Policymakers Must Keep Up with Renewables “Reality”
As countries commit to trebling renewables at COP28, investors cite grid connectivity and inflation as barriers.
Institutional investors have underlined the need for governments to address hurdles to investment in renewable energy, after countries at COP28 pledged to drastically increase renewable energy capacity.
Speaking at a COP28 side event hosted by the Investor Agenda, Faith Ward, Chief Responsible Investment Officer at UK-based local government pension scheme pool Brunel Pension Partnership, said policymakers need to “keep up with market movements” and the “reality” investors have to “deal with on a day-to-day basis”.
At the summit, 118 countries pledged to target to triple global renewable energy capacity and double the annual rate of energy efficiency improvements by 2030. If fulfilled, this would see renewables capacity treble to 11 terawatts or 11,000 gigawatts.
The commitment was a reiteration and expansion of an agreement made by group of 20 countries in September in which leaders agreed to “pursue and encourage efforts to triple renewable energy capacity globally through existing targets and policies”.
Tancrede Fulop, Senior Equity Analyst, Renewable Energy at Morningstar, suggested that the “ambitious” target already looks out of reach due to obstacles including permitting delays and “higher for longer” construction costs.
Ward underscored that boosting grid capacity and system-wide thinking by governments and policymakers is “absolutely essential” to the faster adoption of renewable energy sources.
According to research by the International Energy Agency (IEA), achieving all national climate and energy goals will require adding or replacing 80 million kilometres of power lines by 2040 – an amount equal to the entire existing global grid.
“That is more than we already have done in the last 100 years,” Ward noted. “The scale of grid capacity that needs to be built is phenomenal”.
IEA said this will require significant changes to how grids are operated and regulated, and it also means annual investment in grids, would needs to double to over US$600 billion a year by 2030.
Investor infrastructure headwinds
According to Ember Climate, wind and solar accounted for a record 12% of global electricity in 2022. Yet despite this continued growth, projects often still face issues including delays in approval and connection to the grid, as well as there being a lack of investment in developing markets – such as Africa – that hold significant potential.
Also speaking at the Investor Agenda panel, David Neal, CEO at IFM Investors, underlined that governments have got a “particularly big role to play in the infrastructure space”.
“It’s all very well trying to encourage people to build more renewable generation capability, but if you haven’t got the grids to connect it to then that’s obviously not going to be effective,” he said.
Earlier this year, experts warned ESG Investor that there were three key policy related issues that could stunt wind generation and the renewable energy transition. These issues were failure to address the long-term issues of grid connection and permitting, not accounting for supply chain issues and inflation in contracts for difference (CfD) auctions, and the need to accelerate the impacts of onshore wind policy changes.
Ward said that Brunel and fellow investors are “facing some pretty strong headwinds in the short term” for renewables, and pointed to the example of offshore wind auctions in the UK as being an example of when policymakers need to be “more agile”.
Following a decade of falls in costs of renewable energy generation, last year the cost of solar declined just 3%, while offshore wind increased by 2%.
The most recent UK CfD auction was not priced to account for spikes in costs incurred from inflation and supply chain disruption. Ward highlighted the cost of capital for offshore wind has “rocketed quite spectacularly”, and reinforced that policymakers need to “keep up with the market reality”.
“They need to recognise if they want some of these transitions, then they can’t be doing it in a vacuum, ignoring inflation and everything else is happening in our economy,” she added.
Separately, the International Renewable Energy Agency said it had added four new partners and attracted US$4.05 billion to its Energy Transition Accelerator Financing Platform, surpassing its original target for COP28 by more than fourfold.
The platform aims to scale up renewable energy projects that contribute to nationally determined contributions (NDCs) in developing countries, while also bringing benefits to communities through enhanced energy access and security, and promoting economic growth and diversification.
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