherwood-Randall
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    Deputy Secretary Elizabeth Sherwood-Randall provides her perspective on the changing definition of energy security and the role of innovation in ensuring America’s energy future.
    Event with Elizabeth Sherwood-Randall and P. J. Simmons November 1, 2016
  • Energy and Climate Policy
    Sustaining Fuel Subsidy Reform
    Overview Fuel consumption subsidies threaten the fiscal and economic health of countries around the world. Economists widely agree that the subsidies, which reduce consumer prices for petroleum and natural gas below free-market prices, often strain government budgets, fail to target poverty efficiently, and distribute benefits unfairly. Yet, political barriers often obstruct practical policy changes; for example, the prospect of street protest discourages sensible subsidy reform. Still, over the last two years, governments around the world have taken advantage of the plunge in oil prices and reduced or eliminated subsidies. Recognizing that low oil prices can mitigate the increase in consumer bills caused by subsidy reform, ten countries have, since 2014, completely eliminated subsidies on at least one type of fuel, and a further twelve countries have reduced subsidies. This advances U.S. economic, geopolitical, and environmental goals because subsidy reform can reduce world oil prices, instability in strategically important countries, and wasteful use of fossil fuels, which contributes to climate change. In particular, recent reforms in India, Indonesia, Ukraine, Egypt, Saudi Arabia, and Nigeria all bring strategic benefits to the United States. Recent reforms may not be permanent, however. Past fuel subsidy reforms have often come undone when prices rose or when reform-minded leaders fell. Varun Sivaram and Jennifer M. Harris, reviewing the historical record, reveal three ways governments have reinforced reforms against backsliding: by depoliticizing fuel prices and transferring control over prices to independent regulators, who enforce the link between domestic and international prices; by preempting popular discontent and rapidly demonstrating tangible economic benefits from reform; and by locking in partial subsidy reforms with subsequent reforms as they pursued long-term strategies to eliminate all fuel subsidies and liberalize their energy sectors. The United States can help countries reinforce their reforms, and the authors make recommendations for how U.S. policymakers should do so. Where it has strong relationships, the United States should prioritize reform durability at the highest political levels. In addition, the United States, acting through institutions such as the World Bank, should provide financial support for a limited period of time that creates a path for countries to consolidate their reforms. Finally, the United States and international partners should create aid packages that reward long-term reform over decades; they should also drive private investment into the energy sectors of countries that have reformed fuel subsidies to support broader energy sector liberalization.  Selected Figures From This Report
    Report by Varun Sivaram and Jennifer M. Harris October 18, 2016 Energy Security and Climate Change Program
  • Renewable Energy
    Japan Should Increase Its Target for Renewable Energy, In Case Nuclear Restarts Stall
    I’ve been traveling in Japan, meeting with government officials, power sector executives, and energy policy scholars. I thank CFR life member Bill Martin, Washington Policy and Analysis, and the Japanese Federation of Electric Power Companies for generously hosting me. TOKYO—Last month, Japan commemorated the five-year anniversary of the great earthquake and tsunami that caused the Fukushima Daiichi nuclear disaster. The disaster—three nuclear reactor meltdowns and the release of some radioactive material—forced 164,000 residents to evacuate and deeply traumatized the country.[1] So when Japan shut down its entire fleet of nuclear reactors, it was unclear whether they would ever restart. Five years later, the outlook for nuclear power in Japan is better, as are prospects for a cheaper, cleaner, and more secure energy mix. In 2015, Prime Minister Shinzo Abe’s administration completed a four-year-long process to set targets for Japan’s energy mix in 2030. Those targets include restarting Japan’s nuclear fleet as quickly as possible, though only after reactors pass stringent safety assessments. The administration has also committed to ramp up renewable energy, aiming to combine it with nuclear power to generate nearly half of Japan’s electricity—or a quarter of its primary energy—from “self-sufficient sources” by 2030. And Japan is finally moving ahead with long-overdue electricity system reform to introduce more competition and keep costs down. The targets represent an admirably rational response to the Fukushima disaster. As I’ve written before, Japan should treat renewable energy and nuclear power as complements, not substitutes, which the Abe administration recognizes.  Yet even though administration officials talk about their 2030 vision as a major accomplishment—requiring years of careful analysis and negotiation—setting targets was the easy part. Now Japan needs to execute toward those targets, and an obstacle course of regulatory, legal, and political hurdles stands in the way. If things don’t go according to plan, the government needs to be prepared to adapt its targets, remembering that they are merely instruments to achieve Japan’s overarching energy goals. Japan Will Struggle to Meet Its 2030 Target for Nuclear Energy Restarting Japan’s nuclear reactors could reverse alarming trends that followed Fukushima. After Japan shut down its nuclear reactors, the price of retail electricity rose by two thirds, and the share of imported fossil fuels in the power mix rose from roughly 60 percent to nearly 90 percent (Figure 1). At the moment, low prices for oil and liquefied natural gas (LNG) have reduced Japan’s import bill. But the resource-poor island nation is still at the mercy of commodity market volatility and would suffer if prices increased again. For this reason, Japanese officials care deeply about energy self-sufficiency. If Japan can achieve its nuclear target for 2030, then nuclear will reemerge as its largest source of self-sufficient power. But the nuclear target is easier set than accomplished. Recently, a district court ordered that Takahama Units 3 and 4 stay closed, siding with some residents unhappy about plans to restart the reactors. Whether or not the court’s decision was right (it is puzzling how a local court could overrule the safety assessment of Japan’s nuclear regulator), it certainly appears that the road to restarting Japan’s 42 