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Is investment in renewable energy drying up?

The success of renewable energy until now has been largely thanks to government subsidies, cheap debt and an ever-improving perception amongst the public. But as the financial support fades and interest rates start to rise, there are concerns for the future of renewable energy as the industry looks to stand on its own two feet.

Wind farm
Source: Bloomberg

‘We are at a unique stage in our history. Never before have we had such an awareness of what we are doing to our planet. And never before, have we had the power to do something about it,’ – David Attenborough.

While a world powered entirely on renewable energy is still far from reality, there is no doubting the progress that has been made thus far. Head back ten years or so and the world was still building more fossil fuel-fired power plants than it was renewable alternatives, and generating at best just 5% of electricity from renewable sources, which were dependent on subsidies due to the high costs that made them uneconomical compared to cheap coal and gas.

Now, with almost $3 trillion invested, the world is throwing up more solar and wind farms than it is gas or coal-fired power plants and generating more than double the amount of electricity from renewable sources. These are also starting to be weaned off government support following the dramatic drop in the cost of development over the years.

The renewable energy sector has had its wobbles, but it has largely managed to remain on the right trajectory thanks to the favourable market. Governments have helped renewable companies protect their revenues, banks have offered cheap debt, the tech sector has developed ever-better technology, and the consensus that there is an urgent need to tackle climate change has never been greater. But practically all of the drivers that have allowed renewable energy to thrive over the past ten to 15 years are starting to slip. Subsidies are being cut, interest rates are rising, some areas of renewable tech has fallen behind holding the rest of the sector back, and some governments have started once again to call the danger of climate change into doubt while watering down their commitments to tackle it.

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But with the world relying on clean energy to clean up its act and help protect the planet, the stakes are high as the renewables sector begins to fledge the nest. As the industry enters its most pivotal moment that will determine the future of the world’s energy markets, is the journey toward a carbon-neutral world about to take a turn for the worse?

Investment in renewable energy still trending upwards

Worldwide investment in renewable energy increased 2% in 2017 to $279.8 billion, but still 13% lower than its peak in 2015 of $323.4 billion. While this looks like a cause for concern, it points toward a more positive trend in the industry. The cost of solar and wind, where the vast majority of investment is concentrated, has dropped considerably as the technology has developed and larger players have entered to lend their expertise, meaning that the industry has been able to build more capacity for less. The levelised cost of electricity for a solar project (the cost per megawatt-hour [MWh], including the cost of generation as well as all other costs like construction) has fallen 72% between 2009 and 2017 and the cost of onshore wind has declined by 27%.

Total investment in renewable energy chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

Investment in solar energy continues to outpace wind

Almost all global investment in renewable energy is swallowed up by solar and wind. The amount ploughed into solar energy has outstripped the levels invested into wind since 2010. The gap widened in 2017 as investment in solar energy rebounded while wind experienced another decline. 

Solar and wind chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

Meanwhile, only a fraction of the investment into solar and wind has been put into other renewable energy sources, and that investment has been in decline over recent years. Ultimately, solar and wind have and will continue to dwarf other forms of renewable energy, especially as the market increasingly falls under the control of big players, but that can also present an opportunity for companies to find a niche by focusing on biomass or geothermal projects, for example.

Other renewable energy chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

Renewable energy drives over two-thirds of new capacity added in 2017

Despite investment being below its peak in 2015, the amount of new electricity generation capacity being installed around the world has consistently risen every year for at least the last decade, demonstrating the effect of the drastic fall in costs. More renewable energy capacity was added last year than any on record. But the important takeaway is that the world continues to build more renewable energy plants than it does coal, gas, oil and the like. The first year that the world built more capacity using renewable sources than it did fossil fuels was 2016, accounting for 57% of total new capacity, versus 47% in 2015 and just 20% back in 2007. This continued to grow last year, with renewables making up 61% of all new capacity added worldwide. The same is true on a monetary basis, with the amount invested in renewables being almost three times as much as that put into fossil fuels.

Although the amount of capacity being added from coal and gas plants has continued to remain significant, it is hard not to focus on the fact that solar and wind remain comfortably ahead. Solar energy alone accounted for 38% of the total added capacity last year - more than the amount of new coal, gas and nuclear capacity combined.

