BNEF: The shift to ‘base-cost’ renewables: 10 predictions for 2017

Published 27 Jan 2015

Written for Bloomberg New Energy Finance, click here to read the online article

For the last two years, I have drawn on Russian imagery to illustrate the state of the clean energy industry. In 2013, it was the battle of Borodino: the clean energy sector had suffered a bruising time, but it had survived and was poised to regain ground. In 2014, it was the River Neva in St Petersburg which provided the analogy for an energy industry frozen for aeons, but about to undergo profound and rapid phase change.

This year I want you to go back in time, over 66m years. Dinosaurs roam the earth – in fact they dominate it. They are magnificent creatures, honed by 135m years of competition, huge and fearsome. The very earth trembles as they walk.

Between the dinosaurs scurry some little furry creatures, mammals. No match for the dinosaur’s vast bulk and power, they stay out of their way, operating in ecological niches too small for the dinosaurs to exploit, scavenging scraps and hunting insects. They are industrious, clever, quick and adaptable. They are multiplying and learning, and gaining in confidence, though they are almost imperceptible to the dinosaur eye.

In the distance a herd of Diplodocoals, the biggest of the dinosaurs, is grazing. Slow-moving and with tiny brains, they can chew their way through almost any environment in which they find themselves. As they have done so, they have found themselves in competition with the aggressive Gasontosaurus, and they seem to be losing. The future isn’t looking great for Diplodocoal but they have been around for a long time and are not disappearing soon.

Suddenly, a fight breaks out! A pack of Velocifrackers has been chasing an adult male Tyrannosaurus Saudi, but now it turns on its tormentors, catching them unawares and inflicting terrible wounds. As they thrash around, the huge beasts knock down trees and tear up the ground around them. Naturally everyone stops what they are doing to watch the action.

Right now in the energy sector, everyone is transfixed by the big fight going on in the oil industry between conventional and unconventional production, OPEC vs non-OPEC, Saudi Arabia versus the frackers. It is one of those times when energy breaks through onto the front pages, and suddenly everyone is an expert. Every energy story has to be rewritten to fit around the main narrative of the Great Oil Price Crash.

Of course it is an important story. As we explained in our December press release, the oil price crash will have a range of impacts on the clean energy sector, more severe in the case of businesses directly competing with oil, like biofuels and displacing diesel generators, more moderate elsewhere. But it is probably not the most important story of the past 12 months for the clean energy sector.

The bounce-back in global clean energy investment, up 16% to $310bn after two years of decline, was probably the single most significant development of 2014. EON’s historic announcement that it is splitting into two, selling off its bulk generation and concentrating on its renewable and consumer-facing activities, is another contender. NextEra’s acquisition of Hawaiian Electric Industries was described by its chairman and CEO as “a postcard from the future of the electric industry”. Google’s $3.2bn acquisition of Nest probably said more about the direction of energy technology than any other development in 2014. And ACWA Power’s winning bid of less than 6 US cents per kWh to build 200MW of unsubsidised solar in Dubai is going to set a new benchmark for PV costs, clearly below the price achievable by natural gas.

But all these are “mammal stories”. The press, right now, is only interested in “dinosaur stories”. Welcome to 2015!

It is time for me to try to don my pith helmet, venture out into Jurassic Park, and present my 10 predictions for the year. In doing so, I have drawn on help from Bloomberg New Energy Finance chief editor Angus McCrone, as well as our teams of specialist analysts covering all aspects of the transition to a cleaner energy system.


Bloomberg New Energy Finance does not currently produce an oil price forecast. Having said that, we do have a view, as described in the accompanying article, and that view is that we are in for a few years of low oil prices. We do not buy the “flash crash” theory that after inflicting sufficient pain on US unconventional producers, the Saudis will tighten the taps before year-end and drive oil prices back above $100/barrel. Indeed, I would be very surprised to see a price above $60/barrel by year-end, and in the longer term I see oil trading in the $60 to $90/barrel range.

