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As the world moves rapidly towards green energy, Macquarie explores how a new wave of innovation is powering the next phase.

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Renewable energy in 2040

Global installed capacity is expected to double...

2016
0GW

2040
0GW

$US10.2
trillion

invested in new
energy capacity
by 2040

~86%

of new investment
will be in zero-carbon
technologies

windmill icon
battery icon 10,000%

growth in batteries
to support renewables

Solar and wind
to represent

47.9%

of installed capacity
in 2040. Up from 11.8%
today

Source: Bloomberg New Energy Finance,
‘New Energy Outlook’ Report 2017

Solving the supply reliability challenge

Renewable energy has transitioned over the past decade from an alternative energy source to a major force in global markets.

In today’s power market, innovation across the entire power system will be key to this ongoing transformation – from generation to distribution to storage to in-home technologies offering greater flexibility for consumers.

In a changing energy landscape, new entrants must overcome three major challenges to prove their viability: they must offer sustainable, affordable and reliable power.

Long known for their wide environmental benefits, renewables have fallen rapidly in cost over the past decade, opening significant opportunities for the industry and consumers.

“Renewables are becoming the pragmatic choice rather than the brave one,” says Macquarie Capital’s Global Head of Green Energy Mark Dooley. “The challenge for the industry now is to make it easy for consumers, businesses and governments to do things that are efficient from a carbon emissions perspective.”

The renewables sector is working towards large-scale storage system solutions sophisticated enough to manage the intermittency of renewables generation.

This has sparked a new wave of innovation in the sector which will revolutionise the global power market and allow consumers to shift from being passive to active participants in their energy networks.

“Renewables are two-thirds of the way towards solving the energy trilemma, being affordable and clean” says Anthony Felton, Portfolio Manager for Macquarie Investment Management’s global listed infrastructure team. “The third objective, reliability, is still a work in progress.”

Renewables no longer the brave choice

Once heavily dependent on government subsidies, clean energy technologies are becoming financially viable in their own right.

While renewables accounted for 17 per cent of global energy capacity in 2016, up from 10 per cent in 2010, they delivered a record 55 per cent of the total capacity added that year.

“Renewable technology is now mature enough to stand on its own,” says Gurpreet Gujral, Research Analyst for Macquarie’s Commodities and Global Markets group. “It is difficult to overstate the dramatic impact this is having. It’s changing business models and opening up markets.”

Production prices have dropped significantly as technologies mature and capital costs fall.

Gujral forecasts unsubsidised onshore wind power in Europe will become cheaper than natural gas power generation in the next four years. With subsidies in the US set to expire in 2023, he also believes that by this time onshore wind will be cost competitive to natural gas in many parts of the US market.

The renewables sector’s transition away from a reliance on subsidy is opening up new opportunities globally for the private sector to benefit from the industry’s development.

“The real tailwind for the sector has been that the cost of generation is now comparable with conventional energy,” says Macquarie Capital Managing Director Lachlan Creswell. “This has stimulated investor appetite.”

Recent developments in the energy-from-waste sector highlight the successful transition to the post-subsidies phase. As governments shift to regulatory measures such as landfill bans and landfill taxes, this has created financial incentives for the private sector to invest in energy-from-waste and recycling facilities.

Green Investment Group, acquired by Macquarie in 2017, and Covanta recently announced a joint venture to supply power, and in some cases heat, to consumers in Ireland and Britain, including the development of six new UK energy-from-waste projects.

Initiatives such as this are expected to have growing appeal in emerging markets, both as a form of energy and a waste management strategy.

The changing economics of the sector have flowed through to the negotiation of energy contracts, with leading technology corporations entering into power purchase agreements directly with renewable projects. Customers enjoy low-cost, long-term sustainable power, while the projects secure revenue certainty to keep down the cost of finance as subsidies are removed.

In 2017 the world’s largest known corporate wind energy power purchase agreement was negotiated to finance Sweden’s Markbygden ETT onshore wind farm. Under the agreement, project partners GE and Green Investment Group agreed to provide Norway’s Norsk Hydro with fixed price electricity for 19 years to power its aluminium smelters.

Forty-three corporations around the world entered such clean energy contracts in 2017. While the US still has the bulk of these deals, the biggest growth is in Asia.

“Large clients can get a long-term hedge against power price movements and align with the sustainability objectives of their shareholders and customers,” says Creswell.

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A new wave of innovation

Competitive tension is inspiring innovation across the clean energy spectrum.

As more renewable energy technologies develop, companies are investing to deliver a more reliable system, improve operational efficiency and address intermittent supply.

The three core renewable technologies of onshore and offshore wind and solar power are changing the way energy markets behave and electricity systems work.

