GEF - Clean Edge Report

8/14/2019 GEF - Clean Edge Report

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A Global View of

Emerging Opportunities

In Renewable Energy

Prepared by Clean Edge, Inc.

Exclusively for the use of Global Environment Fund

September 2004

2004 Clean Edge, Inc. All rights reserved.

May not be reproduced without express consent of Clean Edge, Inc.


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2004 Clean Edge, Inc. Page 2

CONTENTS

About Global Environment Fund .....................................................................................3

Overview ..............................................................................................................................7

A Confluence of Forces......................................................................................................8

Key Clean Energy Technologies......................................................................................11

Wind Power ......................................................................................................................11

Biomass .............................................................................................................................12

Solar Photovoltaics.......................................................................................................... 12

Hydrogen Fuel Cells and Infrastructure........................................................................14

Grid Automation and Optimization .............................................................................. 14

Small-Scale Hydro...........................................................................................................15

Geothermal .......................................................................................................................16

Wave and Tidal Power .................................................................................................... 16

Emerging Capital Markets ...............................................................................................17

Select State Clean Energy Initiatives .............................................................................19

Select Key Clean Energy Trends ....................................................................................20

Green Power: A Price Hedge and Market Accelerator................................................ 20

The Energy Web: Changing the Future of Energy Services.......................................20

China and India: The Next Wave in Clean Energy Development .............................22

The Hydrogen Infrastructure: Big Bucks, Big Challenges ..........................................23

Defense Spending Promotes Clean Energy Technologies........................................... 24

Rural Electrification: Large Markets from Small-Scale Power .................................. 25

Conclusion.........................................................................................................................27


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ABOUT GLOBAL ENVIRONMENT FUND

Global Environment Fund (GEF) is an international private equity company,

established in 1990, and committed to investing in companies whose business

operations deliver measurable environmental improvements through deployment

of improved environmental infrastructure and clean technologies. GEFs

investment objective is to provide superior returns by harnessing the power of

technological innovation to promote energy sources and means of production

that are cleaner, more efficient, cheaper, and more sustainable.

GEF currently manages a group of private equity investment funds including

several funds dedicated to basic environmental infrastructure and health care

delivery systems in emerging markets, as well as a fund focusing on clean

technologies in the United States. Through its own capital investment vehicle,

Global Environment Capital Company, LLC, GEF also develops, finances, andtakes controlling interests in principal investments for its own account. Total

capital available for investment through GEFs equity investment programs

exceeds $300 million.

GEF is a registered investment advisor with the U.S. Securities and Exchange

commission, having maintained its registration continuously since 1992. Our

senior management team has worked together for nearly 10 years, and we have

an experienced group of investment and financial administration professionals,

including five who are CFA Charterholders through the Chartered Financial

Analyst Program and three Certified Public Accountants (CPA). In recent years,

the GEF investment team has completed more than 30 private equity or early-

stage technology investments in businesses operating in a broad array ofeconomic sectors and in all of the worlds major geographical regions. On a

firm-wide basis, the six-year audited internal rate of return on more than $165

million invested by GEF in private equity and early stage technology deals for

the period 1998 to 2003 stands at 29.5 percent.


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GEF INTRODUCTION

From our inception in 1990, Global Environment Fund has invested in the

development and deployment of cleaner, more efficient energy sources around

the globe.

In fact, several of GEFs founding investors participated in early private

investment activities in the United States in the late 1970s and 1980s designed

to promote commercial adaptation of renewable energy technologies. Their cause

was noble, but the financial results were mixed: they lost money in the original

Luz solar projects; they achieved modest equity returns in wind power projects at

Altamont and Tehachapi; and they managed a solid dividend return from the

financing of solar hot water systems at the state prison in California on the basis

of tolling arrangements that paid in accordance with the price of displaced

natural gas systems. Despite the satisfaction of promoting the greater good, theconclusion of these investors, and our conclusion when we founded GEF, was

that most renewable energy technologies were still not economically viable. We

anticipated that they still needed a decade or more of experimentation and

research before they could be competitive with traditional energy sources in

most places.

Consequently, our investors were clear about the GEF mandate: promote clean

and renewable energy, for sure, but do not lose money, and do not invest in

technologies that are not mature enough to stand on their own without perpetual

subsidization. In 1990, of course, this was no small order. We are proud of the

fact that, from our inception 15 years ago, we have found exciting and

profitable renewable energy investments around the world. We were earlyinvestors in 1991 in Compania Boliviana Electricidad, which within a very

unstable macro economic climate managed to provide nearly 40 percent of

Bolivias electricity from low-head, run-of-river hydroelectric facilities. Before

privatization of the energy sector in Brazil, we financed and helped create

Brazils only purely private electrical generating and distribution company in

1995, Companhia Forca e Luz Cataguazes, which still serves customers in Minas

Gerais and Rio de Janeiro with an expanding network of small-scale

hydrofacilities. We were investors in Magma Power, as that company grew in the

mid 1990s to become a leading developer of geothermal power in California, and

in The Philippines. In 1996, we participated in a private financing sponsored by

three Indian electricity companies managed by the Tata Group that providedequity capital for the construction of a peak-load-shaving, pumped storage

facility that eliminated the need for a proposed coal-fired power plant to serve

Mumbai, India. In 1997, a company in which we were significant venture

capital investors, NEPC Micon, became, at least for one year, the largest

manufacturer of wind turbines in the world, driven by major government-backed

wind energy programs in India.

We are proud of the

fact, that from our

inception 15 years

ago, we have found

exciting and profitable

renewable energy

investments around

the world


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As we examine global investment prospects over the next 15 years, the energy

generation and transmission industry is in the spotlight of growing worldwide

concerns about the economic and environmental costs of traditional energy

technologies. These concerns include: environmental pollution, public health, the

high costs of fossil fuels, global greenhouse gas emissions, and the vulnerabilityand capital costs associated with mass-grid energy systems.

Nevertheless, the world has a voracious appetite, and need, for new energy

supplies. Even today more than one-third of the people on the planet still do not

benefit from the basic modern amenities that are availed by the fossil fuel

economyelectricity supply, refrigerators, automobiles. The World Bank

estimates that two billion people do not have access to an electricity grid. The

cost of extending power to remote areas is often prohibitively expensive and

difficult to finance for most developing nations. China and India, alone, will

likely double or triple the amount of electricity they produce, and the amount of

total energy they consume in the next 30 years. Car ownership per capita in

China, while growing by double digit percentages every year, has barely reachedthe level that prevailed in the United States when the first Model T rolled off the

assembly line! What will happen to the planet as China, India, Indonesia and

other developing countries drive up the demand for more of the worlds

dwindling oil reserves and continue to fuel their still-nascent industrial

revolution with their large domestic coal reserves?

