Editor’s Note: This is the final part of a four part series we published in the last few weeks reviewing some of the important developments in the field of sustainability in 2016. We focus here on developments in the cost of renewable energy and the increased availability of financing for initiatives to fight climate change. Part 1 can be seen here, Part 2 here, and Part 3 here.
Private sector investment in renewable energies is fundamental to establishing the momentum needed to curb an economic addiction to fossil fuels. While securing more private sector investment for the long-run change in fixed capital is crucial to the mainstreaming of renewable energies, private investment trends in renewables have been shown to be highly sensitive to short-run fluctuations in related markets. This was especially true in 2016 with slowing investments in photovoltaic modules, which this article addresses. However, the good news is that instruments in green finance as well as environmentally-motivated private investment funds may very well contribute to a comparatively stable future for financing climate change mitigation.
Lowest cost of solar PV and price of solar energy, but investments falling
While renewable energy surpassed coal as the largest source of installed energy in the world in 2015, the International Energy Agency (IEA) announced in 2016 that, should policy and production continue in a favorable path for renewables, it will account for 60% of all new energy generation over the next five years. Revised predictions by the IEA added 13% to expected growth in renewable energies based on large-scale additions to wind and solar energy generation. This pattern is explained by exponential falls in the cost of solar and wind production. For solar, the price of photovoltaic modules are at record lows according to data by the International Renewable Energy Agency (IRENA), with a 70 to 80% reduction between 2010 and 2015. As a result, the levelized cost of electricity produced by solar PV dropped by more than half in that same period. In multiple countries, sources of renewable energy reached the same price or are cheaper than new fossil fuel installations even without being subsidized by the government.
While falling prices make solar energy more affordable, a highly saturated market undergoes a desiccation in investment. 2016 saw decreases in solar PV investments across all continents due to a lack of standardized regulation as well as market and price volatility. The impacts were particularly egregious in developing and emerging economies, where docketed projects failed to secure funding. The reason is perhaps best illustrated by the now legendary Hanergy, a Chinese solar panel firm, which in 2015 lost half its market value, USD 18.6bn, in an hour. The Hanergy case spurred questions of market manipulation as well as investment risk in developing and emerging markets.
Despite the challenges in the solar market, offshore wind power showed significant increases in investment, recording 40% growth over the year. One only hopes that these investments do not blow themselves away.
Record year for green bonds and world’s richest individuals form a renewable energy investment fund
While the State has a large hand in financing green growth, it also depends on investment from the private sector and multilateral organizations. Channelling such finance in green growth projects can be essential in economies where public discretionary spending is limited or there are little domestic resources available for finance. 2016 saw a number of huge deals that hit new records in green finance and in the expansion of the use of green bonds.
In terms of traditional financing for sustainable development, the biggest news comes with the biggest investors. At the end of 2016, Bill Gates announced the start of a USD 1bn fund called “Breakthrough Energy Ventures” to finance the development of clean energy. Alongside 20 other high impact investors forming the Breakthrough Energy Coalition, this fund serves as one step in achieving their larger objective: investing in science and technology that “have the potential to reduce greenhouse gas emissions by at least half a gigaton.”
Meanwhile, 2016 was record year for green bonds. Green bonds operate in many ways the same way as a regular bond, bound to the same financial characteristics when evaluated by a potential investor. After an investor buys into a bond, they receive percentage of interest (coupon) until the bond reaches maturity. Financial risk assessments are important for green bonds as it helps investors determine how much risk they are willing to take on with a project. Multilateral banks and public sector entities may help underdeveloped countries or private companies in developing countries with little credit by underwriting such investments, which helps curtail risk.
At the start of 2016, Apple issued a USD 1.5bn bond dedicated to financing clean energy projects, making it the largest green bond issued by a US corporation to date. The proceedings will help finance the tech giant’s transition into 100% renewable energy and other forms of energy and resource conservation. Strong growth in the green bond market reached a record high in 2016 at USD 170bn, representing a USD 80bn rise from 2015.
In addition to private entities, 2016 saw other new frontiers in green bonds. Poland announced in December 2016 that it would issue green sovereign bonds, becoming the first country to begin issuance. The Asian Development Bank (ADB) underwrote the issuance of a climate bond by a Philippine energy firm for the construction of geothermal energy facilities, making it the first climate bond to be issued in Asia. Climate bonds operate like green bonds with the exception that projects financed or refinanced under these instruments must address climate change rather than the broad nomenclature of “green” projects.
Overall 2016 saw a strengthening of the private financial case for combatting climate change. As renewables become increasingly cost competitive with fossil fuels pressure will grow to switch to non-carbon energy sources on economic grounds – ignoring the other benefits that come with transition. The growth of green bonds is also a positive development that should enable greater action by sub-national entities as financing becomes more readily available. As we start 2017 with major questions about the role that the U.S. will play in leading the fight against climate change, the increasing ability of private and sub-national entities to take action is a major positive development.
Image courtesy of Flickr. Originally published by S&S on April 7, 2017.