reactors—of which only two are currently running—will be bumpy. And that’s not all. After Fukushima, the previous government passed legislation making it harder to extend a nuclear reactor’s lifetime beyond 40 years—consistent with its plan to completely phase out nuclear energy. By 2030, one third of existing reactors will hit the 40-year age threshold for decommissioning. Even if utilities manage to finish construction on three new reactors, nuclear energy will still only account for 15 percent of Japan’s electricity. This implies that achieving the government’s 20–22 percent target by 2030 is improbable at best. Uncertainty over nuclear reactor restarts also complicates Japan’s plans to reprocess spent nuclear fuel. When the Rokkasho Reprocessing Plant (RRP) starts up in the near future, it will begin to separate plutonium from the spent fuel that has been accumulating at the facility and at reactor sites around Japan. If enough reactors don’t start up that can burn the reprocessed fuel (in a form called “MOX” fuel) from RRP, then Japan will begin to accumulate reserves of MOX fuel that some experts consider a proliferation risk. After touring RRP, I was left with little concern over the risk that Japan could divert nuclear material to a weapons program or leave it vulnerable to theft or sabotage (Japan’s safeguards at RRP are state-of-the-art, including 140 neutron detectors throughout the facility, multiple cameras recording each step, and automated reporting to the International Atomic Energy Agency). Nevertheless, the government knows that accumulating reprocessed fuel brings risks, including inflamed tensions with China, which has repeatedly voiced concerns over the issue.[2] All of this means that Japan needs to seriously plan for the contingency in which the target nuclear capacity does not materialize. It will need to carefully synchronize operations at RRP with reactor restarts, and it will also need to explore other ways of achieving zero-carbon, self-sufficient energy. Higher Targets for Renewables Could Compensate for a Nuclear Shortfall Although Japan is likely to miss its nuclear target, it has other zero-carbon options to meet its larger goal of 25 percent self-sufficiency in its primary energy mix. Renewable energy, comprising hydro, solar, wind, and geothermal energy, could compensate for a nuclear shortfall. Already, Japan has made substantial progress in ramping up renewables. Following Fukushima, Japan unveiled a generous feed-in tariff incentive scheme to support renewable energy. The market responded enthusiastically, especially in solar power. By 2014, Japan was second in the world to China in annual solar installations, having installed 9.7 GW of capacity. Recognizing that it could not continue funding solar power at such generous levels forever, the government lowered the rate of incentive payments by 16 percent in 2015 and a further 11 percent last month. Nevertheless, its target of 22–24 percent renewable energy by 2030, driven largely by projected growth in solar power, is still well within range. The government set this target by calculating the level of renewable energy that would not cost Japan more in incentive payments than it would save from displaced fossil fuel imports. But in its calculations, the government assumes that solar will cost about six cents per kWh in 2030, a very conservative projection; for reference, unsubsidized solar power in the United States should meet that cost target a full decade earlier, by 2020. Given that solar is likely to be much cheaper than the Japanese government has anticipated, it should not be difficult to support the target share of renewable energy in 2030 without breaking the bank. In fact, Japan should look to support even higher levels of renewable energy. Over the past year, the government has made regulatory changes in this direction. First, it limited the number of days that utilities could "curtail,” or switch off, renewable energy supply to the grid without compensation for the foregone power. Second, Japan has streamlined regulations to drive down the costs of installing rooftop solar—as a result, the price of residential solar in Japan (which composes the large majority of Japanese installed capacity) is lower than that in the United States and closer to leaders Germany and Australia (Figure 2). Finally, Japan is now rolling out a reverse auction system to buy power from utility-scale solar installations. Since large-scale solar is cheaper than rooftop solar and reverse auctions tend to secure lower prices than a feed-in tariff, the shift from decentralized to centralized solar in Japan should further drive down costs and fuel capacity expansion. But intermittent renewable sources, such as solar and wind, have limited potential so long as Japan’s electricity grid remains fragmented. Each of Japan’s ten regional utilities exercises a monopoly in its service territory, and electricity trade among regions is comparatively low. Moreover, the entire power grid is split into two halves operating at different frequencies, limiting power flows between east and west. With better transmission links between regions, the Japanese grid could accommodate more renewable energy, making it easier for resources in one region to compensate for unpredictable renewable energy in another region. Therefore, to make it possible to raise its renewable energy target—important for reducing emissions and increasing energy security—Japan should invest substantially in a more interconnected national grid. Though Overdue, Power Sector Reform Should Not Pit Nuclear Against Renewables On April 1, Japan took an important step toward breaking up its vertically integrated utilities, when it fully deregulated the electricity retail market. Many jurisdictions in the developed world have had deregulated markets—which in several cases has lowered electricity rates by introducing competition into the sector—for decades, but Japan’s path to deregulation has been sluggish. Still, the government has justified its caution by pointing to missteps elsewhere in the world and tailoring its own policies to avoid them. For example, though it now allows customers to choose their retail electricity provider, customers will still be able to stay on a regulated rate from the local utility, and the government will carefully monitor how the market evolves. In doing so, the government hopes to avoid market abuses that plagued deregulation in the United Kingdom and California. But the one aspect of deregulation about which I did not hear a satisfactory answer from Japanese officials was how to avoid the conflict between renewable and nuclear energy that is playing out in other deregulated markets. For example, in many parts of Europe, nuclear power is increasingly unprofitable