Worldwide energy generation capacity chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

Because the price difference between building a new renewable energy plant and one powered by the likes of coal and gas is levelling out, more companies have chosen to opt for the cleaner option as the economics no longer hold them back. Why build a coal plant when you can install a solar farm at the same price?

However, capacity only tells half the story. Capacity simply represents the maximum amount of power that can be generated from renewable energy sources, not how much electricity we actually make from them. Renewables made up 19% of all energy capacity worldwide last year, but only 12.1% of our power came from these sources.

This highlights one of the biggest challenges that the sector has yet to truly overcome, and one that will continue to hold the entire industry back the longer it takes to resolve. The downfall of renewable energy and the reason why non-renewable energy sources are still so important is intermittency. Any energy generated by solar or wind farms has to be used there and then as there is no effective way of storing that energy for later use. That means solar and wind farms provide no power if the sun doesn’t shine or the wind doesn’t blow, but you can start-up a coal or gas power plant whenever you need it if you have the feedstock. While developing huge batteries capable of storing enough energy to power entire countries is no small feat, progress continues to be made. Ultimately, until energy storage catches up, both solar and wind will never be able to reach their full potential.

Interestingly, the growth in renewable capacity has steadily outpaced the growth in renewable generation over the past ten years. Versus 2017, the gap between capacity and generation was considerably narrower in 2007, when renewables accounted for 7.5% of the world’s capacity and 5.2% of power generated. 

Developing nations spearhead growth in renewable energy investment

One of the reasons that worldwide investment in renewables peaked in 2015 was because it was the year that developing economies began investing more into the sector than the developed economies. The developed world, led by the US and Europe, had been supplying 80% of all the funds invested into renewables in 2004 but last year it contributed just 37% as developing economies, driven by China, Brazil and India, invested the other 63% as they continue to gain market share in dollar terms:

Investment in renewable energy by region chart
Source: United Nations Environment Programme, Bloomberg New Energy Finance

Developed economies invested $103 billion in 2017, dropping 19% to hit the lowest amount since 2006, while the amount from developing nations jumped 20% to $177 billion.

The gap between the amount invested by developed and developing economies widened more last year than any other, and the trend is expected to continue moving forward. This was down to solar energy, with developing economies raising their investment by 41% to $115.4 billion as investment from developed nations dropped 17% to $45.4 billion. Investment in wind was more balanced and declined worldwide, although at a faster pace in developed (down 19%) than developing (down 4%).

China drives growth in renewable energy investment

China’s reputation for using clean energy is often questioned, and the country is still opening new coal plants, but the country’s growing expenditure on renewables is so significant that without it, the total invested worldwide would have fallen last year. China’s spending on renewables rebounded in 2017 to hit a new record level of $126.6 billion, accounting for 45% of the worldwide total. Half of all the new solar capacity added last year was in China after the country upped investment by 58% to $86.5 billion.

Investment by geographical region chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

Remembering that the declines in many regions are because the drop in costs means they can now get more bang for their buck, the growth spurt in China since 2013 is all the more impressive, and suggests the country’s appetite for renewables is growing faster than the pace at which the cost of renewables is falling. According to forecasts cited by the UN Environment Programme (UNEP), the 53 gigawatts (GW) of solar capacity that China added last year was way ahead of the 33GW expected. This is part of China’s efforts to maximise the roll-out of the technology to try to bring down the cost of the technology further. The aim of this is that the government can stop giving the industry handouts, with the UNEP describing the country’s National Renewable Subsidy Fund as having a ‘burgeoning deficit’.

However, subsidies for those that install small solar panels to generate energy for their own use, like on their rooftop, are expected to remain in place for the foreseeable future which should help investment continue to grow. Almost one-fifth of China’s investment in solar went into small-scaled distribution. Still, more of the larger projects that are coming online are bypassing the central transmission network that powers the entire country and connecting directly to the more localised distribution network.

Renewable energy market in India and Brazil: stop and start

Although India and Brazil are the two other major developing nations showing the strongest levels of investment into renewable energy, the pair’s combined investment of $17 billion last year represented just 5% of the worldwide total, with industries in both countries hit by setbacks in recent years.

Under plans initiated by Prime Minister Narendra Modi, India is aiming to install a staggering 100GW of solar capacity by 2022. However, it is well behind after overall renewables investment dropped 20% last year to $10.9 billion. The reduction in the cost of solar in India had been accelerated due an oversupply of solar modules flooding into the country from China, but that sharply reversed last year, causing prices to spike. That was further exacerbated by higher taxes and duties on components, in addition to a slowdown in government auctions whereby companies bid to build new capacity in return for an agreed price for the energy that project will generate once it’s up and running.