In the US, many marginal natural gas producers have been kept afloat by selling liquids into the oil market. The low oil price means they will spend the year cutting their drilling programmes, going out of business, being acquired, or handing the keys to their creditors. Although this will remove some natural gas supply, it will barely do anything to push up prices. Nor, in the short term, will there be any relief from new sources of demand, whether from transportation, export, new industrial projects or pipelines into Mexico or New England, where prices have remained high. Barring a very cold winter, we expect Henry Hub gas to remain in the $3 to $4/MMBtu range for at least the next year, while new sources of demand might produce a somewhat tighter market in 2016.

In Europe and Asia we expect further falls in the price of natural gas, on top of those already seen. The spot price for LNG in Asia dipped below $9/MMBtu for the first time in at least four years, down from the $12-18 range; European gas prices are hovering between $9 and $10/MMBtu, down from the $11 to $13 range where they have spent the last few years.

The oil price fall, the persistently weak economy, a mild winter and high storage levels look set to bring about even lower gas prices in Europe during the course of this year.

Prices in Asia will also weaken, although not quite as far. On the supply side, significant new natural gas sources are being brought on-stream. Over Christmas, the first shipment of LNG left Australia’s Curtis liquefaction plant, bound for Asia, one of a number of new Australian facilities coming on stream in the coming two years. A wild card could come from shale gas in China, though it looks more and more like taking quite a few years to come to market in volume.

Tempering the overhang of new supply, however, Asian natural gas consumption remains robust. Demand from China, India, South Korea and South-East Asia continues to grow. Japan is finding it hard to restart more than a few nuclear power stations, and still looking for ways of replacing soaring post-Fukushima fuel oil and coal imports with gas. On balance, while we see prices continuing to come under pressure, we don’t see a collapse on the cards.


You might be surprised at this one, given the strong investment figures from last year, the sector’s increasing competitiveness, and the confidence that low oil prices are not a show-stopper.

There are several reasons why clean energy investment growth might stall in 2015. The first is that 2014’s figure of $310bn will be a tough act to follow. It was up 16% on 2013, it was less than 3% below the all-time record, of $318bn in 2011, and indeed it could yet be revised higher in the months ahead if Bloomberg New Energy Finance’s data hawks in Cape Town and elsewhere spot more deals.

The second reason is that the 2014 total relied on a couple of features that are unlikely to recur. One was a spurt of large offshore wind financings, adding up to a record $19.4bn in total, one-and-a-half times the figure for 2012 and 2013 combined. The other was a jump in public market equity raised by clean energy companies to $18.7bn, a seven-year high. With sector share prices, measured by the WilderHill New Energy Global Innovation Index, or NEX, now nearly 20% below their March 2014 high, public market investment, at least for the first half of 2015, is likely to be weak.

There will be one other bit of grit in the engine this year too. The jump in the US currency’s exchange rate (in the last year up 22% versus the euro, 15% against the yen, 9% against a basket of currencies) is likely to depress the dollar value of investment outside the US in 2015.

We are optimistic about the GW capacity of new onshore wind and PV that will be installed in 2015 (see sections below), and there may well be a burst of new investment-stimulating policy ahead of the Paris COP21 climate change conference in December. India could be a star performer in clean energy this year, as Narendra Modi’s renewables-friendly government targets a doubling in solar installations to some 2.3GW, and the reinstatement of accelerated depreciation for wind projects drives a jump in investment activity.

If you push me for a 2015 investment figure, I would go for something in the $280bn to $320bn range. In other words, probably just short of last year’s figure, but with just a chance of exceeding it if things pick up through the course of the year.

Finally, green bonds: these have been one of the great success stories of the past two years, increasing from a paltry $3-5bn per year between 2007 and 2012, then suddenly jumping to $14bn in 2013 and $39bn last year. In 2015 we expect to see further rapid growth. No fewer than 75 major banks, investors and issuers have now signed up to the Green Bond Principles. There have been no major controversies and demand for green bonds has grown in line with supply. Most new issues have been healthily over-subscribed and have got away at the low end of their yield range, a very positive sign for the future.