as a result of the rise of renewable energy. The way deregulated power markets are set up, renewable energy reduces power prices, making it difficult for existing nuclear plants to cover operating costs and virtually impossible for new nuclear plants to raise enough revenue to amortize capital costs. Today, there is a lower risk of this happening in Japan, because only about 2 percent of power is traded on a wholesale power market. But the Japanese government plans to increase that proportion, which could expose nuclear reactors to wholesale price deflation from renewable energy. Japan is considering implementing a “capacity mechanism” that ensures that reliable power from sources like nuclear reactors—which generate consistently around the clock—are compensated enough to keep them open. But capacity markets around the world have had their own problems, and in general they have not solved this problem of renewable energy crowding out nuclear energy. Some have proposed alternative market designs that have not yet been tested but are theoretically promising. For example, splitting the retail market for electricity into two markets—one for reliable, 24/7 power and another for power whose availability fluctuates—could insulate nuclear power from unhealthy competition with renewable energy. Japan should explore this and other proposals. At the end of the day, it is crucial that zero-carbon, secure sources of energy coexist in the Japanese power landscape. As Japan continues to deregulate its power sector, it should ensure that the right economic incentives are in place for nuclear and renewable energy to both flourish. [1] There is increasing evidence that the release of radioactive material from Fukushima has not posed substantial short or long-term risks to human health. [2] For readers wondering why Japan doesn’t just abandon reprocessing, James Acton of the Carnegie Endowment explains, “Japan is entrapped in reprocessing. Commitments made by the national government to local communities to facilitate the development of Japan’s nuclear industry and, in particular, its industrial-scale reprocessing facility make RRP’s operation effectively inevitable.” The full report is essential reading to understand Japan’s convoluted nuclear fuel cycle policies.
    Blog Post by Varun Sivaram April 4, 2016 Energy, Security, and Climate
  • India
    WTO Ruling Against India’s Solar Policies Previews Clashes Between Trade and Climate Agendas
    This week, a World Trade Organization (WTO) panel decided in favor of the United States and against India in a dispute over Indian domestic content requirements for sourcing solar power. Reading the headlines, one might worry that “The WTO Just Ruled Against India’s Booming Solar Program” or, worse, that the “WTO swats down India’s massive solar initiative.” The histrionics from progressive media outlets are overblown. In fact, whereas judges of international law have reaffirmed that national procurement of renewable energy favoring domestic manufacturers is illegal, the jury is still out on whether this helps or hurts efforts to deploy clean energy worldwide. Because domestic content requirements can reduce supply and increase prices, I am inclined to call this ruling a small victory that makes it cheaper to combat climate change. But I do still worry that in the future, liberalized trade and prudent climate policies might come into conflict. WTO Panel TRIMs India’s Solar Program The WTO panel ruling did not overturn India’s solar program, the centerpiece of India’s plan to curb emissions growth. India is targeting 100 GW of solar—around half of the world’s current solar capacity—by 2022. And at the 2015 Paris Climate Change Conference, Prime Minister Modi unveiled the International Solar Alliance, a confederation of 120 solar-friendly countries, to be headquartered near Delhi. None of this is materially affected by the WTO ruling, which narrowly focused on solar installations accounting for about 0.5 percent of India’s 100 GW target. The panel found that in a portion of its solar procurement from 2010 to 2014, India violated international trade law by barring foreign-made solar panels and, in some cases, the constituent solar cells in a panel. This was accomplished through “domestic content requirements,” which applied to roughly 500 MW of solar capacity installed by private developers, from whom government agencies promised to purchase the solar energy for 25 years. The panel concluded that these domestic content requirements breached India’s obligation under the WTO Agreement on Trade-Related Investment Measures (TRIMs) not to “require the purchase or use by an enterprise of products of domestic origin or from any domestic source…” The panel also found that India had not followed its legal responsibility under the 1994 General Agreement on Tariffs and Trade (GATT): “The products of the territory of any Member imported into the territory of any other Member shall be accorded treatment no less favourable than that accorded to like products of national origin…” The direct consequences of this case are minimal. The panel concluded that India should “bring its measures into conformity with its obligations under the TRIMs Agreement and the GATT 1994.” But since the beginning of this case, India has proactively reduced its domestic content requirements, from 50 percent in 2013 to 33 percent in 2014 to just 12.5 percent in its ongoing procurement. Moreover, a very similar case decided in 2014 by the WTO Appellate Body, Canada—Renewable Energy, failed to find that these domestic content requirements constituted actionable subsidies that could legitimize retaliation. So India may have to curtail its already minimal domestic content requirements moving forward, but nothing else really happens.[1] In My Humble Opinio Juris… Even though the direct consequences of this ruling are minimal, the issues raised in the case have broader significance in the long run. This explains why twelve countries and the European Union followed the case as third-party observers, with some countries providing extensive comments cited in the final ruling.