NEWSLETTER 17 Value Partners met with Vittorio Chiesa, head of the Energy Strategy Group at Politecnico di Milano, to get his point of view on the possible development of the renewable energy and technology sectors. Professor Chiesa, in your reports, you highlight the different approaches undertaken by some countries to promote the development of re- newable energies. How much did the incentive schemes influence the success or failure of green energy-generating technologies? Let’s start by saying that, without incentives, apart from some eolic installations, the eco- nomics of renewable energies is not sustainable. The total cost of generating renewable energy is much higher than conventional generating schemes. With regard to incentives, there are two major considerations. First, the incentive sche- me must gradually decrease, in correlation with the green technology industry capacity to reach economies of scale and reduce costs. Second, there has to be a maximum cap to the total incentivised installed power, but this cap must be reasonable. In Spain, the abrupt end to the photovoltaic sector was not due to the reduction of feed-in tariffs but to the announcement of a maximum cap of 500MW per year, whereas in 2008, more than 2.5 GW of solar photovoltaic power were incentivised. If we look at the multiples of listed companies operating in the renewable sector and we track the drop in performance of some Spanish stocks, we observe analogies with the e-economy. In your opinion, is there any risk of a “green energy bubble”? It very much depends on two factors: how the incentive schemes evolve and the way that single states promote the growth of relevant value chains. For example, in Italy the solar photovoltaic scheme (“Conto Energia”) helps the adoption of the generating technology, but not the development of a value chain. A national economy has grown up around mo- dules and panels, thanks to the initiative of single entrepreneurs, rather than public aid. A green energy bubble could only develop if there were to be a sudden stop in incentive schemes worldwide, but since we are far from reaching our declared objectives in green house gas reduction, the environmental issue will play in favour of green energy. What could happen is a shift of incentives schemes to promote a well-balanced mix of tech- nologies and a premium to distributed generation solutions (putting power generation near the final point of consumption), as opposed to big projects. Which are the factors that differentiate e-economy from green economy? In the e-economy, skyrocketing evaluations were based on a general belief in a revolution in operations that then did not, or only partially, happened. The picture is completely diffe- rent here: in the green economy, there is a potential market. Revenues are based on incen- tives, and thus on government will to incentivise the growth of clean generating technolo- gies, either through feed-in tariffs or with market mechanisms such as green certificates. Are there any particular sectors or geographies risking a green economy bubble? Again, it depends on governments and on their decisions. The Spanish photovoltaic sec- tor is an example of a significant reduction of its government commitment, which has decreased investors’ interest. Even in Italy, there could be a significant risk – for example, as a result of the decision to abolish the obligation of GSE (Gestore Servizi Energetici) to collect excess green certifi- cates from renewable energy producers. This could have a significant impact on green certificate prices and reduce the attractiveness of renewable energy investments, the- reby putting employment at risk and destabilising the sector. On the other hand, the government is promoting the development of lower scale plants (<1MW), which benefit from a well-defined and generous feed-in tariff (and faster authorisation procedures). Green energy bubbles: an academic perspective An interview with Professor Vittorio Chiesa Vittorio Chiesa is Full Professor of Strategy and Organisation of R&D in the Department of Management, Economics and Industrial Engineering at Politecnico di Milano. He heads the Energy Strategy Group (www.energystrategy.it), where he conducts in-depth analysis of solar energy and biomass energy, issuing periodical reports that are a renowned reference for operators, investors and researchers.
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NEWSLETTER
17
Value Partners met with Vittorio Chiesa, head of the Energy Strategy Group at Politecnico di Milano, to get his point of view on the possible development of the renewable energy and technology sectors.
Professor Chiesa, in your reports, you highlight the different approaches undertaken by some countries to promote the development of re-newable energies. How much did the incentive schemes influence the success or failure of green energy-generating technologies?Let’s start by saying that, without incentives, apart from some eolic installations, the eco-nomics of renewable energies is not sustainable. The total cost of generating renewable energy is much higher than conventional generating schemes.
With regard to incentives, there are two major considerations. First, the incentive sche-me must gradually decrease, in correlation with the green technology industry capacity to reach economies of scale and reduce costs. Second, there has to be a maximum cap to the total incentivised installed power, but this cap must be reasonable. In Spain, the abrupt end to the photovoltaic sector was not due to the reduction of feed-in tariffs but to the announcement of a maximum cap of 500MW per year, whereas in 2008, more than 2.5 GW of solar photovoltaic power were incentivised.
If we look at the multiples of listed companies operating in the renewable sector and we track the drop in performance of some Spanish stocks, we observe analogies with the e-economy. In your opinion, is there any risk of a “green energy bubble”?It very much depends on two factors: how the incentive schemes evolve and the way that single states promote the growth of relevant value chains. For example, in Italy the solar photovoltaic scheme (“Conto Energia”) helps the adoption of the generating technology, but not the development of a value chain. A national economy has grown up around mo-dules and panels, thanks to the initiative of single entrepreneurs, rather than public aid.
A green energy bubble could only develop if there were to be a sudden stop in incentive schemes worldwide, but since we are far from reaching our declared objectives in green house gas reduction, the environmental issue will play in favour of green energy. What could happen is a shift of incentives schemes to promote a well-balanced mix of tech-nologies and a premium to distributed generation solutions (putting power generation near the final point of consumption), as opposed to big projects.
