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Ethical Investing The Green Guide 2010/2011
High returns are now available whilst making an environmentally and financially responsible investment.
This guide aims to explore ways in which investors can most effectively engage in the global effort to address climate change. The investment volumes required to avoid the catastrophic impact of climate change are substantial and success will largely depend on the successful mobilization of both the public and private sectors. This report highlights viable business opportunities in the energy and carbon sector that could potentially generate high investment returns. Investors and policy-makers are facing an historic choice. At the very time when commentators are branding green investing as a luxury the world cannot afford, enormous investment in the world’s energy infrastructure is required in order to address the twin threats of energy insecurity and climate change. Waiting for economic recovery, rather than taking decisive action now, will make the future challenge far greater. As the cost of clean energy technologies decreases and policy support is put in place, the shape of the eventual energy system is emerging with the investment demand substantial.
NASA “Because of rapid warming trends over the last 30 years, the earth is now reaching and passing through the warmest levels seen in the last 12,000 years.”
The vast majority of us are aware that our environment is reaching a crisis point. A crisis point that society is desperately trying to pull back from as humanity continues to belch out toxic carbon emissions (CO2 gasses) in its continued efforts to provide the type of existence we feel is necessary. Scientists have recently discovered that the Earth’s temperature is rising at an alarming rate. In fact, if we see a further 3 degree rise in temperature, we will be at the point of no return. This temperature rise is commonly known as global warming and we are all aware that something needs to be done.
have a shortfall in absorbing 500. Rainforests can finally be protected and also replanted allowing for an increase in the removal of CO2 gases from the atmosphere whilst also rewarding enlightened businesses and investors in these projects. Until recently for example. The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions coupled with the understanding that to move forward. With the introduction of Carbon Credit trading. The good news is that the process of reducing pollution from CO2 emissions is well under way. . they have continued to be harvested at an alarming rate with their only monetary value to man being raw materials (timber) and the land they grow on for grazing cattle or growing crops. things look set to change. with the introduction of carbon credit trading a monetary value has been found and there is now a way for the cycle to be turned.Individuals and organisations produce CO2 gases through their everyday activities such as air and car travel. Costs currently are between US $10 – $15 per credit at the moment. agrees that CO2 is a major contributor to global warming (it signed the Kyoto Protocol in 2004) and is already in process of upgrading its antiquated infrastructure to meet its emission targets. Emission reduction targets and ensuing discussions have to date been based around countries that have been identified as major polluters (from global CO2 emission statistics 1990). Until recently. with California its only state taking the opposite stance by aggressively promoting emission reduction policies and the use of renewable resources.000 tonnes of CO2 and according to the Kyoto agreement it must seek to purchase an “offset” from another nation that has been planting trees for such a consideration. This “absorption ability” is the Carbon Credit. However. Unfortunately. there is now a way for the pollution cycle to be turned. with one Carbon Credit equal to one tonne of CO 2. for many years. A nation might. It is referred to as a “CO 2 equivalent” (CO2e). burning of fossil fuels for energy. it must purchase an ‘absorption ability’ from another nation. drawing in harmful CO2 gasses as they grow while producing the air that we breathe. the US government refused to believe that CO 2 was responsible for all global warming. One fundamental feature to emerge from the Kyoto meeting is the requirement that each country that produces CO2 above set targets must reduce the level of its emissions by offsetting by tree-planting or other processes that can absorb CO 2. now it is fast becoming a national concern. such as sequestration and/or changing farming methods. If any country continues to produce more CO 2 than it can absorb. Russia however. Rainforests are finally being protected and replanted. Post George Bush. the US had used the non-inclusion of China and India as a reason to stay out of the Kyoto Protocol. The great forests and rain forests are the lungs of the world. China and India were perceived as not being significant polluters. Other nations deemed responsible for significant CO 2 emissions were given reduction targets. while there has been no way to show a monetary value on the world’s rainforests. textiles and fertilizers. At the Kyoto meeting in 1997. the production of cement. a monetary value needs to be placed alongside the environmental value. for example. steel.
it has been seen by some as falling short of most people`s hopes and our planet`s needs. So what did come out of Copenhagen? Greenhouse gas mitigation: The targets and actions countries listed in the accord entail. The financing of climate change: Copenhagen delivered agreement for initial fast-start finance of 30 billion US$ for 20102012. while the Accord that did emerge is a hard-fought political agreement and does include most of the key elements of a climate deal. In Copenhagen last December. Brazil and South Africa failed to win consensus support among the 119 attending heads of state. OECD analysis shows that industrialised countries' declared targets (as of early February 2010) would reduce their emissions collectively by at most 18% by 2020 compared with 1990 levels. the resulting Copenhagen Accord—which aims to keep global temperatures from reaching any more than 2˚C (3.” reported UN Secretary-General Ban Ki-moon. The new Copenhagen Green Climate Fund will be critical for building trust and cooperation between developed and developing countries. the World's hopes were somewhat desperately high that international negotiators would be able to negotiate a strong enough agreement so that once and for all mankind could take climate change by the horns and start to reign However. with developing countries pledging a total of $30 billion in the short term and $100 billion a year by 2020. However. but it is an essential beginning. Even a weaker 11th hour voluntary “framework” put forth by the U.Copenhagen: A Review Copenhagen Accord aims to keep global temperatures from reaching any more than 2ºC (3. .6˚F) above preindustrial times—does leave the door open for a stronger agreement later. actions and finance -. more ambitious targets will be needed to limit the temperature rise to 2°C. The agreement also includes general principles for the measurement. and a longer term perspective for advanced countries to mobilise 100 billion US$ per year by 2020.S. commitments by both developed and developing countries.6ºF) above pre-industrial times and leaves the door open for a stronger agreement later. pointing out that the original text leading up to the meeting called for a global cut in emissions of 50 percent by 2050.” says climatologist Mark Maslin of the University College of London’s (UCL) Environment Institute. below the 25-40% reduction that science says is needed to stay within a 2°C temperature increase. mostly to help less developed nations adopt policies and technologies to keep carbon footprints small moving forward. However. including an 80 percent cut by all developed countries. China. India.an essential element to ensure transparency and accountability of the carbon markets. reporting and verification of targets. for the first time. “This accord cannot be everything that everyone hoped for. “The bad news is that the Accord is not legally binding and provides no plan of how to limit emissions..
