Mr. Eliott Harris Assistant Secretary-General for Economic Development and Chief Economist

8th International Forum on Clean Energy
Accelerating the Energy Transition – What Can Be Done?
21 November 2019, Macau, China

Excellences,
Ladies and gentlemen,

The transition to the low-carbon economy is well underway in many regions of the world. Clean and renewable energy technologies are maturing, and costs are falling, making these technologies competitive with established fossil fuels even without specific policy support. Moreover, market structures are emerging that facilitate the mobilization of finance for investment in these technologies.

Equally important, the falling costs and scalability of some of the new renewable energy technologies make decentralized distributed and off-grid power solutions possible, where before only large-scale, grid-based power provision was available, at great cost and with relatively slow implementation speeds. For some developing countries, this fact offers the prospect of universal and affordable energy access for the first time.

Renewable power capacity grew 8 per cent in 2018, led by wind energy and solar photovoltaic (PV). A total of 181 gigawatts (GW) of renewable power was added, a consistent pace compared to 2017, about 55 per cent of which was solar PVs, followed by wind- and hydro-power (28 per cent and 11 per cent respectively). Renewables now account for over one third of global power capacity. This progress has been encouraged by clear targets and stable policies, most often in the context of the climate action agenda.

Renewable energy is now an important factor in the energy mix of countries around the world. In 2018, 90-plus countries had an installed renewable power generating capacity of at least 1 GW, while at least 30 countries had more than 10 GW of capacity. Developing and emerging economies in particular, have continued their deployment of renewables.

Distributed renewable energy systems have been installed to spread energy access to households in remote areas.

In many cases, ambitious policy and regulatory frameworks are creating favourable and competitive conditions and are allowing renewable energy to displace carbon-emitting fuels in power generation. A growing movement of cities and countries are sourcing or pledging to source 100 per cent of their electricity from renewables. Iceland and Norway already produce all their electricity from renewable energy, while countries as diverse as Costa Rica, Djibouti and Sweden have set targets to become 100 per cent renewable in their power sectors. At least 100 cities worldwide were reportedly sourcing 70 per cent or more of their electricity from renewables by the end of 2018 – including Auckland (New Zealand), Dar es Salaam (Tanzania), Nairobi (Kenya) and Seattle (United States)—with more than 40 cities already entirely powered by renewables.

But renewables are far less important in heating, cooling and transport, three sectors which when combined, account for over 80 per cent of global energy demand. Technologies do exist to use much higher shares of renewables into these sectors, but inconsistent and ineffective policies coupled with a lack of ambition are slowing progress.

Heating and cooling are responsible for about half of total final energy demand, but in 2018, only 47 countries had targets for renewable heating and cooling, and only 20 countries have relevant regulatory policies in place, and 60 per cent of the total energy used in buildings in 2018 occurred in jurisdictions that lacked energy efficiency policies.

Liquid biofuels still dominate the renewables used in the transport sector, but still account for under 4 per cent of total supply and are relatively scarce in the fast-growing maritime and aviation sectors. However, the growth of electric vehicles in public and private transport has been explosive, with much scope for future expansion.

EFFICIENCY

While energy efficiency measures have been very successful in reducing the energy intensity of nearly all technical processes, overall energy demand is still increasing. Many developing countries will need access to know-how and information about successful policies for implementing and utilizing the most efficient technologies to move directly to modern and efficient energy supplies, in order to delink economic growth from rising demand for energy.

So we see many of the necessary elements being put in place to achieve the transition to the low-carbon economy that we need. And yet, the pace of the transition is simply not high enough.

The key to achieving the energy transition is securing adequate investment flows into renewable energy technologies, including by shifting the overall flows of energy investments away from the fossil fuel sectors and into clean renewables.

In 2018, global energy investment remained relatively stable, at over USD 1.8 trillion, following three years of decline. There was more spending in upstream oil and gas and coal supply, offset by lower spending on fossil-fuel based generation and renewable power. While global investment in renewables decreased from the previous year, developing and emerging economies again provided over half of all renewables investment in 2018.

Overall, however, when adjusted to 2018 cost levels, renewables investment is 55 per cent higher than in 2010. The renewable energy sector overall employed (directly and indirectly) around 11 million people worldwide in 2018.

