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The International Energy Agency, “IEA” a 29-country member organization, founded in 1974 to assist countries in the development of strategies to avoid oil shortfalls, is optimistic about prospects for renewable energy.

In a report released on October 2, 2015, the IEA stated that renewable energy, mostly comprised of wind, solar and hydroelectric sources will represent 26% of the electricity production in the world in 2020. Increasing its previously forecasted target of 22% as published in 2013. Renewable energy sources are expected to contribute almost 10% of total energy production in 2015.

The IEA expects 700 gigawatts of new renewable energy sources to be installed from today until the year 2020. This is the equivalent output of 700 nuclear reactors. The IEA estimate of growth for renewables will represent approximately 60% of all new capacity being added to the world’s electrical system.

WEAK GLOBAL ECONOMIC DATA

Some Wall Street analysts hold a contrary view to the IEA forecast, citing global economic instability. With a number of economic crosscurrents developing worldwide, the global economy is entering a period of listlessness and uncertainty, thus indicating that world economic growth and investment in renewables will be slower.

Downward revisions to world GDP growth projections from major investment banks and government agencies around the world are occurring with increasing frequency. Let us take a closer look at some of the major global economic regions and what these crosscurrents portend for their economic outlook for 2016.

In interpreting economic prognosis for North America in 2016, there are a myriad of opinions and confusions. In recent years, the United States has clearly become a stop and go economy. Moreover, how much confidence can one place in the United States Bureau of Labor statistics on employment when the agency is politically controlled. Are the unemployment numbers real at less than 6%? The fact remains that in the United States (“US”) fewer individuals are employed in 2016 than were employed in 2007. The numbers are indeed skewed by the United States Bureau of Labor using a calculation and definition that does not account for individuals that dropped out of the labor force. Under this new definition, interpreted differently during the Obama administration, if a person stops looking for a job they are no longer considered part of the labor force, thus creating an unreliable and arbitrary definition for unemployment.

The US can no longer show robust growth for the simple reason that the Congress, Senate and the President are unwilling to compromise regarding fiscal policies that are rationale in aiding or stimulating more growth in the US economy. The Federal Reserve Board (“FRB”) has been the sole arbiter in managing the US economy. Several economic distortions occur with the FRB’s near zero interest rate policy. Accordingly, its direct and indirect control of interest rates, which affects the flow of capital, has its winners and losers. The beneficiaries are the major corporations, top financial institutions, the government and the wealthy. The major loser in the US is the middle class. These distortions in the US have resulted in an $18 trillion dollar current debt and $100 trillion dollars in unfunded liabilities (mainly Medicare and Social

IEA FORECAST

The IEA predicts amongst developing countries growth to be substantial. China alone will represent 40% of new installed capacity for renewable energy. In many countries renewable energy, especially wind and the Earth’s solar photovoltaic, saw their production costs fall sharply and become competitive in relation to other types of energy, the IEA said.

This is particularly the case of South Africa, Brazil, India, Middle East and some states in the United States such as California. The agency predicts that $230 billion dollars will be mobilized annually between now and 2020 to develop renewable energy. Last year, investments increased to $270 billion dollars.

The estimate stems from “the decline in the pace of new capacity installations but also the reduction of investment costs for the most dynamic technologies”, especially solar and onshore wind.

The reduction of the costs of energy, as observed in recent years should continue. The IEA is less optimistic about an increase biofuels as oil prices have declined. Biofuels represent 4% of the demand for fuel in the road transport sector by 2020 according to the IEA.

The fight against global warming has helped the successful development of renewable energy. If wind and solar photovoltaic “have no more than a high public investment,” its attractiveness “strongly depends on the regulatory aspects and the operation of the market”, considered the agency.

In emerging countries, the risks today are “regulatory barriers, restrictive networks and micro-economic conditions”, while in developed countries, “the rapid development of renewable energy requires closing the thermal power plants, putting pressure on companies energy policies “, explained the agency.

UNITED STATES ECONOMIC DATA

Recent economic data summarized below indicates that United States GDP growth will slow in the second half of 2015.

1) A telling indicator short term is that the US 10 Year bond yield recently declined to below 2%.

2)  Retail sales only grew by 0.1% in September.

3) Non-Farm payroll additions in the third quarter declined 28% from the previous quarter.

4) No growth in wages.

5) A strong US Dollar takes away from growth as exports decline.

6) Inflation is below the Federal Reserve Board’s target of 2%.

7) Doubt is higher in the financial sector than it was in 2007.

Due to the aforementioned dislocations, the US without a beneficial fiscal policy is relegated to GDP growth of 2% or less for 2016

EUROPE AND ASIA

The economic prospects for Europe possibly with the exception of the United Kingdom are less sanguine than the US outlook. Overburdened by a quasi-socialist welfare policy and excess regulation, even with the benefit of the present monetary stimulus program it appears that Europe, as a whole will be saddled with GDP growth in 2016 that will be less than 1.5%. Working against the major advanced economies (United States, China, Japan and Europe) it is likely that emerging nations will experience a recession in 2016. Due to the fact, emerging countries will see a flight of capital that further complicates their travails along with low commodity prices

The major quandary in Asia surrounds China regarding its attempt to invigorate state owned entities while the country attempts to transition to a viable consumer economy. It is difficult to see with clarity how this will transition without disruption of China’s projected growth rate of 7%. A possible surprise would be a new norm for growth in China settling in the 5%-6% range.

CONCLUSION

In conclusion, due to weak economic data and uncertainty regarding 2016 global economic growth, it appears the IEA forecast for 2020 to be too aggressive. Most likely investment in renewables will be curtailed as economic woes play out.  Further diversification through renewables will be achieved but at a slower pace than projected by the IEA.

About John Kaweske

John Kaweske serves as Chairman and CEO at Bio Clean Energy S.A. in Sao Paulo, Brazil.  Bio Clean Energy, S.A. is a government-licensed producer of biodiesel in Brazil selling to Petrobras, S.A. Mr. Kaweske is co-author of three patents on biodiesel production technology. Mr. Kaweske started his career in 1990 at D. Blech & Company as an analyst focused on the private sector of biotechnology. In 1993, he served as Director at First Atlantic Capital in New York, NY. At First Atlantic Capital in 1995, Mr. Kaweske notably founded, Genome Technologies, Inc., according to Bloomberg news, the second private company focused on genetics sequencing. From 1995 through 2002, Mr. Kaweske served as President and CEO of Grace Investments until the Company was sold in 2002 to Cardinal Capital Management, Inc. where worked for 2 years as Senior Managing Director as stipulated in the Share Purchase Agreement.

This piece was originally published on Capital Business, to view the article click here.