We at GEF believe that the forces of technological change will, in coming years,

transform the profile of energy use and electricity production in the global

economy. This transformation will be facilitated by governments and

international finance agencies which, in addition to supporting traditional

energy production, have fostered policies to commercialize and financed new

technologies and cleaner ways of utilizing energy supplies around the world.

This climate of change in the global energy industry will create significant

opportunities for private sector investors interested in investing in cleaner, more

efficient and decentralized energy generation technologies that are rapidly

attaining commercial viability.

Technology is fast eroding the economies-of-scale-advantage that has favored

centralized generation and transmission systems for electricity. Distributed

generation, the application of relatively small power plants near or at load

centers, is gaining broad interest among competitive energy suppliers and

regulated power delivery service providers. Advances in small generation

systems (i.e. reciprocating gensets, turbines) and new technologies (i.e. micro-turbines and fuel cells) are proving to be more efficient, cleaner and easier to site

than larger centralized power plants. Other emerging generation technologies

small-scale hydro power, wind energy, solar power, ocean power, biomassare

increasingly being employed to meet new electricity demand. GEF believes that

these trends set the stage in coming years for a significant deployment of

We at GEF believe

that the forces of

technological change

will, in coming years,

transform the profile

of energy use and

electricity production

in the global economy


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investment capital into the development and finance of projects that deliver

reliable, efficient and cleaner forms of energy.

To assist us in scoping out new technological developments and the range of

new investment possibilities they may pose in the renewable energy industries,

GEF commissioned this report from Clean Edge. We are grateful to Joel

Makower, Ron Pernick and Clint Wilder of Clean Edge, who took up the task of

preparing this report for GEF. In addition, Samrat Ganguly and Michael Leonard

of GEF made significant contributions. Their collective efforts provide a good

staging point for the GEF investment team, as we continue to scour the globe for

private financing opportunities that will, at once, enable us to stimulate greater

utilization of renewable energy and achieve appropriate, risk-adjusted, private

equity returns.

Jeff Leonard

President

Global Environment Fund

Small-scale hydro

power, wind energy,

solar power, ocean

power, and biomass

are increasingly being

employed to meet

new electricity

demand


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OVERVIEW

Demand for cleaner energy sources is rising on a global basis. A confluence of

factors is compelling nations and companies to seek out clean energy solutions

for transportation fuels and electricity generation. The most significant drivers of

the trend include: rising global energy demands, particularly among rapidly

growing nations such as China and India, that are difficult to meet solely with

traditional energy sources; increasing awareness of the environmental

consequences resulting from continued dependence upon fossil-fuel energy

sources, especially coal and petroleum; and growing international security

threats posed by dependence upon energy supplies from politically volatile

regions.

Clean energy suppliesin the form of liquid fuels and electricity generated from

renewable, recycled, or other benign sourcesare also more widely available,and more cost-competitive as a result of technological improvements,

government incentives, and economies of scale. These trendsthe growing

demand for clean energy sources, and the increased availability of clean energy

supplieswill likely continue and accelerate in coming decades

According to some analyst estimates, global markets for clean energy fuels and

electricity already exceed $50 billion annually, with the deployment of some

clean energy technologies in the electricity generation sector expanding by more

than 30 percent a year. The clean energy industry has also rapidly become a

competitive arena for big business. Global business giants such as ABB, BP,

Caterpillar, DuPont, FedEx, Fuji, General Electric, Kyocera, Sanyo, Sharp, Shell,

Toshiba, UPS, and most of the worlds leading automakers have made majorinvestments in developing and deploying clean energy technologies in recent

years.

The market size for the three fastest-

growing clean technologies for electricity

generationwind, solar PV, and fuel

cellswill expand more than 20 percent

annually from $12.9 billion worldwide in

2003 to $92 billion in 2013, according to

Clean Edges projections, based on

analysis of past and future growth trends.


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A CONFLUENCE OF FORCES

As noted above, clean energys growth is the result of a convergence of factors,

including environmental, technological, economic, security, and social.

Cost Competitiveness. A key driver of the clean energy industry is thesimple fact that the economic cost of most renewable energy technologies has

fallen in recent years. In the next few decades, the cost of generation for most

renewable energy sources is expected to continue to fallabetted by

technological advances, new investment, and governmental incentives around

the world. This trend is gradually making renewable energy technologies cost-

competitive with traditional sources of energy. According to Navigant

Consulting, most renewable energy options should eventually be cost

competitive with grid power in the U.S. without any tax incentives or

governmental subsidies. Already, in some areas, wind-generated electricity is thecheapest energy source, at 4 cents per kWh, according to the U.S. Department of

Energyan order of magnitude lower than it was in 1980. Electricity from solar

photovoltaic (PV) cells has dropped from approximately $1 per kilowatt-hour

(kWh) in 1980 to below 20 cents per kWh in some areas today.

Energy security has become a topic of increasing importance, ascommunities, regions, and nations come to understand the vital importance of

reliable fuel and electricity. Raw cost per kWh of energy is not the only indicator

of competitiveness. The true value of energy in todays markets includes

measures of reliabilitysuch as availability during grid disruptions and ability to

ease grid requirements during periods of peak demand, thereby reducing the

need to build costly peaker plants. Disruptions in recent yearswhether due to

extreme weather, market manipulation, price perturbations, technical failures,

terrorism, or other causeshave underscored the vulnerabilities of having a vast

The Declining Cost of Renewables

As this chart shows, the cost of renewable energy

sources has been declining steadily in recent years,

and will continue to do so through the next few

decades. In some cases, such as photovoltaics,

costs are expected to plummet, due to improved

technology and economies of scale, equaling or beating

the 6 to 10 per kilowatt-hour price of conventional

electricity.

According to some

analyst estimates,

global markets for

clean energy fuels

and electricity already

exceed $50 billion

annually


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electric grid system with centralized, large-scale generation sources, or of

reliance on foreign sources of energy. The demand for energy reliability has

elevated the need for grid-optimization and back-up power technologies and

pushed up premiums for solutions that provide higher levels of energy security

and reliability.

