SustainaWeekly - Investments in renewable energy sources to triple in 2030
The World Energy Outlook of the IEA indicates that investment in renewable energy needs to triple. Many governments have already stepped up plans to boost these investments. There is a huge difference in investments in clean energy between advanced economies and China versus emerging and developing countries. Focus shifts towards COP27 where the financial support for developing economies will be on the agenda again.
The current situation of high energy prices, in combination with the wish to lower Europe’s dependence on Russian energy imports, will trigger an acceleration of investments in renewable energy sources in Europe. This trend is confirmed in the latest World Energy Outlook (WEO 2022) of the International Energy Agency (IEA). At the same time, as stated in the DNV Energy Transition Outlook 2022, the high energy prices may dampen investment in clean energy in other regions like emerging and developing economies. DNV indicates that the high prices of energy (and food) have shifted the attention in low and middle income countries to short-term priorities. As a result, a short-term resurgence of coal is already noted and long term investments in renewable energy and electricity infrastructure are likely to be postponed. As a result, there is a trend in investments in Europe compared to other regions. However, the net effect is relatively low in the near term. At the same time, the acceleration of the investments in Europe will also pave the pathway for the transition in other regions at a later stage.
Investments in renewables need to be scaled up… significantly
The WEO 2022 confirms the analysis done in the DNV report. Investments in renewable energy needs to be scaled up significantly. Both the IEA and DNV indicate that investments in renewable energy need to triple and grid investments need to rise by over 50% up to 2030. The IEA makes it clear that ‘the world has not been investing enough in energy in recent years, a fact that left the energy system much more vulnerable to the sort of shocks seen in 2022’. This is something that the IEA has stressed already several times in recent years. Investments in oil and gas have been cut significantly in recent years and are roughly trending towards a Net Zero 2050 scenario. However, to compensate for this drop in investments in oil and gas – leading to pressure on supply in the coming years – more investments should have been done in renewable energy sources. In fact, this discrepancy between lower investments in oil and gas, without the acceleration to clean energy investments presented a risk to market balances in recent and coming years.
The IEA indicated that investments in renewables should be 3-3.5 times higher by 2030 to be in line with a Net Zero 2050 scenario and to compensate for lower oil and gas capacity whilst still meeting the demand requirements. This would bring investments in clean energy from almost 1.5% of global GDP towards nearly 4% by 2030 in the Net Zero Emissions scenario. In the WEO, the IEA has increased its estimate of investment needs in renewables to over 4 trillion dollars per year globally whilst keeping the investments in oil and gas unchanged. This implicates that investments in renewables should grow to 9x the investments in oil and gas. The current ratio is roughly 1/1.5. Private sources should contribute around USD 3 billion to these investments, which is three times higher than recently has been the case.
According to the IEA, the rise of the share of renewable energy sources mainly relates to the drop in technology costs. However, the amount of investment into energy transitions had been flat at around USD 1 trillion per year since the Paris Climate Agreement. Only in 2020 and 2021 investments in clean energy had seen a notable increase.
Big differences advanced versus emerging and developed countries
In the recent years, investments in clean energy have been roughly similar in advanced economies and in emerging markets and developing economies (both roughly USD 1 trillion per year). However, where investments in advanced economies need to double in 2030, investments in emerging and developing countries even needs to rise more. Also in 2040 and 2050, the investments in emerging markets almost need to be double the investments in advanced economies when we look at the energy investment trends in the Net Zero Emission Scenario. The IEA showed in its World Energy Investment 2022 report that almost all growth in the investments in clean energy is taking place in advanced economies and China. This means that in other emerging markets and developing markets, a large part of the energy supply is based on fossil fuels, or these countries remain constrained by a lack of energy (see table below). The IEA indicates that although emerging and developing economies, other than China, account for 2/3rds of the global population, their share of clean energy investment is both low and declining. This is a worrisome development.
Governments in developed economies and China are adapting already, but more action is needed
As mentioned in previous articles, several policy decisions are already hinting at an acceleration of investments in clean energy. In our of 24 October, we discussed the boost to plans for renewable investments. Support is not only seen here in Europe, where the EU Fit-for-55 and the RePowerEU plans stimulate more investments in renewable energy. However, also in the Chinese Five-Year Plan (June 2022) and the US Inflation Reduction Act (August 2022), ambitions for large investments in renewable energy were taken into account.
In the RePowerEU plans, the European Commission aims to accelerate the transition to renewable energy. The Commission proposes to increase the 2030 renewable energy target from 40 to 45 percent. In addition to this overarching ambition, the Commission is proposing more specific initiatives, including:
An EU solar strategy to double PV capacity by 2025 and install 600 gigawatts of solar panels by 2030.
A rooftop PV initiative with a phased legal obligation to install solar panels installing on new public and commercial buildings and new homes.
Doubling the use of heat pumps and measures to reduce geothermal and thermal integrate solar energy into district heating systems.
Aim for 10 million tons of renewable hydrogen production in Europe and 10 million tons of imports by 2030.
A green gas action plan to increase production in the European Union from the current 3 billion m³ (Guidehouse 2022) to 35 billion m³ in 2030.
A legislative proposal to speed up the licensing of renewable energy projects.
The REPower EU Plan will involve an investment of EUR 210 billion for the period 2022-2027. To support the Plan, EUR 225 billion in loans are already available under the Recovery and Resilience Facility (RRF).
The US Inflation Reduction Act will stimulate investments in renewable energy in several ways. This includes USD 30 billion is scheduled for investments in solar panels, wind turbines, batteries and advanced nuclear reactors. In addition, USD 27 billion was allocated for a ‘green bank’ to support clean energy in disadvantaged communities and USD 60 billion is to support low-income communities and communities of colour to reduce the carbon emissions. This brings the total investments in the US to around USD 370 billion for energy security and climate change investments, with thepotential to mobilise far larger sums from the private sector. China’s latest five-year plan still includes the aim to generate 25% of its energy from non-fossil fuels in 2030. However, it now also indicates that half the increase in electricity demand should be covered by renewable energy sources. And although that would still not be enough to bring China on track with a pathway towards Net Zero in 2050, China did overperform on renewable energy development goals in the last three five-year plans. Renewable energy investment has been an important economic engine in China and will play an even more significant role in boosting the economy than before, at a time when China faces the economic impact of Covid and uncertainties caused by the Ukraine crisis.
As a part of the 2015 Paris Climate Agreement, developed countries would support emerging and developing economies with financial means in order to step up the decarbonisation in those regions. However, so far every year the target of USD 100 billion support has not been reached. All eyes now shift towards COP27 in Sharm-El-Sheik, Egypt, where this topic will be on the agenda again.