gef - clean edge report
TRANSCRIPT
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A Global View of
Emerging Opportunities
In Renewable Energy
Prepared by Clean Edge, Inc.
Exclusively for the use of Global Environment Fund
September 2004
2004 Clean Edge, Inc. All rights reserved.
May not be reproduced without express consent of Clean Edge, Inc.
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CONTENTS
About Global Environment Fund .....................................................................................3
Overview ..............................................................................................................................7
A Confluence of Forces......................................................................................................8
Key Clean Energy Technologies......................................................................................11
Wind Power ......................................................................................................................11
Biomass .............................................................................................................................12
Solar Photovoltaics.......................................................................................................... 12
Hydrogen Fuel Cells and Infrastructure........................................................................14
Grid Automation and Optimization .............................................................................. 14
Small-Scale Hydro...........................................................................................................15
Geothermal .......................................................................................................................16
Wave and Tidal Power .................................................................................................... 16
Emerging Capital Markets ...............................................................................................17
Select State Clean Energy Initiatives .............................................................................19
Select Key Clean Energy Trends ....................................................................................20
Green Power: A Price Hedge and Market Accelerator................................................ 20
The Energy Web: Changing the Future of Energy Services.......................................20
China and India: The Next Wave in Clean Energy Development .............................22
The Hydrogen Infrastructure: Big Bucks, Big Challenges ..........................................23
Defense Spending Promotes Clean Energy Technologies........................................... 24
Rural Electrification: Large Markets from Small-Scale Power .................................. 25
Conclusion.........................................................................................................................27
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ABOUT GLOBAL ENVIRONMENT FUND
Global Environment Fund (GEF) is an international private equity company,
established in 1990, and committed to investing in companies whose business
operations deliver measurable environmental improvements through deployment
of improved environmental infrastructure and clean technologies. GEFs
investment objective is to provide superior returns by harnessing the power of
technological innovation to promote energy sources and means of production
that are cleaner, more efficient, cheaper, and more sustainable.
GEF currently manages a group of private equity investment funds including
several funds dedicated to basic environmental infrastructure and health care
delivery systems in emerging markets, as well as a fund focusing on clean
technologies in the United States. Through its own capital investment vehicle,
Global Environment Capital Company, LLC, GEF also develops, finances, andtakes controlling interests in principal investments for its own account. Total
capital available for investment through GEFs equity investment programs
exceeds $300 million.
GEF is a registered investment advisor with the U.S. Securities and Exchange
commission, having maintained its registration continuously since 1992. Our
senior management team has worked together for nearly 10 years, and we have
an experienced group of investment and financial administration professionals,
including five who are CFA Charterholders through the Chartered Financial
Analyst Program and three Certified Public Accountants (CPA). In recent years,
the GEF investment team has completed more than 30 private equity or early-
stage technology investments in businesses operating in a broad array ofeconomic sectors and in all of the worlds major geographical regions. On a
firm-wide basis, the six-year audited internal rate of return on more than $165
million invested by GEF in private equity and early stage technology deals for
the period 1998 to 2003 stands at 29.5 percent.
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GEF INTRODUCTION
From our inception in 1990, Global Environment Fund has invested in the
development and deployment of cleaner, more efficient energy sources around
the globe.
In fact, several of GEFs founding investors participated in early private
investment activities in the United States in the late 1970s and 1980s designed
to promote commercial adaptation of renewable energy technologies. Their cause
was noble, but the financial results were mixed: they lost money in the original
Luz solar projects; they achieved modest equity returns in wind power projects at
Altamont and Tehachapi; and they managed a solid dividend return from the
financing of solar hot water systems at the state prison in California on the basis
of tolling arrangements that paid in accordance with the price of displaced
natural gas systems. Despite the satisfaction of promoting the greater good, theconclusion of these investors, and our conclusion when we founded GEF, was
that most renewable energy technologies were still not economically viable. We
anticipated that they still needed a decade or more of experimentation and
research before they could be competitive with traditional energy sources in
most places.
Consequently, our investors were clear about the GEF mandate: promote clean
and renewable energy, for sure, but do not lose money, and do not invest in
technologies that are not mature enough to stand on their own without perpetual
subsidization. In 1990, of course, this was no small order. We are proud of the
fact that, from our inception 15 years ago, we have found exciting and
profitable renewable energy investments around the world. We were earlyinvestors in 1991 in Compania Boliviana Electricidad, which within a very
unstable macro economic climate managed to provide nearly 40 percent of
Bolivias electricity from low-head, run-of-river hydroelectric facilities. Before
privatization of the energy sector in Brazil, we financed and helped create
Brazils only purely private electrical generating and distribution company in
1995, Companhia Forca e Luz Cataguazes, which still serves customers in Minas
Gerais and Rio de Janeiro with an expanding network of small-scale
hydrofacilities. We were investors in Magma Power, as that company grew in the
mid 1990s to become a leading developer of geothermal power in California, and
in The Philippines. In 1996, we participated in a private financing sponsored by
three Indian electricity companies managed by the Tata Group that providedequity capital for the construction of a peak-load-shaving, pumped storage
facility that eliminated the need for a proposed coal-fired power plant to serve
Mumbai, India. In 1997, a company in which we were significant venture
capital investors, NEPC Micon, became, at least for one year, the largest
manufacturer of wind turbines in the world, driven by major government-backed
wind energy programs in India.
We are proud of the
fact, that from our
inception 15 years
ago, we have found
exciting and profitable
renewable energy
investments around
the world
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As we examine global investment prospects over the next 15 years, the energy
generation and transmission industry is in the spotlight of growing worldwide
concerns about the economic and environmental costs of traditional energy
technologies. These concerns include: environmental pollution, public health, the
high costs of fossil fuels, global greenhouse gas emissions, and the vulnerabilityand capital costs associated with mass-grid energy systems.
Nevertheless, the world has a voracious appetite, and need, for new energy
supplies. Even today more than one-third of the people on the planet still do not
benefit from the basic modern amenities that are availed by the fossil fuel
economyelectricity supply, refrigerators, automobiles. The World Bank
estimates that two billion people do not have access to an electricity grid. The
cost of extending power to remote areas is often prohibitively expensive and
difficult to finance for most developing nations. China and India, alone, will
likely double or triple the amount of electricity they produce, and the amount of
total energy they consume in the next 30 years. Car ownership per capita in
China, while growing by double digit percentages every year, has barely reachedthe level that prevailed in the United States when the first Model T rolled off the
assembly line! What will happen to the planet as China, India, Indonesia and
other developing countries drive up the demand for more of the worlds
dwindling oil reserves and continue to fuel their still-nascent industrial
revolution with their large domestic coal reserves?