These technologies continue to evolve, as evidenced by GE’s new offshore wind turbine, which produces 45 per cent more energy than existing turbines.

“Technology and process efficiencies are making wind turbines much more powerful and solar panels much cheaper,” says Chris Archer, Macquarie Capital’s Head of Green Energy for the Americas.

“That is really the revolution going on and what’s driving the growth in renewables.”

  • Energy storage

For a world quickly turning to green energy, supply security has become a major issue. Reliable storage methods are necessary for times when renewable energy can’t be generated, and to maintain system stability as fossil fuel power stations retire.

Innovative storage technologies and the proliferation of storage batteries are part of the next phase of the evolution of the renewables sector.

“The rise of battery storage is probably the biggest technological opportunity at the moment,” says Archer, who believes storage solutions are leading the way in technological innovation.

According to Archer, on a typical Californian summer day, the state’s grid can add the equivalent of half of the UK’s daily power generation over a four-hour period.

“Clean energy has become cheap – so the challenge for renewables is no longer generating the electricity, but having it available when you want to use it,” he says.

Projects of this nature are advancing renewables as a flexible energy alternative. Advanced Microgrid Solutions (AMS) is one company leading such projects, providing batteries to power businesses and communities off-grid.

“Grid operators need resources that can start and stop multiple times a day,” says AMS Founder and CEO, Susan Kennedy. “The resources need to be able to change direction in micro-seconds, modify the load and demand, create transparency in voltage and inject reactive power into the grid. The only technology that has these attributes is storage with the right software technology.”

In 2016 Macquarie Capital acquired a 50-megawatt portfolio of distributed battery storage systems from AMS over approximately 100 sites in the Los Angeles area. The batteries assist the local grid in supplying large load commercial and industrial customers.

  • Power generation

Innovation in storage to improve power reliability is being matched by technological improvements in generation.

This is allowing newer segments of the clean energy market to expand, such as tidal and biomass power, and driving new efficiencies in more established areas.

Improved technology enables offshore wind to be harnessed in deeper water and more challenging environments. Norway’s Equinor operates the world’s first floating wind farm off the eastern coast of Scotland, powering 20,000 households.

Turbine technology is being taken underwater to capture the world’s inexhaustible reserves of tidal energy. Atlantis Resources operates the largest project of this nature, with the potential to power 175,000 homes in northern Scotland.

Atlantis Resources CEO Tim Cornelius expects significant growth in tidal power over the next decade, offering a more predictable source of power than wind and solar power.

“The ocean covers 75 per cent of the earth’s surface so there is a vast amount of resource,” he says. “There is a real opportunity for tidal to become disruptive.”

Biomass energy is gaining popularity in some markets, sharing much of the same technology used by traditional power stations. Chris Archer says biomass energy offers the flexibility and stability of fossil fuel plants, with the potential to help retire coal.

MGT Teesside is building the world’s largest dedicated biomass plant in northern England. Due for completion in 2020, the Tees Renewable Energy Plant will power 600,000 homes.

Putting power in consumers’ hands

The evolution of renewable energy is giving greater power to consumers, enabling them to decide when and how they use electricity and control what they spend.

Advancing technologies and falling costs can help turn consumers from passive to active participants in energy networks, with an important role to play in the new democratic, decentralised and digital grid.

“What’s changing in the energy industry is consumers are taking control of their destiny,” says Susan Kennedy, Founder and CEO of Advanced Microgrid Solutions. “They are becoming the producers of their electricity and this is an irreversible trend.”

Green energy is increasingly generated locally – even at home. This has led to decentralised distribution systems that can run independently from large scale transmission networks.

“Consumers can now decide how to use their electricity, when to store it and how to pay for it,” says John Wilson, Global Industry Head of Energy for Macquarie’s Corporate and Asset Finance group. “They can switch between sources and even sell excess electricity to the grid. It’s an exciting time for them and it will only get better as technology costs continue to fall.”

Smart meters, digital infrastructure and batteries are making the grid more intelligent, to the benefit of consumers, says Prashant Mupparapu, Senior Managing Director for Macquarie’s Commodities and Global Markets group. These technologies help utilities anticipate their customers’ reserve energy and tap into it when needed, maintaining grid stability.

“The world is moving from single-point source to more distributed generation,” says Mupparapu. “Smart, localised grids are giving choice, control and transparency back to the consumer.”

The transformation has created investment opportunities in a new class of energy infrastructure and is influencing how power networks are engineered, with grid lines fit to integrate large shares of variable renewable power and ensure flexibility.

“The grid will have to get faster to balance the fact that when the wind is blowing or the sun is shining you are going to get a significant step up in production versus those periods when it’s not,” says Ed Northam, Head of Green Investment Group in Europe.

