Clean energy 2011: Musk, Crane, Khosla and Jurvetson brighten gloom

This year ends on a downbeat note amid the gloom of the US debt and eurozone crises. In 2011, financial commitment to renewable energy stood at £2.5bn. Although the Department of Climate Change and Energy tried to spin this as a boost to the UK economy, it's a sharp fall from the £7.1bn invested in 2009. It is also a long way off from the £200bn required to stimulate the development of low carbon energy generation and tackle the perhaps more pressing energy capacity gap facing the UK.

This is also more than the entire global investment of $185.1bn in wind, solar and biomass according to Bloomberg New Energy Finance figures cited in Ernst & Youngcountry attractiveness indices (CAI) for national renewable energy markets.

Take a look at Ernst & Young's polls on pages nine and ten, which show where investor confidence has been undermined the most. It would seem that the $50trn budget deficit is small beer compared with the eurozone crisis.

The UK still holds it own at joint fifth (dubiously with Italy) in the top 10 all renewables index. E&Y report quarterly. I can't help but feel these rankings will change again come the next report for the UK and its European neighbours.

Figures soon to be published from the Cleantech Group show that $8.398bn was invested globally in cleantech VC last year. That's a drop from 2008's high point of $9.556bn but it's still an improvement on the past two years.

Most of that VC money is being spent in the US, with investment levels in Israel, India and China dwarfing those in Germany, Britain and France in the last quarter.

These are the kinds of figures I quote at people when I tell them that I report on clean energy - most of the time they exhale in sympathy, assuming the worst in the industry given the difficulties facing the renewables industry in the US, UK, Spain, Italy and Germany.

But such pessimism is not necessary - it's a bit like diagnosing terminal cancer in a patient with a broken leg. At some point, the broken economy will recover. We should be reassured that there is less capital in the industry - discipline and due diligence have to be more stringent than ever. The last thing the energy industry needs is a dotcom boom and bust cycle.

Companies such as Vestas might wax and wane on its commitment to manufacturing in the UK and feed in tariff schemes are being trimmed across Europe.

But venture capitalists such as Vinod Khosla and Alan Salzman are not about to give up on clean energy. Capital invested has a forcing effect on the rest of the industry - investment in innovations is where energy technology begins. For example, without Elon Musk and the success of Tesla, I'm pretty certain that the Volt and Ford's electric Focus would still be in the R&D lab.

Musk's optimism is well founded, even though his claim that Tesla's new Model S would be profitable by 2013, just months after the first deliveries of the $49,900 car.

But for Musk, the success of Tesla is a more earthly reward than his ambition of populating other planets with life which he dreamt about at college, before founding PayPal with Peter Thiel.

Musk's optimism is earned despite not quite turning a profit at Tesla, although its stock trades higher than the traditional automakers.

But Musk is not unique. He kicked off last year's west coast clean energy conference season at the Cleantech Summit. These conferences offer flashes of optimism that flare brightly amid the economic gloom.

If you'd like to cheer yourself up, spend some time listening to what these upbeat "thoughtleaders" have to say about their industries.

In this first one, Musk compares starting a company with "eating glass staring into the abyss of death…" but predicts that electric transport will be widespread - cars, trains and even planes.

In April, NRG Energy's David Crane explained how electric vehicles would take off in the US - and why as an electricity generator and retailer, it made sense for his company to stay ahead of the curve.

In August, Jesse Berst gave the best explanation I've seen so far as to why the US needs smart grid at the National Clean Energy Summit. Secretary Chu and Mabus are also worth listening to …

At the Going Green Conference in September, Vinod Khosla talked about his $1bn in profits so far from advanced biofuels, and Steve Jurvetson gave an almost evangelical exposition on synthetic biology.

However you end the year, hopefully these clean energy visionaries will be a source of inspiration for 2012.

What industry thinks of the Electricity Market Reform's £200bn bill

Michael Lewis, managing director Europe, of EON Climate and Renewables, welcomed the government's white paper on Electricity Market Reform, in particular the contract for difference which will be set in 2013. But told delegates at the Countdown to 2020 conference in London that utilities could not front up the £200bn of investment required for new generation.  

