- Renewable energy sources are at the core of any strategy for countries to meet climate goals while supporting growth, employment, and domestic value creation.
- Private sources provide the bulk of renewable energy investment globally, but public finance can play a key enabling role.
- Domestic and international issues also come into play in building investment in renewables.
This article is excerpted from the forthcoming, multi-volume Financing Renewable Energy Projects: A Global Analysis and Review of Related Power Purchase Agreements, published by the Business Law Section.
The Paris Agreement and Its Consequences
In December 2015, the Conference of the Parties (COP21) to the U.N. Framework Convention on Climate Change convened in Paris to address threats posed by climate change. During the conference, 195 nations signed an agreement (the Paris Agreement) and pledged to limit the global average temperature rise to as close as possible to a maximum two degrees Celsius. The Paris Agreement is seen as the cornerstone of a global approach to preventing catastrophic climate change. (The United States has withdrawn from the Paris Agreement.)
The successor to the Kyoto Protocol, this agreement is the first universal, legally binding climate change deal designed to spur global growth of renewable energy development and provide the foundation for a low-carbon, sustainable future. The Paris Agreement unites not only nations, but also cities, regions, businesses, and investors toward a common goal to reduce carbon emissions and mitigate increasing global temperatures.
In July 2017 it was estimated that clean or renewable energy could achieve 90 percent of the energy-related carbon dioxide emission reductions required to meet the central goals of the Paris Agreement. This target requires reducing energy-related carbon dioxide emissions by 70 percent by 2050 compared to 2015 levels, which can be achieved only with the massive deployment of renewable forms of energy such as wind, solar, and hydro, combined with energy efficiency.
Based on the current and future needs for low-carbon technologies in 13 distinct sectors, renewables could account for two-thirds of primary energy supply in 2050, up from just 16 percent today. The transition to renewables will help limit global warming.
Scientists have recognized that the electricity sector must be completely carbon-free by 2050 and that clean and renewable energy sources must become the dominant source of electricity powering buildings, industry, and transportation to avoid the worst effects of climate change. Doubling the share of renewable energy by 2030 could deliver around half of the emissions reductions needed and, in combination with energy efficiency, keep the rise in average global temperatures within two degrees Celsius—the target of the Paris Agreement.
One uncertainty ahead for renewable energy is the manner in which investors will react to the coming period in which project revenues have no government price support and instead depend on private-sector power purchase agreements or merchant power structures.
Another potential issue may be rising interest rates. Record low rates of recent years have helped to reduce overall costs per megawatt (MW) and also attracted new capital from institutional investors into the financing of projects.
Private sources provide the bulk of renewable energy investment globally—over 90 percent in 2016—but public finance can play a key enabling role by covering early-stage project risk and getting new markets to maturity. Public spending on policy implementation far outweighs direct public investments. Project developers account for about two-fifths of private investment in the sector. Institutional investors—pension funds, insurance companies, sovereign wealth funds, and others—make up less than five percent of new investments.
Private investors overwhelmingly favor domestic renewable energy projects (93 percent of the private portfolio in 2013–2015), whereas public investment is more balanced between in-country and international financing.
Renewable goals and mandates in the United States are powerful mechanisms to encourage construction of renewable energy-generating facilities. For a quarter century the most significant renewable energy mandate was the Public Utility Regulatory Policies Act of 1978, which was passed in the wake of the oil crisis in the 1970s.
Since the mid-2000s, that role has been supplanted by state renewable energy mandates often known as renewable portfolio standards (RPS) or renewable electricity standards (RES). These terms are used interchangeably. The most common method for requiring the use of renewable energy sources is the imposition of a renewable electricity mandate in the form of an RPS or RES.
An RPS requires covered electricity suppliers to procure a certain percentage of their electricity from renewable resources or purchase renewable energy credits (RECs) from other sources to meet the statutory (or regulatory) standard. Such plans typically set a mid- to long-range goal and then phase in the mandate over time. Given that the RPS is a mandate, the law typically prescribes the use of sanctions and/or waivers (permission for temporary noncompliance) for shortfalls (i.e., failures to meet the RPS requirements).
The RPS imposes a reporting requirement on the covered electricity supplier, and the supplier then reports compliance through the delivery of RECs, which are earned through electricity generation from qualified renewable sources. If a covered supplier cannot acquire the required number of RECs, programs usually offer the option of making alternative compliance payments.
An RPS covers any entity stated in the statute and will specify what constitutes “renewable energy.” An RPS provides the mandate for bringing renewable energy online; however, other critical issues must be addressed to bring renewable energy to market, e.g., financing issues and transmission infrastructure.
Renewable energy projects are often dependent on tax credits and tax incentives to compete with other forms of energy. RPS programs are often proposed along with other programs, such as cap-and-trade programs, to reduce greenhouse gas emissions. RPS programs focus on increasing the mix of renewable sources of electricity; cap-and-trade programs are focused on emissions reduction strategies, i.e., whether to reduce pollution, climate-impacting emissions, or both.
More recent variations on RPSs involve energy efficiency resource standards under which utilities must spend certain amounts of money on energy efficiency measures or achieve a certain amount of demand reduction.
The year 2017 was the eighth in a row in which global investment in renewables exceeded $200 billion, and since 2004 the world has invested $2.9 trillion in green energy sources. Overall, China was by far the world’s largest investing country in renewables at a record $126.6 billion, up 31 percent in 2016.
Solar energy dominated global investment in new power generation in 2017. The world installed a record 98 GW of new solar capacity, far more than the net additions of any other technology—renewable, fossil fuel, or nuclear. Solar power attracted far more investment at $160.8 billion (up 18 percent) than any other technology.
In total, $279.8 billion was invested in renewables, excluding large hydro, and a record 157 GW of renewable power was commissioned in 2017, up from 143 GW in 2016 and far out-stripping the net 70 GW of fossil-fuel generating capacity added (after adjusting for the closure of some existing plants) over the same period.
In the next five years, wind and solar will jointly represent more than 80 percent of global renewable capacity growth. With almost 70 percent of its electricity generation coming from various renewables, by 2022 Denmark is expected to be a world leader. In some countries such as Ireland, Germany, and the United Kingdom, the share of wind and solar in total generation will exceed 25 percent.
Between 2017 and 2022, global renewable electricity capacity is projected to expand by over 920 GW, an increase of 43 percent. This forecast is more optimistic than last year, but in all likelihood will be affected by a cut in solar tariffs by China.
Renewable energy investment in the United States was far below China at $40.5 billion, down six percent. It was relatively resilient in the face of policy uncertainties, although changing business strategies affected small-scale solar. China, India, and Brazil accounted for just over half of global investment in renewables, excluding large hydro last year, with China alone representing 45 percent, up from 35 percent in 2016.
Europe suffered a bigger decline of 36 percent to $40.9 billion. The biggest reason was a fall of 65 percent in the United Kingdom. Investment of $7.6 billion reflected an end to subsidies for onshore wind and utility-scale solar and a big gap between auctions for offshore wind projects. Germany also saw a reduction in investment of 35 percent to $10.4 billion, on lower costs per MW for offshore wind and uncertainty over a shift to auctions for onshore wind. The latter change was also one reason, along with grid connection issues, for a fall in Japanese outlays of 28 percent to $13.4 billion.