Energy transition investment opportunities

IRENA’s World Energy Transitions Outlook: 1.5°C Pathway sets out a vision for the global transition to renewable energy. In this excerpt, the authors chart recent market moves away from fossil fuels and towards renewables.

Government plans in place today call for investing almost US$98 trillion in energy systems over the coming three decades. The economic stimulus packages announced so far would direct US$4.6 trillion into sectors that have a large and lasting impact on carbon emissions, namely in agriculture, industry, waste, energy and transport, of which less than US$1.8 trillion is green.

To ensure a sustainable, climate-safe and more resilient future, significant investments need to flow into an energy system that prioritises renewables, electrification, efficiency and associated energy infrastructure. At the same time, those investments must not lead to lock-in effects that are not compatible with the 1.5°C Scenario. IRENA’s 1.5°C Scenario could be achieved with an additional US$33 trillion over the planned investments, for a total investment of US$131 trillion over the period to 2050. Over 80% (US$116 trillion for the period to 2050 or around US$4 trillion per year on average) needs to be invested in energy transition technologies (excluding fossil fuels and nuclear) such as renewables, energy efficiency, end-use electrification, power grids, flexibility innovation (hydrogen) and carbon removal measures.

The 1.5°C Scenario shows that cumulative investments of over US$24 trillion should be redirected from fossil fuels to energy transition technologies over the period to 2050. In annual terms, an over two-fold rise in energy sector investments to US$4.4 trillion per year until 2050 would be needed compared to US$1.8 trillion invested in 2019 – nearly 5% of global estimated gross domestic product today. Compared to the Planned Energy Scenario (PES)*, US$1.1 trillion additional energy sector investments would be needed in the next three decades. Over the more immediate term, up to 2030, cumulative investments in the energy system, including infrastructure and efficiency, would reach US$57 trillion. In addition to money for research and development, equipment and infrastructure, investments in people are needed, including for training and reskilling, labour market programmes, economic development and social protection measures.

Financial markets and investors are already shifting their attention towards the opportunity of new energy technologies.

Capital is already moving to take advantage of the most attractive investment opportunities at this time of transition. Financial markets are anticipating peak demand for fossil fuels and rapid growth for new energy technologies, and allocating capital accordingly. They have been de-rating one fossil fuel sector after another as peak demand for fossil fuel technologies has spread from European electricity to coal to cars to oil services. The de-rating of fossil fuel sectors has been going on for some time, with the share of the fossil-fuel-heavy energy sector in the US S&P 500 index falling, for example, from 13% a decade ago to below 3% today. In 2020, investors got enthusiastic about the renewable opportunity. Money flooded into renewable energy stocks; the S&P clean energy index was up by 138%, while the fossil-fuel-heavy S&P energy index was down by 37%.** Financial markets speed up change. They bring the future forward because they remove capital from sectors in decline and allocate it to growth sectors. The fossil fuel sector therefore struggles to raise new capital and has to reduce its expansion plans and change its strategy. In contrast, companies driving the energy transition find it relatively easy to raise capital and to expand fast, and this speeds up the process of change. For example, in 2015 there were just three mega factories dedicated to producing electric vehicle batteries; today there are over 150 active and planned battery mega factories.  

The time for action is now, while there’s a chance to capitalise on the momentum of investment and spending in the wake of the pandemic.

Countries are fighting the damages of the COVID-19 pandemic with huge sums spent on bailouts and recovery measures. The pathway towards the goals of the 1.5°C Scenario starts now, and public investment must be channelled away from fossil fuels and towards the energy transition, including enabling infrastructure for the efficient use of renewable power (e.g. smart grids, cross-country interconnectors), heat (e.g. district heating and cooling networks) and transport (e.g. charging stations for electric vehicles).

At the same time, energy industry bailouts and financial support to carbon-intensive companies should be made conditional on measurable climate action. With comprehensive, supportive and clear policy frameworks, public investment should also be leveraged to mobilise energy transition-related investment. Important government actions include the provision of risk-mitigation instruments (e.g. guarantees, currency hedging instruments and liquidity reserve facilities) to attract and de-risk private capital; creation of pipelines of bankable renewable energy projects; establishment of sustainability requirements for investors (e.g. climate risk analysis and disclosure); provision of reviewed investment restrictions and sustainability mandates for institutional investors; and adoption of standards for green bonds in line with global climate objectives. Moreover, carbon pricing should be implemented, where possible, to avoid distorted economic uptake as the pandemic recedes. Of course, careful consideration of broader social and equity issues is necessary, particularly for low-income populations, for whom energy constitutes a larger share of household expenditures and whose budgets do not leave many options.

* The Planned Energy Scenario (PES) is the primary reference case for this study, providing a perspective on energy system developments based on governments’ current energy plans and other planned targets and policies (as of 2019), including Nationally Determined Contributions (NDCs) under the Paris Agreement.  

** In the first months of 2021, there was a partial reversal of this trend. However, from January 2020 to March 9 2021, the S&P global clean energy index was nevertheless up by 104% and the S&P 500 energy index was down 15%.