” The failure of COP15 to generate a binding agreement means that international policymaking will likely take a back seat in the effort to wean ourselves off of fossil fuels and profligate carbon emissions. or just a painful mid-course correction.The lack of detail in the resulting Accord regarding specific emissions reductions targets means cooperation is completely voluntary. The crucial question during 2010 is to bridge the interests of industrialised. which is not what environmentalists want to hear.” comments Maslin. “The Accord should be seen as simply a face-saving agreement. 29-Dec. Chris Flavin of the U.” Flavin goes on to say that climate change mitigation will depend on the ability of individual nations “to persuade domestic constituents that they will benefit economically as well as environmentally from an energy transition. The world is looking to build on the Copenhagen Accord by developing the mechanisms. What Happens Next? Mexico has a huge opportunity as host to the next Conference of the Parties (COP 16) climate conference to be held in Mexico City from Nov.S. indigenous forest dwellers. and coordinating a global effort to protect the world’s remaining forests given their capacity to store large amounts of carbon. to enable the mobilization of financial resources from developed countries.” “Efforts over the next few years will determine whether Copenhagen was a fatal setback for efforts to combat climate change. Point 6 from the final Copenhagen agreement to emerge from COP15 stated that. 2010 to establish itself as a global leader in environmental protection. rules and systems to put into practice the various elements agreed in the Accord. accelerating international cooperation on technology. Copenhagen delivered agreement for initial fast-start finance of 30 billion US$ for 2010-2012. emerging economies and developing countries. look to the disappointing outcome in Copenhagen and insist on a different strategy and organization that will produce practical near term benefits for coastal dwellers and island residents. “The politics are clear: Some developed and the richer developing countries resisted the call for legal limits to emissions.” concluded Flavin. “We recognize the crucial role of reducing emission from deforestation and forest degradation and the need to enhance removals of greenhouse gas emission by forests and agree on the need to provide positive incentives to such actions through the immediate establishment of a mechanism including REDD-plus. 10. . Arctic peoples. and residents of rural villages and air pollution choked cities. and longer term perspective for advanced countries to mobilise 100 billion US$ per year by 2020.-based Worldwatch Institute believes that future progress on climate “will be driven more by domestic economics and politics rather than the international negotiating process. It must however.” He adds that future UN climate talks should focus not on overarching agreements but on practical goals like providing funding for poor countries to mitigate and adapt to climate change.
more than half of the utilities polled by the Electric Power Research Institute said they considered themselves renewable energy project owneroperators.Renewable Energy Market: 2010 Despite the financial crisis two trends have emerged that seem likely to drive renewable energy markets well into 2010.” said O’Brien. tax equity or pools of tax equity capital to develop projects. distributing benefits and drawbacks inherent in the solar resource. as it deploys 250 MW of rooftop-mounted solar PV across its service territory. That favors small. among others. This strategy is being pursued by Southern California Edison.) includes some $67 billion of stimulus money. growing comfort in renewable technologies. In February after the economy fell on the floor Congress passed the American Recovery and Reinvestment Act (the “stimulus bill”). Ongoing frustrations with sitting. Intervention actually began last autumn when Congress extended an already existing series of tax incentives and then took the step of making utilities eligible for the credits for the first time. No longer “simply” off-takers through purchased power agreements with independent power providers. They point to the infusion of government intervention and stimulus dollars and renewable portfolio mandates in most countries that compel adopting renewable energy technology. PV Shines On One bright spot in 2010 may be utility-scale solar photovoltaics. utilities Cautious Optimism The renewable industry expresses cautious optimism that the worst of the recession is over and that 2010 will see growth resume. which shows signs of emerging from the economic turmoil well positioned for growth. • Building on rooftops eases many of the sitting and permitting headaches that accompany green field development. utilities can use the credits. The Spanish market contracted some 80 percent on the government’s retrenchment and suppliers worldwide started to see inventory pile up. increasing the opportunity for them to invest directly in projects. who have too much manufacturing capacity and too much supply. loan guarantees and grant programs for the renewables industry. The approach aims to achieve several things: • It spreads capacity across the local grid. The approach allows for new capacity without the need for additional transmission. Manufacturers saw the market start to reverse in the third quarter of 2008 when the Spanish government moved to curtail what it saw as an overheated domestic market. Small-scale Preferred A third trend relates to project scale and scope.S. Government Intervention A second major trend likely to influence the sector during 2010 is government’s financial market intervention. . Included were a variety of loan guarantee and grant programs offered through the departments of Treasury and Energy and intended to keep money flowing for project development and new manufacturing initiatives. Rather than site all that capacity in a single project. But the price decline comes largely at the expense of suppliers. That’s good news for developers. which (in the U. increasing the opportunity for them to invest directly in projects. a third benefit to the distributed energy approach. Utility Involvement First