Renewable energy: Can supply meet demand?

David R. Jones

The renewable energy industry has enjoyed a banner year, and new laws in the U.S. and China offer prospects for continued expansion. But will equipment supply shortages cause the renewable energy growth machine to sputter?

THE RENEWABLE ENERGY INDUSTRY THRIVED in 2005, and at first glance 2006 promises to be better still. With oil prices spiking to more than $60 per barrel and concerns mounting about climate change and the security of oil supplies in the wake of Hurricane Katrina, renewable energy sources in 2005 looked more attractive than ever. Yet in 2006 the renewable energy industry could become a victim of its own success.

Wind still strong

The past year saw wind energy worldwide pass the 50-GW capacity mark and prices for photovoltaic cells fall to $3 per watt—90% less than 30 years ago. Wind, solar, biomass, and geothermal energy facilities opened across Europe as the EU continued its drive to supply 21% of its total energy needs from renewables by 2010. And emerging markets in China bloomed while developing nations like Brazil and the Philippines launched renewable energy projects to cut their oil-import bills.

The coming year appears to offer still more opportunities. In the U.S., as part of the Energy Policy Act of 2005 (EPAct), Congress approved a two-year extension of the federal production tax credit (PTC), which provides an inflation-adjusted 1.9¢/kWh tax break for electricity generation from renewables. The revived PTC has unleashed a flurry of wind farm construction that had ground to a halt while developers waited to see if Congress would renew the tax credit. EPAct also knocked down other barriers to wind energy by providing incentives to ease transmission logjams and requiring that federal reliability rules being developed for utilities not discriminate against renewable resources.

As a result, the American Wind Energy Association expects 2,500 MW of new wind energy capacity to come on-line in America this year, and 2,000 MW more to be installed in both 2006 and 2007. The U.S. solar energy, geothermal, and biomass industries also stand to gain from production incentives in the energy law.

EU and China encouraging renewables

Renewables expansion also can be expected in Europe. Many EU countries are scrambling to meet their carbon dioxide emissions limits under the Kyoto Protocol, and power generators are expected to bear the brunt of caps on CO2 releases. Other Kyoto signatories like Russia—whose deindustrialization during the 1990s left it well within its CO2 emissions limits—and developing nations could gain from Kyoto's Clean Development Mechanism (CDM) and Joint Implementation (JI) provisions. CDM and JI allow companies in industrial nations that finance renewable energy projects overseas to use certified emissions- reduction credits from these projects to meet their Kyoto obligations.

Like the U.S., China in 2005 enacted a law designed to spur renewable energy generation. The new measure, which takes effect in 2006, calls renewable energy "the preferential area for energy development." It provides a feed-in tariff to support renewable energy generation—with extra costs spread among grid operators. It also guarantees grid access for renewable energy projects that have obtained or filed for licenses, promotes installation of solar water heating and photovoltaics (PV), and allows financial institutions to offer preferential loans with interest subsidies to renewable energy projects.

China is considered a potential wellspring of renewable power. The Middle Kingdom has an estimated wind capacity of 1,000 GW as well as plentiful solar, wave, and biomass resources. Regarding the last, the government-run Xinhau news agency recently reported that the country's biomass reserves are equal to 64 billion tons of crude oil, or seven times the projected output of Daqing, its major oil field. With the new law in place, China "could transform the global [renewables] markets," said Greenpeace Policy Adviser Steve Sawyer.

This transformation, though, could take unexpected forms. With demand for wind power equipment soaring to feed the construction boom in the U.S., the wind turbine industry is confronting serious supply bottlenecks.

Kinks in the supply chain

"Turbine supply is already an issue, and it will become more of an issue," said Jonathan Johns, head of renewable energy at Ernst & Young. The short-term cause is demand in the American wind power market, he said, but the problem could persist for years as other countries accelerate wind farm construction to satisfy their growing appetites for energy.

"The U.S. has had the impact this year. China and India will have a similar radical impact next year," Johns predicted. "The emerging markets won't be emerging any more. They'll be core markets."

This unrelenting demand for equipment, he cautioned, could force wind farm developers to choose which projects to construct and which to delay or abandon. The big winners could be small and midsize manufacturers that step in to fill supply gaps, Johns said.

At the same time, the wind energy industry will become increasingly international as companies scurry to fill orders by building manufacturing plants overseas, close to potential markets. For example, Denmark's Vestas—the world's largest producer of wind turbines—and Spain's Acciona plan to establish production in China, while Spain's Gamesa looks to build manufacturing centers in the U.S. and India.