India may be raising its game when it comes to renewables, but the country has been defiant before, arguing that the developed world had no right to tell countries like India they weren’t allowed to chase economic growth using their fossil fuel resources like their western counterparts had been allowed to. It was one of the most resistant parties to sign up to the Paris Climate Agreement, only agreeing after being given concessions, and many of the new coal and gas plants that are still being built around the world are being built in India, neutralising the environmental benefits derived from new solar and wind.

In Brazil, investment in renewables climbed 8% last year to $6 billion, but were still below the $11.5 billion of annual investment at its peak way back in 2008 when the country was experiencing a biofuel boom supported by generous government subsidies. The mood around biofuels (such as wood pellets that are burned to create power, for example) has dampened since and last year it got worse after the US imposed duties on imports and domestic demand faltered. Brazil’s investment has, like the rest of the world, moved onto solar and wind, which accounted for $2.1 billion and $3.6 billion, respectively, of its budget last year. Although Brazil’s investment is weighted toward wind this is changing, with investment dropping 18% in 2017 while investment in solar nearly tripled.

However, predicting future levels of investment is difficult in the likes of Brazil, where political and economic uncertainty is rife.

Renewable energy market in the US: steady and stable

Investment in renewable energy has been far more consistent in the US than most other nations, staying between $33 billion to $49 billion since 2010. Assistance has also been in abundance, through tax incentives and green stimulus programmes. Two drivers keeping the market happy are the production tax credit for wind and the investment tax credit for solar, which has incentivised investment.

As these were extended for at least five years in late 2015 the immediate outlook for the US renewables industry looks bright, but companies are trying to pick the perfect moment, waiting as long as they can in order to buy equipment (which continues to fall in price) at a cheaper rate without missing out on the closing window of tax incentives. This suggests that there could be a late boom in the final year before these incentives go up for review again, when it will be more likely than ever that they will be scrapped.

The US remains one of the biggest markets for larger renewable energy projects but it has also been a prominent leader in small-scale solar projects, like those being built in China. These include panels (below 1GW) that are installed on rooftops, for example, to power the building it sits on. This growing trend of a smaller and more localised energy network is becoming more prevalent in numerous nations, and is significant as these new projects bypass the centralised energy networks that have traditionally powered the nation’s homes using huge power plants. Investment in small-scale solar in the US had grown consistently for a decade before experiencing a dip in 2017.

Figures from the UNEP covering the US demonstrates how the dramatic fall in costs allows renewable energy to start competing with fossil fuels in terms of price without the need of being subsidised. The levelised cost of electricity in the US generated by solar was $54.00 per megawatt-hour last year, while onshore wind was $51.00 – only slightly higher than gas at $49.00 and way below both coal and nuclear at $66.00 and $174.50, respectively.

Renewable energy market in Europe: investment levels plunging

The overall fall in investment from developed economies was down to Europe, specifically the UK and (to a lesser degree) Germany. The region’s investment fell 36% last year to $40.9 billion, caused by UK investment plummeting 65% to $7.6 billion after the subsidies that had been supporting onshore wind and larger solar projects were closed in early 2016.

Again, the rapid drop in investment is not necessarily an omen. Europe saw bids submitted in capacity auctions that did not require any subsidy whatsoever for the first time last year, and the UK’s capacity auction in September saw bids submitted that were costed at half the levels seen just a few years ago. When Europe’s spending on renewables was at its peak, around 2010-2011, countries including Spain, Germany and Italy were ploughing in huge sums when the price of renewables was at its highest. This goes some way to explaining the substantial drop in investment from Europe, although it will still be of some concern. The region accounted for only 15% of global investment last year, the lowest figure on record, compared to 45% in 2011.

There have been some other surges in investment elsewhere in Europe, with Sweden and Greece more than doubling spend last year, while Hungary’s $649 million budget grew from practically zero in 2016.

Australia, Mexico, and Egypt other regional leaders in renewable energy

Outside of the main developed and developing nations there are other countries spread across the continents that have made notable progress of late. Investment in Asia Pacific/Oceania was largely flat year-on-year (YoY) outside of China and India, but Australia’s $8.5 billion worth of investment was a new record for the country as spending on both solar and wind doubled.