Technological advances have significantly improved the performance, whiledramatically reducing the prices, of renewable energy technologies. Consider

solar photovoltaics. A wide range of developments have helped push down the

cost of PV modules by roughly an order of magnitudefrom about $30 per peak

watt in 1975 to about $3 today, with lower prices on the horizon. The efficiency

and reliability of the cells have improved to the point that some manufacturers

are offering 25-year warranties on their products. The combination of improving

performance at steadily lower costs comes from advances in cell materials,

module packaging, manufacturing processes, and other innovations. Similar

advances have helped reduce the cost of wind, geothermal, biomass, and other

clean energy technologies in lockstep with the efficiency and reliability of these

technologies.

Environmental concerns around the world, including air pollution, resourcescarcity, and climate change, have grown steadily among scientists and policy

makers, making clean energy an ever more attractive means of growing GDP

without a concomitant rise in emissions. In the developing world, polluted cities

have spurred calls for more efficient cars, buses, trucks, and scooters, opening

potentially vast markets for hybrid, fuel-cell, and other cleaner-running vehicles.

The rapid electrification of developing countries has accelerated concern about

the proliferation of large, coal-fired and nuclear power plants, as well as other

polluting and risky technologies, while making solar, wind, hydrogen, andbiomass increasingly attractive.

Government policies are shifting as political leaders come together torecognize that future economic competitiveness is directly linked to being more

resource-efficient and less reliant on older, polluting technologies. For example,

the U.S. Clean Energy Initiatives Efficient Energy for Sustainable Development

Partnership has announced a collaborative project with the U.K.s Renewable

Energy and Energy Efficiency Partnership. Additionally, the German Ministry for

Economic Cooperation and Development and the Inter-American Development

Bank have agreed to collaborate on clean energy projects in Latin America and

the Caribbean. Clean energy is seen in many regions as a potentially large source

of job creation and economic development because it tends to harnessunderutilized domestic resources. This realization has led national and local

governments to seek to lure clean energy companies and facilities to locate

within their borders.

Local economic development objectives can also be served by clean,affordable, and resource-efficient technologies that can be deployed at the town

Many view clean

energy and other

clean technologies as

among the successors

to the digital

revolution of PCs, the

Internet, and wireless

telephony


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and village levels. Biomass, solar, and small-scale hydro, for example, are

among the technologies with the potential to provide new economic

opportunities and improved quality of life for the two billion people in the world

who lack access to electricity. At the same time, they are creating significant

business opportunities for companies that profitably tap those markets withinnovative products and services. These business opportunities often have the

added benefit of creating jobs. In fact, a UC Berkeley report argued that

investment in clean energy technologies would produce more American jobs

than a comparable investment in the fossil fuel energy sources in place today.

In the developing

world, polluted cities

have spurred calls

for more efficient

cars, buses, trucks,

and scooters,

opening potentially

vast markets for

hybrid, fuel-cell,

and other cleaner-

running vehicles


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KEY CLEAN ENERGY TECHNOLOGIES

Following are sketches of seven principal clean energy technologies.

Wind Power

Wind-generated electricity is one of the fastest-growing clean energy

technologiesa $7.5 billion industry in 2003, expected to reach $47.6 billion by

2013, according to Clean Edge research. In fact, the European Wind Energy

Association has just released a blueprint demonstrating how wind power is

capable of supplying 12 percent of the worlds power by 2020. BTM Consulting

recently released a report showing that the wind industry has grown by an

average of 26.3 percent for the past five years.

More than 70 percent of wind-powered electricity is generated in Europe, withmore than 28,000 MW installed at the end of 2003 and many new, large wind

farms planned in the U.K., Spain, and other E.U. countries. The continent

receives 2 percent of its electricity from wind, and wind turbines in Denmark,

the wind power leader, produce fully one-fifth of the countrys electricity on

windy days.

While winds growth rate in some leadership countries, such as Denmark and

Germany, are slowing, Spain and especially the U.K. are picking up the slack. On

the drawing board in Britain is a mammoth 1,000 MW offshore wind farm, to be

operated by Shell WindEnergy, and at least 160 MW in new capacity being

developed by National Wind Power Ltd.more than double its current output. In

China, the industry is growing as well. The initial stages of construction have

been completed on a $95 million dollar wind project that comprises the second

phase of the Changjiangao Wind Power Plant. This second phase will add

approximately 100,000 KW to the 6,000 KW that the plant currently generates.

In the U.S., the wind industry is poised to continue its healthy growth of the past

several years. New wind installations grew an average of 28 percent annually

from 1998 to 2003, according to the American Wind Energy Association,

including a record 1,700 new MW of capacity in 2003. Furthermore, the U.S.

Department of Energy is in the process of implementing a three-phase

technology development project for wind power. The first step, opening

negotiations for 21 public-private partnerships, has already begun. Assuming areduced annual growth rate of 18 percent, wind would still account for 6 percent

of all U.S. electricity by 2020.

New wind installations

grew an average of

28% annually from

1998 to 2003,

according to the

American Wind

Energy Association


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Biomass

Energy produced from organic matter is the worlds oldest form of energy, and

currently the second-largest renewable energy sector behind hydroelectricity.

The biomass umbrella covers many very different energy sources, including:

solid biofuels (such as wood, straw, and organic waste); liquid biofuels, used

primarily for transportation (primarily ethanol and biodiesel); and biogas, mainly

methane and carbon dioxide, which can generate electricity or provide process

heat (landfill gas is a key source; some 330 landfills in the U.S. produce 1,000

MW of electricity from this source).

Combined, biogas and solid biomass generate some 14,000 MW of electricity

worldwide, with the largest facilities producing as much as 80 MW. Bioenergy

overall accounts for 15 percent of worldwide energy use, according to the United

Nations Food and Agriculture Organizationand up to 90 percent in some

developing nations. The U.S. accounts for about half of the worlds total butdeveloping countries will be the top growth markets as biomass energy roughly

doubles to 30,000 MW by 2020, the U.S. Energy Department projects.

