Welcome to the 2nd quarter of the Decisive Decade—the 10-year period between 2020 and 2030 in which we need to cut greenhouse gas emissions by 50%. Though we’re still far away from transforming global energy systems, three recent game-changing developments should give us hope. These are examples where the “rules” governing a system just went out the window and our assumptions must be re-evaluated. It’s not a market cycle, it’s the market shifting altogether.
1. Renewables freed from the PPA: US solar developer Intersect Power has done something that fellow renewables developers have been dreaming of and few have achieved. Intersect has convinced its investors that it can build and finance solar projects without long-term power purchase agreements (PPAs). The rule for renewables development had generally been that private financiers need stable, long-term PPAs in order to lend against a project. Not anymore, it seems.
PPAs basically ensure a project will always get paid for the electricity it generates, essentially guaranteeing investors they’ll make their money back if the project delivers. PPAs have been the lifeblood of renewable energy revenues around the world. However, many other types of physical infrastructure are financed without long-term revenue contracts. Take real estate (or even fossil fuel-fired power plants), where funding is provided on the basis of projected (rather than contracted) revenues. In the power sector, selling your electricity based on real-time market prices is called selling “merchant”, and financiers have thus far been reluctant to give any credit to volatile merchant revenues, preferring to stick to the safe waters of PPA-backed cash flows. Intersect’s recent fund raise means that investors are willing (or perhaps forced?) to credit merchant revenues too. Let's hope Intersect sparks a new wave of merchant finance!
If the rest of the market (i.e. both developers and investors) also move in this direction, we’ll have a much bigger renewables market. Developers will no longer be constrained by having to secure long-term PPAs (often the most difficult part of project development). They will be able to find a good site, get their permitting, and take their chances on the open market, betting that power demand will go up as we electrify everything from cars to homes. They will be able to raise more money from more investors and hopefully construct more renewables. This would be a net-positive for the climate.
2. Banks are giving out renewables development loans: The rule was that banks really only wrote cheques for wind & solar projects when they were "fully de-risked", but that is hopefully changing. Banks are risk averse; they don't really care if a project increases in value, they mainly just want to be paid back. And so they used to finance renewable energy plants only when the project had been de-risked and was "shovel-ready", i.e. when the developer had secured a PPA, finished permitting, and everyone was ready to start construction. But this left developers with a big problem: where would they get the money to de-risk projects? To take projects to construction?
A renewables developer has a very difficult job. To get a project ready for construction and set for project financing, they must walk a years-long tight-rope, pulling together the exact right set of documents and approvals at exactly the right time, in exactly the right way. There are expensive feasibility studies and costly engineering reports, non-negotiable PPA deposits and steep grid interconnection fees. Doing all that unsexy "development" work takes time and money. That money usually comes in the form of equity from their owners and that equity is limited and expensive. They would much rather have flexible, low-cost debt from their banks.
Banks have largely been weary of giving out these development loans because they are riskier than loans backed by advanced-stage, contracted, shovel-ready projects. What if a developer's early-stage project pipeline doesn't come to fruition and the bank foreclosed? It doesn't want to own an early-stage portfolio; it's not in the business of developing renewables projects! It would rather not foreclose on anything, but if it had to, at least an advanced-staged project would be easier to sell onto someone else and get over the finish line. Well, with Arevon securing its $400 million green loan, that dynamic might have changed. It seems there's more and more pressure on banks to fund renewables and so developers might finally get their development loans. This would enable them to build more clean energy projects and that would benefit us all. Let's hope the Arevon deal opens the floodgates!
3. The US is building factories again: As long as I can remember (and I’m a millennial... so it’s not that long), the rule was that you didn’t build factories in rich countries like the US because labor was too expensive. On the back of your iPhone it said, “designed in California, made in China”. American multinationals reaped the benefits of globalization by outsourcing labor-intensive manufacturing to the developing world. For years, shareholders, corporate executives, and consumers rejoiced, while American labor faced decreasing real wages and former industrial regions were abandoned. We all saw the political backlash materialize in 2016.
But now American factories are back and they’re set to spring up in her heartland. According to a recent Bloomberg report, “the construction of new manufacturing facilities in the US has soared 116% over the past year”. And these billion-dollar factories of tomorrow can help us fight climate change:
- LG and Honda just announced a $4.4 billion US electric vehicle battery factory while Toyota is planning a new battery plant in North Carolina.
- The US Department of Energy’s Loan Program Office recently announced a $2.5 billion loan for a battery manufacturing facilities in Ohio, Tennessee, and Michigan, belonging to General Motors and LG. It is an example of the US government directly supporting domestic manufacturing. Long may it continue.
- A slew of massive new solar manufacturing facilities were announced both before and after the landmark Inflation Reduction Act. It shows this trend began even before policy support really kicked in.
Factories like these are often accompanied by welcome announcements of job creation – a boon for local politicians, especially leading up to mid-term elections. However, those very policy-makers are also sometimes criticized for giving away too much taxpayer money to attract these hugely profitable, multi-multi-billion dollar global corporations. What is the right balance? When does the tax break justify the job creation? How much should American households pay to bring back factory jobs from China? From an emissions perspective, subsidizing electric vehicles and renewable energy is a far better (and far smaller) use of taxpayer money than the $5.9 trillion that goes to subsidize fossil fuels every year. As a US taxpayer I’d want my taxes subsidizing climate-focused manufacturing. And if those clean energy factory jobs get politicians re-elected, great. It'd show democracy functioning.
Which rules can we break next?
Many rules are being re-written and this is a sign of effective advocacy, policy-making, and corporate decision-making over many years. We need to see rule-changes in other seemingly intractable systems too. There are many "rules" I would like to see broken:
- Politicians can’t win election (or re-election) on a platform of climate action
- Building transmission lines will continue to be an expensive nightmare
- Solar panel efficiency will remain stubbornly stuck at 20-odd percent
- EV charging will never be profitable
- New nuclear plants are too expensive and complex to build
- Batteries can only store power for a few hours
- Carbon capture doesn’t work nor scale.
- Earth doesn’t have the minerals in the ground (or processing capacity) to build the renewables/cars we need.
The list is endless and I'd love to hear your suggestions. Rules are meant to be broken and these are all rules that we must break. We are at the foothills—the ankles—of many an S-curve and that’s why progress can seem slow and things can feel hopeless. Do not lose hope. These three game-changers show how fast systems can transition when their constituent parts are lined up correctly. With smart policy-making and proactive corporate citizenship, we can change the game, defeat climate change, and build a better world. Buckle up for Q2 of the Decisive Decade. What rules are you going to break?