While there are a few promising prospects in Latin America, like Chile’s growing commitment to solar energy, Mexico has been drawing the most attention after holding auctions last year that saw the lowest ever price per MWh for onshore wind and solar ever. But other countries like Argentina also impressed after investment increased nine-fold last year to $1.8 billion, mostly into wind.

Egypt is now the 11th biggest investor in renewable energy after its budget increased six-fold in 2017 to $2.6 billion, but other countries like the United Arab Emirates (UAE) are not far behind, with investment of $2.2 billion being 29 times higher than 2016.

Electric cars takes demand for renewables to next level

The transition to renewable energy has been aided by the introduction of energy efficient products, such as LED lighting and smart meters, but the environmental benefits have been limited. The emergence of electric vehicles, however, offers much more environmental benefits by offering the world the opportunity to rid itself of fuel-guzzling vehicles. But the future of electric vehicles is directly linked to renewables, and their individual success is dependent on one another. The whole point of electric vehicles is that they are cleaner than their petrol or diesel counterparts, so there is little point in driving an electric car if that electric that powers it has been generated by a coal plant.

This should, in theory, see growing demand for electric vehicles correlate to renewable energy generation. The move to renewables continues to steam ahead and the rise of electric vehicles will only accelerate this. Global sales have risen from just 122,000 in 2012 to 1.1 million last year, with China once again leading the way by accounting for about half of all sales.

Electric car sales in top three regions and share of global market

  2014 Share 2015 Share 2016 Share 2017 Share
China 36,000 13% 114,000 25% 283,000 41% 533,000 49%
Europe 96,000 33% 182,000 41% 209,000 30% 280,000 26%
North America 121,000 42% 122,000 27% 170,000 24% 212,000 19%

Unfortunately, despite the demand for them and ever-better models being released, the move to electric vehicles is being held up by other matters. The first is a lack of infrastructure in the form of charging points that give customers the confidence they won’t run out of juice and have nowhere to refill. However, this is being addressed as companies like Tesla continue to get more miles out of a single charge and build-out their own charging points.

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The second limitation applies to both electric vehicles and renewable energy: batteries. For energy production, better batteries are needed to store solar and wind power so it can be used when the weather turns sour, but just 1.2GW of storage capacity was installed in 2017 – a miniscule amount versus the amount of renewable energy capacity that was brought online. While a further 3.3GW of energy storage projects were announced last year, suggesting that there is more growth ahead, the sector is way behind those tinkering with panels and turbines. 

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Electric cars are also aiming to rapidly improve batteries for better mileage and lower cost. But the price per kilowatt-hour (Kh) of a lithium-ion battery pack, according to the UNEP, has fallen from $1000 in 2010 to just $209 in 2017. According to estimates by Bloomberg, electric vehicles could have a lower lifetime cost of ownership than fuel-guzzlers by the middle of the 2020s, and that half of all light-duty vehicle sales will be electric vehicles by 2040. Electric vehicle sales accounted for less than 2% of total vehicle sales in 2017.

How are renewable energy projects being funded?

The way renewable energy projects have been financed has remained largely unchanged, with most companies predominantly using their own cash, debt and equity (asset finance). The amount of investment funded from internal balance sheets rose 2% to $121.5 billion in 2017, while the use of debt (including project financing) was down 4% to $91.2 billion, implying that more firms are utilising their own cash rather than asking for help from the bank. However, when debt is used to fund a renewable energy project it often makes up the majority of total funding.

Small distributed capacity, referring to the small-scale and rooftop solar installations, is the second largest area of investment, with China accounting for 40% of the global total after a five-fold increase last year, just as US investment fell for the first time in a decade.

Types of financing used chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

Meanwhile, the amount coming from venture capital and private equity (VC/PE) and the amount renewable companies raised in equity on stock markets (public markets) has continued to fall as more big players, including the likes of Big Oil companies like BP and Royal Dutch Shell, means there is less need to raise equity or private money.