Both environmental and economic imperatives are driving the growth of global

bioenergy, especially in the developing world. The Pew Center on Global Climate

Change calls biofuels like ethanol and biodiesel the most promising alternatives

for reducing greenhouse gas emissions over the next 15 years. Economically,

ethanol has been a boon to corn growers in North America; the same crops-into-

fuel strategy can have huge economic benefits in developing countries. The UNs

FAO, for example, is working with agricultural agencies in China to produce new

strains of sorghum for ethanol production, and has comparable projects

underway in Brazil and Nepal. Ethanol can also be produced from other cropsgrown widely throughout the developing world, such as sugar cane, cassava, and

rapeseed.

Solar Photovoltaics

Solar-powered electricity has been steadily bringing costs down while ramping

up production and installations. Solar PV is expected to reach cost parity for

many regions in the next decade, spurred by a host of technological

improvements in PV cell composition and manufacturing processes, in addition

to the market momentum. This will occur both at the local level in many U.S.

cities and states, and in large developing economies such as China and India.

Some large-scale commercial and industrial PV systems are producing electricity

at rates below 20 cents per kWh and as low as 10 cents per kWh, after

government buy-downs and incentives in places like California, making it

competitive with traditional grid-connected electricity. The worldwide market for

solar PV modules, components, and installations is expected to grow nearly


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sevenfold from $4.7 billion in 2003 to $30.8 billion in 2013. Solarbuzz, Inc.

reports that last year, worldwide PV installations increased to 574 MW, which is

34 percent more than in 2002.

Spurring that growth are dozens of publicly backed solar installations in the

U.S., Japan, Germany, and elsewhere. From San Franciscos Moscone Convention

Center to the Jacksonville, Fla. International Airport, PV panels are sprouting on

rooftops at consistent growth rates in many parts of the U.S. In 2004, the city of

Austin, Tex., approved a 100 MW solar initiative, which would generate 20

percent of the citys electricity by 2020. The California State Senate has even

recently passed a bill that would make it mandatory for a certain percentage of

new single-family homes to include a solar power system in their construction.

Germany, due to the success of its generous feed-in tariffs, which permits

customers to receive up to 45.7 eurocents/kWh for solar generated electricity,

has a number of much larger solar farm developments, some currently

reaching 4 MW in size. Japan, due to strong government and industry support,has installed more than 100,000 residential solar PV systems, in the process

making Japan the current leader in global solar PV installations and production.

The U.K. Energy Savings Trust has offered to give homeowners grants worth up

to 50 percent of the total installation cost of a residential solar PV. In South

Africa, the government has begun accepting bids in accordance with its plan to

invest about $2.5 million to provide 40,000 homes with solar power systems.

China plans to invest $1.2 billion in solar technology and installations in the

next two years alone. Shell, which is already involved in the solar energy market

in China, has recently announced that it plans to increase its market share.

The worldwide market

for solar PV modules,

components, and

installations is

expected to grow

nearly sevenfold from

$4.7 billion in 2003 to

$30.8 billion in 2013


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Hydrogen Fuel Cells and Infrastructure

Compared with wind and solar power, a small amount of energy (either

electricity or vehicular transport) is generated from hydrogen fuel cells today.

Nevertheless, billions of dollars of corporate and government research and

development funding have been deployed in recent years to commercialize new

fuel cell technologies. DOEs $1.2 billion pledge to fund hydrogen fuel cell and

infrastructure research is nearly twice the size of the $700 million industry

today. The industry is expected to grow to $13.6 billion by 2013, according to

Clean Edges assessment of independent analyses.

With well-publicized hydrogen highway proposals from California Gov. Arnold

Schwarzenegger and the organizers of the 2010 Winter Olympics in British

Columbia, hydrogen infrastructure development has received most of the public

attention in this sector. Though the technological and financial challenges

remain, progress is being made in the transition to a true Hydrogen Economy.The number of hydrogen fueling stations increased by more than a third during

2003 to nearly 90, still a small fraction of the number needed before hydrogen

reaches critical mass. Quietly stealing the early lead from cars in terms of actual

use are fuel cell-powered buses, now operating in Chicago, Tokyo, Perth, and 10

European cities.

Although hydrogen-powered vehicles get most of the mainstream attention,

stationary fuel cells, often used for backup power in hospitals, data centers,

factories, and hotels, are also a promising sector. Market estimates predict up to

16,000 MW installed (worth $2.9 billion) by 2012, up from just 45 MW in 2002.

The worldwide market for micro fuel cells, a lighter and longer-lasting

replacement for batteries in everything from cell phones and laptop computers tomilitary weapons and radios, could be worth more than $2 billion by 2013.

Grid Automation and Optimization

Sometimes overlooked among clean energy technologies are the software,

hardware, and services that improve the performance and efficiency of the

existing electric power grid. Brought into the public spotlight during blackouts

in 2000 and 2001 in California, and in 2003 in the Northeastern U.S., efforts to

improve transmission and distribution add up to a sizeable market.

Transmission has replaced generation as the most profitable sector of the electricpower business and will see the most investment in the next five years,

according to consultancy GF Energy LLC. After years of neglect, the North

American power industry plans to spend $4 billion to $7 billion annually on

grid improvements. The federal government has jumped on board as well: the

U.S. DOEs new Office of Electric Transmission and Distribution will help fund

billions in R&D efforts in this sector.

While the

technological and

financing challenges

for the transition to a

true Hydrogen

Economy remain,

progress is being

made


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The grid optimization sector comprises a wide swath of technologies, including:

Smart Generationmore efficient, more controllable production of electricitygenerated from both traditional and renewable energy sources.

Smart Gridautomating, optimizing, and monitoring high-voltagetransmission and medium-voltage distribution, including intelligent switches,

digital relays and advanced meters.

Smart End Useincreasing efficiency and reducing peak loads, includingenergy management software and services, smart motors, intelligent load

shedding, and building automation.

Small-Scale Hydro

Large-scale hydroelectric power remains by far the largest source of clean

energy, accounting for 90 percent of renewable energy worldwide. However,increasing attention is turning to more nascent small-scale hydro technology,

generally defined as turbines powered by water flows already present in the

environmentsometimes known as run-of-riveroften aided by low, small-

impact dams for seasonal water storage. Small-scale hydro ranges from 30 MW

at the high end down to micro-scale installations of 100 kW or less, enough to

power one or two homes.

Due to its ability to serve rural villages at a fraction of the investment cost of

large, centralized power plants, small-scale hydro will see most of its growth in

the developing world. China, for example, expects to install at least 1,000 MW of

small hydro each year for the balance of the decade. Asia overall is expected to

account for nearly half of the worlds small-scale hydro by 2010, according to

British research firm Atlas. World capacity of small-scale hydro at that time will

be about 55,000 MW, or roughly 5 percent of the global hydroelectric total.