[2] Most observers sided with the United States; for example, Japan bluntly called India’s policies “protectionist.” But even though this particular case was relatively easy to decide, onlookers were deeply invested in the precedents this case could set. The clearest outcome from the case was a reaffirmation of the 2014 ruling in Canada—Renewable Energy that domestic content requirements for renewable energy are illegal. Some environmental groups object that outlawing such policies can reduce the incentive to deploy clean energy. Under free trade, they contend, countries will end up importing cheap solar panels from China and never build up a domestic industry that would create local economic benefits. This may well be true, but restricting trade also raises the price of clean energy. And the biggest obstacle to clean energy deployment that I’ve consistently heard from policymakers in the developing world is not that imports fail to create jobs but that the cost is too high. So my conclusion is that this ruling is a felicitous example of the trade agenda aligning well with the climate agenda; reducing barriers to trade can also speed the deployment of clean energy. But India raised another, more interesting, objection on energy security grounds to the U.S. allegation that its domestic content requirements were illegal. Under Article XX of the GATT, countries can derogate from their international trade obligations, i.e., enact contrary policies, so long as certain conditions are met. One such condition is met if a contrary policy is “essential to the acquisition or distribution of products in general or local short supply.” India argued that since it had “abysmally low” domestic production capacity, and since it plans to sharply ramp up its deployment of solar power, it could face a shortage of solar panels if foreign supply were to disappear. The panel was unmoved by this objection. Because India could not prove an “imminent” risk of shortage, the panel held that India could not shirk its legal responsibilities. Surprisingly, the third party observers concurred, and Japan was unsympathetic to India’s argument. As one of the most energy-insecure countries, following the Fukushima nuclear disaster, one might expect Japan to favor retaining the right to prioritize national energy security over international trade liberalization. In this particular case, though, Japan’s opposition to trade barriers in the solar industry has to do with the make-up of Japan’s own solar industry, which largely relies on importing and relabeling Chinese panels. Setting Japan aside, other countries will increasingly want to switch to renewable energy to reduce reliance on fossil fuel imports. But if renewable energy industries become heavily concentrated—as the solar industry has become in China—then countries may not want to shift from one source of concentrated energy imports to another. So the summary WTO panel ruling against India’s energy security objection could set a precedent that discourages renewable energy adoption in the future. The second interesting objection raised by India was that the auctions for solar energy were conducted by the government, and therefore the domestic content requirements counted as government procurement that is exempt under GATT Article III:8(a). Again, the panel disagreed, upholding the prior decision in Canada—Renewable Energy that the government was procuring electricity, not solar panels, so it did not have the right to preferentially procure domestic solar panels. In this case, this prohibition on using preferential government procurement probably does not impede clean energy deployment, again because free trade lowers prices. But I can think of examples in the future where preferential government procurement might be a good idea, especially for advancing new clean energy technology. For example, I advocate targeted U.S. government procurement of emerging technology as a stepping-stone toward free market competition. And it might be logical only to procure technologies that had previously received government research, development, and demonstration (RD&D) support, to ensure that government support follows technologies through every phase of technology readiness. But this sort of program may well give preference to domestic firms eligible to receive public RD&D funds. Following the precedent set by the WTO panel ruling against India, preferential government procurement of domestic clean energy may not be a legally acceptable instrument of technology policy. And since this might hinder efforts to bring new clean technologies to market, this is another potential example in the future where the trade and climate agenda might conflict. Outside of the issues raised in this case, another potential clash between the trade and climate agendas could be the future interaction between carbon pricing and trade barriers. I was (and still am) prepared to call the Trans-Pacific Partnership (TPP) a step forward for climate policy, but TPP does not explicitly authorize trade barriers based on a product’s carbon content. In a related proposal, William Nordhaus calls for “climate clubs," which would erect trade barriers against countries unwilling to enact harmonized climate policies. If such proposals gain momentum, the climate agenda could run afoul of the trade liberalization agenda. As countries around the world implement climate policies and seek to expand clean energy, many more trade disputes will arise. Trying to forecast future rulings at this point is pure speculation. But even if the outcome of this case is far less exciting than the headlines suggest, it hints at what to look out for in the next one. [1] In fact, it is not entirely clear why the United States continued to pursue this case. India’s initial domestic content requirements from 2010–2012 actually helped the United States, by screening out silicon solar panels and cells that China specializes in while enabling U.S. companies like First Solar to export their thin-film products to India. Recognizing that their domestic content requirements had shifted, rather than deterred, solar imports, India revised domestic content requirements from 2012–2014 to plug the loophole, banning all foreign panels. But now that India has generally scaled back all domestic content requirements, the United States has little to gain in the Indian market from a ruling in its favor. One explanation for pursuing the case is that the United States may instead have been seeking a broader precedent to prevent other countries from passing similar domestic content requirements. [2] There was some intrigue about this third-party participation. On behalf of all the third parties, Canada requested “enhanced third-party rights” to make oral statements during hearings and provide several written submissions. It contended that “issues relating to ‘green energy measures’ are of systemic importance to WTO Members.” Both the United and India effectively told Canada to mind its own business, and the panel rejected the request. Undeterred, Canada, Japan, and the European Union submitted extensive comments to the WTO panel. Oddly, China, which had by far the most at stake in this case, remained totally silent, perhaps content to let the other countries make arguments in China’s favor.
    Blog Post by Varun Sivaram February 26, 2016 Energy, Security, and Climate
  • Fossil Fuels
    Now What’s That Got to Do with the Price of Oil?
