Investing in Renewable Energy and Battery Storage
The article below is from our BRIEFINGS newsletter of 11 February 2019
Investors are turning to renewable energy opportunities as the costs of producing wind and solar projects decline. Goldman Sachs' Jon Yoder and Jacob Sandry, portfolio managers in Goldman Sachs Asset Management's Credit Alternatives team, discuss the trends and opportunities in the renewable energy sector.
Why are investors interested in renewable energy? Is it still a niche investment play?
Jon Yoder: Renewable energy is no longer "alternative energy"-- it's now mainstream and changing the way electricity will be delivered over the next few decades. The energy grid, which is the interconnected network for delivering electricity from producers to consumers, used to consist of a few thousand large, centralized power plants that relied on fossil fuels such as coal or gas. But we've seen a dramatic shift in the type of power plant being built. The majority of new electricity capacity that has been added to the US energy grid over the last few years has come from more than 2 million smaller renewable plants, largely due to the sharp decline in costs. For example, the price of solar energy has declined nearly 70 percent over the past eight years, making renewable energy the cheapest, unsubsidized source of electricity over natural gas and coal in many places. For our part, we've invested in more than 100 solar operating projects across the US in a vehicle that seeks to generate yield for investors through the ownership of US solar energy projects.
What are some of the challenges and considerations that investors face in the sector?
Jacob Sandry: Changes in the energy grid have created new challenges, especially in California given the state's ambitious climate change and renewable energy goals. It's not enough, for example, to increase production of low-carbon energy. Matching that energy supply with peak demand is just as critical. It's easy to reduce carbon-intensive electricity during the day when the sun is shining, but it's difficult at night when the sun sets, electricity reaches peak demand and carbon-intensive power plants must be fired up to meet the demands that solar can't. While this is an environmental problem, it is also an economic problem. That's because the marginal cost of producing incremental solar energy is zero since sunlight and wind are free, while the marginal cost of producing carbon-based energy varies based on the cost of the fuel, whether it is coal or natural gas. This means that the hourly swings in spot power markets have changed rapidly with lower prices when the sun is shining and the wind is blowing, and higher prices when the sun has set and the winds are calm.
How are companies in the sector addressing the supply-and-demand challenges?
JY: For many years the sector has been waiting for cost-effective battery storage to help solve both the environmental problem and the economic problem. Today, we believe we are finally on the precipice of widespread coupling of renewable energy with storage. Prices of lithium-ion batteries, which are the primary means to store solar energy, have declined 80 percent since 2010, and we expect that prices will continue to decline. In fact, we believe that many existing solar and wind facilities will be retrofitted with storage to produce even better economic results for existing investors.
Are there other implications for energy storage?
JS: The increased demand for energy storage will put strains on the supply of commodities and resources globally. Cobalt prices, which are a key component of batteries, have doubled in the last year due to stronger demand. In addition, the availability of dense and cheap batteries will have a profound effect on mobility, as new mobility services are created that weren't possible before such as electric buses, scooters and bikes. Some solar developers have indicated they won't bid on solar projects unless they are paired with energy storage, which has implications for investors in renewable power assets.
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