The Road to Net Zero: Renewable Energy Trends

Published September 13 2021

Despite the ongoing COVID-related challenges, the fundamentals driving renewable energy expansion remain unchanged with the International Renewable Energy Agency (IRENA) reporting that investment in renewables in 2020 represented more than 80% of the total investment in new generating capacity globally¹.

Some 260GW of new capacity was commissioned in 2020, almost 50% more compared to 2019. To put this into context, new installed capacity in 2020 represented just under one-fifth of global renewable energy capacity that has ever been installed. Of the new capacity, solar dominated at 127GW and 111GW respectively. Geographically, China – the world’s largest carbon emitter – saw 136GW of new capacity commissioned (representing approximately 52% of global additions), with the USA – the world’s second largest emitter - some way behind with 26GW of new capacity.

Last year also marked the first year for a number of countries where electricity generated from renewables exceeded that generated from fossil fuels. While, previously this had been seen over timelines of days, weeks and, increasingly, the summer months in Northern Europe, 2020 was the first time renewable energy production exceeded fossil fuel energy generation over an entire year in countries such as the UK. This was partly driven by increased renewable energy capacity and the reduced demand because of COVID. Indeed, the IEA foresees thermal power generation will rebound this year as global demand bounces back to pre-pandemic levels².

¹ Source: IRENA
² Source: IEA

The road to 2030

According to the International Energy Agency (IEA), renewable energy will become the world’s largest source of generating capacity by 2025, surpassing natural gas in 2023 and coal in 20242. To achieve this increase in capacity would require an 11% compound annual growth rate from 2020’s installed capacity. By comparison, over the same period, aggregate natural gas-fired capacity is expected to grow by less than 10% and coal-fired capacity will decline as countries decarbonise.

Policy and political willingness to support the energy transition remain the key drivers for its success underscored by the increasingly visible statements of intent from governments around the world. China, whose renewable energy policy essentially recognises the role renewables can play in energy security, has long been a leading advocate for the sector. Not with standing China’s 2060 net-zero target, the rate of new capacity additions is anticipated to be lower than recent years due to subsidies for onshore wind and solar expiring in 2021 and the lack of regulatory clarity until the 2021-2025 policy framework is put in place later this year.

Growth of offshore wind, solar

Elsewhere, the European Union, the UK, Japan, South Korea, Taiwan and India (amongst others) have all announced ambitious targets to decarbonise their economies and reduce fossil fuel reliance, with all of the above bar India seeing offshore wind as the key foundation for the rapid growth in their renewable energy strategy.

In many countries, solar and onshore wind are already the cheapest means to add new generating capacity to the grid. Feed-in-Tariffs and other contractually supporting payment regimes are becoming less common for solar in many countries as subsidies are no longer required for the technology to be competitive and profitable. With further falls in USD/MW anticipated for renewable projects over the decades to come, the lower cost of renewables will increasingly push more expensive fossil fuel generation out of the market on a pure cost basis alone.

However, absent a material parallel development in energy storage, solar’s increasing percentage of daytime generation will see the continuation and potential accentuation of depressed power prices during daylight hours given excess supply but significantly higher prices in the early morning and evening when solar cannot generate. Other energy sources will, therefore, still be required to address this structural market issue, of which wind and natural gas will likely prevail until batteries can be installed at sufficient scale to utilise the excess daytime generation.

Although new solar capacity is forecast to increase by 8,000GW by 2050³, the majority of investment dollars will be for wind opportunities. While the offshore wind industry currently accounts for less than 5% of all investment in the wind sector, industry expectations are that by 2030 annual investment in offshore wind will overtake investment in onshore wind⁴.

The offshore wind targets for North Asia are ambitious in scope. By 2030, China is targeting up to 40GW of new offshore wind capacity, Taiwan 15GW, Korea 12GW and Japan 10GW (albeit with 45GW targeted by 2045). The jury remains out on whether these targets will be met, in particular for Taiwan where changes made to the tariff and procurement regimes may affect investment. However, evidence from the UK – where the original target of trebling current offshore wind capacity to 30GW by 2030 was raised in 2020 to a new target of 40GW - indicates targets tend to go up rather than down if, there is political will to do so.

Predictions of the investment opportunity through to 2030 differ materially, from a low USD2.5trillion to a high of USD5.0trillion with the range largely driven by differing views on the timelines and market size of energy storage⁵.

³ Source: Wood Mackenzie
⁴ Source: GlobalData
⁵ Sources for the size of the market include, but are not limited to, Asian Development Bank; Bloomberg New Energy Finance; European Union; GlobalData; IEA; IRENA; JP Morgan; Morgan Stanley; Refinitiv; Renewables Now; Reuters; World Bank; Wood Mackenzie.

Offshore wine farm capacity (GW) 2020-2030

FIGURE 1:

Source: IEA, Irena, Wood Mackenzie

Global renewable energy investment by 2030 by Sector and Geographic region

FIGURE 2:
Global

FIGURE 3:
Energy Sector

FIGURE 4:

Geographic region

Sources: Derived from Bloomberg New Energy Finance; GlobalData; IEA; IRENA; World Bank; Wood Mackenzie.

Whatever the number, there is no ignoring renewable energy will dominate investment in the energy sector, accounting for up to 95% of all investment in electricity generation over the remainder of this decade ⁶

⁶ Source: IEA

The role of "Big Oil" in the energy transition

One significant development for the market has been the increasingly visible but divergent views of “Big Oil”. There is clear evidence all the Majors understand the need for decarbonisation. Exxon and Chevron, often perceived as laggards, recently outlined their positions with respect to alignment with the Paris Agreement.