Due to its ability to

serve rural villages at

a fraction of the

investment cost of

large power plants,

small-scale hydro will

see most of its

growth in the

developing world


16/28


Geothermal

The tapping of heat from the earth to power steam turbines is a significant clean

energy source in several countries, as well as in the western United States. China,

Iceland, Indonesia, Italy, Japan, Mexico, New Zealand, and the Philippines are

the largest users of geothermal, collectively producing about 8,000 MW each

year. In fact, Indonesia has recently announced plans to offer 13 geothermal

sites for bid, with the goal of generating 2,000 MW of geothermal energy by

2008 and 6,000 MW by 2020. The U.S.s 2,800 MW contribution includes the

worlds largest geothermal facility, The Geysers in northern California, much of

it (19 plants supplying 850 MW) operated by San Jose-based Calpine.

Geothermal steam plants are not 100 percent clean, emitting some amounts of

global-warming gas CO2 as well as sulfur and nitric oxides. But the amounts are

roughly 50 times less than emissions from traditional fossil fuel power plants,

according to the U.S. National Renewable Energy Laboratory. Costs arecompetitive, with geothermal-powered electricity currently being produced at 4

cents to 8 cents per kWh.

Wave and Tidal Power

One of the more embryonic clean energy technologies harnesses tidal action or

wave motion to power turbines. The technology is only in the demonstration

stage worldwide, but it has the potential to play a growing role in the coming

decade.

One leading tidal power technology is based on the Venturi tube, a pre-World

War II invention that uses pressure differentials to create an energy flow through

an enclosed space. (It is actually air, not water, that drives the turbine blades.) In

a closely-watched project, U.K.-based HydroVenturi is working with the city of

San Francisco to exploit the tidal flows under the Golden Gate Bridge, which are

among the worlds most powerful. Fully harnessing the currents of San Francisco

Bay could theoretically produce 2,000 MW of powermore than three times the

citys current daily power load of 650 MW.

Another major emerging tidal-power technology is a system of buoys that utilize

the up-and-down motion of waves to power small generators linked to an

undersea transmission cable. Its leading purveyor, Ocean Power Technologies, in

Pennington, N.J., is testing its PowerBuoy system in a U.S. Navy project off thenorth shore of Oahu in Hawaii. The company claims it can produce power for 3

to 4 cents per kilowatt-hour at a 100 MW scale.

Fully harnessing the

currents of San

Francisco Bay could

theoretically produce

2,000 MW of power

more than three

times the citys

current daily power

load


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EMERGING CAPITAL MARKETS

In the private equity arena, clean energy investments in the U.S. have grown from

0.8 percent of total venture activity in 1998 to 2.4 percent in 2003. This threefold

increase represents a growing wave of clean energy activity.

In 2003, for example, total venture investments

in the U.S. totaled $18 billion, down from

2002s $21 billion. Despite this drop, clean

energy investments remained roughly steady,

with $428 million in 2003 compared with $435

million in 2002, expanding from 2.1 percent to

2.4 percent of total venture activity. On a

global scale, venture investments in new

energy-technology companies in 2003 equaledmore than half a billion dollars, with

approximately $100 million raised for non-

U.S.-based firms.

Large corporations have been investing in

clean-energy R&D, project development, and

acquisitions at levels never before seen. Among

the current projects and investments underway:

ABBexpects its share of the alternative and renewable energy solutions marketto reach $1 billion by 2005.

BP Solarcommitted $500 million over 5 years for clean energy development,including the launch of BP Home Solutions.

General Electricacquired Enron Wind for $350 million in 2002 and turned itinto a $1 billion business by 2003. In 2004 it entered the solar PV business

through its acquisition of U.S.-based AstroPower.

Sharp doubled PV manufacturing output for each of the last three years,exceeded 200 MW production capacity in 2003, more than a third of Japans

total solar PV output.

Shell is investing $500 million in renewables. It operates a range of cleanenergy businesses including solar PV manufacturing and wind development.

Toyota, the leading manufacturer of hybrid EVs and at the forefront of fuel cell vehicles, will manufacture as many Prius vehicles in 2004 as it did in 1997

through 2003 combinedapproximately 130,000 units.


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The influx of private and corporate capital demonstrates how rapidly clean

energy investing has moved from niche to mainstream. National and local

government initiatives around the world are playing a significant role in this

increased activity, totaling billions of collective dollars annually. These programs

range from investment funds and R&D efforts to procurement programs and taxincentives.

South Korea, for instance, recently announced government support to the tune

of more than $500 million through 2010 for the development of fuel cell and

alternative fuel vehicles. The government of Japan invested more than $800

million for its hugely successful residential solar PV program. Germany recently

announced more than $600 million in low-interest loans to support renewable-

energy projects and energy efficiency in developing countries, in addition to the

hundreds of millions it is spending in country for solar, wind, and other clean

energy development activities.

In the U.S., twelve states operate funds whose objective is building markets forrenewable energy and clean energy resources. According to the Clean Energy

States Alliance, these state programs will make available approximately $3.5

billion to promote clean energy over the next decade.

In addition to these direct government investments, several countries and U.S.

states have set clean energy targets (sometimes referred to as Renewable

Portfolio Standards). A growing rank of countries and states are now mandating

that at least 10 percent of their electricity comes from renewable energy sources

within the next decade, with the State of New York contemplating a leading

commitment of 25 percent from renewable energy sources by 2013.

Select Targets and Renewable Portfolio Standards

China 10 percent of total energy consumption fromrenewables by 2010

Denmark 13 percent of primary energy from wind, solar, andbiomass by 2005; 35 percent by 2030

EuropeanUnion 22 percent of all electricity from renewable sources by2010

Iceland 99 percent of all energy from hydrogen by 2030


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Select State Clean Energy Initiatives

STATE TOP FINANCIALINCENTIVES

PUBLIC-SECTORGREEN POWER

PURCHASE

COMMITMENTS

PUBLICCLEAN ENERGY

FUNDS

STATE RPSGOAL

California Low-interest loans fordevelopment, up to

$10M per applicantand $40M per

company

14% in Los Angeles,100% in Santa Monica,

100% in Chula Vista,90% in Santa Barbara

(all now)

Renewable ResourcesTrust Fund:

$135M/yr.

