Are Investments Into Renewable Energy Resources On An Expanding Growth Trajectory?
Investments into renewable energy systems are on an exponential growth track and show no signs of abatement as the world prepares to enter a new decade. At least for the moment, those investments are driven by a combination of shifting government policies, public and private commitments to reduce greenhouse gas emissions, reduced costs of wind and solar power generation sources, improved power generation and storage technology, and an increase in demand from developing nations.
A United Nations Environment Program (UNEP) whitepaper estimates that more than US$2.6 trillion will have been invested in renewable energy resources between 2010 and 2019. The whitepaper notes that this amount is more than three times the value of renewable energy investments from the prior decade.
Some analysts interpret these rising investments as evidence that that the global energy supply is trending away from fossil fuel resources. A contrarian viewpoint suggests that construction efforts on new clean energy systems will decline by more than 40% after 2020 and beyond. Whether this decline represents the end of a trend or merely a correction in the business cycles remains to be seen. “Investment levels at the moment are extremely high and the decline from this was inevitable, but the lack of clear energy policy at the national level is creating some uncertainty and limiting some private sector activity” notes Sarah Hunter, the chief economist at BIS Oxford Economics.
The Renewable Energy Technologies That Have Attracted Investments
U.S. Energy Production Capacity Additions (2015)
Solar- and wind-power generation facilities continue to draw the lion’s share of both public and private investments. The equipment for those facilities is relatively less expensive to manufacture and install, making them extremely attractive to developing nations with limited infrastructure budgets.
As evidence of this, the per unit cost of renewable solar energy has dropped by more than 80% over the most recent ten years. These lower costs have reduced the reliance by power generation facilities on government subsidies and public investments, while drawing larger amounts of private investor funding.
The International Energy Agency expects investments into new solar, wind, and hydroelectric plants to exceed $300 billion annually at least through the middle of the next decade. This is roughly three times the anticipated annual investments over the same period into new fossil fuel facilities.
The Influence of Demand from Asia
Cumulative anticipated solar panel installations by country, 2001-2024(est.) – GWdc
Source: Wood Mackenzie
Through the first half of 2018, China led all nations in renewable energy installations, accounting for approximately one third of the US$2.6 trillion invested over the past decade. Government restrictions and trade tensions have caused those investments to fall off by more than 50% on a year-to-year basis as the decade ended. Even with that reduction, China continues to be the dominant investor in renewable energy capacity, with more than double the investment commitments of the United States.
Critical Factors for Future Investment Growth
The decade’s rapid growth of investments in renewable energy resources forms a reasonable basis for speculation about future growth, but much of that speculation has already been absorbed into and discounted by the investment marketplace. Investors who are looking for guidance on whether to allocate their investment assets into the renewable energy market need more than speculation and guesswork.
Deloitte Transactions and Business Analytics LLP sees three major trends that lend credence to the likelihood of continued future growth.
New and Renewed Local and State Initiatives
At least where domestic growth is concerned, several states have adopted mandates and renewable portfolio standards (RPS) for energy production by renewable resources. Many of those states are contemplating an RPS increase, including a few that are aiming for 100% energy production by renewable resources within the next 25 years. Other state and local initiatives are absorbing much of the marketplace uncertainties that have been fostered by uneven federal policies.
Energy regulations have also been amended in many communities to remove barriers to smaller battery storage facilities that can be incorporated into local power grids. Further, coastal communities are slowly easing restrictions against offshore wind energy production facilities.
Investment Expansion by Oil and Gas Companies and Asset Management Firms
U.S. Capacity and Generation: All Renewables
Sources: EIA, LBNL, SEIA/GTM
More than 150 global corporations have committed to EP100, EV100, and RE100 campaigns to achieve 100% renewable power by certain target dates. Shareholder activists continue to push public corporations to sign on to these campaigns and to adopt sustainability standards for their global operations. Many major oil and gas production companies are also ramping up their operations in renewable energy resources, including Royal Dutch Shell, which recently purchased a significant stake in a solar developer in conjunction with the $1 to $2 billion it allocates to renewable energy every year. Asset managers and investment and merchant banks are adding renewable energy assets to their portfolios and creating new funds that are dedicated to green energy resources.
New digital technologies have emerged to manage and control power grids for more efficient allocation of renewable power generation resources. These technologies are taking clean energy investments beyond the traditional zones of new materials and designs and are creating revenue models that optimize power grid assets with unique delivery solutions at a granular customer level.
Fossil Fuels Still Dominate
Source: BP Statistical Review of Global Energy
Even with unprecedented growth in clean energy investments and resources, fossil fuels are and will be a factor in the energy production industry during the next decade. The U.S. Department of Energy estimates that roughly 90% of the energy consumed in the United States is generated by fossil fuels. Some industry estimates suggest that the world has between 50 and 150 years of fossil fuels reserves. As those reserves are depleted, more renewable energy production resources will be needed, which will drive investments toward those resources.
Estimates for growth in global energy demand coalesce around an expected 25% increase between 2020 and 2040. Leading up to 2020, new solar power generation capacity has grown significantly. Still, a significant portion of the global energy supply continues to come from fossil fuel sources.
Industrialized countries are decommissioning fossil fuel power plants, but even with investments in solar and other clean power technologies, developing countries in Asia have increased fossil fuel energy production alongside their investments in renewable energy sources. This increase explains, in part, why carbon emissions have increased by more than 10% in a decade that has been marked by significant investments in clean energy production.