We at GEF believe that the forces of technological change will, in coming years,
transform the profile of energy use and electricity production in the global
economy. This transformation will be facilitated by governments and
international finance agencies which, in addition to supporting traditional
energy production, have fostered policies to commercialize and financed new
technologies and cleaner ways of utilizing energy supplies around the world.
This climate of change in the global energy industry will create significant
opportunities for private sector investors interested in investing in cleaner, more
efficient and decentralized energy generation technologies that are rapidly
attaining commercial viability.
Technology is fast eroding the economies-of-scale-advantage that has favored
centralized generation and transmission systems for electricity. Distributed
generation, the application of relatively small power plants near or at load
centers, is gaining broad interest among competitive energy suppliers and
regulated power delivery service providers. Advances in small generation
systems (i.e. reciprocating gensets, turbines) and new technologies (i.e. micro-turbines and fuel cells) are proving to be more efficient, cleaner and easier to site
than larger centralized power plants. Other emerging generation technologies
small-scale hydro power, wind energy, solar power, ocean power, biomassare
increasingly being employed to meet new electricity demand. GEF believes that
these trends set the stage in coming years for a significant deployment of
We at GEF believe
that the forces of
technological change
will, in coming years,
transform the profile
of energy use and
electricity production
in the global economy
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investment capital into the development and finance of projects that deliver
reliable, efficient and cleaner forms of energy.
To assist us in scoping out new technological developments and the range of
new investment possibilities they may pose in the renewable energy industries,
GEF commissioned this report from Clean Edge. We are grateful to Joel
Makower, Ron Pernick and Clint Wilder of Clean Edge, who took up the task of
preparing this report for GEF. In addition, Samrat Ganguly and Michael Leonard
of GEF made significant contributions. Their collective efforts provide a good
staging point for the GEF investment team, as we continue to scour the globe for
private financing opportunities that will, at once, enable us to stimulate greater
utilization of renewable energy and achieve appropriate, risk-adjusted, private
equity returns.
Jeff Leonard
President
Global Environment Fund
Small-scale hydro
power, wind energy,
solar power, ocean
power, and biomass
are increasingly being
employed to meet
new electricity
demand
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OVERVIEW
Demand for cleaner energy sources is rising on a global basis. A confluence of
factors is compelling nations and companies to seek out clean energy solutions
for transportation fuels and electricity generation. The most significant drivers of
the trend include: rising global energy demands, particularly among rapidly
growing nations such as China and India, that are difficult to meet solely with
traditional energy sources; increasing awareness of the environmental
consequences resulting from continued dependence upon fossil-fuel energy
sources, especially coal and petroleum; and growing international security
threats posed by dependence upon energy supplies from politically volatile
regions.
Clean energy suppliesin the form of liquid fuels and electricity generated from
renewable, recycled, or other benign sourcesare also more widely available,and more cost-competitive as a result of technological improvements,
government incentives, and economies of scale. These trendsthe growing
demand for clean energy sources, and the increased availability of clean energy
supplieswill likely continue and accelerate in coming decades
According to some analyst estimates, global markets for clean energy fuels and
electricity already exceed $50 billion annually, with the deployment of some
clean energy technologies in the electricity generation sector expanding by more
than 30 percent a year. The clean energy industry has also rapidly become a
competitive arena for big business. Global business giants such as ABB, BP,
Caterpillar, DuPont, FedEx, Fuji, General Electric, Kyocera, Sanyo, Sharp, Shell,
Toshiba, UPS, and most of the worlds leading automakers have made majorinvestments in developing and deploying clean energy technologies in recent
years.
The market size for the three fastest-
growing clean technologies for electricity
generationwind, solar PV, and fuel
cellswill expand more than 20 percent
annually from $12.9 billion worldwide in
2003 to $92 billion in 2013, according to
Clean Edges projections, based on
analysis of past and future growth trends.
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A CONFLUENCE OF FORCES
As noted above, clean energys growth is the result of a convergence of factors,
including environmental, technological, economic, security, and social.
Cost Competitiveness. A key driver of the clean energy industry is thesimple fact that the economic cost of most renewable energy technologies has
fallen in recent years. In the next few decades, the cost of generation for most
renewable energy sources is expected to continue to fallabetted by
technological advances, new investment, and governmental incentives around
the world. This trend is gradually making renewable energy technologies cost-
competitive with traditional sources of energy. According to Navigant
Consulting, most renewable energy options should eventually be cost
competitive with grid power in the U.S. without any tax incentives or
governmental subsidies. Already, in some areas, wind-generated electricity is thecheapest energy source, at 4 cents per kWh, according to the U.S. Department of
Energyan order of magnitude lower than it was in 1980. Electricity from solar
photovoltaic (PV) cells has dropped from approximately $1 per kilowatt-hour
(kWh) in 1980 to below 20 cents per kWh in some areas today.
Energy security has become a topic of increasing importance, ascommunities, regions, and nations come to understand the vital importance of
reliable fuel and electricity. Raw cost per kWh of energy is not the only indicator
of competitiveness. The true value of energy in todays markets includes
measures of reliabilitysuch as availability during grid disruptions and ability to
ease grid requirements during periods of peak demand, thereby reducing the
need to build costly peaker plants. Disruptions in recent yearswhether due to
extreme weather, market manipulation, price perturbations, technical failures,
terrorism, or other causeshave underscored the vulnerabilities of having a vast
The Declining Cost of Renewables
As this chart shows, the cost of renewable energy
sources has been declining steadily in recent years,
and will continue to do so through the next few
decades. In some cases, such as photovoltaics,
costs are expected to plummet, due to improved
technology and economies of scale, equaling or beating
the 6 to 10 per kilowatt-hour price of conventional
electricity.
According to some
analyst estimates,
global markets for
clean energy fuels
and electricity already
exceed $50 billion
annually
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electric grid system with centralized, large-scale generation sources, or of
reliance on foreign sources of energy. The demand for energy reliability has
elevated the need for grid-optimization and back-up power technologies and
pushed up premiums for solutions that provide higher levels of energy security
and reliability.
