Lessons learned from the expansion of wind and solar technologies from an expensive niche option to one of the cheapest electricity generation options can act as a framework for the continued growth of the energy transition and its expansion to emerging economies. That's the conclusion of a new report released this week by the International Renewable Energy Agency (IRENA), launched in partnership with India's G20 presidency, titled "Financing a Low-Cost Energy Transition."
The report focuses on the need for low-cost financing to support the development of newer renewable energy technologies such as green hydrogen, energy storage and offshore wind power in both developing market economies and already advanced Western countries.
In particular, cheap capital must be available in sufficient quantities for all markets, regardless of their own ability to generate capital and the risks inherent in less developed economies, commented the specialized publication Reneweconomy.
Identifying the need to develop to industrial levels a range of technologies and their commercial commercialization to better support the decarbonisation of the global electricity grid, the report highlights the need to deploy "new and emerging renewable energy technologies such as offshore wind". It is offshore wind that has the potential to develop and compete with solar power and land-based turbine power generation.
Likewise, "those technologies needed to keep grid operations stable and reliable as the share of variable renewable electricity in the energy mix increases must grow incrementally." Specifically, the report explains the need for investment in energy storage systems as well as clean hydrogen production.
Achieving these goals requires investment and strong policies to mimic and accelerate the conditions that have made onshore solar and wind cost competitive. Risk reduction policies must work hand in hand with reduced technology risk through innovation and improvement and increased developer experience, all of which have served to reduce the cost of capital for solar and onshore wind to date.
But it can't just be a playground for advanced economies with enough capital to drive down the costs of new RES technologies. Traditional risk analysis needs to evolve to take into account the larger issues caused by the unresolved issues of climate change.
As the report points out, policymakers need to readjust the way they analyze the risk of new projects to include the risk of inaction. “For example, what are the risks of leaving a large part of the population out of the energy transition and technological laggards? What are the risks of not achieving the Sustainable Development Goals?'' ask IRENA's authors.
Thus, "public funds, including those flowing from the global north to the global south, must play a much larger role in addressing the imbalance between private investor risks and economy-wide risks of failure in the energy transition."
"Access to finance in many emerging and low-income economies is insufficient and often too expensive to accelerate the energy transition at the required speed," the report's authors believe. "Therefore, reducing the cost of capital to finance the energy transition is more crucial than ever."
Therefore, cheap capital will be needed to finance projects even in markets that were once considered too "risky" to guarantee immediate and profitable returns. Lenders must also be willing to lend larger amounts, "reducing the need for more expensive equity."
However, it will take more than strong public policy and investment to attract the huge amount of private capital needed. A detailed analysis of the energy transition published in 2022 by IRENA found that the world would need to invest US$131 trillion to achieve the 1.5°C decarbonisation path – some US$33 trillion more than planned under current government policies. To meet these huge amounts of investment, public and private capitals are needed to work together.
"The public sector can also strengthen its role in providing concessional financing that helps to 'crowd-in' capital from the private sector," the report added. "This 'blended' financial approach to catalyzing large-scale institutional capital towards the energy transition will need to be given greater attention." The goal is to mobilize the financial resources necessary for the transition."
Continued investment in innovation is also needed to support the necessary ongoing cost reductions in this direction. According to the report, “policies need to shift into a new gear to support accelerated deployment, supply chain manufacturing and economies of scale. And they lead to cost reduction during the implementation of the project.
"A stable policy environment that includes policies to de-risk projects is critical to unlocking the volume of low-cost financing that would further reduce the cost of power generation and improve the competitiveness of emerging technologies," IRENA argued.
The report concludes with a number of recommendations for G20 members and other countries to consider when making their policies. You can read the full report here.