was the steadily growing utility role in the renewable energy sector. an array of financial incentives and — in the case of solar photovoltaics — a drop in price that makes PV an attractive investment. Another utility trend is that for the first time. the utility is adding it in 1 and 2 MW increments. Their emergence is driven by ongoing access to capital. Thanks to Carbon Credits. permitting and transmission access have some developers seeking the path of least resistance. PV panel prices dropped by around 35 percent in the last year and seem likely to continue to drop. That market also accounted for around 40 percent of the world’s large-scale PV demand. The development focus in the solar energy sector likely will shift from “enormous solar farms in the desert to 1 to 20 MW projects co-located with substations. Thanks to Carbon Credits. utilities are emerging as a significant development force. That factor is likely to put more downward pressure on costs as utilities work to cut costs further. A related development is the growing use by utilities of investor equity. distributed projects. can use the credits. Utilities have tax burdens that are roughly six to seven times higher than what has historically been the pool for tax equity finance.
In the hydroelectric sector. It will still be awhile before the onshore wind market becomes saturated in the U. but a lot of movement offshore exists. Cost-leaders in zcrystalline technology have been driving costs down by using lower-cost polysilicon and less expensive manufacturing processes. Pumped storage projects are also gaining renewed attention as a way to provide storage capacity for wind and solar. Solar may be seeing the most dramatic technology changes. Geothermal development can be more risky than either oil or natural gas development as dry holes are not uncommon. In geothermal. Oerlikon Solar achieved a new stabilized record efficiency level for amorphous silicon (a-Si) single junction PV cells. In the past a geothermal project was not considered financeable unless one-third of a well field was drilled and confirmed.. Competitors have not been standing still. During the second quarter of 2009. A cadmium-telluride competition by FirstSolar showed promise of continuing to drive down costs still further. The improvement is important because higher-efficiency thin film requires considerably fewer balance of system components. This comes 20 years after some of the first offshore turbines were installed in Denmark. This makes it more expensive to develop a geothermal field.S. Solar PV may be among the most innovative technologies at present. These results set a new world record for amorphous thin film silicon PV technology. Conduit and water system projects are among the low-power projects that are seen as more feasible. The coming months could also see the first offshore wind farms developed in the U. work is underway to improve resource detection and development. interest is growing in new developments and repowering. either one of which improves a project’s financial performance. FirstSolar became one of the first PV manufacturers to produce modules for less than $1 a watt.Technology Innovation Also driving change in 2010 and beyond is technological innovation that allows for production cost reductions and installation cost reductions. Interest is growing around areas such as dam-less technologies that insert turbines into navigation locks that previously had not been powered.S. but wind is among the most advanced renewable energy. Recent test results reconfirmed and approved by the National Renewable Energy Laboratory show efficiencies of more than 10 percent power conversion. Now the figure is closer to two-thirds to as much as 70 percent confirmed. For example. . The renewable industry expresses cautious optimism that the worst of the recession is over and that 2010 will see growth growth resume.
Examples of criteria for new reforestation projects: • The project(s) must be additional i. trees and plants release oxygen during the process of “respiration”.e. the more credits are required to offset it. trees and plants physically remove carbon dioxide from the atmosphere with excess carbon stored as a biomass. While the arguments in favour of renewable energies are important. The amount of CO2 produced by an individual. consumers are already far more likely to purchase goods or services from a company that can claim a “low carbon footprint”. What this means in practice is that “new” replanting and reforestation projects will take on greater importance as “offsetting” tools for reducing carbon.e. . Companies are also publicly reducing their carbon emissions and offsetting the rest. • The project(s) need to conserve natural ecosystems and improve biodiversity. About 50% of dry matter is carbon. A forest that is growing (i. In return. reforestation projects are essential to the immediate removal of dangerous CO2 gases that are already in the earth’s atmosphere. Our carbon footprint The burning and cutting of an estimated 34 million acres of trees each year is responsible for 20-25% of global carbon emissions. Offsetting one’s entire footprint is known as becoming “carbon neutral”. as they grow. They cannot be then cut down and burnt. Carbon Offset credits are fast becoming a very popular product in today’s society as we become increasingly aware of the dangers of climate change and the damage we are causing to our planet with our carbon emissions. Indeed.Reducing the carbon through reforestation Forestation is particularly relevant to the activity of CO 2 offsetting because. as they are acutely aware of the business advantages of becoming carbon neutral. adding to the existing capacity of the forest: Planting trees will reduce the carbon in the atmosphere. as it has now been proved that crops that are planted in their place (and then harvested) actually store little or no carbon within them • The project(s) require a good management team along with an excellent business and risk mitigation plan. family or company is called a “Carbon footprint” and the number of carbon offset credits required to neutralise one’s footprint depends on its size the bigger the footprint. increasing in biomass) will always absorb more carbon than it releases.