    This post was co-written with Peyton Kliefoth, an economics major at Northwestern University and research intern at the Council. Over the weekend, I published a piece in Fortune Magazine explaining a surprising correlation between falling oil prices and tumbling shares of Yieldcos, which are publicly traded holding companies mostly comprising renewable energy assets in the U.S. and Europe (see chart below).   Comparison of oil price and share prices of the top seven Yieldcos, from June to September, 2015 (NYLD: NRG Yield, NEP: Nextera Energy Partners, TERP: TerraForm Power (SunEdison Subsidiary), ABY: Abengoa Yield, BEP: Brookfield Renewable Energy Partners, PEGI: Pattern Energy Group, CAFD: 8Point3 Energy Partners (joint venture between SunPower and First Solar))   Fundamentally, the value of solar and wind projects should not depend on oil prices, since oil is rarely used in the developed world for electricity and therefore doesn’t compete with renewable power generation. It turns out that the cause of falling Yieldco share prices has less to do with what is being traded than who is doing the trading—I write: Few paid attention to an ironic trend: the same investors holding oil and gas assets had also piled into an obscure but crucial class of renewable energy investment vehicles—so-called “Yieldcos”—driving down the financing costs of clean energy. As it turned out, renewable energy prospects hitched to the conventional energy bandwagon hit a bump in the road. In June and July the bottom fell out of the oil market (again), the Fed strongly hinted at interest rate increases, and a number of renewable energy firms sought large sums from public capital markets. Together, these three unrelated developments conspired to spook fossil fuel investors, who dumped renewable energy Yieldco shares and plunged prices into a vicious downward spiral. Now the stakes are high: if Yieldcos fail, renewable energy could lose access to public markets and the low cost of capital necessary to scale up wind and solar. To recover, Yieldcos may have to restructure, seek help from parent developer firms, and hope for constructive public policy to further de-risk renewable energy investments. Whereas the article focuses on the causes of the recent downward spiral in Yieldco share prices and the remedies for stabilizing and lifting prices, in this blog post I’ll assess the underlying renewable energy industry and the long-term prospects for vehicles like Yieldcos. Even before the collapse of Yieldco share prices this summer, doomsayers predicted that Yieldcos were overvalued and went as far as to call the Yieldco model a “Ponzi Scheme.” To those analysts, this summer has vindicated their conviction that a Yieldco is no more than the sum of its parts, and that the stock market had erred in imputing value over and above the constituent renewable energy projects in a Yieldco’s portfolio. I disagree.  This summer certainly proved that Yieldcos, as currently structured, are unstable vehicles whose share prices are liable to spiral upward or downward without much of a change in the performance of the underlying projects. But if they can weather this perfect storm, restructure, and attract a broader investor base, Yieldcos can add considerable value by reducing transaction costs and providing public investors a diversified portfolio of renewable projects. The renewable energy industry as a whole is doing very well right now. The costs of solar and wind projects have consistently fallen, and installed renewable capacity is growing around the world. But extrapolations that solar will account for thirty percent of the global power market by 2050 will not come true without further reductions in the cost of capital and participation from public markets, which can supply the scale of investment needed for renewable energy to rival conventional energy sources. That’s where Yieldcos come in. How Yieldcos Create Value There are three ways a Yieldco creates value over and above the value of the renewable energy projects it comprises. First, it reduces the risk of investing in renewable energy. To accomplish this, renewable energy developers spin off the least risky part of their portfolio—owning and operating renewable energy installations post-construction—creating a Yieldco, an independent, publicly traded entity. Thus, the Yieldco avoids the riskier elements of project development—regulatory approvals, construction, contracting—and only purchases operating or near operational assets from the parent developer that come with guaranteed revenues from long-term power purchase agreements (PPAs) with utilities. Second, Yieldcos offer public market investors—like institutional and retail investors—an easy way to invest in renewable energy; in other words, they reduce the transaction costs that would otherwise block public market capital in a sector dominated by private capital. This is possible because of the way Yieldcos return almost all of the revenue generated by renewable energy projects back to investors. Similar to Master-Limited Partnerships, which are holding companies for oil and gas infrastructure assets, Yieldcos are able to shield shareholders from double taxation, avoiding corporate income tax on renewable project revenues to distribute pre-tax dividends to shareholders. Since solar projects compose a majority of Yieldco assets, and solar panels require next to zero operating and maintenance expenditure, Yieldcos are able to return most (80–90 percent) of their projects’ operating revenue to investors through dividends. The third way that Yieldcos add value—by promising 8–15 percent dividend growth—is what got them in trouble this summer. Yieldcos depend on high share prices to raise equity on public markets and purchase more renewable projects at returns that exceed their cost of capital, driving share prices up further. I call this a “treadmill of equity issuances and dividend payouts.” Unfortunately, the treadmill can overheat,  and when share prices start to drop, they viciously spiral downward. I suggest that relying less on equity and more on debt—up to responsible credit limits—will enable Yieldcos to avoid spirals, though their share values will not be as high as when they were on the treadmill. Still, even if Yieldcos are less aggressive about dividend growth, they add value to renewable energy projects by unlocking