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As Renewables Reach Grid Parity, Questions Arise Surrounding Investment and Demand
January 5, 2017
With its potential to combat global climate change, the clean energy industry has experienced significant — and rapid — growth over the last decade. And according to the World Economic Forum, things are only looking up. As it stands, renewables, more specifically wind and solar, are fast becoming just as competitive as fossil fuels, and businesses have been taking note.
“Renewable energy has reached a tipping point — it now constitutes the best chance to reverse global warming,” said Michael Drexler, Head of Long Term Investing, Infrastructure and Development at the World Economic Forum. “Solar and wind have just become very competitive, and costs continue to fall. It is not only a commercially viable option, but an outright compelling investment opportunity with long-term, stable, inflation-protected returns.”
Solar and wind costs have dropped significantly in the last three years, and are now on par with coal and natural gas, according to analysis by the World Economic Forum. Efficiency improvements are largely responsible for this shift. Solar panels are now 15-22 percent more efficient than they were three years ago; wind turbines have experienced even greater improvements, climbing from 25 percent to 50 percent; and during the same period, costs for solar have dropped by 80 percent, while wind has fallen by 30 percent.
From a risk/reward perspective, renewables offer a diverse array of investment opportunities, and these advancements have drawn the attention of forward-looking investors, and in 2015 alone, $285.9 billion flowed through the renewables industry, a 5 percent increase over 2014 and more than what was invested in fossil fuels says the United Nations Environmental Program. All other renewable technologies combined (with the exception of large hydro) came to $15.2 billion. The WEF’s Renewable Infrastructure Investment Handbook sites a subsequent rise in technological evolution, cost reductions and total generation capacity. In fact, 2015 was the first year on record in which the majority of global power-generation capacity addition was in renewables.
The clean energy sector itself has also been taking additional strides via special incentives to attract business buy-in, something that has become particularly important in places where government subsidies and support fall short of the mark. For example, Danish utility company DONG Energy began offering renewable electricity to business customers in the UK early last year, pledging to cover the additional costs associated with ‘going green’ so that more UK businesses could access clean electricity. The move followed the government’s phasing out of the Levy Exemption Certificate program, which exempted businesses who purchased renewable electricity to be exempted from the Climate Change Levy.
The WEF analysis further states: “A catalyst for this process has been and will continue to be the 2015 Paris Agreement, which will further press for global changes welcome to the sector. Investors that understand the magnitude of the change will be able to capitalize on the rising trend while enjoying stable, infrastructure-like returns from renewable energy investments.”
While the World Economic Forum’s outlook remains positive, UK-based think tank Green Alliance is telling another, less encouraging story. After analyzing the government’s latest pipeline of planned major infrastructure projects, Green Alliance found that £1 billion of future investment in renewable energy projects disappeared over the course of 2016.
According to the think tank, this reduction is not due to the falling renewables costs, but rather a shrinking pipeline of projects. For the period of 2017 and 2020, investment in wind, solar, biomass power and waste-to-energy projects will further decline by 95 percent, it added.
A slowdown in clean energy investment was expected after ministers cut several subsidy schemes over the last year and a half, but to see the numbers laid bare is somewhat shocking, especially in light of the UK’s 2030 goal of cutting carbon emissions by 57 percent of 1990 levels, as well as its Paris agreement pledge. What is more troublesome is that the government has yet to disclose how it plans to support low-carbon energy, such as offshore wind farms, beyond 2020.
“Renewables will be cheaper than new fossil power stations by 2025 at the latest if we allow companies to build, learn and cut their costs. But the government has been holding back the final bit of support needed to make renewables subsidy free,” said Dustin Benton, acting deputy director at Green Alliance, in reference to the government’s cuts on onshore wind subsidies. “Unsurprisingly, the result is a 95 percent fall in investment.”
Interestingly, the think tank also found that investment in high-carbon infrastructure — fossil fuel power stations, airports and road building — was also on the decline. This marks the first time since 2012 that high-carbon investment has not seen growth, and it is expected to be down by two-thirds in the next three years.
“The picture of private sector investment is very clear: It is rapidly moving away from high-carbon infrastructure. In contrast, public sector high-carbon investment is rising, although slowly,” Green Alliance adds.
There is, however, some hope. The UK’s infrastructure pipeline showed that the government had cut £2 billion from the cost of decommissioning old nuclear power plants, an achievement that could potentially free up money for the Department for Business, Energy and Industrial Strategy to spend on deployment of low-carbon heat and efficiency, rather than legacy cleanup costs.