Carbon is losing its spot as the centrepiece of renewable energy business models. While carbon credits remain vital to the viability of renewable energy industries, there has been a subtle shift in business models for such projects, said Daniel Kieser, managing director of Singapore-based Asia Renewables.
Speaking on the sidelines of the Clean Energy Expo Asia held in Singapore this week, Mr Kieser noted that the same companies that used to approach a new project with carbon as the primary focus have started designing business models around the project itself.
Typical business models are designed around carbon credits and a project’s potential to offset the carbon emissions of polluting industries.
Simply put, when industries add to climate change problems by emitting greenhouse gases such as carbon dioxide and consuming naturally stored carbon resources such as coal or trees, renewable energy projects make up for it by offsetting the damage.
Models based on this concept have driven the growth of renewable energy industries and are crucial to overcoming the high start-up costs of renewable energy projects.
They are not without problems however, as the models rely on complicated carbon trading schemes, made more complex by the lack of a global carbon trading system.
The regional carbon markets currently in place are prone to political upheaval and erratic public support.
“The underlying voter base doesn’t understand carbon trading schemes;” said Mr Kieser, “In most cases the concept has been badly communicated to the public. Carbon credits are not intuitive for the general public, or for the market itself.” These factors combine to add significant risk to the models from an investment perspective.
Asia Renewables is a clean energy company focusing on the development of renewable energy, carbon abatement and sustainable development assets in emerging markets.
It has developed several renewable energy projects from Thailand to Indonesia on the merits of its commercial viability alone. Carbon credits are a “bonus add on”, but even if it does not happen, the project stands on its own two feet, added Mr Kieser.
“Carbon is too volatile to form the primary basis of a business model for a new renewable energy investment. You have to focus first on the renewable energy project itself,” continued Mr Kieser, “By putting more focus on the viability of the project itself, companies increase the value for investors by decreasing the long-term risks of the project.”
He acknowledged that carbon offsets are not going to disappear from renewable business models anytime soon. Without carbon credits and government subsidies in the form of grants, tax breaks and fiscal incentives, renewal energy cannot compete in the global energy landscape.
In the first half of 2010, new financial investments in clean energy totalled $65 billion, an increase of 22 percent over the same period in 2009, according to a report from UNEP SEFI and Bloomberg New Energy Finance. While these figures appear promising, it’s still not enough to counter the differential in the start-up costs.
Chris de Lavigne, global vice president and consultant at Frost & Sullivan, puts the numbers in perspective: “In Asia, coal and gas fired power plants cost around USD $0.5 million per MW installed whereas wind power is at around $1 million and solar, at $3.5 million, is seven times the cost.”
Mr de Lavigne agrees that the uncertainty surrounding carbon credits is problematic: “Overall, all renewable projects should be seen as risk management, and you work backwards from that.
Key factors that need to be assessed are the management team as it often comes down to track record, country risk, technology risk, input risk and contractual risk.”
No two projects, even in the same country or sector are the same, added Mr de Lavigne.
Eco-Business.com’s coverage of the Clean Energy Expo Asia 2010 is brought to you by Conchubar Capital Management.