We see the volume of green bonds doubling again this year to around $80bn. It should be noted that BNEF tracks green bonds separately from total investment in clean energy: total investment is counted at the point at which it is committed to projects, companies and research, not when funds are raised. Where we add, for instance IPO proceeds, we then adjust the totals to remove double-counting. So our figure for total investment takes into account the clean energy assets financed by green bonds, not the green bonds themselves.


The last five years have delivered formidable improvements in the cost-competitiveness of PV, and to a more modest extent, wind power. After a pause in 2014, I expect to see renewed progress this year. The oil price plunge may help to bring this about, because a lower levelised cost of electricity for gas-fired generation in some countries will force solar and wind developers to respond with keener prices themselves.

I have a bit of an unfair advantage here, because I am writing this during January, having already seen what will clearly be one of the bellwether deals of 2015: ACWA Power’s extraordinary 5.84 US cents per kWh winning bid to build 200MW of solar PV on behalf of the Dubai Electricity and Water Authority (DEWA). In fact ACWA offered to go to 5.4 cents per kWh if DEWA awarded them the contract for a whole GW. At the World Future Energy Summit in Abu Dhabi last week, there was much debate about whether 5.84 cents could be replicated, or whether it was an artificially low price.

Dubai has superb solar resources, ACWA was able to obtain 86% leverage from local commercial banks because of the stability of its off-taker, and the tariff will be in place for 25 years. As a major developer, ACWA has a lot of leverage over equipment suppliers – it plumped for First Solar panels. So the conclusion must be that although 6-cent solar is certainly not going to be the norm, it is certainly the new benchmark. Around the world, solar project developers will be sharpening their pencils and seeing how close they can get. We are leaving behind the world of 15-cent solar, just as we have left behind the world of 30-cent solar and 50-cent solar within a few short years. Soon even Bjorn Lomborg, Dieter Helm, Matt Ridley and Martin Wolf will have to admit it.

Another thing we will be seeing is a narrowing of the surprisingly large gulf between PV system costs in cheap markets such as Germany, and that in expensive ones like the US – particularly California – and Japan. The expensive markets will get cheaper as scale and competition grow, which they will. We also expect to see the fruits of some of the initiatives aimed at squeezing expense out of the PV value chain – using more tailored pastes, new structures and better printing techniques, reducing material waste in manufacturing, using more economical fixings, cheaper inverters, and so on. And PV developers will be able to secure more financial leverage, as more investors become comfortable with the economics of solar power, enabling lower prices to produce the same equity returns.

In offshore wind, we should see cost reduction thanks to an unlikely friend, oil. A $100-plus crude price meant intense competition for large crane vessels, and therefore high charter rates. Anecdotal evidence suggests that the cost of hiring such a vessel has fallen by more than half in the last year, and when we are talking about many tens of thousands of dollars per day, that is a big deal. In onshore wind, lower oil prices will cut transport costs for the large components such as blades, nacelles and tower sections.

Geothermal may also benefit from lower rig rates, but since projects take so long to prepare, the effect of that during 2015 is likely to be minimal.


The Paris climate change conference in December is the biggest fixture in the climate calendar since Copenhagen in 2009. To pursue the dinosaur theme, the climate community are dearly hoping it will prove to be a vast meteorite, streaking across the sky to deliver a long-overdue extinction event.

The reality is rather different. As is well-known, I have never bought the narrative that what the world needs most in order to address climate change is a binding top-down agreement assigning a carbon budget to each nation for all time. I am a relentless bottom-upper – favouring action on the ground over multilateral talks – and I am very much encouraged by what I see at levels around us: concrete and effective initiatives at national level, led by municipalities, mayors, companies, individuals and sectors, as well as bilaterally and plurilaterally, and the emergence of a very convincing set of technical solutions.