However, the means to achieving it is quite different and is essentially geographic in nature reflecting the broader political environment of Europe and the USA (particularly its pre-Biden history) and the focus, policies and initiatives (or lack of ) proposed by the respective authorities.

The US Majors have approached decarbonisation through a strategy of improving energy efficiency and the usage of hydrocarbons. They have primarily focused their attention on leveraging existing core competencies and competitive advantages within their existing business model such as carbon capture and storage, reducing methane intensity and developing new and innovative products.

This strategy involves improving the sustainability of their existing core operations as opposed to branching out into new areas of business where they view they have no competitive advantage. With the Biden Administration’s ambitious efforts to decarbonisation in order to catch up with – and in some cases exceed - the progress seen in the European Union, it is inevitable the US Majors will face increased investor pressure to align with federal targets and obligations arising from the USA re-entering the Paris Agreement.

In contrast, the European Majors have generally adopted master plans that go beyond net-zero targets to, in some cases, establishing the basis of a new economically viable business model for when oil and gas increasingly falls outside of the core energy mix⁷. In December 2020, European Majors including bp, Eni, Equinor, Repsol, Shell and Total jointly announced their agreement to adopt principles for collective industry acceleration of the energy transition, a statement that reinforced their intention to diversify away from their core operations and make significant investments in cleaner energy.

Total has been particularly dynamic in this area, announcing plans for 100GW of renewable energy by 2030; to put this into context, the generating capacity of Australia’s National Electricity Market is approximately 51GW⁸. Others, such as bp, Shell, and Equinor have all outlined commitments to significantly increase investment in the renewable energy sector and a number have bought into or established renewable energy platforms, both utility scale and behind- the-meter.

The offshore wind sector offers a relatively quick way to meet net-zero targets with European Majors acquiring equity stakes in large-scale generation assets. For example, in 2020 Total purchased a 51% stake in the UK’s 1.1GW Seagreen offshore wind farm in 2020 and acquired the 1.0GW onshore wind portfolio of Global Wind Power France and followed this up in 2021 by acquiring a 24% stake in the Yunlin offshore wind farm in Taiwan. In the UK’s recent tender for offshore wind licenses, consortia including bp and Total were awarded 4.5GW of development rights for new generating capacity.

Green investment activity

There has been considerable appetite and activity among fund managers this year with major renewables funds closed in the last quarter by CIP (EUR7.0bn or USD8.3bn), TPG (USD5.4bn, with a potential upsizing to USD7.4 by year end), BlackRock (USD4.8bn) and Stonepeak (USD2.75bn) leading the way. Estimates suggest that almost 40% of all investment dollars raised by fund managers globally is focused on renewable energy and/or energy efficiency⁹.

Recent transactions in the sector include Ørsted’s purchase of Brookfield’s 684MW of onshore wind assets in the UK and Ireland, PSEG’s acquisition of a 25% stake in Ørsted’s 1.1GW Ocean Wind offshore wind project in the USA, Shell’s acquisition of Vattenfall’s 50% stake in the Egmond aan Zee offshore wind project in the Netherlands and a majority stake in the 300MW Emerald floating wind in Ireland.

Also AGL and Mercury NZ’s acquisition of Tilt Renewables’ solar platform in Australia and New Zealand, and Northland Power’s acquisition of a 540MW portfolio of solar and wind assets in Spain. Upcoming transactions in Asia include the sale of JRE’s portfolio of wind and solar assets in Japan (more than 1.3GW of assets, including assets under development) and Chint’s disposal of ~540MW of Commercial and Industrial rooftop solar assets in China.

⁷ Total’s commitment to increased decarbonization has been evidenced through its rebranding to TotalEnergies in May 2021.
⁸ Source: Australian Energy Regulator
⁹ Source: Inframation

Growth in corporate demand

Companies directly securing their own renewable energy supply, thereby bypassing traditional electricity retailers, have also fuelled investment in the sector. Technology companies, for example, are making material renewable energy commitments. Amazon has recently entered into contracts with suppliers for approximately 1.8GW of renewable energy across Europe and North America. With these contracts, Amazon has become the largest corporate buyer of renewable energy globally and is set to achieve net- zero by 2025, five years ahead of its original target.

Similarly, Facebook recently signed renewable energy contracts with Clean Max (India) and Sunseap (Singapore) as part of its global strategy to source 100% of its energy needs from renewable energy and Microsoft signed a contract with Ørsted for 430MW of solar farm capacity. Together with Apple’s commitment for both itself and its suppliers to be net- zero by 2030, technology companies are playing an increasing role in the decarbonisation of their footprint.

It is not just technology companies undertaking this path. In Latin America, Anglo-America has signed a series of contracts across Brazil, Chile and Peru to source 100% of its energy needs for its mining operations from renewable energy. In India, as part of its plans to develop and install 100GW of renewable energy by 2030, Reliance Industries has announced plans to invest USD10bn in building four dedicated factory complexes to manufacture solar modules, batteries, electolysers and fuel cells. These developments are spurring growth in the corporate power purchase market through behind-the-meter transactions, a sector which is anticipated to see up to USD650bn of new investment by 2030¹⁰.

¹⁰ Sources for the size of the market include, but are not limited to, Asian Development Bank; Bloomberg New Energy Finance; European Union; GlobalData; IEA; IRENA; JP Morgan; Morgan Stanley; Refinitiv; Renewables Now; Reuters; World Bank; Wood Mackenzie.

While access to capital is clearly not an issue for the sector, it is not to say that challenges do not exist as investors and banks are still trying to find innovative ways to finance non-conventional assets such as floating wind and carbon capture and storage.