Investment in Renewables Trumps Fossil Fuels

By Ursula Wilhelm

The world financial markets were in a tailspin in 2008, with investments across the board off previous years. Nevertheless, capital growth in clean energy grew 5% on the record investments made in 2007.

According to a new report by the United Nations Environment Program (UNEP), $155 billion was invested last year in clean energy companies and projects worldwide. Of this, $13 billion of new private investment went into companies developing and scaling-up new technologies alongside $117 billion of investment in renewable energy projects.

Over a hundred billion was spent directly developing 40 GW of capacity from wind, solar, small-hydro, biomass and geothermal sources, while 25 GW of large hydropower netted a further $35 billion. These 65 GW of low-carbon electricity generation represent over 50% of the estimated $250 billion spent globally last year and over 40% of actual power generation capacity additions.

Wind attracted the highest new investment of $51 billion, representing 1% in growth, although solar grew 49% on $33 billion in investments.

While biofuel technology is well established, it has suffered for the past two years from over-investment in early 2007, followed by a fall from grace caused by a combination of rising crop prices, lowering oil prices and an increasingly heated food-versus-fuel controversy. Investment in this sector dropped 9% from the previous year and is now focused on finding second-generation, non-food biofuels such as algae and non-cereal crops. One response to the global economic crisis has been announcements of stimulus packages with specific, multi-billion dollar provisions for energy efficiency and energies.

“These ‘green new deals’ lined up by some economies–contain some serious clean energy provisions,” said Achim Steiner, United Nations Under-Secretary General and Executive Director of the UNEP. “These will help support the market.”

The investment surge of recent years and softened commodity markets have started to ease supply chain bottlenecks, especially in the wind and solar sectors, which will cause prices to fall towards marginal costs and several players to consolidate. The price of solar PV modules, for example, is predicted to fall by over 43% in 2009.

Despite the turmoil in the world’s financial markets, transaction value in the global carbon market grew 87% during 2008, reaching a total of $120 billion. Following the lead of the European Union and Kyoto compliance markets, several countries are now putting in place a system of interlinked carbon markets and working towards a global scheme under the UN Framework Convention on Climate Change.

Total transaction value in the sustainable energy sector during 2008–including corporate acquisitions, asset re-financings and private equity buy-outs–increased 7% over 2007. However, capital raised via public stock markets fell as clean energy share prices lost 61% of their value during 2008.

Renewable energy investment fell 2% in the US and 8% across North America. The US saw a slow-down in asset financing following the glut of investment in corn-based ethanol in 2007. Credit-driven markets are mostly ineffective in a downturn, and the number of US tax equity providers fell for wind and solar projects due to the financial crisis.

Not surprisingly given market conditions, private sector investment was stalling in late 2008 but government investment looks ready to take up some of the slack in 2009. Sustainable energy investments are a core part of key government fiscal stimulus packages announced in recent months, accounting for an estimated $183 billion of commitments to date.

Countries vary significantly in terms of investment and the clarity of their measures. The US and China remain the leaders, each devoting roughly $67 billion, but South Korea’s package is the greenest with 20% devoted to clean energy. These green stimuli illustrate the political will of an increasing number of governments for securing future growth through greener economic development.

Between 2009 and 2011, UNEP estimates that a minimum of $750 billion—or 37% of current economic stimulus packages and 1% of global GDP–is needed to finance a sustainable economic recovery by investing in the greening of five key sectors of the global economy: buildings, energy, transport, agriculture and water.

New investments in the first quarter of 2009 fell by 53% compared to the same period in 2008, reflecting the depth of the global financial crisis, according to the report, which notes “green-shoots of recovery” during the second quarter of 2009.

Climate change, economic recovery and energy security will spur far greater investments in coming years. In particular, the growing understanding that global carbon emissions must peak around 2015 to avoid dangerous climate change (based on the 4th assessment of the Intergovernmental Panel on Climate Change–UNEP/World Meteorological Organization) will make clean energy investments national priorities.

Annual investments in renewable energy, energy efficiency and carbon capture and storage need to reach half a trillion dollars by 2020, representing an average investment of less than half of one percent of GDP.
These levels of investment are not impossible to achieve, especially in view of the recent four year growth from $35 billion to $155 billion. However, reaching them will require a further scale-up of societal commitments to a more sustainable, low-carbon energy paradigm.

With the current stimulus packages now in play and a hoped-for Copenhagen climate deal in December, the opportunity to meet this challenge is greater than ever, even seen from the depths of an economic downturn.

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