Technological advances have significantly improved the performance, whiledramatically reducing the prices, of renewable energy technologies. Consider
solar photovoltaics. A wide range of developments have helped push down the
cost of PV modules by roughly an order of magnitudefrom about $30 per peak
watt in 1975 to about $3 today, with lower prices on the horizon. The efficiency
and reliability of the cells have improved to the point that some manufacturers
are offering 25-year warranties on their products. The combination of improving
performance at steadily lower costs comes from advances in cell materials,
module packaging, manufacturing processes, and other innovations. Similar
advances have helped reduce the cost of wind, geothermal, biomass, and other
clean energy technologies in lockstep with the efficiency and reliability of these
technologies.
Environmental concerns around the world, including air pollution, resourcescarcity, and climate change, have grown steadily among scientists and policy
makers, making clean energy an ever more attractive means of growing GDP
without a concomitant rise in emissions. In the developing world, polluted cities
have spurred calls for more efficient cars, buses, trucks, and scooters, opening
potentially vast markets for hybrid, fuel-cell, and other cleaner-running vehicles.
The rapid electrification of developing countries has accelerated concern about
the proliferation of large, coal-fired and nuclear power plants, as well as other
polluting and risky technologies, while making solar, wind, hydrogen, andbiomass increasingly attractive.
Government policies are shifting as political leaders come together torecognize that future economic competitiveness is directly linked to being more
resource-efficient and less reliant on older, polluting technologies. For example,
the U.S. Clean Energy Initiatives Efficient Energy for Sustainable Development
Partnership has announced a collaborative project with the U.K.s Renewable
Energy and Energy Efficiency Partnership. Additionally, the German Ministry for
Economic Cooperation and Development and the Inter-American Development
Bank have agreed to collaborate on clean energy projects in Latin America and
the Caribbean. Clean energy is seen in many regions as a potentially large source
of job creation and economic development because it tends to harnessunderutilized domestic resources. This realization has led national and local
governments to seek to lure clean energy companies and facilities to locate
within their borders.
Local economic development objectives can also be served by clean,affordable, and resource-efficient technologies that can be deployed at the town
Many view clean
energy and other
clean technologies as
among the successors
to the digital
revolution of PCs, the
Internet, and wireless
telephony
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and village levels. Biomass, solar, and small-scale hydro, for example, are
among the technologies with the potential to provide new economic
opportunities and improved quality of life for the two billion people in the world
who lack access to electricity. At the same time, they are creating significant
business opportunities for companies that profitably tap those markets withinnovative products and services. These business opportunities often have the
added benefit of creating jobs. In fact, a UC Berkeley report argued that
investment in clean energy technologies would produce more American jobs
than a comparable investment in the fossil fuel energy sources in place today.
In the developing
world, polluted cities
have spurred calls
for more efficient
cars, buses, trucks,
and scooters,
opening potentially
vast markets for
hybrid, fuel-cell,
and other cleaner-
running vehicles
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KEY CLEAN ENERGY TECHNOLOGIES
Following are sketches of seven principal clean energy technologies.
Wind Power
Wind-generated electricity is one of the fastest-growing clean energy
technologiesa $7.5 billion industry in 2003, expected to reach $47.6 billion by
2013, according to Clean Edge research. In fact, the European Wind Energy
Association has just released a blueprint demonstrating how wind power is
capable of supplying 12 percent of the worlds power by 2020. BTM Consulting
recently released a report showing that the wind industry has grown by an
average of 26.3 percent for the past five years.
More than 70 percent of wind-powered electricity is generated in Europe, withmore than 28,000 MW installed at the end of 2003 and many new, large wind
farms planned in the U.K., Spain, and other E.U. countries. The continent
receives 2 percent of its electricity from wind, and wind turbines in Denmark,
the wind power leader, produce fully one-fifth of the countrys electricity on
windy days.
While winds growth rate in some leadership countries, such as Denmark and
Germany, are slowing, Spain and especially the U.K. are picking up the slack. On
the drawing board in Britain is a mammoth 1,000 MW offshore wind farm, to be
operated by Shell WindEnergy, and at least 160 MW in new capacity being
developed by National Wind Power Ltd.more than double its current output. In
China, the industry is growing as well. The initial stages of construction have
been completed on a $95 million dollar wind project that comprises the second
phase of the Changjiangao Wind Power Plant. This second phase will add
approximately 100,000 KW to the 6,000 KW that the plant currently generates.
In the U.S., the wind industry is poised to continue its healthy growth of the past
several years. New wind installations grew an average of 28 percent annually
from 1998 to 2003, according to the American Wind Energy Association,
including a record 1,700 new MW of capacity in 2003. Furthermore, the U.S.
Department of Energy is in the process of implementing a three-phase
technology development project for wind power. The first step, opening
negotiations for 21 public-private partnerships, has already begun. Assuming areduced annual growth rate of 18 percent, wind would still account for 6 percent
of all U.S. electricity by 2020.
New wind installations
grew an average of
28% annually from
1998 to 2003,
according to the
American Wind
Energy Association
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Biomass
Energy produced from organic matter is the worlds oldest form of energy, and
currently the second-largest renewable energy sector behind hydroelectricity.
The biomass umbrella covers many very different energy sources, including:
solid biofuels (such as wood, straw, and organic waste); liquid biofuels, used
primarily for transportation (primarily ethanol and biodiesel); and biogas, mainly
methane and carbon dioxide, which can generate electricity or provide process
heat (landfill gas is a key source; some 330 landfills in the U.S. produce 1,000
MW of electricity from this source).
Combined, biogas and solid biomass generate some 14,000 MW of electricity
worldwide, with the largest facilities producing as much as 80 MW. Bioenergy
overall accounts for 15 percent of worldwide energy use, according to the United
Nations Food and Agriculture Organizationand up to 90 percent in some
developing nations. The U.S. accounts for about half of the worlds total butdeveloping countries will be the top growth markets as biomass energy roughly
doubles to 30,000 MW by 2020, the U.S. Energy Department projects.