20% by 2017

Connecticut RECs$4M in fuel cell grants

$3M in solar PV grants

State: 20% by 2010,50% by 2020,

100% by 2050

Connecticut CleanEnergy Fund:

$118M over 5 yrs.

10% by 2010

Hawaii RECs N/A N/A 9% by 2010

Illinois RECs State: 5% by 2010,

15% by 2020Chicago: 20%

by 2005

Renewable Energy

Resources Trust Fund:$50M over 10 yrs.

15% by 2020

Massachusetts N/A CCA for 21 towns onCape Cod includesGreen Power

Mass. RenewableEnergy Trust:$150M over 5 yrs.

4% by 2009

Nevada RECs N/A N/A 15% by 2013

New Jersey RECs State:24 MW of wind power

over 3 yrs.

New Jersey CleanEnergy Program:

$358M over 3 yrs.

6.5% by 2012

New York $2.5M in wind powerincentives

Up to 70% rebatefor grid-connected

solar PV

State: 10% by 2005,20% by 2010

NYSERDA PublicBenefit Fund:

$210M over 8 yrs.

N/A

Ohio RECs$100M, 3-yr. program

for fuel cell financing,R&D, and training

Northeast Ohio PublicEnergy Council (112

cities & towns, largestCCA in US): 6-yr. green

power contract w/Green Mountain Energy

Ohio Energy LoanFund: $100M over 10

yrs.

N/A

Pennsylvania RECs

Solar PV Buy-Downs

State: 5% over 2 yrs. $76M through states

4 largest utilities

N/A

Texas RECs

Corporate taxexemption for solar

manufacturers

N/A N/A State:

2,000 MW innew renewables

by 2009Austin:

20% by 2020

Wisconsin RECs 25% in Madison (now) Wisconsin Focus onEnergy: $2.85M per

yr.

2.2% by 2011

Notes:

CCA: Community Choice Aggregation: consortium of communities to buy power from supplier of their choice RECs: Renewable Energy Credits; clean energy producers can sell credits to utilities to meet RPS goals RPS: Renewable Portfolio Standard; mandated goal of percent of power from renewables by target year State and city commitments for Green Power purchases are for energy used in municipal buildings and

operations


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SELECT KEY CLEAN ENERGY TRENDS

Following are six significant and influential trends shaping the future of clean

energy.

Green Power: A Price Hedge and Market Accelerator

Electricity produced from clean sources, primarily wind, is increasingly price-

competitive in some regions. More and more utilities are offering residential and

business customers the option to purchase clean energy through green power

pricing programs. Instead of purchasing distributed clean energy generated on-

site from, say, solar PV panels, buyers of green power purchase electricity

directly from a central utility that has added renewable power into its energy

mix. A consumer or business simply signs up for the green power program and

pays a small premium.

Although the initial green-power premium is nominally higher than the utilitys

conventional price per kilowatt-hour, the rate is usually locked in for several

years. That gives customers a hedge against increasingly likely fuel charge hikes

due to fuel price volatility. That is especially important to business customers

trying to forecast costs over the mid to long term.

Austin Energy, one of the leaders in green power pricing programs, offers the

longest lock-in period for its green power premium: a full ten years. That

premium is also the lowest charged to green power customers in the U.S.,

according to NREL. The current GreenChoice premium is 3.3 cents per kWh,

about half a cent more than Austins current fuel charge of 2.79 cents per kWh.

Austins green power is generated at Cielo Wind Powers 61-turbine wind farm

in west Texas, with smaller amounts of solar and landfill gas generation

contributing to the mix.

Clean energys price stability and declining overall costs, and continued spikes in

oil prices, combine to spell great growth potential for green powerand, as a

result, for the clean energy technologies that produce it. Nearly 400 utilities in

35 states offer some form of green-power options. Two states, Colorado and

Minnesota, have declared wind the least-cost alternative for future power plants.

In Canada, the federal government released a study in early 2004 noting that its

wind power purchases from energy producers in three provinces from 1997 to2002 cost less than conventional power at retail prices.

The Energy Web: Changing the Future of Energy Services

Much clean energy technology has focused on distributed generation

technologies, like fuel cells and solar PV, that produce power near where its

Clean energys price

stability and declining

overall costs, and

continued spikes in oil

prices, combine to

spell great growth

potential for green

power


21/28


needed instead of generating it in large centralized power plants and delivering

it over a costly infrastructure. Some of the impetus for this comes from the

stresses and bottlenecks experienced by the electricity grid in developed

economies. Its far from a perfect system, as millions of people learned during

the great Northeast-Midwest blackout of 2003 in the U.S. and Canada.

But what if technology could make the existing grid work so efficiently and

reliably that it reduced the need for additional power plants? Growing numbers

of researchers and companies are working on grid optimization, an umbrella

term for a wide range of networking and information technologies that monitor

and analyze whats going on in a complex energy system, then making real-time

changes to optimize the system for maximum efficiency.

A marriage of the energy, telecom, and software sectors is working to create a

new breed of smart appliances, buildings, and vehicles that, in turn, will be

connected to a disparate energy web powered by a wide range of energy sources,

including renewables and other distributed-generation technologies.

In the new Energy Web, as it has been dubbed, appliances will be integrated

with energy-management software that will automatically communicate with its

electricity provider. If the "grid" (though it may no longer be called that) gets

stressed, it may seamlessly power down select appliancesrefrigerators, air-

conditioning systems, and othersthat don't require always-on power. Rather

than turning off an entire neighborhood or business district at a time la

California's infamous rolling blackoutsthe individual appliances will be turned

off and on again individually, causing less stress on the entire electric system

and on its customers.

Grid optimization can defer construction of new generation, transmission, anddistribution capacity, better use of existing plants and grids, reduce financial risk

for electric system investments, lower the risk of outages, and increase security

of the grid. The financial implications are staggering. Consider the savings grid

optimization can bring by reducing or deferring the need to increase the U.S.

electricity grids capacity. In 2003, the Pacific Northwest National Laboratory, a

federal research agency in Richland, Wash., estimated that just a 5 percent

deferral (55 gigawatts) of the forecasted necessary increase in grid capacity by

2020 could save the power industry and its customers a whopping $45 billion.

And a 25 percent reduction in outages would add another $15 billion in savings.