He said: "Our balance sheet simply doesn't stretch far enough to deliver these targets. The collective balance sheets of the utility industry doesn't stretch far enough and with the planned or actual closure of the old nuclear plants and newer plants in Germany our balance sheets have been hit. We have to be very clear that the returns are at the right level. The contract for difference will provide that clarity long term. The sooner [it's introduced] the better."

He also welcomed the carbon floor price: "This is a very important piece of the overall Electricity Market Reform proposals. We've seen the carbon price sink to very low levels in the recent past - €7.40 a tonne - that isn't going to incentivise much at all in low carbon generation. The recession has reduced emissions.

"The EU cap has achieved the goal of reducing emission but not incentivised the new investment we need for the longer-term targets, which is why a floor on carbon is essential to provide those long term signals and long term incentives."

But Lewis pointed out concerns about the integration of renewables. Some of these concerns are part of the consultation launched in the technical update published by DECC last week which included plans for a market-based capacity mechanism and a decision that the system operator, the National Grid, should deliver the Feed-in Tariff with Contracts for Difference and the market - a model similar to that operated by California's Independent Systems Operator.

Lewis advocated two separate markets - one for capacity and one for energy: "If you have a very large proportion of intermittent capacity on the system - 30GW-40GW - there will be large periods where prices drop to very low levels. But if you don't have a capacity mechanism you will end up with a very volatile power price with long periods of low prices and short periods of very high prices when capacity has to earn its capital cost through the energy market for a very short period of time.

"By creating two separate markets, one for capacity, one for energy, you create more stable power price planning while ensuring that capacity runs fewer hours and gets the necessary returns."

"£200bn - that's what electricity market has to attract in terms of financing. That's a huge challenge. We're hoping that the figure won't be that high because we've made a commitment to reduce costs - including a 40% reduction in offshore wind by 2015."

Anders Søe-Jensen, president and founder of the offshore division at Vestas made no apologies for the high costs of offshore by saying that the industry was at the start of its innovation/technology cycle. But he warned that although the government target of £100/MWh by 2020 was ambitious, the industry had to bring down costs or it would kill itself.

He said: "Offshore wind is a higher cost energy because we are where we are in the learning curve. And we are all working to bring down the cost of energy. We are at risk but we all have to commit to bringing down costs otherwise we're going to kill our industry."

Vestas was working with Decc and the Crown Estate which issues the seabed permits to lower costs.

But he said the value to the UK economy would go beyond cheaper offshore electricity, pointing to a report from Oxford Economics which said that the industry could create 58,000 new jobs around the UK, many in deprived coastal areas.

Jensen said although Vestas had plans to build a plant at Sheerness that could only happen if the market was created through political and public support. "If the market is here, we will be here," he said. "With the wind resource in the UK, 169GW could be installed that would … make the UK a net exporter of electricity.

"In future, I can imagine a bond market for wind," he said in later comments.

Martin McAdam, chief executive officer of wave power start up, Aquamarine Power, said that creating the marine power industry would require a more fundamental shift back to more domestic manufacturing in the UK.

He said that although he attempted to keep as much of the investment in the Oyster local to the Orkney economy where a prototype was deployed - $4m of a total $20m - it was impossible to order the steel castings anywhere but China.

He said "We need to go way back in terms of where the UK has come from and where it's going. So we saw this huge change under Margaret Thatcher to move from a manufacturing economy to a service economy. There's nothing wrong with services. The financial services are an important part of the economy despite all the turmoil we've seen.

"But if you rely purely on services and you make nothing then you're wholly dependent on imports and that means you have quite an unstable economy. I firmly believe we have to get back to understanding that we can manufacture. A lot of this was driven by ideology at the time - we had a very high unit labour cost in the UK. We were over-unionised. So we talked ourselves out of having a manufacturing base. Siemens in Germany is expanding and they're not saying we're going to make this elsewhere in China. Germany has in the last 10 years increased production in the car industry."

He said there was no reason why the UK couldn't create and export market for marine power in the way it had for offshore oil and gas.

