- More rapidly advancing climate change and the drive for energy independence triggered by the invasion of Ukraine by Russian armed forces are the main drivers for the transition.
- An acceleration to more sustainable forms of producing, consuming and storing energy can be observed globally.
- The consensus to transform the current energy set-up has never been greater.
- Investments in companies that provide solutions for cleaner energy generation, efficient energy storage and sustainable energy consumption can help accelerate and shape this transition, while at the same time offering attractive investment angles.
Record droughts throughout Europe, flooding in Australia, record high temperatures in April in India and forest fires all over the world are precursors that the global climate is changing dramatically and show us the consequences of global warming.
Climate change and its associated risks to economic growth and environmental damage are creating a major concern for our economic welfare. Scientists are warning that time is running out to contain greenhouse gas emissions and prevent disastrous climate change. All this is occurring while the world is confronted by record-high energy prices and energy scarcity in several regions of the world.
This is all evidence that it is high time to shape the transformation of the energy system with commitment, determination and, not least, the help of sustainable energy generation, innovative storage solutions and more sustainable consumption. To accelerate the clean energy transition, more investments in innovative solutions are needed, in parallel with the capital required to develop new frontier technologies that will reach marketability and help to ensure a smooth transition to create a more sustainable future.
Global investments in energy transition are picking up
According to Bloomberg’s Energy Transition Investment Trends 2022, global investments in the energy transition last year climbed up to a new record level of $755bn. Renewable energy topped the list, with $366bn committed in 2021, an increase of 6.5% compared with 2020. With investments totalling $273bn in 2021, the electrified transport sector ranked second, driven by a 77% year-on-year growth rate in spending on electric vehicles (EVs) and associated infrastructure.
Looking at the growth path of energy transition investments from an economic area perspective, the Asia-Pacific region stands out twice over. With $368bn, it’s not only the zone that recorded the highest investments worldwide, but also the region that with an increase of 38% showed the strongest surge in 2021. EMEA takes second place, with clean energy investment in 2021 adding up to $236bn, an increase of 16% compared with the year before. The Americas, lastly, contributed $150bn in 2021 to the transition to a fossil fuel-free global economy, an increase of 21% compared with 2020.
Global investment in the energy transition by region
Broken down by single countries, China invested most in energy transition, with funding worth $266bn in 2021, followed by the US with green energy investments totalling $114bn, and then Germany with $47bn invested in the clean energy transition.
Larger capital flows, lower costs and a still substantial funding gap to reach 1.5°C energy transition target
According to REN21’s Renewables 2021 Global Status Report, in 2020 global investment in new clean energy capacity reached $303.5bn, an increase of 2% compared with 2019.
In parallel, 2021 expenditures for onshore and offshore wind and for solar power experienced double-digit drops of 13% and 15%, respectively, on a year-on-year basis, according to projections from the IEA. In the same year, IRENA reported that a remarkable two-thirds of newly installed renewable power had lower costs than the cheapest fossil fuel-fired option in the G20.
Over a period of more than a decade, the decline in green electricity costs is even more significant.
Considering the favourable development of clean energy on the cost side, cautious optimism seems to be appropriate, especially as in parallel, investments in clean energy have been picking up.
But current funding levels are still far from sufficient to develop and scale up already existing and new low-emission technologies that help smooth the transition of the energy system.
A decade of declining energy costs
Setting energy transition levers in motion
According to the IRENA World Energy Transitions Outlook 2022 Report, the 1.5°C Scenario will require an immense increase in current funding levels within this decade.
Capital markets and private investors will play a vital role here in raising the major part of the additional capital needed to facilitate and accelerate the clean energy transition, to significantly increase the share of renewables in the overall energy mix.
Matching the gap between the generation of energy use and keeping the grid stable calls for innovative solutions. These new-frontier technologies will reach marketability, and help to ensure a smooth transition. In addition, energy storage solutions like battery technology and hydrogen technology will become more important in the future. As well as just storing energy, hydrogen might help to decarbonise carbon-heavy industries such as steel and cement, and can be used as a substitute for natural gas. Therefore, the creation of a hydrogen-based economy remains an important pillar.
Routes to renewables
In recent years governments and entities worldwide have started pushing the green accelerator pedal by freeing up considerable amounts of capital to help bring their countries and the world back on the 1.5°C maximum-warming track.
With the Inflation Reduction Act passing both the US Senate and Congress in August, the US adopted an extensive legislative package that according to US President Joe Biden “makes the largest investment ever in combatting the existential crisis of climate change”.
With almost $370bn of climate spending over the next ten years and the objective to significantly reduce energy costs, increase cleaner production, and cut carbon emissions by approximately 40% by 2030, this bill represents quite a historic feat, and “does about two-thirds of the remaining work needed to close the gap between current policy and the nation’s 2030 climate goal” – halve emissions by the beginning of the next decade.
