Ian Simm answers your questions

In this week’s readers’ Q&A session, Ian Simm, chief executive of Impax Asset Management, answers your questions.

Below, he discusses impediments to biofuels, EU support for Chinese renewables and gas’ future as a clean energy source.

Next in the hotseat is James Cameron, vice chairman of Climate Change Capital. He will be answering your questions next Friday, February 4th. Send in your questions for consideration by the end of Sunday, January 30th to energysource@ft.com.

But for now, over to Ian:

Biofuels

How have decisions by government affected your decisions to invest or withhold investment from biofuel technologies? Has the development of biofuel technologies been influenced by the criticisms regarding “food versus fuel” or the imputed cost of “indirect land use change”?
Alan Baumgart

We have been cautious over investment in “first generation” biofuel producers and related technologies.

Although government support for this sector has been attractive, there are very low barriers to entry so manufacturers struggle to sustain attractive profit margins.

Volatility of feedstock prices, partly driven by the competing demand from the food sector, has compounded the risk for investors.

The “food versus fuel” debate is particularly fierce in Europe, where biodiesel is a significant component of the sector and there is strong pressure on the industry to avoid unsustainable feedstock sources, such as palm oil. In contrast, the US Environmental Protection Agency has recently approved use of a 15 per cent bioethanol blend (“E15”) for vehicles manufactured since 2001, despite lobbying from the food sector. The US government has also extended tax credits for ethanol blenders.

In contrast, “second generation” biofuels production, which is based on cellulosic feedstock (for example wood or grasses, which are outside the “food chain”) requires more complex technology and processes where investors can create barriers to entry, and is therefore more attractive. We have made a couple of successful investments in this area and expect the supply of second generation biofuels to grow significantly over the next five to ten years.

Solar energy

Which one out of thermosolar and photovoltaic technology do you think will emerge as dominant?
Imanol Arbulu

In their most straightforward configurations, solar thermal (which produces hot water for domestic or industrial customers) and photovoltaic (PV, which generates electricity either on a rooftop or in a large-scale power plant) are technically proven (i.e. reliable) and are experiencing rapidly growing demand in different markets; for example, during 2010, shipments of PV panels were more than double the volume in 2009.

It’s not that one will necessarily emerge dominant over the other as they are not incompatible. Both solar thermal and PV technology are and should remain commercially successful, and in countries with strong solar insolation (i.e. resource), there is a large potential market for both, although PV is likely to retain a larger market share – HSBC recently estimated that, by 2020, solar thermal installations would be around 33GW, or 11 per cent of the installed capacity of PV (300GW).

“Hybrid” technologies, for example solar thermal systems that supply hot fluid to a boiler which is coupled to a generator of electric power, are also commercially viable in specific locations, for example where there is demand for power away from the mid-day peak.

European renewables

To what extent does the EU’s recent disclosure that it has extended a €500m ($687m) loan to support the Chinese renewable energy market, undermine wider market confidence in the European renewable energy market? And what message does it send to the European investment community?”
Adam Barber, director, awordaboutwind.com

To your first question, not at all! Climate change is a global problem, and the EU is committed to providing finance on commercial terms to businesses around the world that are reducing greenhouse gas emissions, and has mandated the European Investment Bank (EIB) to prioritise lending to viable businesses in this sector in developing countries, including China. In fact, the European Investment Bank’s latest €500m loan is the second “Climate Change Framework Loan” provided to China. As set out on the EIB’s website:

The EIB supports the EU’s goal of low-carbon and climate-resilient growth within and outside the Union. The EIB’s financing in these sectors is one of the largest among international financial institutions: in 2009, the Bank invested almost EUR 17bn in climate action. Acting as a financial leader supporting innovative clean and climate-resilient technologies, the EIB is committed to catalysing investment with partners both within and outside Europe.

Separately, EU commitment to the development of renewable energy within the 27 Member States is demonstrated by the renewable energy directive, which includes targets for energy supply from renewable sources as a percentage of total energy supplied in 2020. Under the principle of “subsidiarity”, each member state is free to design and implement policies designed to achieve its agreed 2020 target. Incidentally, the EIB is also lending to projects and businesses that are working in renewable energy sectors within the EU.

Environmental policies

To what extent will national specific environmental policy impact on emerging renewable energy markets such as those related to water treatment and landfill within Europe, over the next five to ten years?
Adam Barber

There is considerable potential to develop renewable energy in the water treatment sector (particularly from anaerobic digestion) and the waste sector (particularly landfill gas and advanced thermal treatment). For these sectors to be economic, there is typically a need for government intervention, either to guarantee market access and/or to subsidise the economics of production. For example, the UK’s renewable obligation has ensured financial support for the generation of power from landfill gas while the forthcoming renewable heat incentive is expected to make “gas to grid” viable for anaerobic digestion.

Across the European Union, around 40 per cent of municipal solid waste is still landfilled (on average), while in Denmark and Sweden the comparable figure is only 5 per cent. With carefully targeted government policies, for example landfill taxes and/or absolute volume limits on landfill, local government and the private sector should be well positioned to develop and operate value added waste processing facilities, including renewable power and heat production.

Gas as clean energy

Why shouldn’t gas be the bridge fuel to the renewable technology of twenty years from now? Do you have any guesses for technologies that may be more realistic in 2030 than today?
Nick Grealy, No Hot Air

To a significant extent, it is already. In the US and much of Europe, the recent roll-out of coal fired plants has been severely limited by pollution regulations and uncertainties around carbon prices, while new nuclear plants have been delayed by planning/siting issues, uncertain economics and political indecision. Against this backdrop, gas-fired generation has often been the marginal investment of choice, while investment in renewables has been driven forward by regulatory support.

Without government support for renewables today, there is no chance that sufficient investment will be made in these technologies to bring their costs down to (and below) “grid parity” in the next decade. To my mind, this is a key learning point from recent renewable energy policy – although technology may be the key to reducing greenhouse gas emissions to levels that stabilise ambient CO2 (and provide other benefits such as improved energy security), this technology doesn’t develop in a vacuum: the businesses that have the capacity to deliver cost-effective technical solutions need time to develop their processes, and this is best achieved by a competitive market over a period of time.

The power generation technologies that will be fully commercial in 20 years are almost certainly here already. Wind and solar PV should be fully competitive without subsidy in many markets by then, while we will probably see much more power generated from waste and biomass. Equally, the cost-effectiveness of wave and tidal power should have improved considerably by 2030, while I’d also be looking out for market penetration from a range of demand-side management technologies, including power storage.

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