The growth of renewable energy (RE) in recent years has caused many to wonder if the world has reached the “beginning of the end of the fossil age.” However, critical, and continued investment in sustainable energy from the private and public sectors could be set back years by global events such as the war in Ukraine and rising inflation, the Al-Attiyah Foundation explains in its latest Sustainability Research Paper.
RE for power generation – grid-connected hydropower, wind energy, solar energy, bioenergy, geothermal, as well as off grid renewable technologies – has experienced remarkable global growth and development since the beginning of the 21st century.
By the end of 2022, according to the International Renewable Energy Agency (IRENA), global RE generation capacity amounted to 3,372 gigawatts (GW), growing the renewable power generation capacity by a record 295 GW or by almost 10% compared to 2021. In 2022, RE thus represented 83% of all new power generation capacity additions and produced 30% of global electricity.
However, disrupted supply chains, spiking interest rates, and an increase of input costs have reduced the attractiveness of RE investments.
In the aftermath of the 2008 financial crisis, central banks around the world reduced interest rates to provide people and firms with an incentive to borrow and spend to maintain economic growth. However, since the Russian invasion of Ukraine, beginning in February 2022, interest rates have dramatically increased, thereby burdening RE investments more than fossil fuel technologies. For RE technologies, the Levelized Cost of Energy (LCOE) is much more sensitive to increasing interest rates compared to fossil-based electricity generation.
Though the LCOE for solar and wind power in many parts of the world is already lower than that of most fossil fuel-based power, RE technologies tend to have comparatively higher upfront investment costs compared to fossil-based power infrastructure. This is a major factor why in the context of high interest rates RE investments are likely to be paused, delayed, or overlooked, despite their much lower operational and maintenance costs.
Rising input costs constitute another major barrier to investment in RE technologies. The COVID-19 pandemic emphasised the interconnectedness of international supply chains and the potential disruptions this can cause across the world. Construction material costs reached a 40-year high and rising energy and electricity costs led governments – attempting to protect populations and businesses – to increase fossil fuel consumption subsidies to a record 1 trillion USD in 2022. Rising costs of energy have deterred investments in RE as the need to securitise cheap and reliable forms of energy – widely considered the main arguments for fossil fuels – trumps longer-term investments.
Although, these ‘multi-crises’ present significant hurdles to overcome, targeted policy support measures could help prevent the ‘cold’ from evolving into ‘pneumonia’. Governments can provide direct financial support for RE projects, such as grants and tax credits. These measures can help reduce the currently increasing upfront costs and risks associated with RE investments, making them more attractive for investors. Governments can also offer low-interest loans or loan guarantees to RE projects, reducing the cost of borrowing and making it easier for projects to secure financing amid higher interest rates during times of crisis.