By Kevin Clark
Experts believe the hot start to 2022 is not an anomaly, and that investors are now more bullish on renewables than they used to be. Rabia Ferroukhi, Director of Knowledge at IRENA’s Policy and Finance Center said more recent research suggests institutional investors’ allocation to renewables are set to increase in the coming years.
For example, a report published in June by the American Council on Renewable Energy (ACORE) found that most financial institutions planned to increase their investment by more than 10% in 2021 compared with 2020. Its survey covered 62 banks, asset managers and other institutional investors.
One main reason for the increased investment is that renewables — notably utility-scale wind and solar projects — are the cheapest to build and to operate over the course of their lifetimes, said David Spence, professor of Energy Law at the University of Texas at Austin. He expects that advantage to grow bigger every year.
“I expect wind and solar to continue to be the cheapest sources moving forward and continue to be attractive investments, at least relative to the alternatives in the electric generation sector,” said Spence.
He said that investors know that whenever a wind and solar plant is built, greater certainty exists in terms of how much money it will generate. That’s because “it’s always going to be chosen first by the operators of the grid,” who dispatch least-cost energy resources first.
Ferroukhi said there is almost a “natural” fit between institutional investors and renewable energy, made stronger by economic and policy-related benefits.
“Institutional investors have large amounts of long-term ‘patient’ capital seeking relatively predictable, stable and long-term returns,” she said. Compared to more volatile and increasingly more expensive fossil fuel sources, renewable energy power fits the institutional investors’ requirements.
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Given that interest rates are currently low, she said that institutional investors are also seeking higher returns compared to investments in government bonds, for example. Asset diversification is also a goal. Renewable investments largely meet these requirements, she said.
Experts said another driver is the shifting political climate and increased public pressure on institutions to invest their assets sustainably.
“Slowly but surely, [Environmental, Social, and Governance or ESG] investing is growing in scale and popularity, and the regulatory requirements to diminish climate-related risks in their portfolios is sure to follow,” said Ferroukhi. Given the power sector’s outsized contribution to climate change, renewables are an “obvious solution” for the ongoing de-carbonisation of institutional investors’ portfolios.
In states like Louisiana and Alabama, Spence said that utilities that in the past had not invested in renewables are now being pushed by their corporate customers to do so.
The renewable energy is “cheap” and large volume users can tell their own customers they are using clean energy, said Spence.
Experts weigh in on the future
For the past seven years globally, more renewable power was added to the grid annually than fossil fuels and nuclear combined. In 2020, a record 260 GW of renewable energy capacity was added, more than four times the capacity added from other sources.
Ferroukhi said she expects institutional investment in renewables to continue growing for multiple reasons. For one thing, the economic case for renewables is becoming impossible to ignore, even by the slowest moving companies.
According to IRENA, among newly commissioned projects, the global weighted average levelized cost of energy (LCOE) of utility-scale solar PV fell by 85% between 2010 and 2020. At one time, solar PV was more than double the cost of even the most expensive fossil-fuel option for power generation. Now, utility-scale solar PV can compete with the cheapest new fossil-fuel power plant.
What’s more, between 2010 and 2020, the global weighted-average LCOE from onshore wind fell by 56%. Over the same period, concentrating solar power (CSP) dropped by 68%. Offshore wind has seen a reduction of 42% in 10 years.
Ferroukhi also noted important policy developments and commitments in the world’s largest economies point to governments’ growing commitment to the energy transition. Examples include a raft of net-zero commitments: Canada and the Republic of Korea have proposed net zero goals in legislation; Brazil, China, Italy, Japan, Turkey, and the United States all have included net zero ambitions in policy documents; and Australia, India, Russia, Saudi Arabia, and South Africa have communicated net zero targets in pledges.
At COP26, commitments were made to end support for the fossil fuel energy this year. And private financiers joined coalitions aiming to scale up the deployment of capital required for the energy transition. —Renewable Energy World