In terms of bilateral agreements, last November’s US-China deal was the most significant development on the climate front for years. As we speak there is an ongoing plurilateral negotiation under the auspices of the World Trade Organization, aiming for a trade deal covering environmental goods, perhaps to be announced by year-end. However, we have also seen India continue to refuse to make any significant pledge in bilateral talks with the US, a position it will most likely maintain in Paris, to the detriment of any effective outcome.

I believe the best we can hope for is that the UNFCCC process does not impede progress on all these fronts, in particular investment in clean energy and infrastructure, and perhaps that it provides some overall encouragement. That may sound unambitious, but the collapse of Copenhagen and the fiasco of rebuilding the climate negotiations thereafter set back the cause of clean energy considerably.

The way the Paris talks are structured, it is possible to be optimistic about this limited goal. There is little talk of a top-down, binding deal structured around carbon budgets. Most likely, a deal will emerge, structured around what used to be called “pledge and review”. In other words, each country will state what it is prepared to do, and then there will be some process of totting up commitments and pushing for more ambition in subsequent negotiating sessions. It will be denounced as unambitious by activists, but the reality is that it will be a decent outcome.

With any luck there will be general acceptance that the Kyoto approach, hobbling the economies of the developed world but allowing the developing world free license to emit, will be dead. But that may be a hope too far.


When world oil prices were above $100 per barrel this summer, we felt we were set for nearly 400,000 electric vehicle (EV) sales globally in 2015, up from last year’s 290,000. With oil prices languishing around $50 per barrel, the EV market is inevitably going to fall short of those figures.

The biggest impact of cheaper oil, however, is likely to be on sales of hybrid cars, not EVs. Some buyers of electric vehicles, for instance those plumping for the Tesla S or BMW i8, are making their decisions in principle, not based on economics. Even those buying mid-range EVs, like the Leaf and the VW e-Golf, rarely make total cost of ownership calculations – it is just too hard, particularly when no one knows the resale value of these cars. So, while the drop in oil prices makes electric vehicles less attractive in theory, it does not change the sticker price, which is all about those pesky battery costs, less any subsidy.

What we are also seeing is that where EVs are being adopted very rapidly, it is as much to do with driver perks, like the right to share the single-occupant car lane, free use of ferries, exemption from congestion charging and the availability of charging infrastructure. Again these are things which are being offered more frequently, and are not affected by oil prices.

The Chinese EV market has been “challenging”, to use the words of Tesla Motors chairman Elon Musk, but the country nevertheless continues to bet on EVs as one of the main ways of dealing with its desperate urban pollution problem. This is a position likely to be adopted by more and more mayors around the world as the health impacts of diesel pollution are better understood. A landmark ruling by the European Court of Justice in November last year opens the way for any EU citizen to take his or her government to court over failure to address air quality breaches – and it is hard to see any meaningful action in European cities not including increased support for electric vehicles.

Finally, although in the US there are signs that some Americans are once again turning to larger cars, most buyers will wonder how long oil prices will stay below $50.

My forecast, therefore, is for continued growth in the EV market in 2015, but at a slower rate than 2014’s 40%, with the eventual sales total around 15% up at 330,000.


Our prediction for solar in 2015 is that the world will add more than 55GW of capacity, and indeed, if the sector gathers steam during the year as we think it might, it could reach as much as 60GW, up from a record of just under 50GW last year. The manufacturing capacity is certainly there, and investors are increasingly happy holding solar assets, as evidenced by the surge of yieldcos during the past two years and the ease with which green bonds are being placed.

The continuing solar success story will be driven mainly by increasing competitiveness, as discussed above, supported by a growing confidence among investors and policy-makers that solar is indeed a cheap source of daytime power. In in the developing world, it can quickly help to close the energy access gap, and in the developed world it can play an important role in meeting peak demand, in particular where there is heavy air-conditioning demand.

As solar gains in market share we will see more territories imposing taxes on rooftop PV, following on the heels of Germany and Austria last year. Other European countries, and some US states, are among the places that might introduce an impost to try to ensure that small-scale solar users contribute to the cost of the grid.