public capital markets through reduced risk and lower transaction costs. By focusing on developing a strong asset portfolio, Yieldcos can still play an important role in scaling up renewable energy. Four Questions Underlying the Long-Term Success of Yieldcos As Yieldcos mature and find ways to avoid short-term share price volatility, their long-term prospects will depend on macroeconomic fundamentals and the health of the renewable energy industry—these are far more logical factors to drive Yieldco value than the price of oil. There are four threshold questions that require affirmative answers for Yieldcos to succeed long-term: Question 1: Will solar remain economical after the imminent expiration of the solar Investment Tax Credit (ITC)? Yes. Although important in the near term to U.S.  solar project economics,  the ITC is not crucial to their long-term viability. Currently, the ITC offers developers of U.S. projects 30 percent of the project value in tax credits through 2016 and 10 percent thereafter. The ITC was crucial to incentivize domestic deployment when solar economics were not so favorable, but today, installed solar costs are on a sufficient downward trajectory to make many projects viable on their own, without the tax credit. The expiration of the ITC will likely cause a drop off in project development in 2017, but falling costs will enable project growth thereafter. First Solar, a leading panel manufacturer, has projected highly competitive costs of $1 per installed Watt in 2017, without the ITC, and historically low bids in recent solar PPA auctions below 5 cents per kWh suggest that solar will be competitive in wholesale power markets even after the ITC step-down. Yieldcos comprising solar assets should be able to weather this short-term storm, especially because many are amassing a global portfolio of assets, diversifying their exposure outside of the U.S. market. Question 2: Can Yieldcos survive rising interest rates?  Probably. Rising interest rates will tarnish Yieldcos’ attractiveness as a low-risk, comparatively high return investment, but rates will have to rise considerably to really damage the Yieldco value proposition. Yieldcos can be attractive because of the spread between the market’s “risk-free rate,” often defined as the yield on a ten-year Treasury Bill (about 2.13 percent today), and the Yieldco dividend yield, currently between 5–6  percent. However, the Federal Reserve has signaled that an interest rate hike is likely by the end of the year, possibly marking the end of a historically low interest rate era. Combined with the falling oil price, the Fed’s hints contributed to plunging Yieldco prices over the summer. Still, rate hikes of a magnitude required to wipe out Yieldcos’ return over the risk-free rate are only distantly on the horizon. Michael Liebreich of Bloomberg New Energy Finance warns that if rates return to their 2007 level of 5.3 percent, Yieldco competitiveness as a low-risk investment would fall. Still, for the foreseeable future, modest interest rate hikes will likely not spell doom for Yieldcos. Question 3: Is there room for growth? Yes, resoundingly. The growth potential of renewable energy in the United States and the world is so high that Yieldcos will not run out of projects to acquire anytime soon. A useful point of comparison is the Yieldco’s cousin, the oil and gas asset MLP. MLPs support around 10 percent of the $1.1 trillion U.S. oil and gas sector and have posted an annualized 27 percent growth in market cap over the last 24 years. By contrast, Yieldcos represent less than 1 percent of the burgeoning renewable energy project finance sector, and Yieldco dividend growth targets are considerably less ambitious at 8–15 percent. Fundamentally, there is certainly room for growth. Question 4: Is a Yieldco all that different from a Ponzi Scheme? Yes. Although a Yieldco does depend on continually raising equity to acquire projects and pay shareholders, it is not a Ponzi scheme, because it comprises real, income generating assets just as do other established financial vehicles. However, it is unclear if the accounting practices that enable Yieldcos to distribute high dividends are sustainable. Unlike a Ponzi scheme, in which new cash is raised to pay existing investors, a Yieldco actually invests new cash in income-generating assets en route to paying dividends. Some may quibble that the difference with a Ponzi scheme is semantic, but the Yieldco model is akin to MLPs and Real Estate Investment Trusts (REITs), both of which are considered established, sound investment vehicles. To call one a Ponzi scheme would be to indict all three models. However, questions remain unanswered about the details of Yieldco accounting. In particular, Yieldcos assume a very low rate of depreciation oftheir operating assets, of which solar installations are often the majority. Since the installations have historically proven to be long-lived, in some cases twice as long as the standard twenty-year PPA contract signed with utilities, Yieldcos only deduct a small “Maintenance” sum from their operating revenues before distributing dividends to shareholders. If this assumption is wrong, however, then Yieldcos will have failed to accurately depreciate their assets, so that over time their asset base shrinks because of inadequate reinvestment and excessive dividend distributions. It will be years and perhaps decades before Yieldco claims of asset life are vindicated or disproven. In the meantime, critics will continue to accuse Yieldcos of hiding the need to reinvest in capital expenditure in order to reward shareholders. But the historical record of long-lived and productive renewable energy projects is on the Yieldcos’ side. In summary, Yieldcos do add value to the projects that they bundle together, and the health of the renewable energy sector can underpin Yieldcos’ long-term success. That means that the conclusion I wrote to the short-term story of Yieldco prices tumbling alongside oil prices applies equally well to the long-term story of how the future of renewable energy may depend on the success of Yieldcos: Renewable energy is on the cusp of becoming a mainstream alternative to fossil fuels—getting there requires a mainstream financing tool. Although the Yieldco model must improve after derailing this summer, getting it back on track is in everyone’s best interest.
