Investment trends in renewables: Meeting the energy transition challenge
The world is facing an unprecedented challenge to transition from fossil fuels to renewable energy sources to meet climate goals and promote socio-economic development. Global investments in energy transition technologies, including renewable energy, energy efficiency, electrified transport and heat, energy storage, hydrogen, and carbon capture and storage (CCS), reached a record high of USD 1.3 trillion in 2022, up 19% from 2021 and 50% from 2019 levels before the COVID-19 pandemic. This trend indicates a growing recognition of the climate crisis and the risks associated with over-reliance on fossil fuels.
However, the current pace of investment is not sufficient to meet the energy transition challenge. Annual investments need to at least quadruple to achieve the 1.5°C Scenario laid out in IRENA’s World energy transitions outlook 2022, which requires annual investments of USD 5.7 trillion on average between 2021 and 2030 and USD 3.7 trillion between 2031 and 2050.
Fossil fuel investments remain a significant challenge to meeting the energy transition target. Although fossil fuel investments declined by 22% in 2020 due to the COVID-19 pandemic’s impact on global energy markets, they bounced back in 2021, up 15% to USD 897 billion, and preliminary data for 2022 suggest that they almost returned to their pre-pandemic levels, reaching USD 953 billion. It is estimated that USD 570 billion will be spent on new oil and gas development and exploration annually until 2030, and the world’s 60 largest commercial banks invested around USD 4.6 trillion in fossil fuels between 2015 and 2021, with more than one-quarter of this investment coming from US banks.
Investors and banks have already committed to financing fossil fuel development beyond the limit needed to meet the 1.5°C target. Large multi-national banks maintained or even increased their investments in fossil fuels at an average of USD 750 billion per year over the six years following the Paris Climate Agreement.
To redirect financing towards energy transition-related technologies, USD 0.7 trillion per year needs to be redirected from fossil fuels. Achieving the energy transition requires a comprehensive effort involving governments, investors, banks, and the private sector. It is necessary to create a conducive policy environment and develop financing mechanisms that mobilize private capital towards renewable energy and energy transition technologies.
Renewable energy has emerged as a significant area of investment with the potential for substantial returns. The global renewable energy market is projected to reach USD 1.5 trillion by 2025, driven by government policies, technological advancements, and declining costs of renewable energy.
Investments in renewable energy need to be directed towards emerging markets and developing economies, where renewable energy investments have remained low despite their high potential. Fossil fuel companies in these economies have continued to attract substantial volumes of financing, with their outstanding debt reaching USD 3.3 trillion in 2022. Therefore, efforts to finance renewable energy in these economies need to be scaled up to achieve the energy transition target.
In conclusion, meeting the energy transition challenge requires quadrupling annual investments in energy transition technologies, redirecting USD 0.7 trillion per year from fossil fuels, and creating a conducive policy environment and financing mechanisms that mobilize private capital towards renewable energy and energy transition technologies. Renewable energy has emerged as a significant area of investment with the potential for substantial returns, but investments need to be directed towards emerging markets and developing economies to achieve the energy transition target.