Power optimization and energy-related information technology were two of the

fastest-growing sectors for venture capital investments in 2003, by some

estimates increasing 42 percent and 27 percent respectively. And companies see

the opportunity, too. IT giants like Cisco Systems and Lucent Technologies have

formed the Consortium for Electric Infrastructure to Support a Digital Society, a

collaborative effort to develop technologies that improve the energy web.

A marriage of the

energy, telecom, and

software sectors is

working to create a

new breed of smart

appliances, buildings,

and vehicles


22/28


With the potential for huge savings in financial, environmental, and fuel

consumption costs, grid-efficiency optimization will be a key growth area.

Whether ecologically-minded or not, all electric utilities know that the cleanest

(and cheapest) energy plant is the one that you dont have to build at all.

China and India: The Next Wave in Clean Energy Development

Its tempting to view the worlds largest energy consumer, the U.S., as the most

influential force in clean energy. But in the larger global picture it is the rapidly

growing economies of China and India, the worlds two most populous nations,

that could be even bigger drivers of clean energy growth.

With a burgeoning middle class spurring unprecedented demand for

automobiles, appliances, and other energy-intensive products, both countries are

rapidly outpacing their ability to meet their energy needs with traditional

domestic sources. China has already surpassed Japan as the worlds number-two

oil consumer, according to the International Energy Agency, and Chinas

government predicts that the nations number of private cars will triple by 2015.

Chinas increase in oil imports is already considered a key factor behind todays

high oil prices worldwide. Meanwhile, Indias energy demand is projected to

grow 4.6 percent annually through 2010, the highest rate of any major country,

according to the U.S. Energy Information Administration. Both nations are

adding vast amounts of energy capacity, with coal and nuclear power looming

as key resources.

Its not just a resource issueits also a critical environmental and public health

issue. Power generation takes a severe toll on Chinas and Indias public health

and the environment. Seven of the worlds ten most polluted cities are in Chinaand air pollution in some cities is more than ten times the standard proposed by

the World Health Organization.

The good news is that to meet a portion of those demands, and to stave off

environmental calamity, both countries are aggressively developing clean energy

sources. In June 2004, China pledged a goal of 10 percent of its power

generation by 2010 from clean energy sources, including solar PV, wind,

biomass, and small-scale hydro. In China, that 10 percent translates to a

staggering 60,000 MWthe equivalent of 60 giant fossil-fuel power plants. This

goal creates huge potential for companies outside China to provide clean energy

technology. In 2002 and 2003, Chinas Township Electrification Program

invested more than $240 million to provide electricity for a million residents inremote villages by installing solar photovoltaic, small hydropower and wind

generating systems. With the next phase targeting 20,000 new villages, Chinas

rural electrification program is stimulating a huge new home-grown renewable

energy industry.

In 2004, China

pledged a goal of

10% of its power

generation by 2010

from clean energy

sources, including

solar PV, wind,

biomass, and small-

scale hydro


23/28


India already is the worlds fifth-largest wind power provider, with 2,000 MW of

installed capacity. The nation expects to beat its target of 1,500 MW of new

capacity by 2007. Danish turbine maker NEG Micon opened a factory in India in

2003 and the worlds other large manufacturers have a strong presence,

including GE Wind and Germanys Enercon, Nordex, and Vestas. India is alsothe fourth-largest manufacturer of solar PV, with established energy players like

BP Solar producing some of their highest efficiency and lowest cost solar PV

cells on the Indian subcontinent.

With a combined 2.36 billion peoplemore than a third of humanityChina and

India will have a major say in the global energy future. Both countries clearly

recognize the importance of renewable energy to their economic and

environmental outlook, making both markets ripe for clean energy development

and investment.

The Hydrogen Infrastructure: Big Bucks, Big ChallengesThe only problem with hydrogen, goes a current industry joke, is that we dont

have any. This highly-touted, emissions-free energy source is highly efficient in

combustion, but it does not occur freely in nature. So it must be extracted from

non-renewable substances (currently the leading source of hydrogen for

industrial and agricultural applications) or from water through the energy-

intensive process of electrolysis.

In April 2004, U.S. DOE committed $353 million to three areas of R&D research:

hydrogen storage ($150 million over five years), vehicle and infrastructure

demonstration systems ($190 million over five years), and fuel cell research ($13

million over three years). The goal of on-board hydrogen storagethe hydrogenequivalent of a tank of gasis 300 miles between refueling; the demonstration

systems goal is to see commercialized hydrogen-powered vehicles by 2015.

As the industry embarks on this rapid period of R&D activity, two key

technology trends are emerging, according to a 2004 report by industry Web

portal Fuel Cell Today. One trend is that fueling stations are becoming smaller

and more akin to traditional gasoline stations. Fueling equipment manufacturers

like Air Products, Plug Power, and Stuart Energy are building smaller and

cheaper units, capable of fueling just five cars a day or less. But the lower

capital costs will enable more demonstration locations, perhaps enabling

California Gov. Schwarzeneggers goal of 200 hydrogen fueling stations in

California in the next five years. There are currently fewer than 90 such stationsworldwide.

Another key trend is the emergence of compressed gaseous hydrogen, rather

than liquid, as the preferred fuel format. More than 90 percent of hydrogen fuel

presently comes in the form of compressed gas, which is cheaper and easier to


24/28


store. As the infrastructure slowly moves to widespread commercial use, all

trends toward lower costs are positive steps.

Although the U.S. and Canada are leading in hydrogen infrastructure

development, they are not alone. The European Union has pledged 2.8 billion

euros to fund hydrogen production and usage projects by 2014 in an initiative

called QuickStart, and an 18.5 million-euro project running fuel cell buses in

nine European cities is well underway. Japan will spend $260 million on

hydrogen infrastructure research and development during 2004, and is the first

market to offer commercial-ready fuel cell vehicles from Honda and Toyota.

While operational hydrogen highways are at least several years away, the

markets for stationary fuel cells and micro fuel cells in electronic, radio, and

military equipment already are established and growing. More than 2,500

stationary fuel cells have been installed worldwide, cutting energy costs in office

buildings, hotels, schools, hospitals, and other facilities (including remote

telecommunications outposts) by 20 percent to 40 percent. One leading

manufacturer, Fuel Cell Energy in Danbury, Conn., more than doubled itsproduct revenues to $16 million in 2003. In fact, it plans to install a 250 KW

direct fuel cell power plant at the Sheraton New York Hotel and Towers.