The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC or FCCC). but by operators who have been set quotas by their country.” The Kyoto Protocol establishes a legally binding commitment (from its signatories) for the reduction of four greenhouse gases (carbon dioxide. The Kyoto Protocol provides for three mechanisms that enable countries or operators in developed countries to acquire greenhouse gas reduction credits. an international environmental treaty with the goal of achieving “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. . to 7% for the United States. National limitations range from the reduction of 8% for the European Union and others. methane. whereby all the participating nations commit themselves to tackling the issue of global warming and greenhouse gas emissions. and 0% for Russia. The treaty permitted emission increases of 8% for Australia and 10% for Iceland. • Under Joint Implementation. while the developing country would receive the capital investment and clean technology or beneficial change in land use. industrialized countries agree to reduce their collective green house gas (GHG) emissions by 5.The Kyoto protocol: an introduction The objective of the Kyoto climate change conference in the city of Kyoto. The developed country would be given credits for meeting its emission reduction targets. most of the transactions are not performed by national governments directly. 6% for Japan. sulphur hexafluoride). These carbon projects can be created by a national government or by an operator within the country.2% from 1990 levels by the year 2012. but the atmospheric effect is globally equivalent. • Under the Clean Development Mechanism (CDM) a developed country can ‘sponsor’ a greenhouse gas reduction project in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country. The target agreed upon was an average reduction of 5. Under Kyoto.2% from the level in 1990. In reality. As more and more governments start to regulate their countries emissions. 183 parties had ratified the protocol. As of January 2009. and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by industrialized nations. Japan was to establish a legally binding international agreement. Investors and Policy makers are facing an historic choice – now is the time for us to make a difference. Carbon trading could become the World’s biggest commodity market. which entered into force on 16 February 2005. nitrous oxide. Countries with surplus credits can sell them to countries with capped emission commitments under the Kyoto Protocol. • Under International Emissions Trading (IET) countries can trade in the international carbon credit market to cover their shortfall in allowances.
or Socially Responsible Investments (SRIs).Ethical. are one of the most rapidly growing areas of finance today. .
By investing in Carbon Credit projects.” As more and more governments start to regulate their country’s emissions. We live in a society where money is important. by any stretch of the imagination. we are living at a critical point in human history and. the anticipation of good returns and peace of mind: a combination rarely achieved.” Companies are scrambling to get “a slice of a market now worth about $30 billion and that could grow to $1 trillion within a decade. the majority of us are looking for a degree of security.and so will the price! We need only refer to the law of supply and demand to see that this industry is on the brink of a major explosion. carbon trading is one of the “fastest-growing specialties in financial services. and it could become the world’s biggest market over all. However. Achieving change requires the participation of businesses and governments around the World. common sense and our conscience will only take environmental change so far. getting involved now could be one of the wisest investment moves in the first half of this century. One question raised by critics is: Is it immoral to make profit from an investment that will be for the betterment of humankind and our planet? No. Charity. If increased demand dictates an increase in price. “Carbon will be the world’s biggest commodity market. an investor can enjoy high returns on his investment plus satisfaction in the knowledge that they are truly helping to change our planet for the good. interesting times.” Another article. “In London’s Financial World.” states that. the demand for available carbon credits will steadily rise .The rise of ethical or socially responsible investments When we invest our money. According to a recent New York Times article. By investing in Carbon Credit projects you can enjoy growth on your investments with the satisfaction that you are helping change the future of our planet . either voluntarily or by legal requirement. and as more companies start to limit their emissions. as stated before. it is necessary. Carbon Trading Is the New Big Thing. Making profits is fundamental to achieving change on a scale that is necessary.
In 2009. with an abundance of carbon credits available. The carbon market’s total value for 2008 was estimated at €92bn (US$125bn). . now in play and a reduced amount of credits available and ever more stringent emissions targets. their price is relatively low.this is now clear. The battle against climate change cannot be won without the World’s rainforests . Climate Exchange Plc (CLE) is listed on the AIM market of the London Stock Exchange. When the United States signs the Kyoto agreement and sets its own guidelines and targets. prices are set to rise. ECX and ICE Futures Europe have a partnership whereby ECX manages the product development and marketing of its emissions contracts and ICE lists those contracts on its electronic trading platform. Futures and Options on CERs were introduced in 2008. with the second phase of the program. However. known as EU Allowances. If a company exceeds its permitted levels. each member state of the EU currently receives an annual emission allocation that is then divided between its worst emissions-producing companies. 2008-2012. Trading on ECX began in April 2005. ECX carbon contracts are listed for trading on ICE Futures Europe (the former International Petroleum Exchange). the EUA and CER Daily Futures contracts. further cementing ECX’s position as the industry benchmark for carbon trading globally. All contracts are cleared by ICE Clear Europe.Carbon: the world’s next biggest market In the efforts to reduce. If a company comes in under its set target. more than double the €40bn it was worth in 2007. several thousand traders around the world have access to the ECX emissions market on ICE Futures Europe via banks and brokers. ECX currently trades two types of carbon credits: EU allowances (EUA’s) and Certified Emission Reductions (CERs). Right now. control and (one day) eliminate harmful emissions. with options on EUAs following in October 2006. ECX offices are located in London. it can sell its excess as “carbon credits” allowance to other companies that have overshot their targets. the price of carbon credits could potentially explode. two new spot-like contracts were added. These companies are then legally obliged to comply with their set emissions targets. when futures contracts were launched on European carbon dioxide emissions. it has to pay a penalty and buy credits to make up the difference. Other member companies include the Chicago Climate Exchange (CCX) and the Chicago Climate Futures Exchange (CCFE). enjoy standardised terms and are regulated by the UK’s Financial Services Authority (FSA). ECX volumes are experiencing tremendous growth. In addition. The European Climate Exchange (ECX) is the leading marketplace for trading carbon dioxide (CO 2) emissions in Europe and internationally. ECX is a member of the Climate Exchange Plc group of companies. Over 100 leading global businesses have signed up for membership to trade ECX emissions products.
