Earlier this month, the International Renewable Energy Agency said the world needed to invest $131 trillion by 2050 in order to limit the estimated global rise in average temperatures to 1.5 degrees Celsius. That’s 30 percent more than what is currently planned. It’s also equal to investments of $4.4 trillion every year from now until 2050. How realistic are these spending goals?
Well, it appears that the realism of IRENA’s estimates depends on how you look at the energy transition: as simply an increase in renewable energy generating capacity and a consequent increase in the share of electricity in national energy mixes. While not exactly wrong, this widely shared perspective fails to account for the sheer scale of the change we are in the process of undertaking.
James Bradford, chief executive of asset manager Vivid Capital management, compared the energy transition to the Industrial Age in terms of significance—an era that will present substantial challenges and numerous opportunities.
“There will be some spectacular growth industries developed along the way,” Bradford told Oilprice. “Installed solar capacity for example is expected to grow from less than 1TW today to nearly 10TW by 2050. That’s 10x growth, which is enormous growth, for any industry.”
And solar is just one example. When you add all the other renewable forms of energy such as wind or biomass, or hydro, and the ambitious plans many governments have about hydrogen, the scale of the transition—and the fitting size of the investment needed to implement it—becomes more obvious.
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“It is difficult to overstate the magnitude and duration of the energy and transportation transition ahead of us,” Bradford said. “This is a multi-decade investment thematic that is every bit as significant as the advent of the industrial age, railroads, the internet and digitization. It will take decades and enormous industries will form and we will use vast quantities of hydrocarbons along the way.”
The question of hydrocarbon use is one that makes some energy industry observers uncomfortable. Still, facts seem to point towards the continued use of oil and gas during the energy transition. That’s why even BP has not declared it will stop pumping any oil next year.
So, we’ve got a truly massive transformation on the way that will need trillions every year. ESG investing—environmental, social and governance—has quickly been gaining popularity. Even governments have jumped on the ESG bandwagon with their green recovery plans for the post-pandemic period. And governments will have a key role to play in securing the funds for the transition, according to Etienne Cadestin, founder and global CEO of Longevity Partners, a UK-based environmental consultancy.
“It’s [$131 trillion] a large number, especially compared to today’s investments of around $500-600 billion/year in climate finance,” Cadestin told Oilprice.com. “There are some positive signs, as ESG investments are one of the fastest-growing asset classes and a green recovery is common amongst covid-19 stimulus packages.
“There isn’t enough capital in the private sector to address this challenge and we’ll likely see more cooperation between institutional investors, governments, and development finance institutions. Countries have earmarked over $100 trillion in economic stimulus packages for covid-19, so countries are willing to spend money, it just has to be funneled to the right places.” Related: Report Accuses Banks Of Creating “Climate Chaos”
Yet, the role of the private sector, especially large private investors, should not be underestimated, according to EY Global Renewables Leader Arnaud de Giovanni.
“Investment in renewables and integration technologies, like battery storage, continues to expand, but current capital inflows remain far below the amounts required to reach global climate goals,” de Giovanni told Oilprice.
“We see a role for large private investors, such as insurers and pension funds, in the renewables sector. Institutional investors could satisfy their stakeholders’ growing climate-risk concerns by providing the kind of ‘patient capital’ required to support infrastructure projects such as renewables, particularly as the sector continues to mature. However, investors need the ability to plan investments over the long term, as well as greater transparency and new routes to invest in renewables.”
So, a lot of the money seems to be already there, up for grabs, in a way. Meanwhile, institutional investors are increasingly eager to spend on sustainable energy as these projects become more and more profitable, says Abraham Cambridge, CEO of Sun Exchange, a crowd-based solar leasing platform. New financial models are emerging as a result, allowing everyone to become a renewable energy investor, essentially expanding the investor base for the energy transition globally.
Ultimately, the success of the energy transition—and the justification of spending those $131 trillion—would be tied to profitability, as is the case in any business venture. And there is already intense competition for investments, according to Vicki Knott, CEO of Crux OCM, a control room operations automation solutions provider for the energy industry.
“Most likely sovereign wealth funds [will provide the funds] for the expansion of solar, wind, and green hydrogen in their respective countries since they can take on lower-return investments given the diversified nature of their portfolios,” Knott told Oilprice. “Taking bets on game-changing technologies that could really move the needle will be venture capital; however, this is not an investment in expanding the trusted renewable technologies, but in finding new solutions that have the potential to be even more economical.”
So, the money is there, and so is the incentive: clean energy projects are making their investors money. That’s all very encouraging, but one final word of caution needs to be added. The world’s energy demand will be growing over the next years and decades. While some scenarios about curbing climate change call for a reduction in this energy demand, this appears to be unrealistic: people have the right to access energy—and the more people there are, the greater the demand will be. Also, more people in developing economies will be getting more affluent, and affluence breeds greater energy demand.
This means that the investment needs of the transition may change, as Crux’s Knott points out. The $131 trillion is a moving target, she said, which suggests the actual expenses tied to a transition to a net-zero global energy system could end up being higher.
By Irina Slav for Oilprice.com
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