The most exciting change in a business-as-usual year may well be the spread of PV to more and more localities in Africa and India, both rooftop and projects, as the entrepreneurial effort fans out from early-moving countries such as Kenya and Rwanda, and Prime Minister Modi’s ambitious vision for solar takes shape.


Last year saw a record 51GW of wind capacity added worldwide, with China, the US, Brazil, Germany and India the biggest markets. In 2015, we expect to see this figure beaten handsomely, with some 58GW added, nearly 55GW of that being onshore and more than 3GW offshore.

Apart from German onshore, where installations will fall back after the rush to take advantage of a tariff that expired on 1 January, most of the other big markets will see growth. The US will see particularly strong activity, with anything up to 10GW added, as projects that qualified for the Production Tax Credit in 2013 or during the short-lived extension at the end of last year, reach the construction stage.

Even though the number of new GW installed will be up, dollar investment in wind is likely to be down in 2015 from the record $99.5bn figure achieved last year. This is because there is a lag of a year or more between investment decision and project completion, and in 2015 policy uncertainty in key markets such as German and US onshore and UK offshore is likely to hold back new financings.


Home energy management, innovations such as smart thermostats and the “connected home”, are really set to catch the consumer imagination in 2015. Nest will continue to run out its slick advertising, Apple and Honeywell are now pushing their Lyric, British Gas is pushing Hive, and so on.

2015 should see progress towards more systematic products – smart thermostats that can talk to the boiler and process a weather forecast – as well as the integration of various services on one platform. US-based security firm ADT has secured one million customers for its connected home platform, leveraging its strong position in burglar alarms.

All this should open up the chance for households to take advantage of time-of-use electricity pricing. Regulators in many countries are looking to require utilities to offer this, and indeed Italy and Ontario already do so. Large-scale uptake of demand-side management technologies is likely to be faster in the US, where air conditioning is a key part of the load, than in Europe. The prize for the power system as a whole will be much greater flexibility to cope with peaks and troughs in demand and in variable generation from wind and solar.

However, although it will become much more common to include smart home products in new-build housing, their overall penetration into housing stock will remain in the single-digit percent in even the most enthusiastic countries. The fact is most consumers are not ready to retrofit their homes with a new and complex system, even if the economics makes sense. And falling utility bills due to lower natural gas prices are not going to help.

So it is with storage. 2014 saw at least one big milestone – the announcement of the Tesla gigafactory – as well as a plethora of reports claiming that grid defection is about to hit utilities in the gut. However, our analysis of Germany and Australia, and an upcoming analysis of the US, show that this claim is premature. It is clear that storage is an area enjoying a lot of research and development activity, corporate dollars, experimentation, policy interest, pilot projects, and very fast price declines.

We predict some big milestones in 2015 – average storage system prices will continue to fall, at least one more 100MW-plus project will be launched, and more major corporations will enter the market. Overall, we expect to see a hefty 400-500MW of new storage capacity added this year, excluding pumped hydro, up from little more than 100MW in 2014. Most of it will be grid-level power storage for transmission and distribution, or residential and commercial storage, rather than bolt-ons to wind farms or solar parks. The US, Japan and South Korea will see much of the growth.

However, those hoping for the arrival of either a GW market for grid storage, or of a mass market in home storage, will have to wait a few more years.


2015 looks like being another miserable year for the black stuff, and I do not mean Guinness. Coal is under fire from all directions. The price of its nearest base-load rival, natural gas, is either low (the US) or going lower (elsewhere), as described above; environmental regulations are cracking down on emissions in big economies such as the US and China; and carbon prices in Europe are likely to trend upwards during the year as policy-makers support a Market Stability Reserve to prevent withdrawn allowances returning to the market.