ecologists and the scientific community have long argued that forests are worth billions. CCX Members are leaders in greenhouse gas (GHG) management and represent all sectors of the global economy. third party verification by the Financial Industry Regulatory Authority (FINRA. if their worth can be captured by economic and financial models. each of which represents 100 metric tons of CO 2 equivalent. the CCX Tradable Commodity The commodity traded on CCX is the CFI contract.UNEP. Those who reduce below the targets have surplus allowances to sell or bank. those who emit above the targets comply by purchasing CCX Carbon Financial Instrument® (CFI®) contracts. Chairman and CEO of CCX is economist and financial innovator Dr. formerly NASD).” CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets. Reductions achieved through CCX are the only reductions made in North America through a legally binding compliance regime. Richard L. Exchange Allowances are issued to emitting Members in accordance with their emission baseline and the CCX Emission Reduction Schedule. with global affiliates and projects worldwide. providing independent. who was named a Hero of the Planet by Time Magazine in 2002 for founding CCX. if not trillions of dollars. Exchange Offsets are generated by qualifying offset projects. CFI Contracts. Sandor. and in 2007 as the “father of carbon trading. . CFI contracts are comprised of Exchange Allowances and Exchange Offsets. The founder. Chicago Climate Exchange (CCX) operates North America’s only cap and trade system for all six greenhouse gases. as well as public sector innovators. Clean Energy and Carbon offset projects represent a potential for explosive profits of earth saving proportions.
Spain and Denmark wind power now supplies 3%. In this section. and in Denmark up to 43% of the country’s electricity demand at times of peak wind supply. the next place to look for large quantities of renewable energy is offshore. farms can be built at scales impossible on land. Fossil fuel generation will undoubtedly still be a substantial part of the equation. In the next section we will look at some of the other technologies – principally around the digital/smart grid. it is clear that any future low carbon energy infrastructure will have to include a significant proportion of energy generated from renewable sources – most scenarios showing the proportion of primary energy having to reach 40-50% by 2050. new capacity is coming on line and costs are set to drop rapidly from US$ 4/W to US$ 2. 3 . Electricity from onshore wind can be generated at prices of 9-13 c/kWh. making it only 32% more expensive than natural gas CCGT. the cost of electricity from offshore wind is high – around 16-21 c/kWh – but this will come down rapidly as more project experience is gained. 11% and 19% respectively of total electricity production during the course of the year. 2 Onshore Wind The most mature of the renewable energy sectors. Solar Photovoltaic Power Photovoltaic (PV) technology has made very rapid strides in the past four years. Offshore wind offers enormous potential. Some of the leading technology contenders are emerging and. bringing installed capacity to over 100GW. in terms of reducing the cost of crystalline silicon (its main component) and commercializing thin film technology. in some cases have begun to build significant experience. with investment volume growing to US$ 50 billion in 2007-2008. the onshore wind industry saw 21GW built in 2007. making unsubsidized solar PV generation costs comparable with daytime peak retail electricity prices in many sunny parts of the world.60/W by the end of 2009. power storage and carbon capture and sequestration – which will be required if low carbon energy is to fulfill its full potential within the future energy mix. Planning permission can be easier to obtain than onshore. In Germany. However. 1 It is clear that any future low carbon energy infrastructure will have to include a significant proportion of energy generated from renewable sources. At present.Key Renewable Energy Sectors No-one can predict with any certainty what the energy mix will look like in 2030. with stronger more predictable winds and almost unlimited space for turbines. Although there has been a bottleneck in the production of solargrade silicon. even in the absence of a carbon price. Offshore Wind When the best sites for onshore wind have been snapped up. let alone 2050. energy efficiency. we highlight eight renewable energy technologies which look particularly promising in terms of two factors: abatement potential and current state of competitiveness. and the availability of space is almost unlimited if deep waters are mastered.