"We're seeing foreign manufacturers set up in the U.S. to compete with GE [Energy], and American companies are expanding overseas. It's a sign of the financial health and maturation of the industry," said Chris Groobey, a partner at the law firm Baker & McKenzie who analyzes renewable energy markets.

But with expanded production, wind turbine makers are facing rising steel costs as industrial demand from China and India squeezes world supplies, Johns said.

Companies looking to supply the growing offshore wind industry are also facing challenges in designing turbines tough enough to withstand harsher conditions than those found on land. The so-called marinization of the wind power industry has begun as manufacturers learn to handle details such as keeping corrosive salt water out of equipment.

The learning curve has been steep. Turbines at the 160-MW Horns Rev wind farm off the coast of Denmark had to be hauled back to shore and repaired because of damage from the North Sea environment. The technical challenges for offshore wind energy "are still there," Johns said. "But North Sea oil wasn't a happy picture to start with either."

Droughts, man-made and natural

Solar energy companies, like their counterparts in the wind industry, are plagued by supply problems. Solar technology companies must compete with computer builders for limited amounts of industrial-strength silicon, and PV makers are more likely to be viewed as secondary customers. Some PV companies are reporting that their entire production lines are sold out for the coming year.

In response, PV companies are planning long-term strategies to ensure supplies. Germany's SolarWorld, for instance, recently signed a 10-year deal for polycrystalline silicon and formed a venture to produce silicon for solar cells from silane gas.

Hydropower is another renewable that faces uncertain times in 2006—not from lack of equipment but because of dwindling supplies of "fuel." Though small hydroelectric projects continue to spring up in developing nations, particularly in Brazil, the industry has experienced flat growth for years. Many prime sites around the world have already been developed, and ongoing droughts in Spain and the U.S. Pacific Northwest have cut into generating capacity. Incentives for electricity production from hydropower in EPAct could help the industry through its dry spell.

The outlook for most other renewable energy sources, though, indicates fewer potential problems. While PV companies struggle with supply shortages, developers of solar concentrators, which use the sun's radiation to heat water or air for steam to power turbines, are finding no shortage of interest in their utility-scale projects.

Among the projects slated to begin construction next year are EnvironMission's 50-MW solar tower in Australia, Solucar Energia's 11-MW tower in Spain, and Southern California Edison's 500-MW solar power station in its home state.

In Europe, farmers might look to diversify their crops to include biomass for energy as new EU member states are admitted, creating competition for long-time EU members from Eastern European countries with lower commodity costs, Johns said.

Geothermal, biofuels, and micropower

One renewable resource that seems immune to supply problems is geothermal energy. According to Baker & McKenzie's Groobey, its full potential has yet to be tapped. "It's a mature technology that hasn't been fully realized, and it has significant growth opportunities. Obviously, geothermal is geographically limited, but it can be more fully exploited," he said.

Geothermal power is attracting particularly strong interest along the Pacific Rim. Development projects are under way from Chile to Nicaragua to California to the Philippines, and the Indonesian news agency reports that China plans massive investments in Indonesian geothermal plants in the coming years.

Both Johns and Groobey foresee the emergence of biofuels as an alternative to expensive gasoline. "We're not going back to $20 or $30 barrels of oil. People are realizing supplies are finite," Johns said. "The economics [for biofuels] haven't quite reached the right level yet. But there will be a push to get biofuels on the agenda." Global biodiesel production jumped 47% in 2004, the Worldwatch Institute reports. In Brazil, sugar cane ethanol now provides more than 40% of the country's nondiesel fuel.

Groobey is particularly optimistic about the U.S. biofuels market. EPAct calls for annual production of 7.5 billion gallons of renewable fuels in the U.S. by 2012—twice the current output, he noted. "We're seeing a progression from renewable power to renewable fuels as a replacement for fossil fuels," he explained. Some companies are already looking to cash in on the U.S. biofuels rush: Archer Daniels Midland is planning to construct a 50-million-gallon biodiesel facility in North Dakota, while TexCom is preparing to build a 30-million-gallon biodiesel plant along Texas' Gulf Coast.

Over the long haul, Johns sees the emergence of micropower as a critical issue for the power industry. "Integrating [photovoltaic panels] into buildings as a consequence of planning permit requirements could become common. And fiscal and tax policies could increasingly be used as tools for behavioral change," he said. The UK's Labor government is currently conducting a review of the nation's policies for micropower, and a new strategy expected by year's end could prove a boon to manufacturers of PV and rooftop wind turbine systems.

All told, 2006 promises to be another stellar year for renewable energy—if the industry can handle so much good fortune.