With electricity demand still lagging far behind GDP in developed countries, and rooftop solar helping itself to more of the market, it looks like coal will end up like the child without a seat in a game of musical chairs. Expect to see more coal-fired power station phase-outs and mine closures, hold-ups in building railheads and port facilities, and a growing consensus among climate-aware institutional investors that holding on to investments in coal is simply a risky business. 2015 will likely to see coal identified by the divestment movement as the weakest steer, given that the market cap of publicly quoted coal companies is just $250 billion, compared to around $5 trillion for oil and gas companies.

Of course, this will not be the end for coal. For one thing, there are nearly 2TW of coal-burning capacity worldwide, and some emerging economies will add more, partly for energy security or balance of trade reasons. That capacity will go on firing for many, many years to come. Also, the long slide in the international coal price, from $130-a-tonne in 2011 to $60 now, and perhaps lower still this year, will cushion the competitiveness of this fossil fuel against gas and renewables.

As happened with oil, if you erode its market, then its price will fall and its competitiveness is shored up. And who knows: the world may start talking seriously again about carbon capture and storage in 2015.


My final prediction is that 2015 will be the beginning of a record boom for energy mergers and acquisitions. Many of the trends we have been tracking for years are coming to a head, and they will drive a significant restructuring in both the utility and oil and gas sectors.

EON’s split into two, and NextEra’s acquisition of Hawaiian Electric Industries, are just the first shots in a value-chain revolution that will rip through utilities in the next five years. In justifying EON’s split, CEO Johannes Teyssen explained that electricity retailing and bulk generation are as different as football and handball. “They are both ball sports, but not even Bayern Munich could survive in a handball league,” as he put it. This logic is spot-on, and inescapable. Expect to see many more utilities, or as the Australians call them, “gen-tailers”, separate their generation and retailing assets.

While the generating assets, particularly when they are heavily dependent on coal and nuclear, might look like the power sector’s equivalent of a “bad bank”, the retailing part is where the innovation, and hence perhaps higher margins, are going to be. So while the generation assets look set to be sold off – and perhaps these will be attractive to some – there will also be acquisitions to be made at the retailing end of things, to bring in new services and skills. Where regulation allows it, we may even see acquisitions or mergers between telecoms and electricity companies.

As for the oil and gas sectors, we have already identified that US shale operators are likely to see a few years of forced consolidation, with all the M&A activity that implies. But in the oil sector too we are going to see action. The biggest international oil company, ExxonMobil, is only the fourth-biggest oil company in the world, behind Saudi Aramco, Gazprom and the Iranian National Oil Company. BP and Shell are sixth and seventh. The only other international company in the top 10 is Chevron.

The recent oil price drop, even if it does turn out to be a “flash crash”, is shining a spotlight on the inherent weakness of the smaller international oil companies. They are excluded from access to the lowest cost supplies, so in a world of volatile oil prices, not only are their margins systemically low, but any time the price drops, they are the first to be squeezed off the end of the supply curve. Their investors are receiving a very rude wake-up call. For all the acres of publicity given to the so-called “carbon bubble”, old-fashioned commodity volatility has delivered a far more powerful blow to oil companies’ financeability (it is also worth noting that the recent 22% drop in the NYSE Arca Oil share index has done nothing to unleash the next round of fiscal meltdown, as many in the climate community predicted it would).

This should naturally lead to a surge of M&A activity in the oil industry. Not even the super-majors are immune. Faced with a cost problem and reduced market prices, it is the only available strategy for many players, particularly those without significant gas businesses. Consolidate, cut costs, stop exploring. We have been here before – welcome to the 1980s.

All in all, if you are an energy M&A banker, look forward to short nights and lots of frequent-flyer miles.

* * *

Well, there you have our predictions for the year. Many of the themes I have discussed above, such as oil and gas prices, the dilemmas facing utilities, yieldcos and green bonds, and the whole area of financial innovation, will be vigorously debated at the Bloomberg New Energy Finance Summit. Put it in your diary now: New York, 13-15 April (for further details, see

I hope to see you there. In the meantime, a final word to our dinosaur friends: not all of them died out in the extinction event 66m years ago. Some learned to fly and are with us today as birds.

I wish you all the very best of luck and business success in 2015.