storage. with specialist operators planning to build several new plants.2 billion into the sector. there is sufficient land to increase biofuels production from the current 1% of transport fuel to 3% or even 5% without impacting on food availability (as long as we can quickly return to increasing annual agricultural productivity). Luckily. with investors pouring US$ 9. By contrast. it grows well in many southern hemisphere countries (and far from the Amazon). The US MSW sector is also seeing a resurgence. the technology of choice for big solar plants in the world’s deserts looks set to be Solar Thermal Electricity Generation (STEG): concentrating the heat of the sun to generate steam. ocean thermal and osmotic power – each of which has substantial potential and its fervent admirers. but with costs already in the 24-30 c/kWh range. for example through the Private Finance Initiative (PFI) in the United Kingdom. all countries can exploit geothermal resources for ground source heat pumps or district heating. which is more expensive to produce than sugar-based ethanol. Landfill also creates methane. led by the EU countries. There are many other emerging technologies – a wide range of biomass based power generation approaches. Waste has traditionally been deposited in landfill sites. however. We do not consider it in detail in this paper. Municipal Solid Waste-to-Energy (MSW) The use of municipal solid waste to generate energy is increasing. Geothermal Geothermal power is particularly attractive as a renewable energy source because it can be used as predictable base-load power in a way that wind and solar power cannot be. Waste that cannot be recycled. But most of this flowed into corn-based ethanol. this technology is shaping up to be a part of the solution in the sunniest parts of the world. and there is no shortage of land to increase production substantially without jeopardizing food production. 5 6 7 8 . although its contribution will be limited by issues of cost. Until now. the cost of producing biofuels from agricultural waste through cellulosic conversion and algae is coming down rapidly. which can be used in conventional and highly efficient turbines. Brazilian sugar cane-based ethanol is competitive with oil at US$ 40 per barrel. wave and tidal power. Sugar-based Ethanol The period 2004-2006 saw US investment in biofuels soar. ground source heat pumps. Future technologies could include artificial photosynthesis and synthetic genomics. a practice which is becoming increasingly expensive and constrained by shortage of sites. Nuclear power is also set for a renaissance in many countries around the world. However. Nuclear energy’s share of total electricity production has remained steady at around 16% since the 1980s.4 Solar Thermal Electricity Generation While PV is ideal for smaller projects and integrated into buildings. but a raft of new approaches has helped make it economically viable across a wider area. In addition. can be used to generate electricity by a variety of technologies at costs starting at 3 to 10 c/kWh. Cellulosic and Next Generation Biofuels The argument over food vs fuel is an emotive one. subject to volatile prices and controversial because its feedstock is a food staple around the world. when 218 reactors were built around the world. and the future fuel system is likely to include a proportion of fuels from these sources. Government support for the development of MSW plants is increasing. if not for large-scale electricity generation. There are relatively few projects up and running yet. safety and public resistance. In most regions. It is important to emphasize that these are by no means the only clean energy sectors of promise. geothermal power has been used only in limited regions. But after that the only way to increase production of biofuels will be to source feedstock that does not compete with food. a powerful greenhouse gas. nuclear power will clearly be part of any future energy system.
Investment Performance Over the past few years. While the exceptional gains of the past few years may have declined during 2008. 500 450 400 350 300 250 200 150 100 50 0 01–jan–03 01–jan–04 01–jan–05 01–jan–06 01–jan–07 01–jan–08 NEX AMEX OIL NASDAQ S&P 500 Indeed. making them an attractive investment proposition. Over the period from the beginning of 2003 to the end of 2007. the sector as a whole has fared better than any major benchmark over the past five years. Even after its tumultuous 2008. although historically clean energy stocks have been more volatile than those from other sector. although historically clean energy stocks have been more volatile than those from other sectors.08.9%. Public Markets The WilderHill New Energy Global Innovation Index (ticker symbol NEX) tracks the performance of around 90 leading clean energy companies. making them an attractive investment proposition on a risk-adjusted basis despite their recent history (see Figure 2). unmatched by any of the major stock market indices. geographies and business models. the NEX remained up 75% on six years ago – an annual return of 9. spanning different sectors. and the index defied gravity for the first three quarters of 2008. the NEX rose from its index value of 100 to a peak of 549. investors made good returns from clean energy investments at all stages of the value chain. 2007 was a particularly high-octane year. Indeed. logging an increase of 57. 14% 12% 10% 8% 6% 4% 2% 0% 10% –2% MSCI World S&P 500 NASDAQ 12% 14% 16% 18% 20% 22% 24% AMEX Oil NEX Return Volatility . their returns have been consistently higher. before succumbing to the credit crisis and ending the year at 178 (see Figure 1). their returns have been considerably higher. a compound annual growth rate of over 40%. prior to the recent turmoil in the global financial markets.8%.