Top 10 nations for renewable energy investment in 2017 by type of funds

In USD, billions (YoY growth)

Asset finance Public markets Small-dis capacity
China 103.3 (14%) China 1.8 (209%) China 19.6 (396%)
US 29.3 (-1%) UK 1 (37%) US 8.9 (-12%)
India 9.4 (-24%) US 1 (-17%) Japan 5.4 (-38%)
Germany 7.6 (-32%) Hong Kong 0.5 (From 0) Australia 1.5 (18%)
UK 6.7 (-67%) Australia 0.3 (3430%) Germany 1.4 (4%)
Australia 6.6 (212%) Ireland 0.3 (From 0) India 1.1 (0%)
Japan 6.6 (-23%) Brazil 0.2 (-41%) South Korea 0.7 (-15%)
Mexico 5.8 (970%) South Korea 0.2 (1233%) Netherlands 0.6 (-17%)
Brazil 5.5 (11%) Germany 0.1 (-95%) Pakistan 0.5 (-10%)
Sweden 3.6 (207%) Thailand 0.1 (From 0) Thailand 0.5 (40%)

Merger and acquisition activity in the global renewable energy market

The value of mergers and acquisitions (M&A), including refinancings and private equity buyouts, in the renewable energy sector dropped 1% in 2017, amounting to $114 billion and representing the first dip in four years – but it was still the second highest on record. While M&A activity has remained concentrated on wind assets, this is declining while solar M&A is growing.

Some of the biggest deals last year were part of a growing amount of consolidation in the sector, spearheaded by General Electric’s (GE’s) acquisition of LM Wind Power Holding, which was its main supplier of turbine blades. Siemens also became the fourth largest manufacturer of wind turbines after buying Gamesa, putting it behind rivals Vestas, GE and Goldwind.

Biggest M&A deals in global renewable energy market in 2017

(USD, billions)

Acquirer Acquisition target Country Sector Value
General Electric LM Wind Power Holding Denmark Wind $1650
Siemens Siemens Gamesa Renewable Energy Spain Wind


Shanghai Electric Power SPIC Jiangsu Electric Power China Solar $554
Energias de Portugal EDP Renovavels Spain Wind $354
Direct Energie Quadran France Wind $353
EDF Energy Futuren                 France Wind $350
FRI-EL Green Power Alerion Cleanpower Italy Wind $291
Engine   La Cie Du Vent France Wind $245
Jera ReNew Power Ventures India Solar $200


Business continues to grow R&D spend as government contributions stall

The amount being invested in research and development (R&D) of renewables has continued to rise but this has been solely down to corporations coughing up more money, with government contributions in China, the US, Europe and elsewhere having all remained flat for several years as they look to further wean the sector off government aid.

Corporate versus government investment via region chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

While global corporate investment rose 12% in 2017 to $4.8 billion, the amount governments have put in has remained largely unchanged since 2009. R&D spending rose across all types of technology and geographically Europe was the biggest regional investor last year.

Corporate versus government investment via source chart
Source: United Nations Environment Program, Bloomberg New Energy Finance

Growth in renewable energy market could slow as tides change

The cost and inefficiency of renewable energy means that much of the success has been driven by our desire to transition to renewable energy, but with the cost falling in line with dirtier power sources there seems little excuse not to continue our pursuit of clean energy.

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However, the renewable energy market is about to enter its most crucial moment yet. The industry has had everything it needs to flourish so far, with subsidies providing projects with a safety net and record-low interest rates providing the cheap debt that is integral to funding renewable energy projects (which demand very high upfront capital costs). But with central banks starting to raise interest rates there are concerns that the vital investment that the industry relies on could become considerably more costly over the coming years – right at the time that governments are cutting subsidies and other support for the sector, convinced it has matured enough to look after itself. While the industry has been able to depend on governments and banks, now they will have to rely on market prices and their ability to stand on their own two feet up against fossil fuels.

Government policy is more certain in some places than others. Areas like Europe have clear ambitions as part of the wider Paris Climate Agreement, but the future is clouded elsewhere following US President Donald Trump’s decision to pull the US out of the deal, throwing the country’s commitment to climate change up in the air. If renewable energy is to properly grow then it needs a long-term framework it can rely on.

With renewable energy facing so many uncertainties about everything from the impact of subsidy removal on future revenues to their ability to access affordable debt to keep building new projects, there is a lot of reason for the industry to be wary. But the reason it finds itself in this position is because of the success it has already had, lowering the cost and becoming competitive enough to take on fossil fuels without having to play on the heartstrings of the public.

The apprehension over the outlook for renewable energy is justified, but it also deserves an equal dose of optimism.

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