"A quarter of Europe's wave resource is in the UK. It makes a huge amount of sense for the UK to create an industry around these new technologies.

"But to move this industry to the next stage - we need the ecosystem. We need the supply chain to participate. I need other competitors, I need financing solutions. All of that benefit comes because we have an ecosystem that supports the new infrastructure.

So is the £200bn electricity bill worth it?

"£200bn might seem like a lot of money but in the context in the energy that this country requires today and will require in the future it's tiny. If we had to re-create the energy infrastructure in the UK its value is far greater than £200bn."

But, he admitted: "The early days are the hardest."

Hard days may become harder unless it becomes clearer where this £200bn is going to come from.

UK's £200bn electricity bill could be worth wholesale market access

£200bn is a lot of money for any country, even in good economic times. But £200bn is the electricity bill currently facing politicians, utilities, power generation companies and consumers just to keep the lights on. But as Europe's debt crisis demonstrates, this kind of money is not going to be easy to come by and the UK this week rejected calls to boost eurozone coffers with €30bn.

In July, the UK's Department for Energy and Climate Change released its much-anticipated white paper on Electricity Market Reform. Planning our electric future: a White Paper for secure, affordable and low-carbon electricity sets out the UK's particular problem: 19GW (a fifth) of existing capacity is expected to come off the system between now and 2020 (compared to around 6 GW of capacity coming off in the last decade), principally due to EU environmental regulation and ageing plants closing.

The UK is also the only country in the world to have legally binding targets on carbon reduction - even though the government has never been clear about what penalties it would impose against itself. Britain's target of an 80% carbon reduction by 2050 requires large-scale decarbonisation of the power sector. The UK's Coalition government is still committed to these targets - the Climate Change Act 2008 was Tory legislation, after all. 

Despite strained British political relations with France and Germany, relations between the UK and the European power companies is stronger than ever, with EDF Energy, RWE npower, E.ON and Centrica expected to find a way to bridge the capacity gap.

But that is the consequence of "liberalising" the power industry in the UK, beginning with Margaret Thatcher's programme of privatisation in the 1980s. The mere thought of foreign-owned utilities would have bureaucrats and Congressmen reaching for their metaphorical rifles in the US where the energy industry often bears the characteristics of a monopoly.

Instead of merely an investment opportunity in which UK consumers line the pockets of private German utilities or French state-owned companies, Coalition politicians must surely have thought through the benefits to the UK economy which faces long-term slow growth.

DECC claims that the cumulative benefits to the economy of Electricity Market Reform are expected to be over £9 billion higher than without policies over the period 2010-30.

And for those who have to pony up the real costs, DECC says that the average domestic consumer bills are expected to be 15% lower in the five-year period up to 2030 than they would be under current policies.

The white paper puts forward four key proposals to increase investor and consumer confidence: 

• a carbon price floor [which given its low price will be welcome and should boost investment in low carbon technologies];

• new long-term contracts (Feed-in Tariff with Contracts for Difference) to provide stable financial incentives to invest in all forms of low-carbon electricity generation. A contract for difference approach has been chosen over a less cost-effective premium feed-in tariff; [to be decided in 2013]

• an Emissions Performance Standard (EPS) set at 450g CO2/kWh to reinforce the requirement that no new coal-fired power stations are built without CCS, but also to ensure necessary short-term investment in gas can take place; and

• a Capacity Mechanism, including demand response as well as generation, which is needed to ensure future security of electricity supply.

Earlier this month, Charles Hendry, DECC energy minister, told delegates at the Countdown to 2020 conference in London:

"Securing the £200bn necessary is integral to keeping prices affordable. There is a price for energy security, but it's nothing like the price of energy insecurity. It is no longer a case of do we have energy security or low carbon? We can't have energy security without low carbon technologies and without a full role being played by renewables in that mix.

"The starting point for the changes that we've made over the last 18 months is admitting that business as usual is not an option if we're going to get investment in our energy infrastructure at two times the rate this decade as was achieved in the last decade. There has to be a fundamental change to the market structure to incentivise that."