    Blog Post by Varun Sivaram September 8, 2015 Energy, Security, and Climate
  • Technology and Innovation
    Five Things I Learned About the Future of Solar Power and the Electricity Grid
    Nestled in the foothills of the Rockies in Golden, Colorado, the Energy Department’s  National Renewable Energy Laboratory (NREL) was established in 1977 to help bring new energy technologies to market. Today it is one of seventeen national laboratories overseen by the Energy Department and the only one whose sole focus is renewable energy and energy efficiency research and development. I spent a full day touring the facilities and interviewing researchers working on a range of solar photovoltaic (PV) technologies and on integration of clean energy into the electricity grids of the future. Here’s what I learned: 1. NREL is unique in the solar research ecosystem—that’s a bad thing. Originally christened the Solar Energy Research Institute, NREL is best known as the gold standard of solar technology. One researcher remarked to me, matter-of-factly, “We are the best in solar PV there is.” It is easy to see why. Cutting-edge research on myriad solar technologies is co-located on one campus, and basic science, economic modeling, manufacturing development, and systems integration are all neighbors. Around the world, just two institutions (Germany’s Fraunhofer Institute for Solar Energy Systems and Japan’s National Institute for Advanced Industrial Science and Technology) come close to NREL’s breadth of solar activities... Unfortunately, limited resources constrain NREL’s ability to leverage its integrated research capabilities to commercialize promising technologies. For example, take NREL’s work on an upstart technology I’ve written about elsewhere—solar perovskites. In contrast to academic researchers’ obsession with making fingernail-sized devices that are highly efficient under perfect lab conditions, the researcher leading NREL’s perovskite work wants to scale up manufacturing of larger areas of solar perovskite coatings and achieve long-term stability in the real world. Those goals are ambitious and sorely needed, but with only three and a half researchers supporting them, they will be tough to achieve. Some major research universities (e.g., MIT) also house integrated research programs that help researchers fill the gaps between basic research and commercial success. But many more such centers are needed to institutionalize energy technology development. Prototype printer heads for inkjet printing perovskite solar coatings in a scalable manufacturing process. The process is contained inside a “glovebox,” into which researchers can reach, through the rubber arms, to interact with the process under a controlled atmosphere (Varun Sivaram). 2. Rapid solar PV market evolution means moving targets for researchers. Earlier this year, First Solar (the lone American panel maker in a Chinese-dominated industry) stunningly projected $1 per Watt fully installed cost for utility-scale solar installations by 2017 (this includes a major step-down in tax credit subsidies to solar power). If they achieve this cost, some of the research projects I saw at NREL may have to adjust their targets even lower. For example, an ingenious reactor to mass-produce NREL’s record efficiency solar cells has a long-term panel cost target of $0.70 per Watt. Because the panels are highly efficient, the remainder of the costs to complete the installation should be roughly 33 percent lower than with existing panels; still, even if this reactor were scaled up to produce solar panels in 2017, the fully installed panels would cost $1.10/W, already higher than the industry roadmap. As the leader in solar innovation, researchers around the world will look to NREL to clearly articulate the value of new solar technologies and why a combination of low cost, superior performance, and new applications is preferable to today’s race-to-the-bottom solar commodity market. The reactor (left panel) in which researchers created the world-record efficiency solar cell (46 percent efficient under concentrated sunlight) (Varun Sivaram). For four decades, NREL has compiled the record efficiencies of solar cells and published them in a chart (right panel) that is consulted around the world (U.S. Department of Energy). 3. Reliability in the real world makes and breaks solar PV technology. At NREL’s Outdoor Test Facility (OTF), rows and rows of solar panels endure the rain, snow, and even hail that Golden, CO hurls at them. Out in the field, all sorts of unexpected things can go wrong, and NREL partners with companies who want to learn about the failure modes that could plague their technology. My tour guide pointed out the rooftop shingles coated with a flexible solar panel—although the panels still appear to work, the ensuing leaks from poking wires through the roof had doomed the product and the company. Later, I saw panels which had worked fine for the first year but whose sealing material had gradually given way to attacks by moisture, which now eroded the power-producing material itself. The take-home lesson was that exciting technologies in the lab still have a long way to go to demonstrate the twenty-year reliability that the market demands. As we snaked around the rows of the OTF, two words came to mind: “testbed” and “graveyard.” One First Solar test setup had been in operation for over two decades and still produced 80 percent of its original output—the data from this test had emboldened First Solar’s investors and helped the company achieve its current success. But I also passed dozens of failed relics, sober lessons from the heady days when capital poured into new solar startups that have since expired. NREL’s Outdoor Test Facility (OTF) hosts solar panel test setups from industry partners for multi-decade reliability studies (Varun Sivaram) 4. Standards, not new technology, are crucial for integrating clean energy into electricity grids. At NREL’s Energy Systems Integration Facility (ESIF), researchers shared their views about the challenges and opportunities from modernizing the U.S. electricity grid to integrate new energy technologies. Specifically, ESIF is interested in integrating distributed energy resources (DERs), which include solar panels but also other decentralized ways to make or save energy (e.g., fuel cells, batteries, efficient appliances). In theory, DERs can improve the efficiency of the electricity grid, reduce electricity consumption, and save ratepayers money while also maintaining grid reliability. But in practice, this is complicated by the proliferation of DERs made by different vendors to different specifications and operated without much regard for their effects on the grid, positive or negative. The solution could come from emulating the successful IT industry. There, a