The Trouble With Renewables

In last week’s issue, I discussed the highlights of the recently released BP (NYSE: BP) Statistical Review of World Energy 2015. This week I want to do a deeper dive into the report’s numbers for  renewable energy production and consumption. My intention is to provide some insights and to focus on the storylines that the mainstream media may have overlooked.

I will also draw upon another important report that was released just last week – The Renewables 2015 Global Status Report (GSR). The GSR is released each year by the Renewable Energy Policy Network for the 21st Century (REN21), a global network that connects governments, nongovernmental organizations, research and academic institutions, international organizations and industry to share information and advance renewable energy. I have been a contributor to and reviewer of the report for the past six years, which has given me an early look at new developments in the renewable energy sector.

Hydropower has long served as the largest source of the renewable energy consumed globally. But hydropower is a mature technology and has a relatively low growth rate among renewables. In 2014 the world consumed 879 million metric tons of oil equivalent (TOE) of hydropower, a 2% increase over 2013. This was 53% more than the world’s nuclear power consumption, and a bit less than a quarter of the world’s coal consumption. Global hydropower capacity reached 1,055 gigawatts (GW) in 2014.

But today I want to focus on the modern renewables like solar photovoltaics (PV) and wind power that continue to drive explosive growth in the sector. Solar PV capacity grew 28.7% in 2014 to bring the total installed capacity to 180 GW (177 GW according to the REN21 graphic below). Since 2004, solar PV capacity has grown by a factor of nearly 50.

Wind power capacity grew 16.2% to 373 GW of installed capacity (370 GW per REN21). Wind power capacity has grown by a factor of 7.7 since 2004. If growth continues at the current rate for both solar PV and wind power, global solar PV capacity will overtake global wind capacity within a decade.


But capacity isn’t the same as production. One of the main drawbacks of wind and solar power is that they are intermittent. That means that a megawatt (MW) of installed capacity won’t produce the same amount of electricity over the course of a year as a MW of power from coal, natural gas, nuclear power, or geothermal power. The capacity factor — that is the amount of power produced divided by the power that would be produced if the power source was producing at full capacity at all times — is around 90% for nuclear power, 70% for geothermal power, and 50-70% for coal-fired and natural gas-fired power.

So, what are the capacity factors for wind and solar PV power, and what are the implications? We can calculate this from data in the BP Statistical Review. We can convert the 373 GW of wind capacity into theoretical electricity production if it was producing at full capacity for the entire year. A gigawatt hour (GWh) is the amount of energy that can be produced by 1 GW of power produced over the course of an hour.

A 373 GW facility could theoretically produce electricity for 24 hours a day and 365 days a year for a total of 8,760 hours. Thus, 373 GW of power could in theory produce 373 GW * 8,760 hours = 3.267 million GWh. A terawatt-hour (TWh) is 1,000 gigawatt hours, so this is also equal to 3,267 TWh. The actual consumption numbers reported by BP were 706 TWh of wind power consumption, so the global capacity factor for wind power in 2014 was 706/3,267 = 21.6%.

The consumption figures for solar power in 2014 were 185.9 TWh of energy produced from a solar PV capacity of 180.4 GW. Repeating the calculation performed for wind power, we get a global capacity factor for solar PV of 11.8%.

As a result of these low capacity factors, it would take several times as much wind and solar power capacity to displace an equivalent capacity in nuclear or fossil fuel-generated power.

For example, the U.S. has 303 GW of coal-fired power capacity with a capacity factor of ~60%, for an effective coal-fired capacity of 303 * 0.6 = 182 GW. To replace the amount of electricity produced from coal with solar PV in the U.S. would require 182 GW divided by the 11.8% capacity factor (assuming the capacity factor across the U.S. is consistent with the global capacity factor), or 1,542 GW of solar PV capacity. Actual installed solar PV capacity in the U.S. in 2014 was 18.3 GW; only 1.2% of what would be required to displace all coal-fired power capacity in the U.S.

Using wind power to replace the electricity produced from coal in the U.S. would require 182 GW divided by the 21.6% capacity factor for wind power – 843 GW of required wind power capacity. Actual installed wind power capacity in the U.S. in 2014 was 66 GW – 7.8% of the amount required to displace coal power.

There are a couple of important implications from these calculations. One is that the countries making serious attempts to rein in carbon dioxide emissions are going to require a huge expansion of renewables (and most likely nuclear power) to displace significant amounts of fossil-derived power. This also means that even at the rapid growth rate of recent years, it will take a long time to eliminate fossil-fired power from the global power generation portfolio.

The other thing to keep in mind is that global power consumption continues to grow. Between 2013 and 2014 world electricity consumption increased by 353 TWh. Over that same time period, wind power consumption increased by 65 TWh and solar PV power consumption increased by 51 TWh. Thus, the combined increase in the consumption of wind and solar PV power in 2014 accounted for only about a third of the increase in global power consumption. So, despite the gains for wind and solar power, coal consumption actually increased — as did the appetite for natural gas, petroleum and nuclear power.

The same is true if we look over the past decade. Between 2004 and 2014 wind and solar PV consumption increased by 621 TWh and 183 TWh respectively. But this combined 804 TWh increase was only 13% of the total global electricity consumption increase of 5,963 TWh.

Thus, while wind and solar power consumption is growing rapidly and making an important contribution to our electricity mix, it hasn’t come close to satisfying the growing global demand for electricity. As a result, fossil fuel and nuclear power consumption have continued to grow to keep pace with the world’s electricity demands.      

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Take Some of the Money and Run

In an alert issued yesterday, we recommended selling half of your initial position in Williams (WMB). The rationale is blindingly obvious: banking some of the 26% one-day gain in Williams’ valuation on news of the bid by Energy Transfer Equity (NYSE: ETE) offsets the risk of holding on to the remaining half of the position in hopes of garnering  the 32% premium that ETE proposed, or possibly more from an improved bid.

Subscribers who bought Williams on our advice in October 2013 have already seen a total return of 88% on their investment, and while selling will generate capital gains taxes that a tax-free exchange with ETE would not, a taxable bird in hand is worth a slightly plumper tax-deferred one in the bush. It is a goal of ours to continue to increase your capital gains tax bills by continuing to generate capital gains worth cashing out alongside predictable tax-deferred income.

Here the lesson of Energy Transfer’s rejected bid for Targa Resources (NYSE: TRGP) last year should be instructive. We recommended selling half of the position last June at $135 per share a few days after merger speculation leaked. Seven months later Targa’s share price troughed at $85, and it trades only a bit higher now.

Of course, that lesson might be a useful reminder to Williams directors too as they hold out for a fatter bid. But we’re not keen on betting the farm on the value maximizing skills of corporate insiders faced with a loss of a business empire with all its perks. Sell half of your initial WMB stake if you haven’t already done so.

— Igor Greenwald