Meeting 2050 net-zero targets will require adding renewable energy capacity at scale and speed. Can it make financial sense, or will we need to rely on our commitment to do the right thing?
With the net-zero transition, humanity is embarking on the first industrial-scale rethink of the global energy system in 140 years. The key questions are: can a clean energy system be built on a global scale in the next 30 years, and can it make financial sense?
Solar and wind power are likely to face bottlenecks in the supply of rare earths and metals. Most materials are plentiful enough, but constraints will stem from demand competition, geopolitics, social and environmental risks, and the time it takes for a new mine to become operational.1
Resilience capacity also needs to be built across geographies to mitigate geopolitical risk, with responsible approaches adopted to minimise social and environmental disruptions.
Governments have national issues to deal with as well. They need to build a huge amount of infrastructure, including smart grids, connections, long-distance transmission lines, and wind and solar farms. Developing countries are struggling to get the financing they need, while developed nations face NIMBYism and lengthy processes for planning permissions.
“Improvement to permitting is planned but may be delayed, because politicians will have to push it through opposition from local governments and consumers,” says Luke Mulley, ESG utilities analyst at Aviva Investors.
Reduce, reuse, recycle
In parallel, innovation and substitution are constantly reshaping forecasts. New sources of materials are found, and R&D enables manufacturers to substitute scarce materials, or those that pose social or environmental concerns.
Additionally, as companies continue to innovate, production will use less materials. Combined with extended product lifecycles, improved recycling and changes in demand patterns, this drastically alters the outlook for materials consumption.
“There is much upside potential for recycling,” says David Timmons, ecological economist and associate professor of economics at UMass Boston's College of Liberal Arts. “Once the materials needed to produce energy from renewable sources are mined, they become part of a global stockpile that doesn't shrink.”
There are challenges and costs, but manufacturers are increasingly developing circular management and production processes. This will help reduce shortages, as well as create value.2
Building capacity is economically beneficial
The good news is that renewables development also makes economic sense.
Key International Energy Agency (IEA) and Intergovernmental Panel on Climate Change (IPCC) models used to make decisions on renewables are increasingly coming under fire for underestimating cost improvements and deployment rates. Several studies have found that, if realistic costs are applied, renewables become the obvious solution.3
Costs should fall over time as renewables benefit from technology improvements and economies of scale
And whereas building a wind turbine or solar panel requires a lot of capital upfront, once in place, subsequent costs to produce the energy are almost non-existent. In addition, costs should fall over time as renewables benefit from technology improvements and economies of scale.4
As a result, renewables’ levelised costs of energy (LCOE – a measure of the cost of operating an energy facility over its lifetime divided by the energy produced) have fallen dramatically over the last ten years and are projected to fall further still.5
In a 2021 report, think-tank RethinkX contended this was just the beginning of an unavoidable disruption that could see renewables displace fossil fuels much faster than anticipated.6
And, as the costs of building wind and solar capacity continue to fall, it may become cheaper to build large excess capacity, reducing the need for long-duration storage, particularly if long-distance transmission lines are built to transport energy from sunny and windy places to where it is needed.7
Government and supranational support are key in creating a new energy system
Despite positive momentum, a supportive government policy and regulatory environment will be critical to make the transition to renewable energy happen.
This includes speeding up planning permissions and investing in grids, setting a realistic carbon price, and ending fossil-fuel subsidies to level the playing field. Fossil-fuel extraction could even be capped. More broadly, governments need to start looking at other metrics alongside GDP, including decarbonisation, biodiversity and social welfare to reduce the reliance on extractive economics.8
“Policy instruments like a symmetric contract for difference can incentivise renewables capacity by creating the right balance between revenue certainty and capping the upside so consumers can benefit from falling costs,” says Elena Pravettoni, senior analyst at the Energy Transitions Commission (ETC), a global coalition of leaders from across the energy landscape.
Finally, governments need to manage the transition to avoid stranding workers and communities that rely on carbon-intensive industries today. At a global level, it also means investing heavily in climate finance for emerging markets.
This is difficult because of a combination of macro governance issues, the state of transmission networks, local power utilities’ creditworthiness and the small size of many projects. In addition, most emerging markets are considered high risk, leading to a high cost of capital.
To attract private capital, we need de-risking mechanisms
“To attract private capital, we need de-risking mechanisms, for example from the multilateral development banks,” says Pravettoni. “Blended finance vehicles, especially at the early project stage, can aggregate small- or medium-sized projects by bundling them together.”
Opportunities and risks today…
Research by Sora Utzinger, senior environmental, social and governance (ESG) analyst at Aviva Investors, estimates a compound annual growth rate (CAGR) of five to nine per cent in wind over the next 30 years. Huge investment is also required to update ageing grids and plug in renewables, not to mention upgrading to smart grids and improving interconnectedness, supporting the outlook for power solutions providers like Hubbell and Quanta Power.
Although short-term challenges remain around permitting, there is now more certainty in the sector
“Although short-term challenges remain around permitting, European renewables are looking particularly attractive for long-term investors compared to the last two years,” adds Mulley. “With the EU having set its inframarginal price cap at €180 and windfall taxes being set out, there is now more certainty in the sector, while valuations are not pricing in much growth despite strong demand.”9
Mulley also finds opportunities in battery storage, with global capacity forecast to grow 15 times at a 30 per cent CAGR by 2030.10
On hydrogen and CCUS, Pravettoni says the focus must be on building the market for the 30 per cent of energy demand that cannot technically be fulfilled by clean electricity.
From a real assets point of view, Darryl Murphy, managing director of infrastructure at Aviva Investors, sees potential opportunities emerging in energy efficiency and long-term storage, though he doesn’t think they are investable yet – energy efficiency because it is fragmented, and long-term storage because the technology still has to come to fruition.
And for the long term
There are so many variables it's hard to project how it will actually come together
Most studies forecast a 2050 energy mix overwhelmingly reliant on renewable electricity, combined with some dispatchable (available on demand) sources such as hydropower or biomass to fill in the gaps. They also include some storage, both short- and long-term, though this will be influenced by available wind and solar capacity, long-distance transmission lines and efficiency improvements.
“It's clear from the various studies it is absolutely feasible,” says Timmons. “But there are so many variables it's hard to project how it will actually come together.”
Download The economics of renewables to understand:
- How the renewable energy market might adapt to current challenges
- Why large-scale investment in renewable electricity makes economic sense
- The support needed from governments to enable a fast transition
- The investment opportunities and risks in a rapidly changing landscape