As the uptake of smart technologies and local storage and distribution options increases, consumers are bringing renewable energy to the forefront of the electricity market.

New technologies make it possible for consumers of power to deliver some of the flexibility the electricity system needs, and take some control over their own energy security by investing directly in measures that can give a secure supply at home.

Powering Asia's growth

With more than 400 million people living in Asia without power, the region is leading global installation of renewable energy – and advancing the technological innovation.

While 870 million people gained electricity access in Asia’s developing nations between 2000 and 2015, economic growth and rapid urbanisation continue to boost electricity demand in the region.

“We are witnessing the largest migration in history in Asia, with 650 million people moving to urban areas in the next 15 years,” says Ben Way, CEO Macquarie Group Asia and Co-head of Macquarie Infrastructure and Real Assets in Asia-Pacific. “That gives you a sense of the magnitude of the opportunity.”

"Economic development needs infrastructure. You need a stable energy supply chain as much as you need roads and ports – and governments need it to be affordable,” he says.

More than 50 per cent of the global growth in renewable energy in the past two years has been in Asia.

The region’s large size and different stages of economic development highlight the versatility of green energy technologies.

Distributed generation is bringing power to less developed areas, says Ana Plecas, who works for the Green Investment Group’s UK Climate Investments, a joint venture with the UK government to support developing economies as they adapt to climate change.

“We have seen many smaller scale, disruptive trends that avoid the big, centralised systems, either because there is no grid there or because residents are too poor to connect,” she says.

Emerging economies are being driven by the need for new – and clean – energy installation.

“The main focus in the developing world is the pressing need to reduce pollution levels,” says Macquarie Chief Economist and Head of Macro Strategy Ric Deverell. “This economic and social necessity is likely to see China lead the way in renewable investment, whether it be the electrification of the car fleet, or innovative ways to integrate renewable energy into the power grid”.

The world’s biggest power market, China will be the largest investment destination for renewables, with the country’s wind and solar capacity expected to increase eightfold by 2040.

In advanced economies such as Japan, South Korea and Taiwan, clean energy sources are driving the transition from nuclear and coal, especially given their need to import fuel and manage the challenges of a seismically active region.

Taiwan has launched its first offshore wind farm as part of a government plan to install more than 1,000 wind turbines by 2023, enough to power around one million homes.

Most of these projects have a lasting impact beyond providing energy to local communities, says John Jackman, Head of Development Capital Asia for Macquarie Capital.

“As well as providing clean energy, we interact with the local community in terms of development, local jobs and the local supply chain,” he says. “We aim to transfer knowledge and ensure there are benefits for the population.”

Asia also appears at the front line of innovation in renewable energy, says Way.

“Some of the breakthrough technology is being developed in China, Korea and Japan,” he says. “This is true of technology in general but also within renewables.”

Japan has pioneered waste technology since its rapid industrialisation in the 1960s, driving an 84 per cent reduction in industrial waste to landfill in the 20 years to 2010.

Following the Fukushima nuclear crisis in 2011, Japan has further reformed its electricity system in favour of renewable energy generation.

Way sees significant scope for private sector involvement in the region’s energy development. “Over the next 15 years, Asia needs more than $US20 trillion to realise its infrastructure needs – including green energy,” he says.

“You have to create the confidence for institutional capital to help fund those projects. That’s the biggest challenge for Asia today, but also its biggest opportunity.”

Creating a more efficient energy system

The pace of change in the energy sector shows no signs of slowing. The power landscape will look very different in ten years’ time as new ways unfold to foster cleaner, cheaper and more reliable energy and bring renewables further to the forefront of the power sector.

As renewable power becomes more integrated with the energy system, greater consumer control over energy use and pursuit of cost efficiencies will lead to greater network decentralisation, says Ed Northam, Head of Green Investment Group in Europe.

“I expect we’ll see a substantially transformed industry in terms of both generation solutions and a decentralised model. One that draws heavily on clean power and where generation is located increasingly at the point of consumption,” says Northam.

New demand for clean power will also stem from governments’ efforts to reduce carbon emissions in heating and transport and attract private investment to meet the scale of global energy investment required.

“The regulatory framework and tariff regime is what creates greenfield opportunities,” says Macquarie Capital’s Head of Development Capital Asia, John Jackman. “What’s important is the long-term consistency of government policy.”

As system-wide innovation in the renewable sector makes it a more reliable source of power, and one which helps individual consumers to become more energy self-sufficient, entire energy markets will become more efficient.

“Getting better at how we use energy, working out where the major load is and managing that load in a smarter manner,” says Northam. “That’s what it is all about – enhancing the efficiency of the energy system as a whole.”

Read about Macquarie’s long-term commitment to renewable energy