which they were subsequently able to sell to Energias de Portugal at a substantially increased value. the pooled return was closer to 14%. some spectacular returns were achieved during the period 2004 to 2007. completed by New Energy Finance in collaboration with the European Energy Venture Fair. Allianz Private Equity and Apax Partners shared the private equity deal of the year in 2006. representing € 1. recording an IRR of 101% on their investment. As of mid. 26 have so far resulted in public listing and 32 have been exited or partially exited via trade sale. covered 302 clean technology portfolio companies. then the world’s most valuable turbine manufacturer. For private equity players.2008 there had been relatively few down-rounds (subsequent venture rounds at reduced valuations).2008. one of the most successful strategies during this period was to identify clean energy companies which had been struggling to commercialize their products or services during the period of low energy prices. and 22 months later they were able to sell it for € 465m to India’s Suzlon Energy. . Meanwhile in venture capital. These exceptional returns. but it is a very young sample with relatively few exits to date. Private Equity has taken up the challenge of funding the acquisition of deforested land returning its biodiversity and providing employment to the local population. which is based on confidential returns by investors at the end of H1 2008.77 billion of venture capital invested in clean technology since 1997. Other very successful deals of this nature included an investment made by Goldman Sachs in Zilkha Renewables (later renamed Horizon Wind Energy). The study. were driven by the outstanding success of a small number of early investments in the solar sector – Q-Cells and REC in particular.Venture Capital & Private Equity On the venture capital and private equity side. Without these. based on the limited number of exits and with only 23 companies being liquidated or written off at the time of the study. a leading provider of gearboxes for wind turbines for € 132m. They bought Hansen Transmissions. but which were now experiencing soaring demand. according to the third annual European Clean Energy Venture Returns Analysis (ECEVRA). The success rate to date has been reasonably high with a pooled gross IRR (at the portfolio company level. not the fund level) of over 60%.. Of these. investors in clean technologies in Europe and the US were on track to achieve excellent returns on their investments up to mid.
before the premiere of the film. only to be very hard hit during the closing months of 2008. Beyond that. Camile Rebelo. the fourth largest in the world in any sector. asset-based clean energy companies.. it remains to be seen whether the crisis will shake policy-makers’ determination to shift to low-carbon energy and force embattled voters to take painful action to limit greenhouse gas emissions. saw the index collapse.4 billion. and finance is much harder to come by. ending the year at a slightly more respectable 178 – perhaps in recognition that the sector’s sell-off had been overdone.. touching a low of 135.6 billion IPO. making clean energy less competitive in immediate financial terms. before the publication of the Stern Review. with energy prices collapsing by 70%. represents a serious threat to the clean energy sector. which bear no technology risk. however. however. Second. .15 in late November. secondary offerings and convertible issues – dropped by 60% between 2007 and 2008 to US$ 9. First. There are three reasons why the sector was hit so hard. the sector was bound to suffer – these are.Maybe money really does grow on trees. Since that low. At the same time risk has been re-priced. The collapse in valuations of clean energy companies effectively shut the door to further fund-raising in the public markets. Clean energy investment held up well during the early phase of the credit crunch. and the recession that is following in its wake. the NEX index has bounced back. also represent something of opportunity: as policy-makers take decisive action to refuel their economies. New financings – IPOs. in favour of longer established businesses. after all energy stocks. investors penalized companies with high capital requirements – even the more established. being highgrowth are capital-hungry. Short-term energy and carbon prices have fallen. a level not seen since September 2003 – before the ratification of the Kyoto Protocol. however. The final quarter of 2008. and perhaps on hope that the election of President Obama would create a floor through which the sector would not fall. they are at least talking about ensuring the resulting fiscal and monetary stimuli benefit the clean energy sector. mainly because of turbulent market conditions and lower valuations. in an era of sharply constrained credit. 2007’s total was boosted by Iberenova’s US$ 6. The NEX index defied gravity for the first three quarters of 2008. investors were getting rid of stocks with any sort of technology or execution risk. Carbon forester The Impact of the Financial Crisis The global financial crisis of 2008. trading mainly in the 350 to 450 range. The crisis may. as did the valuations of publicly-quoted clean energy companies. Third. perhaps as opportunistic investors began to pick up bargains. “An Inconvenient Truth”. before Hurricane Katrina and President Bush’s statement that the US was “addicted” to oil.
Growing demand for oil – much of it fuelled by the rising middle classes in China and India – is demanding the exploitation of ever more expensive sources of supply – deeper offshore fields. There is no question that the short-term priority for the world’s policy-makers is to do whatever is necessary to prevent the effects of the financial crisis turning from a recession to a depression. The good news for clean energy investors is that supporting the sector is seen by the leaders of many of the world’s major economies as consistent with achieving this goal.2 billion in 2008. As they address the urgent problems and then the longer-term structural weaknesses of their economies. clean energy infrastructure – safe projects with reliable yields – will be among the first to benefit. and when it does. no serious commentator expects oil prices to revert to the US$ 25 per barrel median price (in 2008 money) which prevailed throughout the 1990s. which raised US$ 195m in a secondary offering. the clean energy sector stands to benefit as follows: 1 Monetary stimulus An enormous monetary stimulus has already been applied in every major economy of the world – central bank rates have dropped to levels not seen for half a century. particularly in the solar and digital power sectors. and Chinese wind turbine manufacturer Dongfang Electric Corporation. At the time of writing.Venture capital and private equity to a certain extent stepped in where the public markets stepped out during 2008. making them more than averagely sensitive to periods of higher interest rates or credit risk aversion – and more than averagely responsive as interest rates fall. CFTC commissioner (Sept 09) . New investment – i. 45% higher than a year earlier. including a rights issue by Brazilian bioethanol leader Cosan. shale oils and tar sands – driving up the cost of marginal production. In the wake of decreased leverage. making this a good time to invest for those that have funds available. anecdote suggests that valuations have come down. A repeat of the collapse in investment in clean energy which followed in the wake of previous spikes in energy prices in the 1970s and 1980s.worth $2 trillion Bart Chiltern. those that have already raised funds and now need to put them to work. therefore. as banks steward their capital in fear of the levels of defaults which will emerge as the recession bites. However. investment deals continued to close. excluding buyouts – is estimated to have reached US$ 14.e. over 80 VC and PE deals were completed in Q4 2008. In addition. Venture capitalists. there is evidence that some private equity players have preferred to invest expansion capital with modest leverage rather than return money to their limited partners. Carbon trading may dwarf that of crude oil with five years . though not quite to the extent of public market valuations. For one thing. there is a web of policy in place around the world which supports a mandated level of activity far in excess of previous levels. Secondly. this wall of cheap debt has not yet worked its way through the system. Meanwhile. does not look likely. at some point a flood of cheap money will begin to flow. Even during the darkest weeks of October and November 2008. Renewable energy projects generally have higher up-front costs but lower or no fuel costs. which raised US$ 412m. have continued to invest.