In its 14th Five-year plan for renewable energy development, the People’s Republic has set ambitious goals to foster the green and low-carbon transformation of the country by 2025 and beyond. Besides the ambition to achieve carbon neutrality by 2060, and the gradual reduction of carbon dioxide emissions, China is also striving to boost the proportion of renewables in its overall power consumption and installations.
With its Green Growth Strategy, the country has taken up pressing climate change challenges. Backed by the Green Innovation Fund worth 2 trillion yen ($15.1bn), the programme aims to:
- install 10GW of offshore wind power by 2030, and 30–45GW by 2040
- establish carbon-free hydrogen production technology for high-temperature gas-cooled reactors (HTGR) in 2030
- have electrified vehicles making up a 100% share of new passenger car sales in 2035
- achieve carbon-neutral semiconductor/information and communication industries by 2040
The UK government’s Department for Business, Energy and Industrial Strategy ‘Ten Point Plan for a Green Industrial Revolution’ includes:
- a £12bn fund of public money to support the low-carbon energy industry, and a commitment to securing 40GW of offshore wind power capacity by 2030 (up from around 10GW in 2021)
- a £1 billion fund to “support the electrification of UK vehicles and their supply chains” plus £1.3bn to speed up the roll-out of EV charging infrastructure
- a £240 million Net Zero Hydrogen Fund to build up 5GW of low-carbon hydrogen production capacity by 2030
The German Federal Government recently committed an additional €8bn to promote the expansion of renewable energies and related abatement measures, including the funding of:
- €860m for “green steel” and transitioning steel production to green hydrogen
- €95m for promoting offshore electrolyser systems, and doubling electrolysis capacity to 10GW by 2030
- €5.5bn for the energy refurbishment of residential buildings, and climate-friendly new construction
- more than €1bn for improving medium to long-range charging infrastructure for EVs
A big Spanish utility has recently announced investments close to $5bn for, among other things, the adaption of natural gas infrastructure for the handling of hydrogen and for the production of renewable hydrogen. But also, on a non-corporate level, Spain is following an ambitious agenda to become Europe’s hydrogen front-runner.
The country’s Renewable Hydrogen Roadmap envisages installing 4GW of electrolyser capacity by 2040 (equivalent to the capacity of four large coal-fired power plants), in parallel with getting 150-200 fuel cell buses and 5,000-7,500 light and heavy-duty fuel cell transport vehicles onto Spanish roads, accompanied by 100–150 public access hydrogen stations.
The European Commission’s REPowerEU Plan is an additional response to the market disruption caused by the conflict between Russia and Ukraine. The double urgency to transform Europe’s energy system is based on following the Paris 2015 climate agreement, and ending the EU’s dependence on fossil fuels from Russia, adding up to around €100bn per year. To “fast forward the green transition” and to quickly lessen the EU’s dependency on Russian fossil fuels, the REPowerEU Plan contains:
- the doubling of solar photovoltaic capacity by 2025, and the installation of 600GW by 2030
- setting a target of 10 million tonnes of domestic renewable hydrogen production and 10 million tonnes of imports by 2030, as a replacement for natural gas, coal and oil in hard-to-decarbonise industries and transport sectors
To emancipate Europe from its dependence on Russian fossil fuels, the EU Commission expects a funding gap of €210bn within the next five years, emphasising that “these investments must be met by the private and public sector, and at the national, cross-border and EU level”. On the plus side, delivering the REPowerEU objectives could lead to savings of nearly €100bn per year, not least because of the drastic cutback of Russian fossil fuel imports.
NextGenerationEU key features
The EU’s post-Covid recovery plan, NextGenerationEU14, provides funding of nearly €807bn covering investments in environmentally friendly technologies, electrified public and private transportation, greener and more energy-efficient buildings and spaces, as well as in improved water quality and more sustainable agriculture.
Identifying clean energy transition front-runners and beneficiaries
Despite the encouraging growth of investments in sustainable energy solutions, current funding levels are still insufficient to tackle the multifaceted challenges related to the clean energy transition.
From an investor’s angle, the projected and urgently needed rise of clean energy spending in the next years opens up interesting possibilities to participate in the growth prospects of enablers and beneficiaries of the energy transition process. Investments in solutions that deliver on changing energy consumption patterns, and the resulting new demand dynamics are just two of several pathways to support energy transition along the entire value chain.
Allianz Global Investors (AGI) looks at companies around the globe with long-term potential that provide solutions to cleaner energy generation, efficient energy storage and sustainable energy consumption along the value chain, and at the same time contribute to the ecological and social goals of the UN SDGs.
AGI also identifies opportunities arising from the development of innovative technologies like hydrogen-based energy supply, other forms of energy storage or CO2-reducing tech innovations that are still in their infancy and are yet to unfold their benefits – not least considering currently rising energy prices as a temporary side effect throughout the transformation phase.
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