Investment in energy efficiency was relatively stable as prices for some energy efficient goods like LEDs and elective vehicles have continued to fall, while many energy-efficiency related investments are already cost-effective with relatively short payback periods. However, even greater investments in energy efficiency may be hampered by shortcomings in the policy environment and challenges related to markets and financing.

Of course, the situation varies considerably across regions. Compare the different experience of the European Union and of China, for example. In both cases, overall energy investment fell by 7 per cent over the last three years. In the European Union, the share of that spending allocated to low-carbon energy has risen to 60 per cent, and 80 per cent of power generation spending is on renewables. China’s declining energy investments reflect primarily significantly lower spending on new coal-fired power plants, down by more than 60 per cent. This drop masks the relatively high investments in renewable power and nuclear generation.

There have been several positive developments in energy investment and finance…

Some investors have announced intentions either to invest more in sectors seen as supporting energy transitions or to invest less in areas now perceived as riskier—for example, some financial institutions have announced restrictions on financing coal assets. However, these market signals are not yet enough to unleash a major capital reallocation.

Moreover, the range of financing options available to renewables projects is expanding to include the use of different financial risk management tools. Alongside traditional policy-based tools, like guaranteed longer-term prices/remuneration under auctions for contracts and feed-in tariffs – and physical power purchase agreements with utilities subject to purchase obligations – the availability of such tools could help to increase the flow of bankable renewables projects, and make more finance available, especially in developing countries.

But, this evolution could also make the projects more complex and raise the average financing costs, a potentially serious disadvantage in some developing countries, given that energy investment is closely tried to country-level financial conditions. Access to capital is critical to supporting energy investment, and the investment gaps are largest in the least financially developed markets facing high capital constraints. And yet, the need to boost investment in sustainable energy is highest in the regions with the least-developed financial sectors.

Corporate sourcing of renewables more than doubled during 2018, as some big industrial groups in energy-intensive sectors are backing renewable projects to cut costs and boost income. Initiatives range from building small-scale power plants on-site through to deals with energy utilities for long-term direct supply, with renewables often chosen because of their falling costs and the environmental benefits.

…But overall, the outlook for energy investment is not reassuring.

There is a lot of energy investment underway and planned. According to the International Energy Agency, at least USD 95 trillion worth of energy investments are planned worldwide until mid-century. For the fourth straight year, more renewable power capacity was installed than fossil fuel and nuclear power combined, and renewables now account for over one third of global power capacity. Today, we can meet about a quarter of global power demand through renewables.

We are clearly heading in the right direction, but it is still not enough to put us on a track to sustainable energy, consistent with what we need to answer the climate emergency. Much of the planned investment must be redirected away from fossil fuels investments toward clean and renewable technologies, and annual investments in renewables must be at least doubled over the next decade. The advantage of this shift in terms of reducing greenhouse gas emissions and helping to combat climate change are self-evident, but there are other benefits, as well–IRENA’s analysis of this scenario points to the creation of 7 million more jobs and a rise in global GDP by 2.5 per cent, by 2050.

The problem is obviously no longer the relative cost of renewable energy solutions nor the availability of the money. It is that those investment plans and related activities are not always channelled toward climate-proof systems, toward clean and renewable energy sources. Far too much of the investment in energy is still flowing into fossil-fuel based energy systems, because it is still possible to make a good profit through fossil-fuel investments.

Incentives are still not properly aligned with the low-carbon economy, and externalities continue to prevail. Investments in the major oil and gas companies continue to generate substantial and relatively secure returns that investors find difficult to resist. There are lots of new large-scale oil and gas investment projects that are often better suited to the needs of large institutional investors than the smaller often more fragmented projects that are available in the renewable energy sector.

The negative externalities of fossil fuel energy are recognized but the longer-term or more immediate consequences of using that based energy is still not fully taken into account in either energy policy or prices. According to the 2019 edition of the REN 21 Global Status Report, as of 2018, only 44 national governments, 21 states/provinces and 7 cities had implemented carbon pricing policies, covering only 13 per cent of global carbon dioxide emissions. Consumer prices still fall well short of what would be needed to remove the distortions and shift demand away from fossil fuels.

The return on investments in the oil and gas sectors is being artificially inflated by public subsidies that are still being provided at different levels of the value chain. Such subsidies make some energy projects commercially feasible by reducing costs the projects would otherwise have to carry; they reduce the consumer price below levels at which demand might begin to fall; and they raise the net return on the investments, encouraging continued allocation of investment flows toward fossil fuel energy, and thereby slowing the shift of investment flows into renewables.

