Angus McCrone, / Chief Editor / Bloomberg New Energy Finance
It’s January, so that means it’s time for BNEF to look forward in time – and try to predict what 2018 will hold for the clean transition in energy and transport. Luckily, there is a new Star Wars film out, and I have tracked down the far-sighted Master Yoda on LinkedIn.
To summarize, the Force will be with clean energy and transport this year, but there is also a Dark Side.
OK, not all of this forecast comes from Master Yoda. My colleagues from Bloomberg New Energy Finance’s analyst teams have also had a hand in it, and their detailed predictions are set out below, covering everything from solar and wind to battery storage and electric vehicles, to intelligent mobility and North American gas and international LNG, to U.S. policy and the dynamic markets of China and India.
But first, here are a few broad-brush pointers on what could drive the transition forward in 2018, and what could disturb it. The continuing plunge in costs for solar and wind energy, and for lithium-ion batteries, means that market opportunities will keep opening up for clean power, storage, and electric vehicles. In 2017, we saw new records set for the tariffs in renewable energy auctions around the world, at levels – for instance, $18.60 per MWh for onshore wind in Mexico – that would have been unthinkable only two or three years ago.
In batteries, we estimate that lithium-ion pack prices fell by no less than 24% last year, opening up the prospect, with further cost improvements, of EVs undercutting conventional, internal combustion engine cars on both lifetime and upfront cost by the mid-to-late 2020s.
Detailed analysis by our teams suggests that these cost reduction trends are set to remain in place in the years ahead, thanks to economies of scale and technological improvements – although no trend is a straight line, given the importance of the supply-demand balance and commodity prices.
The upswing in the world economy in recent months could also be helpful for the transition in energy and transport, since it has bolstered oil and coal (and, to a lesser extent, gas) prices, so tipping the competitive comparison a little further toward wind, solar and EVs. Investor confidence in our sectors has certainly been quietly improving, with the WilderHill New Energy Global Innovation Index, or NEX, which tracks the performance of around 100 clean energy and transport stocks around the world, climbing 28% between the end of 2016 and January 11 this year.
However, and this is where the Dark Side comes in, there is room for concern about some of the risks in the wider world at the start of 2018, and about how waves created outside could wash into the energy transition. One particular risk is the uneasy co-existence of the most buoyant financial markets for more than a decade with the potential for a political or geopolitical shock – perhaps a collision between President Donald Trump and Robert Mueller, the special counsel investigating Russian interference in the U.S. presidential election; or a miscalculation on the Korean peninsula; or a military clash between Iran and Saudi Arabia.
There is a more conventional market risk. A healthier world economy has raised the likelihood of tightening monetary policies in not just the U.S. but also Europe and Japan. Long-term interest rates have recently been rising – the U.S. 10-year up from 2% in September to more than 2.5% now – and a bigger move in the same direction could start to affect the cost of capital, and therefore the relative competitiveness, of high-capex, low-opex technologies such as wind and solar.
With that intro, here are BNEF’s ‘‘10 Predictions for 2018’ ‘10 Predictions for 2018’:
- $330 BILLION CLEAN ENERGY INVESTMENT, AGAIN
BNEF’s clean energy investment figures for 2017, published today, show that last year came in pretty strongly – at $333.5 billion, up 3% on a revised total for the previous year and within 7% of the all-time record, set in 2015. I am going to plump for a very similar number in 2018 because the factors pushing for a higher figure this year appear to be fairly well matched against those arguing for a lower one.
First, on the bearish side, the remorseless reductions in solar (and to some extent, wind) project capital costs mean that the same billion-dollar sum will buy more gigawatts than a year earlier. And offshore wind investment could fall short of last year’s $20.8 billion unless the French projects come out of the slow lane and get financed in 2018.
On the bullish side, public markets investment could well be higher than 2017’s modest $8.7 billion, the lowest for five years – unless, of course, we do get a general stock market upset. One firm, electric vehicle battery maker, Contemporary Amperex Technology, has filed for a $2 billion initial public offering in Shenzhen. Also, our solar team is predicting further growth in additions in 2018, and so are its colleagues in energy storage (see the specific predictions from both below). These may be enough to cancel out the capital cost reductions.
- SOLAR TO 100GW – AND BEYOND!
