January 18, 2016
Coming Tailwinds for Solar and Renewable Energy Products
by Anthony Wright
The tailwinds for the adoption of solar energy have shifted. As a trend watcher, there are a few key insights I’d like to share. In spite of cheap gas prices and lack of an economic incentive to move away from fossil fuels, developments over the past year have seemingly established an inflection point for significant tailwinds in solar energy. This shift marks a move away from economic drivers to regulatory drivers as the prime mover for the adoption of solar and other renewable energy technologies.
In December 2015, 196 nations ratified an agreement on carbon emission targets to prevent climate change. The Conference of the Parties (COP) was the 21st annual meeting of the United Nations Framework Convention on Climate Change. The agreement reflects an international shift in priorities, with the ultimate stated objective to hold climate change to 1.5° to 2° C. The biggest challenge to meeting this goal is faced by the largest CO2 emissions producer (namely, China) and the largest CO2 emission producers per capita/person (namely, United States, Australia and Saudi Arabia). Only 10 percent of the global population produces about half of emissions.
I believe that years from now, we will look back at these events and note that this was the inflection point that energized the investment and production of a renewable energy global economy, led primarily by solar. There are three events that converged this past month which should be noted.
196 nations sign the COP 21 Climate Agreement. Climate Change is an issue that will continue to be an influencer of geopolitical and global economic policy for years, if not decades, to come. This factor is significant because as temperatures continue to climb, there is a confluence of activist, government and private industry call to action.
The COP 21 Climate Agreement signed in Paris represents a watershed movement of unprecedented global collaboration. The key takeaway is the global community has agreed to regulatory measures that will drive capital investment and funding for renewable energy technologies, such as solar, and disincentives for fossil fuel technologies such as coal, oil and natural gas.
Congress extends the 30 percent Investment Tax Credit. The top strategists and lobbyists for the solar industry have been working tirelessly to get the Investment Tax Credit (ITC), which was set to end in 2017, extended. The ITC subsidizes the solar investment to make renewable technologies, such as solar energy, cost-competitive with fossil fuels.
In a compromise for ending the 40-year export ban on crude oil, Congress passed a spending bill that extends the ITC for five years, through 2020.
As a result, economists estimate 25 additional gigawatts of solar capacity will be added to the market in five years, fostering $40 billion in incremental investment.
This investment is in stark contrast to the steep declines in oil and mining capital investment. One private equity firm estimates 40 percent of global industrial fixed investment was coming from oil and gas and an astounding 70 percent in the United States, due to the domestic shale oil boom.
Due to low commodity prices, U.S. energy-related capital expenditures (capex) declined 20 percent in the first half of 2015 and continue to contract at a rate of 24 percent annually
and the industry has shed over 250,000 jobs globally.
Capex in the oil and gas industry is forecasted to fall to a six-year low of $522 billion, down $73 billion from the $595 billion estimated capex investment level of 2015.
Business is going green. Corporations have been preparing for the green revolution and climate change through corporate responsibility and sustainability programs for years. It was a matter of corporate interests to shareholders and investors to do so (primarily to limit activist attack). But now that has seemingly changed. As the Millennial workforce and consumer base grow, which is increasingly environmentally conscious, corporations have adopted a sense of economic responsibility to strive for carbon neutrality.
At the COP 21 summit last year, it was notable that representatives from several major multinational corporations were present as well. Some see this as hypocrisy, but I believe businesses are innovating to stay ahead of the fossil fuel end game. Some of the major sponsors of the COP 21 summit were fossil fuel corporations.
I believe the solar industry may become a “wild card” for the U.S. economy and the energy sector in 2016. Will we see a rise in private capex investment in solar that counterbalances the cuts in oil and gas? Will the solar industry create new jobs that sustain economic growth domestically? Will new markets emerge perhaps in regions more favorable to solar energy development and manufacturing? With these extended tax credits, will we see a greater emergence towards zero net carbon footprint homes and building requirements (both in residential and commercial construction)? These are the questions I will be looking to find the answers to as the solar winds shift in this new year of 2016.
Questions or comments? Email me directly at Anthony.Wright@quanex.com.
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January 18, 2016 by Anthony Wright