Both environmental and economic imperatives are driving the growth of global
bioenergy, especially in the developing world. The Pew Center on Global Climate
Change calls biofuels like ethanol and biodiesel the most promising alternatives
for reducing greenhouse gas emissions over the next 15 years. Economically,
ethanol has been a boon to corn growers in North America; the same crops-into-
fuel strategy can have huge economic benefits in developing countries. The UNs
FAO, for example, is working with agricultural agencies in China to produce new
strains of sorghum for ethanol production, and has comparable projects
underway in Brazil and Nepal. Ethanol can also be produced from other cropsgrown widely throughout the developing world, such as sugar cane, cassava, and
rapeseed.
Solar Photovoltaics
Solar-powered electricity has been steadily bringing costs down while ramping
up production and installations. Solar PV is expected to reach cost parity for
many regions in the next decade, spurred by a host of technological
improvements in PV cell composition and manufacturing processes, in addition
to the market momentum. This will occur both at the local level in many U.S.
cities and states, and in large developing economies such as China and India.
Some large-scale commercial and industrial PV systems are producing electricity
at rates below 20 cents per kWh and as low as 10 cents per kWh, after
government buy-downs and incentives in places like California, making it
competitive with traditional grid-connected electricity. The worldwide market for
solar PV modules, components, and installations is expected to grow nearly
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sevenfold from $4.7 billion in 2003 to $30.8 billion in 2013. Solarbuzz, Inc.
reports that last year, worldwide PV installations increased to 574 MW, which is
34 percent more than in 2002.
Spurring that growth are dozens of publicly backed solar installations in the
U.S., Japan, Germany, and elsewhere. From San Franciscos Moscone Convention
Center to the Jacksonville, Fla. International Airport, PV panels are sprouting on
rooftops at consistent growth rates in many parts of the U.S. In 2004, the city of
Austin, Tex., approved a 100 MW solar initiative, which would generate 20
percent of the citys electricity by 2020. The California State Senate has even
recently passed a bill that would make it mandatory for a certain percentage of
new single-family homes to include a solar power system in their construction.
Germany, due to the success of its generous feed-in tariffs, which permits
customers to receive up to 45.7 eurocents/kWh for solar generated electricity,
has a number of much larger solar farm developments, some currently
reaching 4 MW in size. Japan, due to strong government and industry support,has installed more than 100,000 residential solar PV systems, in the process
making Japan the current leader in global solar PV installations and production.
The U.K. Energy Savings Trust has offered to give homeowners grants worth up
to 50 percent of the total installation cost of a residential solar PV. In South
Africa, the government has begun accepting bids in accordance with its plan to
invest about $2.5 million to provide 40,000 homes with solar power systems.
China plans to invest $1.2 billion in solar technology and installations in the
next two years alone. Shell, which is already involved in the solar energy market
in China, has recently announced that it plans to increase its market share.
The worldwide market
for solar PV modules,
components, and
installations is
expected to grow
nearly sevenfold from
$4.7 billion in 2003 to
$30.8 billion in 2013
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Hydrogen Fuel Cells and Infrastructure
Compared with wind and solar power, a small amount of energy (either
electricity or vehicular transport) is generated from hydrogen fuel cells today.
Nevertheless, billions of dollars of corporate and government research and
development funding have been deployed in recent years to commercialize new
fuel cell technologies. DOEs $1.2 billion pledge to fund hydrogen fuel cell and
infrastructure research is nearly twice the size of the $700 million industry
today. The industry is expected to grow to $13.6 billion by 2013, according to
Clean Edges assessment of independent analyses.
With well-publicized hydrogen highway proposals from California Gov. Arnold
Schwarzenegger and the organizers of the 2010 Winter Olympics in British
Columbia, hydrogen infrastructure development has received most of the public
attention in this sector. Though the technological and financial challenges
remain, progress is being made in the transition to a true Hydrogen Economy.The number of hydrogen fueling stations increased by more than a third during
2003 to nearly 90, still a small fraction of the number needed before hydrogen
reaches critical mass. Quietly stealing the early lead from cars in terms of actual
use are fuel cell-powered buses, now operating in Chicago, Tokyo, Perth, and 10
European cities.
Although hydrogen-powered vehicles get most of the mainstream attention,
stationary fuel cells, often used for backup power in hospitals, data centers,
factories, and hotels, are also a promising sector. Market estimates predict up to
16,000 MW installed (worth $2.9 billion) by 2012, up from just 45 MW in 2002.
The worldwide market for micro fuel cells, a lighter and longer-lasting
replacement for batteries in everything from cell phones and laptop computers tomilitary weapons and radios, could be worth more than $2 billion by 2013.
Grid Automation and Optimization
Sometimes overlooked among clean energy technologies are the software,
hardware, and services that improve the performance and efficiency of the
existing electric power grid. Brought into the public spotlight during blackouts
in 2000 and 2001 in California, and in 2003 in the Northeastern U.S., efforts to
improve transmission and distribution add up to a sizeable market.
Transmission has replaced generation as the most profitable sector of the electricpower business and will see the most investment in the next five years,
according to consultancy GF Energy LLC. After years of neglect, the North
American power industry plans to spend $4 billion to $7 billion annually on
grid improvements. The federal government has jumped on board as well: the
U.S. DOEs new Office of Electric Transmission and Distribution will help fund
billions in R&D efforts in this sector.
While the
technological and
financing challenges
for the transition to a
true Hydrogen
Economy remain,
progress is being
made
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The grid optimization sector comprises a wide swath of technologies, including:
Smart Generationmore efficient, more controllable production of electricitygenerated from both traditional and renewable energy sources.
Smart Gridautomating, optimizing, and monitoring high-voltagetransmission and medium-voltage distribution, including intelligent switches,
digital relays and advanced meters.
Smart End Useincreasing efficiency and reducing peak loads, includingenergy management software and services, smart motors, intelligent load
shedding, and building automation.
Small-Scale Hydro
Large-scale hydroelectric power remains by far the largest source of clean
energy, accounting for 90 percent of renewable energy worldwide. However,increasing attention is turning to more nascent small-scale hydro technology,
generally defined as turbines powered by water flows already present in the
environmentsometimes known as run-of-riveroften aided by low, small-
impact dams for seasonal water storage. Small-scale hydro ranges from 30 MW
at the high end down to micro-scale installations of 100 kW or less, enough to
power one or two homes.
