The cost of renewable energy is declining, making it more attractive for commercial and private use. These shifting market conditions create huge opportunities and risks for investors, along with major implications for markets.
As things look sunnier for solar, many are worried about coal’s financial feasibility. According to former vice president and environmental activist Al Gore, “We now have $28 trillion of carbon assets mark to market on the books of sovereigns and multinationals. No more than one third of those assets can ever be put to their intended use and burned. That means that we almost certainly have $22 trillion of subprime carbon assets which, at some point, will be recognized as having a value of not what’s marked on the books, but a value of roughly zero.” If this assessment is correct, investors have ample reason to reconsider their energy investment strategies.
Coal Declines on Both Sides of the Atlantic
According to the Institute for Energy Economics and Financial Analysis, coal’s share of the electricity generation market has dropped from 45% in 2009 to 30% in 2017. This is having an impact on coal’s financial performance. Half of European coal plants Europe are cash flow negative today. By 2030, nearly all will be.
Coal generators have been lobbying hard in Germany and elsewhere, but EU regulators consider them “problematic” since they “risk distorting” competitive markets. They have put limits on member states’ ability to adopt capacity payments.
Utilities are fighting back, pushing for changes to market rules to benefit less-competitive plants. A push by U.S. Energy Secretary Rick Perry to prop up existing coal and nuclear plants in the name of national security was rejected by federal regulators in a bipartisan 5-to-0 vote.
Wind and Solar Start to Add Pressure
While some damage to coal’s profitability was caused by natural gas, made cheap and plentiful by the “shale revolution,” the low cost of renewable energy is taking its own toll.
Wind power costs in the windy Great Plains have been more or less consistently under $30 per megawatt-hour for the past five years, according to Department of Energy data. New, larger turbines continue to drive down costs and open new areas to development.
Next in line is solar. In December 2017, Austin Energy announced a winning bid for a solar project in Texas at rates as low as $21 per megawatt-hour.
Even offshore wind is starting to compete, with projects off Germany and the Netherlands claiming they can be built without subsidies and survive on the income from market power prices and carbon credits.
The story of renewables is increasingly a story of tech disruption. As coal’s capex goes up and renewables become cheaper, it’s hard to imagine that the market will not respond. If trends stay as they are, investors may increasingly see renewables as financially prudent, in addition to being environmentally prudent.