Which are the factors that differentiate e-economy from green economy?In the e-economy, skyrocketing evaluations were based on a general belief in a revolution in operations that then did not, or only partially, happened. The picture is completely diffe-rent here: in the green economy, there is a potential market. Revenues are based on incen-tives, and thus on government will to incentivise the growth of clean generating technolo-gies, either through feed-in tariffs or with market mechanisms such as green certificates.
Are there any particular sectors or geographies risking a green economy bubble?Again, it depends on governments and on their decisions. The Spanish photovoltaic sec-tor is an example of a significant reduction of its government commitment, which has decreased investors’ interest. Even in Italy, there could be a significant risk – for example, as a result of the decision to abolish the obligation of GSE (Gestore Servizi Energetici) to collect excess green certifi-cates from renewable energy producers. This could have a significant impact on green certificate prices and reduce the attractiveness of renewable energy investments, the-reby putting employment at risk and destabilising the sector. On the other hand, the government is promoting the development of lower scale plants (<1MW), which benefit from a well-defined and generous feed-in tariff (and faster authorisation procedures).
Green energy bubbles: an academic perspective
An interview with Professor Vittorio Chiesa
Vittorio Chiesa is Full Professor of Strategy and Organisation of R&D in the Department of Management, Economics and Industrial Engineering at Politecnico di Milano.He heads the Energy Strategy Group (www.energystrategy.it),where he conducts in-depth analysis of solar energy and biomass energy, issuing periodical reports that are a renowned reference for operators, investors and researchers.
Power - up
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Recently, you released an exhaustive report on biomass energies, highlighting the diffe-rences in the technologies, supply chains, economics and regulatory issues of agro fore-stry, biogas, bio fuels and waste to energy. Which of these are the most promising and how could the incentive schemes or authorisation procedures determine their success or failure?In Italy, the incentive scheme is mainly determined by the size, rather than the techno-logy. Apart from bio fuels, plants above 1MW receive green certificates, whereas below 1MW, there is a feed-in tariff. Having said this, what really matters in biomass generation is the supply chain. In agro forestry, there is a lack of collection systems guaranteeing a continuous and price stable feeding. With biogas, the difficulty is in making sound con-sortia agreements between agricultural farms and breeding industries. As far as waste to energy is concerned, there is a strong cultural factor against incinerators (“Not in my back yard”) and waste collection must be well organised.
On the subject of bio fuels, unless we develop second-generation feedstock, such as cel-lulosic bio ethanol, micro algae or jatropha, there will always be competition in the food chain and a strong dependence on imports.
How can a country (e.g. Italy) replicate the virtuous path of Germany in the solar photo-voltaic sector and create a national value chain? And what could be the “next wave”?In the solar photovoltaic sector, Italy has missed the boat in crystalline technologies, but in 3-4 years’ time, we will see a growth in thin film technologies (some estimate an opti-mistic 30-40 percent of share of new installations). There are also excellent prospects in concentrated solar and in solar thermodynamic generation, where Italy has strong engi-neering skills and significant manufacturers of components (mirrors, reflecting surfaces, heat collectors and sun trackers).
If the Obama plans are maintained, there are significant opportunities for these indu-stries to play a leading role in this field.In the second-generation bio fuels, companies such as Mossi Ghisolfi are well positioned to develop a consistent presence in cellulosic wood bio ethanol production. Another in-teresting project is Mambo (Micro Algae Material for Bio Oil), in which the objective is to grow micro algae – which won’t compete with the food value chain – to produce diesel oil. Exxon is also investing US$ 600 million in this field.
Up to now, a significant amount of incentives have been devoted to generation or to system safety. What has been done to promote energy efficiency?In my opinion, energy efficiency is undervalued. Energy demand is growing, and the ca-pacity to reduce consumption is limited and well below the 2020 objectives. Of the three 20/20/20 elements, the most forgotten is indeed energy efficiency. For CO
2 reduction,
there is an Emission Trading Scheme. Renewable generation, we already mentioned.
The 20 percent of energy efficiency is totally neglected. It’s a factor that passes through a process of cultural growth. It entails changing people’s behaviour and making use of exi-sting solutions and technologies. For example thermal solar is completely undervalued, it can be easily integrated into cooling systems since the energy production is perfectly matched with the need and it can be easily integrated in industrial processes. Also low enthalpy geothermal energy is a possible solution. The culture of energy efficiency is weak: solutions with low costs upfront tend to prevail, even though energy consumption is higher. What could help draw people’s attention is a government intervention on building efficiency – for example, the obligation in Italy to install 1kW of renewable energy in order to obtain the construction permit of a new hou-se, or the obligation to obtain an energy certificate during real estate transactions. In the UK, from 2016 every new house built must be energy sufficient. The growing industry of ESCO (Energy Service Companies) can help this sector’s growth.
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To sum up, in your opinion, which sectors are the most promising in the future?Renewable energies, in general, will continue to develop, provided that the incentive schemes survive. In the next few years, the focus on energy efficiency will grow, due to financial restrictions and government willingness to reduce state aid and promote savings. Moreover, there could be significant development in the energy efficiency components in-dustries – for example, in illumination and construction materials.
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