Investment: Are wind and solar too dominant?

Ninety-five percent of global investment in renewables in 2022 went to the wind and solar sectors, which the International Renewable Energy Agency said is too much. But it also warned that annual investment in the energy transition must grow fourfold to $5trn a year.


July 6, 2023

  • Wind and solar attracted 95% of renewables investment in 2022
  • IRENA said this is because 75% of funds came from private firms
  • It said energy transition investment must quadruple to £5trn a year

Too much renewable energy investment globally is focused on wind and solar in too few countries. That is the assessment of the International Renewable Energy Agency in the ‘World Energy Transitions Outlook 2023’ report, which it published last month.

The report makes interesting reading for investors in the wind and solar sectors.

IRENA said that 95% of renewable energy investment globally in 2022 was directed to wind and solar projects, which it warned would hamper efforts to meet the target in the Paris climate change agreement of keeping the rise in global temperature to less than 1.5 degrees centigrade higher than pre-industrial levels. It said more investment was needed in biofuel, geothermal and hydropower projects, as well as in developments that would help to cut carbon emissions in sectors including heating and transport.

It also argued that investment in renewables was spread unfairly. IRENA highlighted that 85% of investment in renewables in 2022 went towards projects that are set to directly benefit less than half of the world’s population, while poorer regions such as Africa are missing out. It attributed this imbalance to the fact that 75% of investment in renewables between 2013 and 2020 came from the private sector, where investors tend to pursue strategies that seek to mitigate technology and geographical risks.

Finally, IRENA warned that overall investment in the energy transition is still too low. It welcomed the record $1.3trn that was invested in all energy transition technologies in 2022, but said $150trn would need to be invested globally by 2050 to meet the targets in the Paris agreement. That $1.3trn is only a quarter of the $5trn needed annually.

IRENA said the best way to tackle this investment gap was for stronger intervention by the public sector to drive private capital into more technologies and countries. In some poorer developing nations, this may include investment in basic energy infrastructure.

Otherwise, it warned that gap between the Global North and South will keep widening – and that the world will miss its long-term climate commitments by a wide margin.

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It would be easy for private investors to feel affronted by IRENA’s suggestion. After all, investors have a duty to protect the financial returns of their shareholders, and so it is normal that they would generally pursue risk-averse strategies focused on the limited number of renewable energy technologies that have achieved commercial maturity.

In addition, the companies who are investing in wind and solar now are those who are seeking to support a global energy transition. IRENA may want the $1.3trn invested in a more balanced way, but it should be careful about criticising those making the effort.

Finally, we must remember that investors do not act in isolation. Wind and solar may be dominating the investment mix, but that is because governments have chosen to back wind and solar projects because of the low-cost electricity that they offer. This is as much a warning for policymakers and the public sector as it is for the private sector.

Nevertheless, IRENA’s point is a good one. Wind and solar cannot do all of the work of the global energy transition. Between them, they accounted for just 12% of electricity generation globally in 2022, with all renewables making up around 30%. There is still a huge amount of work to be done to change electricity grids to run mostly on renewable power including wind and solar, and that is before you get to the changes needed to reduce emissions in sectors including heating, industrial processes and transport.

The energy transition is still in its early days, and our interpretation is not that IRENA is bemoaning investment in wind and solar, which needs to grow. Rather, it is making a sensible point about the need for private and public sectors to work together to unlock investment in sectors, including green hydrogen and other green fuel production.

Are wind and solar too dominant? In terms of investment last year, probably yes. But it is good that they have become a default solution for countries that want to add more electricity generation capacity in a renewable way. The challenge now is for investors to find opportunities to back projects using other renewable technologies on similarly attractive terms, while also helping wind and solar to replace dirtier power sources.

We have come a long way in the energy transition over the last decade. But in terms of the huge energy transformation that is needed, we’ve barely got started.

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