Due to its ability to serve rural villages at a fraction of the investment cost of
large, centralized power plants, small-scale hydro will see most of its growth in
the developing world. China, for example, expects to install at least 1,000 MW of
small hydro each year for the balance of the decade. Asia overall is expected to
account for nearly half of the worlds small-scale hydro by 2010, according to
British research firm Atlas. World capacity of small-scale hydro at that time will
be about 55,000 MW, or roughly 5 percent of the global hydroelectric total.
Due to its ability to
serve rural villages at
a fraction of the
investment cost of
large power plants,
small-scale hydro will
see most of its
growth in the
developing world
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Geothermal
The tapping of heat from the earth to power steam turbines is a significant clean
energy source in several countries, as well as in the western United States. China,
Iceland, Indonesia, Italy, Japan, Mexico, New Zealand, and the Philippines are
the largest users of geothermal, collectively producing about 8,000 MW each
year. In fact, Indonesia has recently announced plans to offer 13 geothermal
sites for bid, with the goal of generating 2,000 MW of geothermal energy by
2008 and 6,000 MW by 2020. The U.S.s 2,800 MW contribution includes the
worlds largest geothermal facility, The Geysers in northern California, much of
it (19 plants supplying 850 MW) operated by San Jose-based Calpine.
Geothermal steam plants are not 100 percent clean, emitting some amounts of
global-warming gas CO2 as well as sulfur and nitric oxides. But the amounts are
roughly 50 times less than emissions from traditional fossil fuel power plants,
according to the U.S. National Renewable Energy Laboratory. Costs arecompetitive, with geothermal-powered electricity currently being produced at 4
cents to 8 cents per kWh.
Wave and Tidal Power
One of the more embryonic clean energy technologies harnesses tidal action or
wave motion to power turbines. The technology is only in the demonstration
stage worldwide, but it has the potential to play a growing role in the coming
decade.
One leading tidal power technology is based on the Venturi tube, a pre-World
War II invention that uses pressure differentials to create an energy flow through
an enclosed space. (It is actually air, not water, that drives the turbine blades.) In
a closely-watched project, U.K.-based HydroVenturi is working with the city of
San Francisco to exploit the tidal flows under the Golden Gate Bridge, which are
among the worlds most powerful. Fully harnessing the currents of San Francisco
Bay could theoretically produce 2,000 MW of powermore than three times the
citys current daily power load of 650 MW.
Another major emerging tidal-power technology is a system of buoys that utilize
the up-and-down motion of waves to power small generators linked to an
undersea transmission cable. Its leading purveyor, Ocean Power Technologies, in
Pennington, N.J., is testing its PowerBuoy system in a U.S. Navy project off thenorth shore of Oahu in Hawaii. The company claims it can produce power for 3
to 4 cents per kilowatt-hour at a 100 MW scale.
Fully harnessing the
currents of San
Francisco Bay could
theoretically produce
2,000 MW of power
more than three
times the citys
current daily power
load
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EMERGING CAPITAL MARKETS
In the private equity arena, clean energy investments in the U.S. have grown from
0.8 percent of total venture activity in 1998 to 2.4 percent in 2003. This threefold
increase represents a growing wave of clean energy activity.
In 2003, for example, total venture investments
in the U.S. totaled $18 billion, down from
2002s $21 billion. Despite this drop, clean
energy investments remained roughly steady,
with $428 million in 2003 compared with $435
million in 2002, expanding from 2.1 percent to
2.4 percent of total venture activity. On a
global scale, venture investments in new
energy-technology companies in 2003 equaledmore than half a billion dollars, with
approximately $100 million raised for non-
U.S.-based firms.
Large corporations have been investing in
clean-energy R&D, project development, and
acquisitions at levels never before seen. Among
the current projects and investments underway:
ABBexpects its share of the alternative and renewable energy solutions marketto reach $1 billion by 2005.
BP Solarcommitted $500 million over 5 years for clean energy development,including the launch of BP Home Solutions.
General Electricacquired Enron Wind for $350 million in 2002 and turned itinto a $1 billion business by 2003. In 2004 it entered the solar PV business
through its acquisition of U.S.-based AstroPower.
Sharp doubled PV manufacturing output for each of the last three years,exceeded 200 MW production capacity in 2003, more than a third of Japans
total solar PV output.
Shell is investing $500 million in renewables. It operates a range of cleanenergy businesses including solar PV manufacturing and wind development.
Toyota, the leading manufacturer of hybrid EVs and at the forefront of fuel cell vehicles, will manufacture as many Prius vehicles in 2004 as it did in 1997
through 2003 combinedapproximately 130,000 units.
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The influx of private and corporate capital demonstrates how rapidly clean
energy investing has moved from niche to mainstream. National and local
government initiatives around the world are playing a significant role in this
increased activity, totaling billions of collective dollars annually. These programs
range from investment funds and R&D efforts to procurement programs and taxincentives.
South Korea, for instance, recently announced government support to the tune
of more than $500 million through 2010 for the development of fuel cell and
alternative fuel vehicles. The government of Japan invested more than $800
million for its hugely successful residential solar PV program. Germany recently
announced more than $600 million in low-interest loans to support renewable-
energy projects and energy efficiency in developing countries, in addition to the
hundreds of millions it is spending in country for solar, wind, and other clean
energy development activities.
In the U.S., twelve states operate funds whose objective is building markets forrenewable energy and clean energy resources. According to the Clean Energy
States Alliance, these state programs will make available approximately $3.5
billion to promote clean energy over the next decade.
In addition to these direct government investments, several countries and U.S.
states have set clean energy targets (sometimes referred to as Renewable
Portfolio Standards). A growing rank of countries and states are now mandating
that at least 10 percent of their electricity comes from renewable energy sources
within the next decade, with the State of New York contemplating a leading
commitment of 25 percent from renewable energy sources by 2013.
Select Targets and Renewable Portfolio Standards
China 10 percent of total energy consumption fromrenewables by 2010
Denmark 13 percent of primary energy from wind, solar, andbiomass by 2005; 35 percent by 2030
EuropeanUnion 22 percent of all electricity from renewable sources by2010
Iceland 99 percent of all energy from hydrogen by 2030
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Select State Clean Energy Initiatives
STATE TOP FINANCIALINCENTIVES
PUBLIC-SECTORGREEN POWER
PURCHASE
COMMITMENTS
PUBLICCLEAN ENERGY
FUNDS
STATE RPSGOAL
California Low-interest loans fordevelopment, up to
$10M per applicantand $40M per
company
14% in Los Angeles,100% in Santa Monica,
100% in Chula Vista,90% in Santa Barbara
(all now)
Renewable ResourcesTrust Fund:
$135M/yr.
