investment viewpoints

Renewable energy – When double-digit growth is still too slow

Renewable energy – When double-digit growth is still too slow
Christopher Kaminker, PhD - Group Head of Sustainable Investment Research, Strategy & Stewardship

Christopher Kaminker, PhD

Group Head of Sustainable Investment Research, Strategy & Stewardship
Thomas Höhne-Sparborth, PhD - Head of Sustainability Research

Thomas Höhne-Sparborth, PhD

Head of Sustainability Research

At a global level, the energy sector accounts for as much as 70% of all manmade Greenhouse Gas (GHG) emissions. As a result, climate change policies and efforts to limit global warming to well-below 2°C depend vitally on the decarbonisation of our energy system.

After decades of growth in GHG emissions, it was therefore welcome news when from 2014 to 2016 emissions from the combustion of fuels appeared to stabilise. Although emissions need to fall, and not merely stabilise, this initial success appeared to be a step along the right path. In 2017 and 2018, however, progress reversed with emissions from energy reaching an all-time high, increasing 1.7% last year.

The root of the problem lies in the ongoing strength of energy demand, which has outpaced increases in the generation of renewable energy. In 2018 energy demand increased by 2.3%, at twice the average rate of growth since 2010. While the world economy’s relatively strong performance drove much of this increase, heatwaves and cold spells also boosted demand for heating and cooling. In this manner, climate change results in a vicious cycle, exacerbating volatility in weather patterns, which in turn contributes to higher emissions from energy use that further accelerates global warming.

Mitigating this challenge requires a multipronged approach. On the demand side, energy efficiency, through green construction, re-using waste heat, and similar techniques can radically reduce requirements. Buildings alone account for 32% of global energy demand, with retrofitting capable of reducing energy requirements by 50-90%. Even simple technologies such as LED light bulbs were estimated to have decreased global emissions by 1.5% in 2017. Also on the demand side, transitioning to a leaner economy, less focused on the accumulation of material goods than on the rationalisation of their use, through the sharing and circular economy, can also reduce energy demand, without stifling growth.

On the supply side an acceleration in investment in renewable energy is also required. Electricity generation from renewables now accounts for 25% of global power output, but despite double-digit growth, this still lags behind the increase in energy demand. Consequently, in 2018, 70% of the increase in energy demand was met by fossil fuels. Our remaining carbon budget that would allow us to keep global warming below a 2°C scenario is limited to 1,170 to 1,500 gigatonnes of CO2 ,and only 420 to 580 gigatonnes for a 1.5°C scenario. At present levels, these latter figures amount to only 10-14 years of emissions, while further expansion of energy from fossil fuels would exhaust this budget at an accelerating rate.

One key aspect of the equation, however, has changed dramatically over the last decade. Economies of scale and technological improvements are continuing to improve the competitiveness of renewable energy, with market forces inexorably driving costs of clean energy down. Over a period of 10 years, efficiency of common solar cells has increased from 12% to 17% with further innovations under development. In the wind industry, increased turbine hub height and rotor diameter has increased average power output per turbine from 1.77MW in 2010 to 2.70MW in 2017.

Costs of onshore wind in the US has fallen by 66% in real terms since 2014, while prices of solar power have dropped by 70% over the same period, according to BNEF. Both price levels are now below BNEF’s reported cost for coal-fired electricity in the US. IRENA forecasts that by 2020, auction prices of solar and wind power will fall below the marginal operating cost of 700 GW and 900 GW, respectively, of the world’s operational coal capacity, corresponding to 35%-45% of the coal industry’s current capacity. Theoretically, with adequate investment, wind energy could meet the entirety of the world’s energy demand, and is expected to attract USD 1 trillion of investment over the period to 2040.


Trends in levelised cost of electricity in the US (USD/MWh, 2018 real terms)


Green Bonds chart EN-01.jpg (Print)

Source: LOIM analysis based on BloombergNEF 

Considerable further investment is required to maximize these technologies’ potential. Owing to the variable output of solar and wind power, for instance, energy storage solutions can improve economics by balancing output between peak periods of supply and demand. Costs of energy storage have already fallen sufficiently to offer a positive economic proposition and lifetime costs of storage using lithium-ion technology is expected to fall by 28% over the next five years. The scale of individual energy storage projects in Australia, China, the US and elsewhere has increased to hundreds of megawatts, but further expansions are expected. Overall, the energy storage market is forecast to grow from a mere 17GWh in 2018 to 2,850GWh by 2040, requiring USD 622 billion worth of investment.

To meet the goals of the Paris Climate Agreement, renewable energy needs to be scaled up six times faster than has been the case up until 2018. To achieve this goal, IRENA estimates that a total of USD 120 trillion will be required between 2015 and 2050 – USD 27 trillion in excess of current and planned policies. This includes investment in renewable energy, energy efficiency, power grids, energy storage, and other enabling technologies. Cost savings related to these investments, however, are expected to exceed these additional costs by a factor of five-to-one, creating an attractive role for the finance community in channelling capital towards these technologies.

China is now leading the way and accounted for 40% of the increase in renewable electricity in 2018, at around 182 TWh of new installations. Total growth in 2018 amounted to 450 TWh, an amount roughly comparable to the entire electricity demand of Brazil. With investment accelerating – and needing to accelerate further still – the challenge is vast, as is the opportunity.

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