Additionally, Japanese manufacturer Sanyo plans to offer a residential fuel cell

power unit starting next April.

Micro fuel cells, most of which run on liquid methanol, have significantand

very near-termapplications in portable consumer electronics. A fuel cell can

potentially power a cell phone for a month without recharging. Like many other

technologies, this one is being powered by the military. The U.S, Defense

Department is investing millions in micro fuel cells that can make military

radios, infrared scanners, and other battlefield devices lighter, longer-lasting,

and less detectable in combat operations.

Defense Spending Promotes Clean Energy Technologies

For nearly half a century, defense spending has been a boon to furthering the

development of technologies, from transistors to the Internet, that have also

improved the lives of those in the civilian world. With schemes like the Next-

Generation Manufacturing Technology Initiative, the U.S. Department of Defense

looks to reestablish U.S. leadership in manufacturing science and technology by

delivering a plan to double the nations manufacturing technology investments

and increase the return on those investments by a factor of ten. Now that same

type of Department of Defense effort is being brought to bear on clean energy,

especially fuel cells. In 2003, the DoD spent about $130 million on clean energy-

related research and development, and is sure to be a major purchaser of fuel

cells as the technology advances. The market for military fuel cells is poised to

take off in 5 to 10 years, according to a March 2004 research report on military

batteries and fuel cells from Electronics.ca publications. The U.S. Army Corps of

More than 2,500

stationary fuel cells

have been installed

worldwide, cutting

energy costs in office

buildings, hotels,

schools, hospitals,

and other facilities


25/28


Engineers Construction Engineering Research Laboratory granted a contract to

the fuel cell company ReliOn to install and test fuel cell systems in critical

military applications. Additionally, Case Western Reserve University has a

research agreement with The Ashlawn Group, LLC to develop fuel cells for the

DoD.

The Pentagons interest in fuel cells is multifold. An estimated 70 percent of

DoDs fuel budget is spent transporting fuel to where its needed, so stationary

fuel-cell units for power supply on military bases around the world hold great

promise. (The Pentagon estimates it costs $40 to transport one gallon of diesel

fuel from Kuwait to Baghdad). Thirty bases around the world, for example, have

been chosen to test an $80,000 hydrogen fuel cell for base power needs.

Transportation in mobile military operations clearly places a high premium on

light weight, nimbleness, and flexibility, so fuel cell-powered vehicles and

hybrids can reduce the need for hauling large amounts of gasoline, diesel, and

other fuels. But the militarys greatest interest may be in micro fuel cells, whichhave huge potential to replace heavy batteries in portable communications and

electronic gear carried by soldiers in the field, as well as in new high-tech

weaponry. Soldiers typically carry up to 20 pounds of spare batteries to power

their gear.

Central to this effort is the Armys $500 million Objective Force Warrior

Program, aimed at providing a panoply of high-tech improvements that would

reduce the weight load of 95-102 pounds per soldier in Afghanistan today to 45-

50 pounds by 2008-2010. In one example currently in the demonstration stage,

a 1.5-pound fuel cell recharger from MTI Microfuel Cells would be used in Harris

Corps widely-used Falcon II handheld tactical radio to replace the standard

three-pound BA 5590 military battery, which requires several spares because it isnot rechargeable.

Rural Electrification: Large Markets from Small-Scale Power

The worldwide distributed and cogeneration power market is estimated to grow

at a compounded annual growth rate of 8 percent during 2003 to 2008, or from

53 GW to 78 GW, establishing a $30 billion market by 2008. But, one of the

greatest potential growth areas for distributed power generation, especially from

clean energy sources, is in supplying electricity to often-remote rural areas in

developing nations. In the past, this required hefty investments in generators,

transmission lines, and distribution networks, and more importantly, highcontinuing maintenance costs. Diesel generators, in particular, have proven to be

polluting, inefficient, and expensive.

Now, small-scale solar PV, wind, hydroelectric (known as microhydro for

powering one or two homes), and biomass have changed the economic and

environmental equations, making clean rural energy increasingly affordable in

The militarys

greatest interest may

be in micro fuel cells,

which have huge

potential to replace

heavy batteries in

portable

communications,

electronic gear, and

new high-tech

weaponry


26/28


the worlds poorest regions, including remote areas of developed countries like

the U.S. and Canada, such as the Navajo Tribal Utility Authoritys installation of

200 solar PV systems bringing power to remote parts of the Navajo reservation

in the southwest. In developing countries, larger-scale systems of 100KW or

more that tie together local villages are another growing option. The Indianisland of Lakshadweep, for example, is now set to have the largest solar

electrification project in the Asia Pacific region. By 2005, grid-interactive solar

PV plants will contribute more than 1 MW, or 20 percent, of the island groups

total power needs.

Global development finance agencies like the World Bank, International Finance

Corp. (IFC), and the Asian Development Bank are starting to place large sums

behind small-scale rural electrification projects, especially with solar PV. The

World Bank announced in mid 2004 a target of 20 percent annual growth in its

renewable energy and energy-efficiency investments over the next five years,

essentially doubling its current outlay of $200 million per year by 2010.

The World Bank,

International Finance

Corp. (IFC), and the

Asian Development

Bank are starting to

place large sums

behind small-scale

rural electrification

projects, especially

with solar PV


27/28


CONCLUSION

Markets for clean energy technologies are increasingly generating big business

opportunities. While not without technical, financial and policy hurdles, a

confluence of forces appears to have created a tipping point for significant

private sector capital flows into the clean energy sector. Multinational

companies, governments, venture funds, and others are investing billions of

dollars in the sector to reap both profits and potentialworking to build

increasingly global and robust clean energy markets.

An interesting and telling sign is the degree to which major oil companies and

large public and private utilities have begun to view renewable energy

technologies as providing a secure hedge against energy cost and supply

volatility in the form of stable, lower-operational-cost solutions. Clean energy is

also capturing the imaginations of the public and the news mediamoving frommarginalized to mainstream. Indeed, with historical and projected growth rates

for some clean energy technologies exceeding 30 percent per year, clean energy

offers an increasingly bright future for investors, governments, communities,

and businesses alike.

A confluence of forces

appears to have

created a tipping

point for significant

private sector capital

flows into the clean

energy sector


28/28

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Documents

GEF - Clean Edge Report