5 min read 10 Mar 22
The power sector has an important role to play in climate change mitigation. According to the latest global figures, electricity and heat production account for around 25% of 2010 greenhouse gas (GHG) emissions. In the UK, the energy supply sector is the second-biggest emitting sector after transportation, accounting for around a fifth of UK GHG emissions.
Increasing the supply and scale of renewable and clean energy – and decarbonising our energy infrastructure – forms a key part of the strategy to limit global heating and its devastating impacts, as economies transition towards a path of greater sustainability and target net-zero emissions over the coming decades.
Many impact-oriented investors are focused on investing in climate solutions; allocating private capital to renewable energy businesses and providing senior debt financing for new and existing infrastructure projects with a clean energy focus. Investors have been attracted to, for example, the potential for stable, long-dated returns and cashflows in financing offshore wind power companies and projects – with the added benefit of knowing the investments contribute to addressing climate change and its impacts.
Renewable energy generation capacity set an all-time record in 2021 for new installations according to the International Energy Agency (IEA). Looking ahead to the next few years, the IEA also expects renewables to account for 95% of the increase in global power capacity through 2026. With an eye on 2050, renewables are expected to contribute most to decarbonising electricity under the IEA’s Net Zero Emissions by 2050 Scenario (NZE); seeing “…the share of renewables in total output rising from 29% in 2020 to over 60% in 2030 and nearly 90% in 2050. Solar PV and wind race ahead, becoming the leading sources of electricity globally before 2030…”1
2021 also marked a new record for global power generation from coal, despite falling in 2019 and 2020. While mainstream renewables such as wind and solar have grown significantly in recent years, fossil fuels are having to address a gap to meet rising electricity demand driven by the post-pandemic economic recovery.
Electricity grids tend to struggle with the intermittent supply of renewable energy sources, such as solar and wind, which have variable supply. Winds are generally higher in the winter months and in bad weather conditions, while reduced sunlight may mean solar photovoltaic (PV) panels are less productive during these times. While the output of wind tends to have a negative correlation with solar, there are times where there is insufficient wind or sunlight output to fully support society’s energy needs. For most grids, a reliable base-load power that is not coal-fired is required.
There have been significant advances in both the scale and the economics of renewable energy over the past few years. Technological and financial innovations together with falling costs have helped to facilitate growth in adoption of renewable energy technologies, alongside growing interest in achieving net-zero carbon emissions. Much more investment is needed, however.
More recently, supply chain instability and rising energy prices as well as accelerated cost inflation (from raw materials, transportation etc.) have created short-term headwinds, but the cost of installing new energy infrastructure, and consequently the cost of producing power from it, has declined materially over the past decade or so. “Since 2010, the cost of solar power has fallen by 85%, and that of wind power by 56% and 48%. Solar and wind are now cheaper than new coal and gas power plants in two thirds of the countries of the world…”2
Investments in solar energy including rooftop solar PV panels for residential homes and businesses and large-scale ground-mounted solar parks, have accelerated in recent years as they have become less expensive and more efficient. According to the IEA’s ‘main case’ forecast (2021-2026), the expansion of solar PV capacity in the next five years is expected to be almost double that of the previous five years.
Wind is also playing an increasingly important role in today’s energy mix and over the past decade or so, the wind power industry has scaled and has become more competitive. Although there have been sizeable increases in capacity for onshore wind, the UK is the world leader in offshore wind, with more installed capacity than any other country.
As part of the Offshore Wind Sector Deal agreed in 2019, the UK Government has pledged to become a world leader in low-cost, clean power generation, having set out its ambition to quadruple offshore wind capacity by 2030 to 40 gigawatts (GW). This came after the Climate Change Committee advised that in order for the UK to reach net zero, then up to 100GW of offshore wind capacity will be needed by 2050. Recently in the US, the Biden administration set a target of 30GW of offshore wind capacity by 2030, but has only approved its first big project (which will generate 800 megawatts (MW) of electricity a year) which is set to be operational in 2023.
The Economist recently estimated in an article that imagines a world powered entirely by offshore wind that “…around seven million square kilometres (km2) of offshore farms would be needed to power the whole world.” This would amount to, they say, thousands more wind farms than exist today for a net-zero world.
There is clear recognition that significant upscaling and investment in renewable energy resources is needed for countries to meet their climate goals of net-zero emissions by 2050. However if renewable energy generation is to fully realise its potential for electricity generation, then cost-effective, long-term energy storage solutions, or technologies like hydrogen for example, will also need to be utilised to ensure continuous supply of clean electricity to the grid and into people’s homes.
1 IEA, “Net Zero by 2050: A Roadmap for the Global Energy Sector”, published May 2021.
2 UK Government, “Now is the time to speed up the transition to cleaner energy sources”, 4 November 2021.
3 Based on figures provided in the reporting period to end of 2020.
4 Number of loans outstanding in securitisation pool to finance the installation of rooftop solar panels, as at 30 June 2020.
5 Estimated based on number of loans outstanding in securitisation pool as at 30 June 2020.
6 Calculated using United Nations Framework Convention on Climate Change (UNFCCC) Harmonized Grid Emissions Factors.
7 While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.
8 Reported 2020 production.
9 Calculated using United Nations Framework Convention on Climate Change (UNFCCC) Harmonized Grid Emissions Factors.
10 Based on annual estimate electricity usage of c. 3,079 kWh per household in the UK - Ofgem figures 2020.
11 While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.