20% by 2017
Connecticut RECs$4M in fuel cell grants
$3M in solar PV grants
State: 20% by 2010,50% by 2020,
100% by 2050
Connecticut CleanEnergy Fund:
$118M over 5 yrs.
10% by 2010
Hawaii RECs N/A N/A 9% by 2010
Illinois RECs State: 5% by 2010,
15% by 2020Chicago: 20%
by 2005
Renewable Energy
Resources Trust Fund:$50M over 10 yrs.
15% by 2020
Massachusetts N/A CCA for 21 towns onCape Cod includesGreen Power
Mass. RenewableEnergy Trust:$150M over 5 yrs.
4% by 2009
Nevada RECs N/A N/A 15% by 2013
New Jersey RECs State:24 MW of wind power
over 3 yrs.
New Jersey CleanEnergy Program:
$358M over 3 yrs.
6.5% by 2012
New York $2.5M in wind powerincentives
Up to 70% rebatefor grid-connected
solar PV
State: 10% by 2005,20% by 2010
NYSERDA PublicBenefit Fund:
$210M over 8 yrs.
N/A
Ohio RECs$100M, 3-yr. program
for fuel cell financing,R&D, and training
Northeast Ohio PublicEnergy Council (112
cities & towns, largestCCA in US): 6-yr. green
power contract w/Green Mountain Energy
Ohio Energy LoanFund: $100M over 10
yrs.
N/A
Pennsylvania RECs
Solar PV Buy-Downs
State: 5% over 2 yrs. $76M through states
4 largest utilities
N/A
Texas RECs
Corporate taxexemption for solar
manufacturers
N/A N/A State:
2,000 MW innew renewables
by 2009Austin:
20% by 2020
Wisconsin RECs 25% in Madison (now) Wisconsin Focus onEnergy: $2.85M per
yr.
2.2% by 2011
Notes:
CCA: Community Choice Aggregation: consortium of communities to buy power from supplier of their choice RECs: Renewable Energy Credits; clean energy producers can sell credits to utilities to meet RPS goals RPS: Renewable Portfolio Standard; mandated goal of percent of power from renewables by target year State and city commitments for Green Power purchases are for energy used in municipal buildings and
operations
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SELECT KEY CLEAN ENERGY TRENDS
Following are six significant and influential trends shaping the future of clean
energy.
Green Power: A Price Hedge and Market Accelerator
Electricity produced from clean sources, primarily wind, is increasingly price-
competitive in some regions. More and more utilities are offering residential and
business customers the option to purchase clean energy through green power
pricing programs. Instead of purchasing distributed clean energy generated on-
site from, say, solar PV panels, buyers of green power purchase electricity
directly from a central utility that has added renewable power into its energy
mix. A consumer or business simply signs up for the green power program and
pays a small premium.
Although the initial green-power premium is nominally higher than the utilitys
conventional price per kilowatt-hour, the rate is usually locked in for several
years. That gives customers a hedge against increasingly likely fuel charge hikes
due to fuel price volatility. That is especially important to business customers
trying to forecast costs over the mid to long term.
Austin Energy, one of the leaders in green power pricing programs, offers the
longest lock-in period for its green power premium: a full ten years. That
premium is also the lowest charged to green power customers in the U.S.,
according to NREL. The current GreenChoice premium is 3.3 cents per kWh,
about half a cent more than Austins current fuel charge of 2.79 cents per kWh.
Austins green power is generated at Cielo Wind Powers 61-turbine wind farm
in west Texas, with smaller amounts of solar and landfill gas generation
contributing to the mix.
Clean energys price stability and declining overall costs, and continued spikes in
oil prices, combine to spell great growth potential for green powerand, as a
result, for the clean energy technologies that produce it. Nearly 400 utilities in
35 states offer some form of green-power options. Two states, Colorado and
Minnesota, have declared wind the least-cost alternative for future power plants.
In Canada, the federal government released a study in early 2004 noting that its
wind power purchases from energy producers in three provinces from 1997 to2002 cost less than conventional power at retail prices.
The Energy Web: Changing the Future of Energy Services
Much clean energy technology has focused on distributed generation
technologies, like fuel cells and solar PV, that produce power near where its
Clean energys price
stability and declining
overall costs, and
continued spikes in oil
prices, combine to
spell great growth
potential for green
power
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needed instead of generating it in large centralized power plants and delivering
it over a costly infrastructure. Some of the impetus for this comes from the
stresses and bottlenecks experienced by the electricity grid in developed
economies. Its far from a perfect system, as millions of people learned during
the great Northeast-Midwest blackout of 2003 in the U.S. and Canada.
But what if technology could make the existing grid work so efficiently and
reliably that it reduced the need for additional power plants? Growing numbers
of researchers and companies are working on grid optimization, an umbrella
term for a wide range of networking and information technologies that monitor
and analyze whats going on in a complex energy system, then making real-time
changes to optimize the system for maximum efficiency.
A marriage of the energy, telecom, and software sectors is working to create a
new breed of smart appliances, buildings, and vehicles that, in turn, will be
connected to a disparate energy web powered by a wide range of energy sources,
including renewables and other distributed-generation technologies.
In the new Energy Web, as it has been dubbed, appliances will be integrated
with energy-management software that will automatically communicate with its
electricity provider. If the "grid" (though it may no longer be called that) gets
stressed, it may seamlessly power down select appliancesrefrigerators, air-
conditioning systems, and othersthat don't require always-on power. Rather
than turning off an entire neighborhood or business district at a time la
California's infamous rolling blackoutsthe individual appliances will be turned
off and on again individually, causing less stress on the entire electric system
and on its customers.
Grid optimization can defer construction of new generation, transmission, anddistribution capacity, better use of existing plants and grids, reduce financial risk
for electric system investments, lower the risk of outages, and increase security
of the grid. The financial implications are staggering. Consider the savings grid
optimization can bring by reducing or deferring the need to increase the U.S.
electricity grids capacity. In 2003, the Pacific Northwest National Laboratory, a
federal research agency in Richland, Wash., estimated that just a 5 percent
deferral (55 gigawatts) of the forecasted necessary increase in grid capacity by
2020 could save the power industry and its customers a whopping $45 billion.