The challenge in the UK was greater than in other European countries, he said.

"That £200bn over the next decade compares to about €1trn in all 27 member states. Over 1/5th of the energy investment in the EU needs to be here in the UK.

"As we try to make up for lost time, we do need to have additional measures such as the carbon floor price introducing it at a predictable level from 2013 - 2020. That will bring £30-£40bn of new investment to the low carbon sector."

Hinting at the importance of reductions in corporate tax from 28% to 25%, Hendry said: 

"The companies looking to invest in the UK are global companies looking at international opportunities and if they don't see something which is better in the UK - an easier way of doing business here - then they will look and invest elsewhere. We need to look at other issues which threaten or encourage investment."

Hendry focused on the importance of the development of the offshore wind industry in the UK, claiming that the country could kick start the global industry. The UK already has the most installed capacity for offshore, which could rise from 1.3 GW to 18 GW by 2020.

He said: "Between September 2011 - October 2011 we saw £940m of new investment decisions in the renewable energy sector coming forward in the UK and the promise of 1,300 jobs. There are some incredibly important investment decisions which will be coming forward in the next few months in terms of the supply chain opportunities. Any company which is serious about wanting to play in this area on a global basis must look at the UK if they want to be in the offshore wind sector. We want to be the best market for developing it we will have the biggest market in the world and we've also got tremendous enthusiasm to make it happen."

He said that the world's first Green Investment Bank would play an important role, but when it opens its doors to renewable financing, it will start with £3bn in 2013. But it is hoped that this relatively modest sum will leverage private investment "to get companies through the valley of death through the difficult period where they often struggle to get investment and where we can ensure that we can create a real vitality in this country".

But the road to 13GW offshore is not going to be cheap, he acknowledged. Republicans talk about "affordable power" when they mean cheap fossil fuel generated electricity. The difference is that Conservatives are not afraid to include the other costs associated with polluting sources of power in their calculations - check out the excellent 2050 Pathways calculator here.

But in language that would be difficult to imagine from many US right-wing mouths, Hendry explained his reasoning behind the recent reductions in feed in tariffs.

He said: "I found it impossible to justify why people on low incomes would be paying a surcharge on their electricity bills for people with 10-15,000 to invest to get a guaranteed rate of return for 12% tax free for 25 years. That is not the right way to create a sustainable industry. We're taking this back to the [original] principles … and that was an expected rate of return of 5% and as the cost of installations has gone down, the expectations has always been that the cost of the support would come down at the same time. 5% is still better than most investors can find anywhere else especially guaranteed and tax free."

But the FIT proposals have caused much disruption in the UK's solar industry which has managed to take its challenge to the high court, which resulted in the energy secretary Chris Huhne, being likened to Macbeth. The government now faces a judicial review after the high court ruled that slashing the small-scale feed in tariff rate from 43.3p to 21p per kWh was "legally flawed".

This is just one of many emerging signs that the Coalition government is placing more focus on wind at the expense of solar as it believes the potential is greater than say small-scale PV.

But without any wind turbine or supply chain manufacturing industry, where is the UK's economic gain? One thing the DECC white paper doesn't mention, nor does its subsequent technical update, is the Internal EU Electricity Market which is expected to be up and running by 2014. From March next year, member states must unbundle transmission systems and transmission system operators. This will of course massively expand wholesale electricity markets, but also gives greater credence to the UK's ambitious offshore targets.

The UK already has 3.5GW of interconnection with mainland Europe, around 5% of peak UK demand. Most of that electricity comes onto the UK grid from France's nuclear power stations. But there is scope for that to change and examples of trading excess electricity to other EU countries are growing, particularly in Spain. 

Designing policy and gearing renewable capacity for Europe's wholesale market could be the main driver behind the Coalition's commitment to offshore wind and part of its strategy for economic growth.  Although Huhne or Hendry wouldn't necessarily admit that.

But turning the UK from a net importer of energy to a net exporter might comes with a high price tag - a price possibly worth paying as the benefits of selling electricity to Europe will be worth more than £200bn.