Renewable energy: the 2050 remix

There will be significant demand for specific components and materials for the build-out of clean energy networks and the events of 2022 exposed supply chain vulnerability in meeting the demand for these components. Not only do these factors risk decelerating progress but they also risk significant inflation. This highlights the need to increase the scale and reach of circularity in the economy (especially e-waste) to fulfil climate mitigation and adaptation goals. The European Central Bank (ECB) has recognised the challenges that inflation and economic uncertainties present for the expansion of renewable energy.⁹

Lastly, there is the structural factor of intermittence.¹⁰ Fluctuations in output can result in additional costs incurred due to energy-balancing measures required in the decoupling of energy production and consumption. To date, intermittence has been mainly balanced by gas power plants. Mass storage is the solution to ensure cost-effective upscaling of renewable energy, countering marginal cost impacts from gas price inflation and lowering any association of clean energy growth with an increase in gas demand to address intermittency.

Developed countries have directed policy support to renewable energy through subsidies and fiscal stimulus packages like the Inflation Reduction Act in the US and the European Green Deal Industrial Plan. However, most developing economies do not have the same fiscal tools at their disposal. To address this point, the International Renewable Energy Agency (IRENA) has proposed the idea of a transfer mechanism, whereby developed countries can support developing countries. Exhibit 3 shows the concentration of renewable energy capacity globally. 

Source: https://ourworldindata.org/renewable-energy#how-much-of-our-primary-energy-comes-from-renewables.

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Renewable energy comprises a broad range of energy sources, each at its own stage of maturity, with its own future trajectory, risks and opportunities. Hydroelectric power is currently the world’s third-largest energy source and by far the largest renewable energy source. IRENA estimates that it will account for 37% of renewables, equal to 1,250GW, by the end of 2022 (solar: 31%; wind: 27%). However, by 2050 while we expect hydroelectric power to have increased slightly, its share of the overall and renewable energy mixes is expected to have fallen sharply. Solar and wind are expected to be the leading sources of energy in the renewables mix – see Exhibit 4.

Our own renewable energy heatmap – Exhibit 5 – incorporates an assessment of the key areas of dependency and risk materiality. Some can be counterintuitive like climate change, where the very factor renewable energy is trying to solve, may also negatively impact its future adoption. It is also important to understand the extent to which future development is a function of processes, technologies and enabling infrastructure (grids and grid connections) that do not currently exist. Some of these factors may be subject to political volatility to the extent that progress may be policy-related (eg, reducing the delay on permits). 

The heatmap reinforces the need for both in-depth analysis and targeted investor engagement to fully understand the risks and opportunities for the different renewable energy sources. These factors, even if sometimes highlighted less often and with more abstract modelling, are considered in the forecasts of the agencies (eg, IRENA in its World Energy Transition Outlook 2022¹¹ devotes a whole chapter to the problem of critical materials and the IEA¹² also discussed this point in its Net Zero Emissions by 2050 scenario). 

While USD 1.3 trillion¹³ of energy transition investments in 2022 was a record, it falls significantly short of what is required. IRENA has estimated that at least USD 35 trillion needs to be invested by 2030 to meet the 1.5°C target¹⁴ – this means annual requirements of over USD 5 trillion¹⁵ globally. For renewable energies, this equals an uplift in annual investment from USD 500 billion to USD 1–1.5 trillion¹⁶. The rest (and bulk) of energy transition investments are focused on assisting adaptation within fossil fuels.

In addition to expanding the scale of investment, there is a need to increase the reach. Most renewable energy investment flows will go to solar photovoltaic and wind in the key markets of China, Europe, and the US. However, there needs to be greater allocation to developing markets – Africa accounted for a mere 1% of new renewable energy capacity installations globally last year.

The private sector has a major role to play. Public finances have been challenged by successive crises, and ongoing economic uncertainty could threaten the ability of governments to meet such enormous financing needs. The depth and breadth of the private sector can also ensure the fullest investment across renewable energy sources across the world.

*Piloting: controlling the generation of electricity according to demand.
Source: Allianz Global Investors, IEA, IRENA.

The gap between current and required investment is significant and the expectations of both public and private investments are very high. What is the answer? There are different ways to support the depth and breadth of investment required:

Financing renewable energy: this can be achieved either through direct investment in projects in the private markets or through investment in companies looking to significantly expand their renewable energy infrastructure.

Investing in supporting infrastructure: similar to above, this can be achieved through both private and public markets to support the necessary infrastructure required for renewable energy expansion – such as connection to the grid and pipelines. It is worth noting the potential to invest in private equity, which has been very involved in this segment.¹⁴

Considering energy enablers: Exhibit 5 highlights the areas of key dependency, and significant potential investment opportunities exist, for example: 

• Development of mass storage solutions for solar and wind energy.
• Grid adaptation.
• Sourcing of critical minerals and metals – including local, more sustainable mining, but significant opportunities also could also arise in the circular economy and e-waste solutions.

Monitoring the evolution of disclosures: the past year has seen increasing company disclosures on the contribution of renewable energy to total energy consumption and, renewable energy targets, and even greater granularity on location-based versus market-based scope emissions. Improved disclosure will assist further refinement of key investment reporting requirements like “sustainable investment share”¹⁵ and Do No Significant Harm¹⁷, which should bring benefits. Similarly, it will assist the alignment of activities to the UN Sustainable Development Goals¹⁸, specifically SDG 7: affordable and clean energy and, even more specifically, SDG 7.2: focused on increasing the renewable energy share of the global energy mix.