And a 25 percent reduction in outages would add another $15 billion in savings.
Power optimization and energy-related information technology were two of the
fastest-growing sectors for venture capital investments in 2003, by some
estimates increasing 42 percent and 27 percent respectively. And companies see
the opportunity, too. IT giants like Cisco Systems and Lucent Technologies have
formed the Consortium for Electric Infrastructure to Support a Digital Society, a
collaborative effort to develop technologies that improve the energy web.
A marriage of the
energy, telecom, and
software sectors is
working to create a
new breed of smart
appliances, buildings,
and vehicles
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With the potential for huge savings in financial, environmental, and fuel
consumption costs, grid-efficiency optimization will be a key growth area.
Whether ecologically-minded or not, all electric utilities know that the cleanest
(and cheapest) energy plant is the one that you dont have to build at all.
China and India: The Next Wave in Clean Energy Development
Its tempting to view the worlds largest energy consumer, the U.S., as the most
influential force in clean energy. But in the larger global picture it is the rapidly
growing economies of China and India, the worlds two most populous nations,
that could be even bigger drivers of clean energy growth.
With a burgeoning middle class spurring unprecedented demand for
automobiles, appliances, and other energy-intensive products, both countries are
rapidly outpacing their ability to meet their energy needs with traditional
domestic sources. China has already surpassed Japan as the worlds number-two
oil consumer, according to the International Energy Agency, and Chinas
government predicts that the nations number of private cars will triple by 2015.
Chinas increase in oil imports is already considered a key factor behind todays
high oil prices worldwide. Meanwhile, Indias energy demand is projected to
grow 4.6 percent annually through 2010, the highest rate of any major country,
according to the U.S. Energy Information Administration. Both nations are
adding vast amounts of energy capacity, with coal and nuclear power looming
as key resources.
Its not just a resource issueits also a critical environmental and public health
issue. Power generation takes a severe toll on Chinas and Indias public health
and the environment. Seven of the worlds ten most polluted cities are in Chinaand air pollution in some cities is more than ten times the standard proposed by
the World Health Organization.
The good news is that to meet a portion of those demands, and to stave off
environmental calamity, both countries are aggressively developing clean energy
sources. In June 2004, China pledged a goal of 10 percent of its power
generation by 2010 from clean energy sources, including solar PV, wind,
biomass, and small-scale hydro. In China, that 10 percent translates to a
staggering 60,000 MWthe equivalent of 60 giant fossil-fuel power plants. This
goal creates huge potential for companies outside China to provide clean energy
technology. In 2002 and 2003, Chinas Township Electrification Program
invested more than $240 million to provide electricity for a million residents inremote villages by installing solar photovoltaic, small hydropower and wind
generating systems. With the next phase targeting 20,000 new villages, Chinas
rural electrification program is stimulating a huge new home-grown renewable
energy industry.
In 2004, China
pledged a goal of
10% of its power
generation by 2010
from clean energy
sources, including
solar PV, wind,
biomass, and small-
scale hydro
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India already is the worlds fifth-largest wind power provider, with 2,000 MW of
installed capacity. The nation expects to beat its target of 1,500 MW of new
capacity by 2007. Danish turbine maker NEG Micon opened a factory in India in
2003 and the worlds other large manufacturers have a strong presence,
including GE Wind and Germanys Enercon, Nordex, and Vestas. India is alsothe fourth-largest manufacturer of solar PV, with established energy players like
BP Solar producing some of their highest efficiency and lowest cost solar PV
cells on the Indian subcontinent.
With a combined 2.36 billion peoplemore than a third of humanityChina and
India will have a major say in the global energy future. Both countries clearly
recognize the importance of renewable energy to their economic and
environmental outlook, making both markets ripe for clean energy development
and investment.
The Hydrogen Infrastructure: Big Bucks, Big ChallengesThe only problem with hydrogen, goes a current industry joke, is that we dont
have any. This highly-touted, emissions-free energy source is highly efficient in
combustion, but it does not occur freely in nature. So it must be extracted from
non-renewable substances (currently the leading source of hydrogen for
industrial and agricultural applications) or from water through the energy-
intensive process of electrolysis.
In April 2004, U.S. DOE committed $353 million to three areas of R&D research:
hydrogen storage ($150 million over five years), vehicle and infrastructure
demonstration systems ($190 million over five years), and fuel cell research ($13
million over three years). The goal of on-board hydrogen storagethe hydrogenequivalent of a tank of gasis 300 miles between refueling; the demonstration
systems goal is to see commercialized hydrogen-powered vehicles by 2015.
As the industry embarks on this rapid period of R&D activity, two key
technology trends are emerging, according to a 2004 report by industry Web
portal Fuel Cell Today. One trend is that fueling stations are becoming smaller
and more akin to traditional gasoline stations. Fueling equipment manufacturers
like Air Products, Plug Power, and Stuart Energy are building smaller and
cheaper units, capable of fueling just five cars a day or less. But the lower
capital costs will enable more demonstration locations, perhaps enabling
California Gov. Schwarzeneggers goal of 200 hydrogen fueling stations in
California in the next five years. There are currently fewer than 90 such stationsworldwide.
Another key trend is the emergence of compressed gaseous hydrogen, rather
than liquid, as the preferred fuel format. More than 90 percent of hydrogen fuel
presently comes in the form of compressed gas, which is cheaper and easier to
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store. As the infrastructure slowly moves to widespread commercial use, all
trends toward lower costs are positive steps.
Although the U.S. and Canada are leading in hydrogen infrastructure
development, they are not alone. The European Union has pledged 2.8 billion
euros to fund hydrogen production and usage projects by 2014 in an initiative
called QuickStart, and an 18.5 million-euro project running fuel cell buses in
nine European cities is well underway. Japan will spend $260 million on
hydrogen infrastructure research and development during 2004, and is the first
market to offer commercial-ready fuel cell vehicles from Honda and Toyota.
While operational hydrogen highways are at least several years away, the
markets for stationary fuel cells and micro fuel cells in electronic, radio, and
military equipment already are established and growing. More than 2,500
stationary fuel cells have been installed worldwide, cutting energy costs in office
buildings, hotels, schools, hospitals, and other facilities (including remote
telecommunications outposts) by 20 percent to 40 percent. One leading
manufacturer, Fuel Cell Energy in Danbury, Conn., more than doubled itsproduct revenues to $16 million in 2003. In fact, it plans to install a 250 KW
direct fuel cell power plant at the Sheraton New York Hotel and Towers.