Global solar installations will be at least 107GW in 2018, up from the higher-than-expected 98GW last year, and new countries will become established as significant markets. In the total global forecast for PV this year, China still dominates, with 47-65GW. However, this is the year that Latin America, south-east Asia, the Middle East and Africa will make up a measurable slice of the total. For instance, Mexico is likely to be a 3 GW-plus market in 2018, and Egypt, the U.A.E., and Jordan between them at 1.7-2.1GW.
China’s boom, which saw an extraordinary 53 GW installed in 2017, is still fundamentally irrational – the mechanism to collect the subsidies to be paid out has not been determined, and many of these projects are being built before they have secured ‘quota’ from the government to have access to the subsidy pool. However, it looks as if Chinese state-owned developers and investors will build them anyway, on the assumption that the government will find a way and, if not, compensation for the power itself will prevent a total loss.
A mandatory Renewable Energy Credit may be introduced in 2018 in China and might answer part of the ‘where does the subsidy come from’ question. About half the new build in China will be distribution-grid-connected, ie smaller projects with the ability to sell to local power consumers. These are not subject to quota, but are limited by the ability of large developers to put together volumes of small deals.
(Jenny Chase, head of solar)
- WIND INSTALLATIONS EDGE HIGHER AGAIN
We expect the slow recovery to continue in 2018, with additions reaching about 59GW, before a new record is established in 2019 at around 67GW.
Global wind installations – onshore and offshore – were some 56GW in 2017, slightly above 2016’s 54GW but well below the record of 63GW reached the previous year. We expect the slow recovery to continue in 2018, with additions reaching about 59GW, before a new record is established in 2019 at around 67GW, as the U.S. Production Tax Credit nears expiry. China and Latin America are likely to be the two regions seeing growth between 2017 and 2018.
In offshore wind, the main markets will continue to be the U.K., Germany, the Netherlands, and China, but with more signs this year that the U.S. and Taiwan are preparing the ground for a string of projects in the 2020s. One of the highlights in 2018 will be the result of the Netherlands zero-subsidy auction for the Hollandse Kust I and II sites, totaling some 700MW. Two bidders (Vattenfall and Statoil) have confirmed their participation, and we expect others to emerge. Competition between a strong selection of developers would be another sign of the much-improved cost-effectiveness of offshore wind.
(Tom Harries, senior analyst, wind)
- BATTERY PACK PRICES FALL, DESPITE METAL PRESSURE
Lithium-ion battery pack prices will continue to drop in 2018, but at a slower pace than in previous years. Cobalt and lithium carbonate prices rose 129% and 29% respectively in 2017. This will start to increase average cell prices in 2018, leading to many headlines about how the EV revolution and the rise of energy storage are under threat. Despite this, we expect average pack prices to decline by 10-15%, driven by economies of scale, larger average pack sizes and energy density improvements of 5-7% per year.
Falling capex costs, an increasing need for flexible resources and greater confidence in the underlying technology will continue to drive energy storage uptake. Global storage deployments in 2018 will exceed 2GW/4GWh, and South Korea will be the single largest market, for the second consecutive year. The market is still fragile, however, and some expectations about the speed of deployment are not realistic. Batteries are hyped as the answer to all problems with intermittent renewables, including price cannibalization caused by the merit order effect, system-level balancing and network constraints. Policies rather than economics alone will determine the rate of uptake. Energy storage remains poorly understood by many within the energy sector and by policy-makers. This matters hugely since investing in alternatives such as natural gas power plants with a 25-plus year lifetime will either create a long lock-in period that would limit opportunities for other flexible resources such as storage or result in stranded assets further down the line.
(Logan Goldie-Scot, head of storage)
- ELECTRIC VEHICLE SALES AT 1.5 MILLION
Global EVs sales will be close to 1.5 million in 2018, with China representing more than half of the global market. This will represent a rise of around 40% from 2017, a slight slowdown in the growth rate as China tapers off direct subsidy support in preparation for the introduction of its EV quota in 2019. Sales there will probably drop in the first quarter and then recover during the rest of the year. Europe will hold its spot as the number-two EV market globally. Urban air quality concerns are mounting in European capitals, and diesel’s fall from grace will benefit the EV market. Watch Germany in particular as EV sales there doubled in 2017 and could double again in 2018. North America should finish 2018 with EV sales of around 300,000, but Tesla is the wildcard there. If it can deliver on its production targets, U.S. sales could be much higher.
(Colin McKerracher, head of electric vehicles)
For the other five trends, https://goo.gl/wLqjH6
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