Recent developments could bring a sizable clean energy boon to the world.
Throughout the week, Longitudes is featuring content from DAVOS 2016. For more on this year’s theme, “The Fourth Industrial Revolution,” check out our earlier posts DAVOS 2016 and The Fourth Industrial Revolution.
In November 2015, the Breakthrough Energy Coalition (BEC), a team of private investors, announced a multi-billion dollar fund to “get energy technologies out of the lab and into the marketplace”.
The scope of the initiative, including the marketplace, is relevant: development and demonstration of new energy technologies are no guarantee for successful commercial deployment.
“Investors and entrepreneurs in energy technology need to develop an ecosystem from day one. ”
Three key reasons contribute to the challenge of commercializing new energy technologies:
Finalizing all stages of bankability reviews requires months and years as opposed to weeks and days in other areas of high technology.
At-scale data collection, often for more than 12 months, is a key element to achieve product certification and meet requirements of independent engineering reviews.
These certifications and reviews are major inputs to achieve bankability, a critical commercialization milestone for most energy technologies. Finalizing all stages of technology, supply chain, performance and reliability reviews can take years.
Simulation, testing, and developing at-scale demonstration projects is already capital intensive. But in order to achieve up to 20-year lifetime requirements for large scale energy technology deployments, many more requirements have to be met.
For example, accelerated life time testing of components and systems are adding to the commercial development cost. Moreover, capex layout for building tools, fixtures, and product can be substantial.
“ The world is now adding more capacity for renewable power each year than coal. ”
Investors and entrepreneurs in energy technology need to develop an ecosystem from day one, consisting of early adopter customers, partners from the financial industries for financing and from the insurance industries for risk reduction, partners in product development and supply chain, and partners in independent engineering and certification.
Building trust over the course of development and demonstration periods is critical to have strong partners at the inflection point of commercialization.
Against these challenges, 2015 was a landmark year with five key trends that have the potential to accelerate the commercialization of energy technology for the future:
Clean energy overtakes fossil fuels
The electricity system has been shifting to clean and this trend is here to stay. According to a 2015 analysis from Bloomberg New Energy Finance, the world is now adding more capacity for renewable power each year than coal, natural gas, and oil combined.
The shift occurred in 2013, when the world added 143 gigawatts (GW) of renewable electricity capacity, compared with 141 GW in new plants that burn fossil fuels.
This trend is even more surprising when considering the 2000 IEA world energy outlook at the beginning of the millennium that forecasted the share of renewables would climb to only 3 percent by 2020 and from then 2 percent.
The 2015 IEA world energy outlook already revised the share of renewable energy in global power generation to over 26 percent by 2020 from 22 percent in 2013 – a remarkable shift in a very limited period of time.
New sources of capital and financial products
Private investors from sovereign wealth funds, pension funds, family offices, to corporate VCs have increased their engagement in energy technology, providing patient capital to reap the benefits of taking a longer-term view.
These new sources of capital are thought to turn the ‘valley of death’ for energy entrepreneurs into a ‘valley of opportunity’, as recently analyzed in a Stanford research paper.
Additionally, new government initiatives such as the US Treasury permitting “mission-related” investments incentivize charitable foundations to invest in clean energy technologies.
Recent product innovations in the insurance and re-insurance industries also support managing risk in energy technology ventures more effectively and efficiently.
Risk transfer solutions to the insurance markets improve capital and revenue protection as well as forecasting of cash flows. Examples for energy technology insurance products include technical performance guarantees, warranty insurance or liquidated damage solutions.
Alternative risk transfer structures have become much more common through the rise and experience gained with PV solar and can significantly increase the success of project finance structures.
The rise of distributed generation
The UN Sustainable Development Goal number 7 has set a universal access target for electricity access.
Specifically in developing nations, distributed generation (DG) has increased access to electricity in meaningful ways.
“ The best of the energy paradigm shift from centralization to decentralization is yet to come. ”
The deployment of solar power solutions, often combined with development tools such as microfinance and female entrepreneurship, are being adopted rapidly.
But even in 2015, an estimated 1.2 billion people worldwide are still without access to electricity.
Policy makers and regulators play a very important role to encourage new DG energy technology deployment and to innovate in DG energy.
Expectations for this SDG are high, considering the impact decentralization has had on telecoms. In 2002, mobile phones for the first time overtook fixed lines.
The phenomenon was as prominent in developing nations as in mature economies.
Rapid advancement and cost decline in mobile technologies as well as targeted policy and regulation contributed to its rise and impact on development.
For electricity access, the future may be unevenly distributed today.
But with DG technologies evolving and smart policy and regulation, the best of the energy paradigm shift from centralization to decentralization is yet to come.
Commercial and industrial customers take the lead
2015 was a record-breaking year for corporate purchasing of large-scale wind and solar energy. Commercial and industrial customers contracted capacity of ~3GW, far exceeding the 2014 record of 1.2 GW. Google alone has purchased 2 GW of clean energy to date.
Driven by ambitious sustainability agendas, Fortune 500 players from technology, retail, and increasingly manufacturing industries are sourcing energy directly from utility scale projects.
Sixty percent of Fortune 100 and more than 40 percent of Fortune 500 companies already have clean energy or climate targets. At the end of 2015, 53 Fortune 500 companies have pledged to go 100 percent renewable through the RE100 initiative that was launched only in September 2014.
In order to also accelerate the development and commercialization of new energy technology, these private companies can play an important role by supporting R&D and pilot projects as part of their sustainability commitments.
Government-funded cross-technology development
At COP21 in Paris, 20 governments pledged to double their energy R&D in theMission Innovation initiative.
“At COP21 in Paris, 20 governments pledged to double their energy R&D. ”
Basic and applied research to support system-level innovation matters in energy technology where new entrants either have to; comply with requirements of existing infrastructure such as grid systems; adapt existing system architecture with the help of other players, e.g., smart grid innovators; or develop a new system as in the case of, for example, microgrids.
In either scenario, energy generation, storage, distribution and demand has to be considered holistically across hardware, software and service players.
Government funded R&D organizations can play an important role for system-level integration and much more can be done.
For example, existing research agendas may merit a fresh look.
Noam Chomsky critically questioned MIT’s research agenda in May 2015 as still being oriented towards Cold War defense priorities even in our times where a number of different national security priorities could be considered, including energy security.
The observation is supported by a BEC analysis: the ratio of US federal government R&D to total spending in energy is 0.4 percent. In defense, the ratio is more than 22 times higher.
Building on the achievements of 2015, we have the potential of impacting and accelerating the future development of energy. Bringing new energy technologies into the marketplace is challenging.
But the five trends described above capture a snapshot of the positive development to shift the mindset in the energy industries from long-cycle, incremental improvements to rapid, breakthrough commercialization.
With global multi-stakeholder agreements such as the UN Sustainable Development Goals and the COP21 Paris agreement, public-private cooperation has a reinforced mandate.
Valerie Feldmann will be participating in the World Economic Forum’s Annual Meeting in Davos.
This article appeared on World Economic Forum, and was republished with permission.
Photo credit: GE wind turbines in the horizon at the Fântânele-Cogealac Wind Farm in Romania, the largest wind farm in Europe. Shot by Chris New.
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