Additionally, Japanese manufacturer Sanyo plans to offer a residential fuel cell
power unit starting next April.
Micro fuel cells, most of which run on liquid methanol, have significantand
very near-termapplications in portable consumer electronics. A fuel cell can
potentially power a cell phone for a month without recharging. Like many other
technologies, this one is being powered by the military. The U.S, Defense
Department is investing millions in micro fuel cells that can make military
radios, infrared scanners, and other battlefield devices lighter, longer-lasting,
and less detectable in combat operations.
Defense Spending Promotes Clean Energy Technologies
For nearly half a century, defense spending has been a boon to furthering the
development of technologies, from transistors to the Internet, that have also
improved the lives of those in the civilian world. With schemes like the Next-
Generation Manufacturing Technology Initiative, the U.S. Department of Defense
looks to reestablish U.S. leadership in manufacturing science and technology by
delivering a plan to double the nations manufacturing technology investments
and increase the return on those investments by a factor of ten. Now that same
type of Department of Defense effort is being brought to bear on clean energy,
especially fuel cells. In 2003, the DoD spent about $130 million on clean energy-
related research and development, and is sure to be a major purchaser of fuel
cells as the technology advances. The market for military fuel cells is poised to
take off in 5 to 10 years, according to a March 2004 research report on military
batteries and fuel cells from Electronics.ca publications. The U.S. Army Corps of
More than 2,500
stationary fuel cells
have been installed
worldwide, cutting
energy costs in office
buildings, hotels,
schools, hospitals,
and other facilities
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Engineers Construction Engineering Research Laboratory granted a contract to
the fuel cell company ReliOn to install and test fuel cell systems in critical
military applications. Additionally, Case Western Reserve University has a
research agreement with The Ashlawn Group, LLC to develop fuel cells for the
DoD.
The Pentagons interest in fuel cells is multifold. An estimated 70 percent of
DoDs fuel budget is spent transporting fuel to where its needed, so stationary
fuel-cell units for power supply on military bases around the world hold great
promise. (The Pentagon estimates it costs $40 to transport one gallon of diesel
fuel from Kuwait to Baghdad). Thirty bases around the world, for example, have
been chosen to test an $80,000 hydrogen fuel cell for base power needs.
Transportation in mobile military operations clearly places a high premium on
light weight, nimbleness, and flexibility, so fuel cell-powered vehicles and
hybrids can reduce the need for hauling large amounts of gasoline, diesel, and
other fuels. But the militarys greatest interest may be in micro fuel cells, whichhave huge potential to replace heavy batteries in portable communications and
electronic gear carried by soldiers in the field, as well as in new high-tech
weaponry. Soldiers typically carry up to 20 pounds of spare batteries to power
their gear.
Central to this effort is the Armys $500 million Objective Force Warrior
Program, aimed at providing a panoply of high-tech improvements that would
reduce the weight load of 95-102 pounds per soldier in Afghanistan today to 45-
50 pounds by 2008-2010. In one example currently in the demonstration stage,
a 1.5-pound fuel cell recharger from MTI Microfuel Cells would be used in Harris
Corps widely-used Falcon II handheld tactical radio to replace the standard
three-pound BA 5590 military battery, which requires several spares because it isnot rechargeable.
Rural Electrification: Large Markets from Small-Scale Power
The worldwide distributed and cogeneration power market is estimated to grow
at a compounded annual growth rate of 8 percent during 2003 to 2008, or from
53 GW to 78 GW, establishing a $30 billion market by 2008. But, one of the
greatest potential growth areas for distributed power generation, especially from
clean energy sources, is in supplying electricity to often-remote rural areas in
developing nations. In the past, this required hefty investments in generators,
transmission lines, and distribution networks, and more importantly, highcontinuing maintenance costs. Diesel generators, in particular, have proven to be
polluting, inefficient, and expensive.
Now, small-scale solar PV, wind, hydroelectric (known as microhydro for
powering one or two homes), and biomass have changed the economic and
environmental equations, making clean rural energy increasingly affordable in
The militarys
greatest interest may
be in micro fuel cells,
which have huge
potential to replace
heavy batteries in
portable
communications,
electronic gear, and
new high-tech
weaponry
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the worlds poorest regions, including remote areas of developed countries like
the U.S. and Canada, such as the Navajo Tribal Utility Authoritys installation of
200 solar PV systems bringing power to remote parts of the Navajo reservation
in the southwest. In developing countries, larger-scale systems of 100KW or
more that tie together local villages are another growing option. The Indianisland of Lakshadweep, for example, is now set to have the largest solar
electrification project in the Asia Pacific region. By 2005, grid-interactive solar
PV plants will contribute more than 1 MW, or 20 percent, of the island groups
total power needs.
Global development finance agencies like the World Bank, International Finance
Corp. (IFC), and the Asian Development Bank are starting to place large sums
behind small-scale rural electrification projects, especially with solar PV. The
World Bank announced in mid 2004 a target of 20 percent annual growth in its
renewable energy and energy-efficiency investments over the next five years,
essentially doubling its current outlay of $200 million per year by 2010.
The World Bank,
International Finance
Corp. (IFC), and the
Asian Development
Bank are starting to
place large sums
behind small-scale
rural electrification
projects, especially
with solar PV
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CONCLUSION
Markets for clean energy technologies are increasingly generating big business
opportunities. While not without technical, financial and policy hurdles, a
confluence of forces appears to have created a tipping point for significant
private sector capital flows into the clean energy sector. Multinational
companies, governments, venture funds, and others are investing billions of
dollars in the sector to reap both profits and potentialworking to build
increasingly global and robust clean energy markets.
An interesting and telling sign is the degree to which major oil companies and
large public and private utilities have begun to view renewable energy
technologies as providing a secure hedge against energy cost and supply
volatility in the form of stable, lower-operational-cost solutions. Clean energy is
also capturing the imaginations of the public and the news mediamoving frommarginalized to mainstream. Indeed, with historical and projected growth rates
for some clean energy technologies exceeding 30 percent per year, clean energy
offers an increasingly bright future for investors, governments, communities,
and businesses alike.
A confluence of forces
appears to have
created a tipping
point for significant
private sector capital
flows into the clean
energy sector
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