Tulips were considered a top traded commodity in 1636, with stories of a flower costing the same as a house. That was until the next year, when the first reported economic bubble happened.
"The bottom fell out of the market," Anne Goldgar wrote in Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age. "Buyers for the most part would not pay and sellers were left holding the bulbs."
Panic set in and the flower quickly began losing its value, resulting in the Dutch government creating a sort of bailout allowing a cancellation of contracts for 10 per cent of the value. Goldgar said: “But the tulip craze was not only amazing; it was also stupid.”
Holland’s flower bust happened as everyone began thinking they could make money from the latest fad. The same is true in renewables.
There are various people discussing the sector and the amazing pricing gains, but for many it seems to be merely a fashionable topic without a clear understanding.
The Global Trends in Renewable Energy Investment report released by the UN Environment Programme, the Frankfurt School of Finance and Management and Bloomberg New Energy Finance (BNEF) said the costs of energy generated by solar photovoltaic (PV) dropped 13 per cent last year compared to 2015, while onshore wind applications fell 11.5 per cent and onshore by 10 per cent.
More than 138 gigawatts of renewables, excluding hydropower, was added last year for less money. It was cheaper to build these projects than ever before.
Angus McCrone, BNEF’s chief editor, said that further drops could come by trimming costs throughout the supply chain. “There are other kinds of ways for costs to come down – less or cheaper materials and lower manufacturing costs,” he said.
But how much more fat can be cut to give the necessary returns throughout the renewable supply chain?
Are the world record-breaking bids simply a business strategy to gain more leverage on future projects? If so, how many strategic investments can be made before putting a company in the red?
And how long will governments be willing to spend to close the gap on underbidding and overspending?
In the short-term, this means a reduction of a competitive landscape and consolidation. One insider said: “Who can or wants to bid for these big independent power producer projects?”
One solar developer told me that we hadn’t hit the bottom just yet, but we were close.
The race to the bottom is making renewables a great business case to generate electricity, but will this rapid escalation continue to drive prices down or are folks biting off more than they can chew?
One industry executive said that a “blind race to the bottom is not something to [reach] at all costs ... People will get burnt and it will affect the sustainability of the market.”
lgraves@thenational.ae
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