Green energy market presents modest risk

A safe bet?

08 January 2010 00:00  [Source: ICB]

Renewable energy is an attractive market for chemical companies, but it is not without risk

THE RENEWABLE energy sector could become a key customer of the chemical industry, but first it will have to prove itself a worthy competitor of oil and coal.

 Rex Features

The potential is enormous. Interest in biofuels, solar and wind power has soared in the past decade, propelled by fears of climate change, and each relies heavily on chemistry. However, they also rely heavily on state subsidies that could vanish if political winds blew the wrong way. Misreading the weather could cost chemical firms millions.

Ethanol producers already buy enzymes and microorganisms from companies such as Denmark-based Danisco and Novozymes. Biodiesel producers purchase sodium methylate and other process chemicals from firms such as Germany's BASF and Evonik Industries. Hemlock Semiconductor (a subsidiary of Dow Corning, both of the US), Germany's WACKER and many other firms supply polysilicon for the manufacture of photovoltaics (PV) for solar power, while countless other specialized materials are also incorporated into PV cells or consumed in their production.

These are significant markets. In 2008, for instance, global demand for polysilicon used in PV exceeded 50,000 tonnes, according to WACKER, a sum the company projects will grow to at least 100,000 tonnes, and potentially 300,000 tonnes, by 2012.

Last month, US-based market research firm Nanomarkets projected that the demand for materials used in thin-film PV could reach $13bn (€9.1bn) by 2017. Installed wind capacity is also growing fast, jumping 27GW in 2008 to reach 120.8GW, according to the Global Wind Energy Council, which put the value of turbine installations that year at about €36.5bn ($52.5bn).

State subsidies have played an essential role in driving demand growth in these markets. In Germany, feed-in tariffs established in 1991 and expanded in 2000 have given the country the largest installed PV capacity in the world. In second place is Spain, which has also aggressively employed subsidies to encourage renewables.

Germany has the world's second-largest installed wind capacity. The leader is the US, which began offering production tax credits for wind power in 1992. Government support totaled $724m in 2007 alone, according to the US Energy Information Administration (EIA).

The case for such subsidies seems strong, but global economic disruption could test the public's willingness to make immediate sacrifices for long-term goals. Proponents counter by arguing that the growing renewable energy sector will help resolve the economic crisis by creating green jobs, often pointing to the examples of Germany and Spain for support.

The records of both countries do demonstrate how much can be achieved in a relatively short time, given the right incentives. However, two recent studies cast a very critical light on these achievements.

"German renewable energy policy, and in particular the adopted feed-in tariff scheme, has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into the country's energy portfolio," states an October 2009 study by the Rheinisch-Westalisches Institut fur Wirtschaftsforschung (RWI), a German think tank.

"Technology has been driven largely by products looking for markets"

Dallas Kachan, managing director, Cleantech Group 

"To the contrary, the government's support mechanisms have, in many respects, subverted these incentives, resulting in massive expenditures that show little long-term promise for stimulating the economy, protecting the environment, or increasing energy security," it continues.

The study doubts projections of job growth, observing: "they typically obscure the broader implications for economic welfare by omitting any accounting of offsetting impacts [such as] job losses from crowding out of cheaper forms of conventional energy generation, indirect impacts on upstream industries, additional job losses from the drain on economic activity precipitated by higher electricity prices, private consumers' overall loss of purchasing power due to higher electricity prices, and diverting funds from other, possibly more beneficial investments."

As for reducing CO2 emissions, the RWI study notes that emissions certificates on the EU Emission Trading System are currently valued at about 50 times less than the CO2 abatement costs of PV, and four times less than wind.

A 2009 study from Spain's Universidad Rey Juan Carlos entitled "Study on the effects on employment of public aid to renewable energy resources," makes similar arguments. Among its claims:

Since 2000, Spain spent €571,138 to create each "green job."

For every green job created, 2.2 jobs were destroyed elsewhere in the economy, for a total of 110,500 jobs lost.

Subsidies aside, emerging technology markets have a treacherous tendency toward hype, speculation and overinvestment, epitomized by the internet bubble of the 1990s.

Corn ethanol provides a recent example from the renewable energy market. US government mandates to blend increasing quantities of ethanol into the nation's gasoline encouraged massive capital spending to meet the expected demand.

Nearly 200 ethanol biorefineries were built, by one count. But the cost of corn soared, the price of gasoline dropped, and the economics of production became untenable. Scores of plants shut down and major players, such as VeraSun went bankrupt.

Could PV go the same way? After years of single-digit growth, polysilicon capacity grew by 17% in 2006, and about 20 capital projects have been announced through 2012, says Tony Pavone, senior consultant in the process economics program of US-based business research firm SRI, although he is skeptical whether they will all be completed.

"Any of these projects could have the plug pulled just because the people backing it no longer expect a good enough return," Pavone notes.

Indeed, the combination of increased polysilicon capacity and decreased demand for PV modules from Spain reversed the market from undersupply to oversupply in 2009, according to UK-based analysts New Energy Finance, which noted that the spot price of polysilicon had dropped to $65/kg in November, versus a contract average of $78.

However, Branko Terzic, US and global regulatory policy leader for energy and resources at global business consultancy Deloitte and a 40-year veteran of the energy industry, notes that there are a key differences between ethanol and PV.

"It will have growth, and will certainly be advantaged by, first, any carbon-limiting legislation in the US, and second, by any international climate change agreement," he says.

"Those are fundamental positives for the photovoltaic industry that do not go away with ups and downs in gasoline and oil markets, or with concerns about food versus fuel arguments."

In Washington, D.C., Terzic adds, opinion is almost universal "that climate change legislation is not a question of if, but when, and global agreements are the same."

Dallas Kachan, managing director of the US-based research, events and advisory company Cleantech Group, also remains optimistic for renewables, and he discounts comparisons with the internet bubble.

"The most fundamental difference is the role of technology, which has, to date, been driven largely by products looking for markets," he explains. "The exact opposite is happening in green technology, in the sense that we have the world's biggest market, the world's biggest drivers - things like climate change and resource scarcity - driving entrepreneurs to look for the right technologies to meet these market requirements."

Venture capital (VC) investment in cleantech has been uniquely resilient over the past year, he notes. Like all VC investment, it fell in late 2008, but in contrast to other sectors, it rebounded in the second quarter (Q2) of 2009, and it has since risen at 10-15% per quarter.

"As of the [third] quarter, there is more venture capital money going into cleantech as an investment class than any other venture investment class," Kachan points out. "This is hugely significant, because cleantech was 3% of all venture investment only four years ago." In Q3, it accounted for 29%.

Terzic advises chemical firms to focus on the long term. "Our economy is fundamentally sound," he says. "We also have huge pent-up demand expectation - 1.7bn people will join the middle class, mostly in Asia, and will be consumers of all kinds of goods, including housing and equipment with photovoltaic attachments. I take an optimistic view over the next decade - that's inevitable.

Read Doris de Guzman's Green Chemicals blog

By: Clay Boswell
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