that’s going to be my number one priority when I get into office..” President Barack Obama .“There is no better potential driver that pervades all aspects of our economy than a new energy economy..
but at the same time encourage the move towards a low-carbon economy. Policy-makers are trying to ensure that any fiscal stimulus multitasks by supporting short term consumption and jobs and building the long-term productive capacity of the economy. technicians and scientists meet all of these criteria and could be part of many fiscal stimulus programmes. The development of clean energy technologies. Deficit reduction Policy-makers are likely to look for sources of tax which are not only substantial. rolling out a fully digital grid.” As well as supporting the extension to the Production Tax Credits and Investment Tax Credits. and either a carbon taxes or cap and trade schemes with auctioning of permits. but how much and what sort. not about whether fiscal stimulus is needed. as well as moving us along in achieving our long-term goal of a sustainable energy system. that’s going to be my No. he has indicated his support for a federal Renewable Portfolio Standard (the minimum proportion of renewable power in the electricity mix) of 25% by 2020.. fossil fuel prices and scarcity – remain strong. President Obama has galvanized the world’s carbon negotiators by restating his commitment to provide leadership on the issue of greenhouse gas emissions. he stated that “there is no better potential driver that pervades all aspects of our economy than a new energy economy. He has also committed to spending US$ 150 billion on clean energy over the next 10 years. With continued government support through the current financial crisis. Then we could see increasing energy taxes. the fundamental drivers – climate change. the sector will likely see a return to its long term growth trend in the near future. properly insulating homes and offices. Since his election. export guarantees and soft loans. In short.2 Fiscal stimulus Around the world debate is raging. a dramatic reduction of fuel subsidies in the developing world. and educating a new generation of engineers. exploration concession waivers. During his campaign. 1 priority when I get into office. And that means the likely dismantling of any fiscal support for fossil fuels – fuel subsidies. investment tax holidays. so instrumental in the development of the US wind and solar sectors. 3 .. research grants. accelerated depreciation. while the global financial crisis has certainly brought the clean energy sector down to earth with a bump. energy security. The position of US president Barack Obama is of particular interest in this context.
AND help save our planet. Two processes are under way. the future of the EU ETS and CDM is secure. and the world is holding its breath to see what comes out of negotiations in Copenhagen in December 2009. and easy sources of credits are exhausted. Perhaps the biggest problem the carbon market presents to investors – other than its sheer complexity – is its apparently uncertain future. and a second. the structure of the CDM. the long-term outlook for carbon remains bullish as momentum towards a network of national and regional schemes remains strong. the potential commitment by the US. New Carbon Finance’s central forecast for the price of credits in Phase II of the EU ETS is for an increase from the current US$ 21 per tonne to US$ 40 per tonne in 2012. which took place after the US election but before the Inauguration of President Obama. so an extension is possible. and by 30% if other nations join in – and to the EU ETS in particular. Beyond 2012 prices will continue to rise as carbon caps bite more deeply in the run-up to 2020 and beyond. which includes the US. In a short space of time. It will also continue allow CDM credits to be used in lieu of local carbon reductions. Whatever happens in Copenhagen. the so-called Bali roadmap. carbon credits are beginning to provide an economic rationale for the large-scale roll-out of renewable energy. The December 2008 Poznan negotiating session. the inclusion of credits from avoided deforestation and carbon capture and sequestration and. The EU has shown a strong commitment to climate goals in general – most recently passing the climate package which sets out its target of reducing emissions by 20% by 2020. working to develop a successor regime: one involving those nations that have ratified Kyoto. This is seen as the last chance if there is to be a solution in place before the current Kyoto arrangements expire in 2012. Early Stage investment into reforestation may well reap huge rewards for investors.Carbon Markets: an immediate necessity In summary. of course. The Kyoto Protocol in its current form lasts only until 2012. . President Obama has signified that such a commitment will be forthcoming under his leadership. Issues debated included the adoption of emissions targets for large developing countries (India and China) – although this was firmly rejected. although missing that deadline does not mean the process is dead. although this was not surprising. commercial carbon capture and sequestration projects. if not probable. produced little of substance.
Ethical Investing The Green Guide 2010/2011 Investing in our planet Investing in our future .
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