In our first Sustainable Finance Report published last year, we examined the transformation of the Chinese power generation sector and the leading position China was establishing in the renewables sector. Here, we examine prospects for the U.S. renewables sector and the risks and opportunities that are unfolding from a competitive and regulatory perspective.
According to the International Renewable Energy Agency (Irena), the number of jobs in the global renewables sector reached 8.1 million in 2015 with China, Brazil and the United States accounting for almost two thirds of people employed in the renewables sector globally. By 2030, Irena estimates a threefold increase in the number of people employed in the global renewables sector.
In the U.S., of the roughly 770K people employed in the renewable sector, the solar sector accounts for just over a quarter with the wind industry employing approximately 90K. Jobs in the U.S. solar sector have increased by over 60% in the three years to 2015. As a result, more people are employed in the U.S. solar industry today than in the domestic oil and gas extraction sector (187K).
In the U.S., the deployment of renewable technology has been assisted by falling costs across the wind and solar sectors, which has made renewable power generation increasingly competitive compared to more traditional generating sources such as coal and natural gas.
The growth in the renewable sector has also been driven by a desire among utilities and independent power producers to diversify power fleets. According to the EIA, renewables, excluding hydro, accounted for just 7.3% of the U.S. power generation mix in 2015 with obvious room for growth.
The renewable sector is also being boosted by consumer demands for clean energy as well as U.S. corporates such as Walmart, Google and Apple stating their intent to source up to 100% of their energy from renewables.
In addition, 29 U.S. states have Renewable Portfolio Standards which mandate that a certain proportion of electricity generated must come from renewable sources. For example, New York and California have set targets that renewable energy must account for at least half of their energy source by 2030.
We believe renewable projects are also attractive from a yield and cash flow perspective. Renewable energy projects tend to be long-lived assets with 20-25 year financial lives and generally have consistent, long-term contracted cash flows that are independent of fossil based fuel price volatility. Such projects have garnered the attention of those seeking long-term, stable and relatively high yielding securities, particularly now during a period of low interest rates.
Within the renewable power generating sector, we believe opportunities are particularly attractive for distributed utility-scale power generation projects, that is projects of less than 25MW for non-rooftop solar photovoltaic and less than 100MW for onshore wind.
One of the benefits of distributed utility-scale projects is that they are sited close to the end-users of the power and as a result do not rely as heavily on the electricity transmission grid compared to large-scale utility projects. Consequently these facilities are able to mitigate a significant portion of the mark-up from transmission and distribution costs while still pricing close to retail power prices.
The appeal of the global renewable sector among institutional investors is also being enhanced by changing investor attitudes towards fossil fuels and the transition required towards a low carbon economy. This is a topic we explore in the climate risk article that features earlier in this report.
However, uncertainty towards the path of U.S. environmental legislation and its implications for the U.S. renewable sector has grown since the U.S. Presidential election at the end of last year.
In our view, policy change as it relates to the coal and renewables sectors are focused on the elimination of the Clean Power Plan, the repeal of energy tax credits that support the development of renewable energy and the possible withdrawal by the United States from the Paris climate agreement.
While federal legislation may become more supportive to coal and possibly less favourable to renewables, we expect state, corporate and investor level support for the U.S. renewable sector will prove resilient. This reflects improving competitivess of renewables as well as attractive investment opportunities for the sector.