robust set of standards have enabled different pieces of hardware to operate seamlessly with software applications, a design feature known as “interoperability.” In much the same way as a computer language employs a concept called “abstraction” to send generalized instructions to diverse hardware, the electricity distribution grid is in need of a standard language, or “common semantics” to coordinate the diverse DERs that will connect to the grid in the coming years. ESIF hopes to create a set of standards that enables such a language and ensures DER interoperability; more federal support would be helpful to accelerate this work. Indeed, the gains from system-level innovation, according to several ESIF researchers, dwarf the expected gains from new energy technology—“we have all the technology we need” was a refrain I heard often. Two of the “Smart Homes” that ESIF has set up to simulate the integration of homes packed with internet-connected, energy-efficient appliances into the electricity grid (Varun Sivaram) 5. A decentralized grid poses serious cybersecurity threats that require immediate attention. As grids integrate more DERs, shifting from a centralized to a decentralized model, there are two opposing effects on grid resilience. The physical resilience of the grid to failure improves, because the strategic value of central power stations and bulk transmission lines decreases as more power is generated and saved closer to the customer. However, the cybersecurity risk actually increases with decentralization, because access points for malicious hackers proliferate—imagine a hacker accessing a mobile phone to breach a home energy system to attack a utility distribution substation, etc. The root cause of the opportunity to efficiently coordinate DERs—their increasing connectivity via the Internet—is also the source of increased cybersecurity risks. Fortunately, these are not new problems, and their solutions are well catalogued. Enterprise IT best practices have long incorporated “role-based access” protocols, in which a proliferation of users on a network does not compromise the network’s integrity, because of walls that isolate decentralized users from the rest of the system. I learned from researchers at ESIF that electricity utilities are far behind other enterprises in their IT practices, and that an immediate culture shift is imperative if grid decentralization is to reduce, rather than enlarge, resilience risk. The contrast between ESIF and the solar research facility was striking to me. ESIF, by decades the younger of the two, was manned by researchers intent on modernizing the century-old utility business model. On the other hand, the solar researchers I met brought decades of experience in solar PV and had a long-term research orientation, at odds with the quarterly target obsessions of a solar industry that is rapidly reducing its costs. But to label the two facets of NREL as its future and past would be a mistake. New solar technologies will be essential to displace fossil fuels, and NREL plays a crucial role in advancing solar PV research and methodically preparing new technologies for the field. Coupled with the next-generation grid that ESIF envisions, tomorrow’s energy systems may look fundamentally different from today’s. I am grateful to the staff of the National Renewable Energy Laboratory for their openness and hospitality, including: Bryan Hannegan, Greg Wilson, Jen Liebold, Tami Reynolds, Jim Cale, Martha Symko-Davies, Erfan Ibrahim, John Geisz, John Simon, Matt Beard, Joe Berry, John Wohlgemuth, Jao van de Lagemaat, and Paul Basore.
    Blog Post by Varun Sivaram July 15, 2015 Energy, Security, and Climate
  • Energy and Climate Policy
    Oil Prices, Low-Carbon Energy, and Climate Policy
    Overview For decades, oil prices have influenced the outlook for alternatives to oil and policies that support those alternatives. Expensive oil makes substitutes more appealing; cheap oil makes the economic case for alternatives that much more difficult. High prices in the 1970s kick-started clean energy, including the first modern electric vehicles, while the oil slump beginning in the 1980s pummeled sources like wind and solar power and undermined the push for more fuel-efficient cars. Given the sharp decline in global petroleum prices beginning in late summer 2014, which saw the cost of benchmark grades of oil fall as much as 60 percent in six months before recovering slightly, the relationship among oil, alternatives, and government policies is again of critical concern for business and policymakers. In light of that, the Maurice R. Greenberg Center for Geoeconomic Studies (CGS) at the Council on Foreign Relations convened a workshop in Washington, DC, in May 2015 with roughly two dozen participants with backgrounds in state and federal public policy, economics, energy, and the automotive and alternative-fuels sectors. The workshop set out to understand the implications of relatively cheap oil for cleaner alternatives, such as natural gas–fueled and electric vehicles and renewable energy, with a special focus on the future shape of ambitious fuel-economy standards that are slated for review in 2017 and 2018. This report, which you can download here, summarizes the discussion’s highlights. The report reflects the views of workshop participants alone; CFR takes no position on policy issues. Framing Questions for the Workshop The New Low Oil Price World—Assessing Drivers and Future Trends What factors will be most important in driving future oil prices? Global supply vs. demand drivers? Structural vs. cyclical drivers? Low-Carbon Technology Investment in the New Oil Price World How will different future oil price scenarios influence U.S. and global private investment in alternative vehicle technologies, including electric, hydrogen-fueled, or driverless cars? What about investment in alternative transportation fuels, such as biofuels, renewable electricity generation, and storage? Should U.S. public investment compensate for changes in private investment here and globally? Future of CAFE Standards in the New Oil-Price World How will different future scenarios influence the 2017 midterm review of U.S. Corporate Average Fuel Economy (CAFE) standards? What role does CAFE play in U.S. global leadership on climate, and what are the implications if CAFE is frozen or rolled back? Should CAFE be used as a tool to protect electric vehicles and other alternative-vehicle technologies from increased competition from conventional vehicles when oil prices are low? Charts and Maps From This Report Crude Oil Prices Percentage of Electricity Generation From Oil and Oil Products NHTSA CAFE Standards, Model Years 2017-2025
    Report by Greenberg Center for Geoeconomic Studies June 29, 2015 Greenberg Center for Geoeconomic Studies