The lessons learned from scaling up wind and solar technologies from an expensive niche option to arguably the cheapest option for new electricity generation can act as a framework for the continued growth of the energy transition and its expansion to emerging economies.
This is the conclusion from a new report published this week by the International Renewable Energy Agency (IRENA) launched in partnership with the Indian G20 Presidency entitled “Low-Cost Energy Transition Finance”.
The report focuses on the need for low-cost finance to support the development of newer renewable energy technologies such as green hydrogen, energy storage, and offshore wind in both emerging market economies and advanced economies.
Specifically, low-cost capital must be available in sufficient quantities for all markets regardless of their own ability to generate capital and the risks inherent in less-advanced economies.
Identifying the need for a range of technologies to be scaled up to commercialisation so as to better support the decarbonisation of the global power grid, the report highlights the need for “new and emerging renewable energy technologies, such as offshore wind power” to be scaled up to compete with solar and onshore wind.
Similarly, “those technologies that are needed to keep the grid operations stable and reliable as the share of variable renewable electricity in the power mix increases must rise in lockstep.”
To achieve these ends, investment and strong policies are necessary to mimic and accelerate the conditions that led to the cost competitiveness of solar and onshore wind. De-risking policies must work hand-in-hand with reduced technology risk through innovation and improvement, and increased developer experience, all of which served to drive down the cost of capital for solar and onshore wind.
But this cannot only be a playground for advanced economies with sufficient capital to drive down the costs of new technologies. Traditional risk analysis must evolve to take into account the greater risks caused by unaddressed climate change.
As the report identifies, policymakers must readjust the way they analyse the risk of new projects to incorporate the risk of inaction.
“For instance,” write the authors of the report, “what are the risks associated with leaving a large part of the population out of the energy transition and locked in underdevelopment? What are the risks of the Sustainable Development Goals not being met?”
Thus, “public funds, including those that flow from the Global North to the Global South, need to play a much larger role in addressing the imbalance between private investors’ risks and economy-wide risks of falling short in the energy transition.”
“Access to funding in many emerging and low-income economies is not sufficient, and often too costly to accelerate the energy transition at the necessary rate,” write the authors of the report.
“Lowering the cost of capital for financing the energy transition has therefore become more crucial than ever.”
Low-cost capital for project financing will therefore be required even in markets which may have once been deemed too “risky” to guarantee an immediate and profitable return. Lenders must also be prepared to lend larger amounts, “reducing the need for more expensive equity capital.”
More than strong public policy and investment will be required, however, so as to attract the massive amount of private investment necessary. A detailed analysis of the energy transition published in 2022 by IRENA identified that the world will need to invest $US131 trillion to achieve a 1.5°C pathway – around $US33 trillion more than is planned under current government policies.
To meet these massive amounts of investment requires public and private investment working hand-in-hand.
“The public sector can also step up its role in providing concessional finance, that helps ‘crowd in’ private sector capital,” the report states.
“This ‘blended’ finance approach to catalysing institutional capital at scale towards the energy transition will need to be given greater attention to mobilise the financial resources required for the transition.”
Continued investment in innovation is also required so as to support the continued cost reductions needed. According to the report, “policies need to shift gear to support accelerated deployment, supply chain manufacturing and the economies of scale that drive cost reductions during project implementation.
“A stable policy environment that includes policies to de-risk projects is then crucial in unlocking the volume of low-cost finance that would further reduce power generation costs and improve the competitiveness of emerging technologies.”
The report concludes with a number of recommendations for the G20 members and other countries to take into consideration when they are making their policies. The full report can be read here.
