Doug Arent and Adam Warren from the National Renewable Energy Laboratory discuss in the January 2021 Issue on the Financier Worldwide website the opportunities available to invest in clean energy technologies because of their dramatic cost reductions in the past decade.
Financing clean energy: unprecedented momentum and opportunity
Clean energy technologies, particularly solar photovoltaics (PV) and wind, have experienced dramatic cost reductions over the past decade. This is the beginning of an energy transition driven not only by the need to address climate change but also by economics. The least-cost source of electricity in many regions around the world is now wind and solar, increasingly combined with storage and grid-interactive loads and sophisticated control systems. These solutions are poised for exponential growth, building off a base of $300bn per year. The clean energy sector represents more than a $1 trillion a year in investment opportunity as it becomes the foundation for energy transitions to low-carbon energy economies globally.
The state of clean energy technologies
It is hard to miss the news on renewables and other clean energy technologies today, ranging from unprecedented cost reductions to investments in new multibillion dollar renewable and hydrogen plants, or the first transcontinental shipment of ammonia that will be reconverted to hydrogen in Japan. For those that might have missed the larger trends, more renewables, in particular PV and wind, have been installed worldwide than fossil fuel power generation or nuclear plants every year for nearly the past decade. In 2019 alone, more than 200 GW of new renewable power was installed, with overall investment of nearly $300bn, according to Bloomberg New Energy Finance, the International Energy Agency (IEA) and the Renewable Energy Network (REN21). Solar and wind have reached nearly two-thirds of new power added globally over the last year. And, despite the challenges from the COVID-19 crisis, the economic fundamentals of renewable energy have not changed.
Today, solar and wind power, often combined with storage, represents the least-cost new power in many jurisdictions across the globe. Auctions for grid-scale power projects dominate the procurement mechanisms, offering long-term contracts with clear financing terms. And, while auction prices are as low as a few cents per kWh, project developers and contracting entities are offering cost-competitive solutions that deliver 24/7 power, as recently called for in India. This reflects new technical and financing capabilities of project developers, as well as the need for ‘dispatchable renewables’ and grid-interactive loads to provide reliable, affordable power.
Solar PV dominates in many countries, in many cases combined with storage or other clean energy sources. As the IEA recently reported in the 2020 World Energy Outlook: “Solar PV is becoming the new king of electricity. Solar PV is now the cheapest source of electricity in most countries in part due to low cost financing and is set to triple before 2030 under current and proposed policies.”
The landscape of opportunities
Looking forward, assessing investment opportunities starts with an understanding of market potential. Recent analyses from the IEA and many others indicate that wind and solar PV capacity will continue to expand at more than 150 GW/year, with the potential to double annually over the next decade. Overall growth of solar PV is more than 400 percent by 2030 under the IEA’s ‘net-zero emissions by 2050’ scenario. For those used to evaluating energy opportunities more broadly, this growth puts renewables on course to surpass total installed capacity of natural gas and coal before 2025, as coal growth slows or decreases in select countries and gas annual additions slow. Combine this with the rapid expansion of electric vehicle offerings, incentives and infrastructure for charging, and the electrification of buildings, and these growth projections may turn out to be conservative.
Just as Moore’s Law created a revolution in computing, the exponential drop in the cost of solar, storage and power electronics is accelerating the energy transition already underway. According to the IEA, solar PV alone accounts for 60 percent of all renewable capacity additions through 2025, and wind 30 percent. Offshore wind is also poised to expand dramatically, especially in Europe, and selectively in Asia and the US. A common myth is that renewable power is problematic for power grids; while there is much research needed to power the grid with 100 percent renewable electricity, the reality is that leading jurisdictions around the world regularly manage reliable power systems with annual renewable contributions approaching 50 percent, instantaneous contributions over 80 percent, and some interconnected areas above 100 percent. Increasingly, companies are offering smart solutions for demand management, as well as smart supply to ‘unlock flexibility’ through creative business solutions that not only meet customer expectations but also offer enhanced value to the energy service provider and the power system. Moreover, market assessments, such as the IEA’s, consider power separately from liquid fuels or other chemicals. Increasingly, this separation is fading as transportation, buildings and industry are electrified. With increasing competitiveness of renewables plus hydrogen or ammonia and other ‘cross-sector coupling’ solutions, the market for clean power may well grow faster and larger.
Policy environments, as expressed by governments and leading companies, are accelerating clean energy demand. For example, net-zero emission targets have been announced by the European Union (EU) and in several European countries, Japan and South Korea by 2050 and China by 2060. Further, more than 250 global corporations have committed to net-zero, 100 percent clean or 100 percent renewable energy for their global operations and supply chains. And, of course, governments will be looking for ways to stimulate the economy and create jobs in the wake of the COVID-19 pandemic. Clean energy jobs, particularly those focused on energy efficiency and construction, are inherently high-wage, local jobs.
Dynamics for financiers
Growth in the clean energy market is at the core of investment opportunities, but other factors are coming into alignment as well. These include unprecedented efforts to assess climate risk and alignment of investment theses with climate mitigation principles, as exemplified by the coalition efforts of the Global Investor Coalition on Climate Change, Climate Action 100+ and The Investor Agenda, to name a few. Institutional investors with nearly $30 trillion of assets under management participate in these coalitions and are eager to put assets to work in alignment with their climate principles.
For investors managing listed equities, recent performance of the clean tech sector, or the broader environmental sector, offer possible insights of what is to come. Since 2018, according to the IEA and Bloomberg, clean energy stock growth has ranged from 2 to 2.5 times on an indexed basis versus a decline in overall energy and broad market index gains of less than two.
Debt and project finance returns have also been robust, and while the market is expected to grow substantially, investors will have to be increasingly competitive to win the best risk-adjusted returns.
In summary, it is rare that stars align, but one might argue that is the case for clean energy investment today and for the forthcoming decades. But market dynamics will no doubt evolve to uncover both unforeseen risks and new opportunities.