Editor’s Note: This article first appeared in the International Development Journal, an online journal offering a platform to engage in debate and discussions on global policies and current affairs.
A December 2016 World Economic Forum (WEF) report entitled ‘Renewable Infrastructure Investment Handbook: A Guide for Institutional Investors’ has found, that for the first time, solar energy is the cheapest form of new energy including fossil fuels. It credits “the adoption of the Paris Agreement on 12 December 2015 by 195 governments [as] a major turning point in the global fight against climate change.”
In a growing number of countries worldwide the WEF suggests “it has become more economical to install solar and wind capacity than coal capacity.” This is primarily due to the rapid decreases in the Levelized Cost of Energy (LCOE) world average prices for solar and wind compared to coal. The global LCOE for coal “has hovered around $[US]100/MWh” while solar cost around $600/Mwh ten years ago, around $300/MWh five years ago, but is now less than $100/Mwh for utility-scale photovoltaic.
Developing countries were responsible for leading the way in 2015 in terms of total investment commitment to renewables totalling $US156 billion. China led the way with $US102.9 billion followed by India ($US10.2 billion) and Brazil ($US7.1 billion). In comparison, the total investment commitment to renewables of developed markets was $US130 billion. Europe came in first with $US48.8 billion closely followed by the United States ($US44.1 billion) and then Japan ($US36.2 billion).
The growth of the sector can be considered even more impressive when the subsidies given to fossil fuel and renewable energy producers are taken into account. Throughout 2014 fossil-fuel consumption received $US493 billion in subsidies which represented more than four times the value of subsidies paid to renewable energy producers.
Furthermore, it is estimated that in excess of 30 countries have reached grid parity without the need for subsidies including Chile, Mexico, Brazil and Australia. A Deutsche Bank study, cited by the WEF report, concludes that “If electricity costs were to rise by 3% annually, 80% of the global market would reach grid parity in the next couple of years.”
Investment in the renewable energy sector is not without its risks and challenges which can be broken down into three categories – at the pre-investment stage, at the construction (greenfield) stage and finally at the operation (brownfield) stage. While not all risks can be planned for and “completely hedged out” many of them can be successfully mitigated.
Regulation has been talked about challenge for investors wishing to enter into renewable energy investments. Uncertainty can exist over a lack of regulation, as is the case in many developing markets, as well as over-regulation, as is the case in many developed markets. Such uncertainty can result in large legal costs for (potential) investors. The report points out that “Successful investors have generally managed to strike PPP [public-private partnership] contracts where the balance of risks between private and public stakeholders is adequate.” Entering into some types of insurance, which can cover expropriation or political violence, can also serve as an effective regulatory mitigation strategy.
The report concludes by discussing renewable energy as a relatively new industry and believes that any challenges faced can be successfully overcome. It says: “It is clear that investors have generally neglected the sector for a long time (arguably with reasonable justification) and the exponential changes in cost and efficiency have been too recent to have an impact on their mindsets.” However, it also argues that “the attractiveness of the sector will only increase” due to the “economic soundness of renewable infrastructure” and the promise of further technological evolution and innovations.