Recent financial indicators seem to suggest that power companies investing in energy transition have a better performance in terms of creating shareholder value than those investing in oil and gas. But these market signals are not enough to drive the major reallocation of capital towards renewables and away from hydrocarbons that we need to reach the goals of the Paris Agreement or of a sustainable development scenario more broadly.

Clearly, more is needed.

The energy transition is therefore underway but neither widespread nor fast enough. So, what can be done to speed up the transition? Much will depend on:

• how governments use public policy to affect incentives and the relative returns on the different types of energy investments;

• the predictability of the future direction of energy policy; and

• how authorities can influence the financing conditions of energy investments.

Carbon pricing and the reduction of subsidies are a matter of public policy, not markets.

Governments can and must therefore increase the price of carbon (through carbon taxes, excises and other duties), making energy from clean and renewable sources more favorable, and altering the incentives that drive energy investment in favour of the clean and the green.

Subsidy reform should initially focus on removing the subsidies that promote new fossil fuel-based investments, and that artificially inflate the net return on fossil fuel investments. The savings can be shifted to support investments in renewables, where necessary, or they can be used to fund a just transition for those adversely affected by the phasing out of the subsidies. This can include training/retraining for jobs in renewables; funding incentives programs for household renewable energy investments (especially in underserved regions to enable and encourage access to decentralized solutions).

Decoupling GDP from energy growth is possible, as China and Denmark have demonstrated, and efforts should be stepped up to reduce overall demand for energy through efficiency investments. The deployment of smart technologies in grid management, and the use of big data to more precisely model the demand for power, heating/cooling and transportation should allow for a more effective and efficient use of renewable energy.

Policies to increase the use of renewables in heating, cooling and transport are essential as these sectors account for over 80 per cent of global energy demand. Tougher regulation may be part of the answer. More stringent mandatory energy efficiency requirements in commercial and residential building codes for new construction would drive improvements in this critical area of energy demand. The deployment of innovative building designs and improvements in construction materials that would substantially reduce heat and cooling demand can also be mandated. Tougher codes and standards can also be applied to commercial and residential lighting, appliances, and water use.

Green building certifications, such as BREEAM in the United Kingdom or LEED in the United States, which measure areas such as energy, waste and water, add to the market value of real estate assets, and will drive the market demand for greener buildings. In residential homes, however, government authorities may need to propose innovative schemes including tax incentives/holidays, and support for cheaper retrofitting loans, to help private homeowners make the necessary investments.

Greater certainty about the future direction of energy policy should help to drive a shift in the allocation of investment toward renewables. A clear national energy strategy that sets out a predictable path toward meeting the Paris Agreements, with ambitious targets for increasing the share of renewables in the overall energy mix, would drive a much more rapid shift in capital allocations toward renewables.

Public policy is not only about the legislation and regulations discussed above, however. Everywhere, the government is the largest consumer in the market for whatever it procures. Governments can set the stage for changes in private mindsets and demand habits but insisting that constantly rising share of its own energy demand be met from renewable sources. This should help tip the balance on markets squarely in favour of the renewables, and accelerate the shift in investment flows away from hydrocarbons towards sustainable forms of energy supply.

CLOSING

I recently read a very interesting statement in the Financial Times. It said: “There has never been an energy transition”, in the sense of old fuels being replaced by more advanced ones. As each new energy source has arrived, it has been added to the ones already in use”. I think this is very true, and in the past, it really made no difference. New sources of energy merely increased our choices.

We no longer have that luxury. Our traditional fossil fuel energy does make a difference, a negative one, and the new clean and renewable sources MUST displace and replace it, very rapidly. This to my mind is the main reason why policy must take the lead.

At some point, markets will start to include the true costs of fossil fuel use into the price the consumer pays. By then it will be too late.

Public policy can intervene to hasten that process, to change incentives, to price carbon more rationally; to remove the perverse subsidies that distort private investment decisions; to enhance public awareness of the alternative options that are now available; and to lead the change in consumer demand through the example of public energy procurement.

Above all, it can set firm and clear ambitious policy signposts that remove all doubt about the future direction of policy, and that give the investor community the certainty to stop investing in assets that have no future, and instead, to invest in the low-carbon future of us all.

Thank you.

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