Global Green Energy Investments Surge to Record Levels admin 13.09.2022

Global Green Energy Investments Surge to Record Levels

With ongoing fears of global recession and the downturn in markets, industry leaders have come to terms with the importance of shifting away from conventional energy sources. Risks associated with oil dependence have emerged at the forefront as a result of global shortages and elevating demand.

Growing awareness and empirical evidence have resulted in an aggressive shift toward green energy investment by governments and leading corporations. This trend has been reflected in this year’s data.

United States and China Lead the Way

Policymakers in leading economies are recognizing the importance of transitioning towards sustainable energy. This shift is broadly reflected in the investment decisions made by China and the United States.

Chinese investment in green energy witnessed an increase of 173% on a Year-on-Year basis in H1 2022 to reach $41 Billion. The surge in investment has been driven by an increase in global demand during the ongoing climate crisis.

The United States has also observed a significant surge in investor interest backed by the policy directive of the government. Investors have flocked to green energy funds as President Joe Biden signed a $369 Billion climate and energy funding bill.

Estimates from Morningstar Direct show that investors have already allocated over $400 Million into exchange-traded funds (ETFs) through mid-August. This is a significant increase compared to the $112 Million invested in July. The directive by the US house comes as a supplementary step by the government to preserve domestic natural resources and decrease emissions.

Despite the challenges created by high inflation and supply chain constraints, the demand for green energy is higher than ever before. Policymakers are recognizing the importance of renewable energy to unlock security goals and are attempting to devise ways to decrease dependence on volatile energy sources.

A Global Perspective

In 2022, global energy investment is set to increase by 8% to reach $2.4 Trillion. The majority of the investment is anticipated to be focused on the renewable energy segment, according to a recent study by the International Energy Agency (IEA). The most aggressive growth in the sector is being observed in the development of renewables and power grids to improve energy. Stakeholders are also focused on improving energy efficiency in existing infrastructure with additional funding.

The current post-pandemic landscape has witnessed elevated fossil fuel demand in all major economies. The result has been in the form of a historic price elevation in gas prices. Global oil and gas incomes are expected to jump to over $4 Trillion this year. This is over twice the average profits over a five-year period. Increased spending in the sector has also been triggered by geopolitical conflicts and resurging industrial demand after the pandemic. Global governments have also continued to adopt variable energy requirements policies to counter the impact of macroeconomic inflation.

However, a major gap still exists on a global level. The majority of the funding increase has been observed in advanced economies and China. This can potentially lead to a disparity in infrastructure in countries most exposed to energy security concerns.

Positive Growth After Stagnation

The current increase in investment comes as a positive indicator after an extended period of stagnation. In the five years since the Paris Agreement was initially signed in 2015, green energy investments only grew by 2% a year. Experts have linked the stagnation to geopolitical factors as well as the impacts of the Covid 19 pandemic. Since 2020, the trend has positively changed as economies have accelerated investments into clean energy. The pace of growth has increased to 12%, with further governmental support expected through sustainable finance.

According to IEA, over 80% of the funding in the power sector has been directed towards grids, storage, and renewable generation. Spending on solar power, electric vehicles, and battery technologies are consistent with the benchmarks defined to reach net zero emissions by 2050. Rapid growth is also underway in emerging technologies like carbon capture, batteries, and low-emission hydrogen. In battery storage alone, investment is expected to double to $20 Billion in 2022.

Despite the numerical increase in investments, tightening supply chains have played a significant role in the witnessed increase in investment. Estimates suggest that up to half of the investment increase is a reflection of higher labor and material costs. These challenges are still a deterrent for energy companies to increase their spending.

Economic Impact of the Transition to Green Energy

Aside from having a monumental impact on slowing down the pace of climate change, the transition towards green energy is also helping countries save significant resources. Estimates suggest that Europe is on track to save an additional €1 trillion by 2035.

Research from energy think-tank Ember suggests that a 95% clean power system can be implemented in Europe by 2035 without threatening supply or adding additional costs. The scalability of clean power has the potential to save resources and can help Europe stay on track with its environmental commitments.

Senior energy analyst Chris Rosslowe also expressed confidence in the economic viability of the shift.

“Scaling clean power is a win-win situation. Aside from saving money, green energy will also allow Europe to fulfill its climate commitments and reduce reliance on foreign fossil fuels. It is the ideal time for Europe to invest now for a major return by 2035.”

The trajectory of Europe’s transition to green energy is expected to be robust. Steps are already being taken to phase out coal usage by 2030 and minimize gas utilization to less than 5% of current levels. Solar PV presents the ideal solution for the region to minimize reliance on fossil fuels and generate clean energy. Europe needs to improve solar capacity by up to nine times and multiple its wind capacity five-fold to meet the defined goals.

Macro Growth in Green Energy Segments

Advancements in solar and wind power have been critical in improving efficiency and making these technologies affordable for consumers. Estimates by IRENA suggest that wind installment costs have decreased by 31% between 2010 and 2020. This has resulted in a three-fold increase in wind capacity. Similarly, in the solar industry, installation costs have decreased by 81%. These drops have been a key factor in improving global green energy adoption.

At the same time, infrastructure advancements are also being completed at a record pace.

Global renewable electricity generation increased at 800% of the growth rate of electricity generated from conventional sources in the past decade. This rate of growth needs to be further accelerated in the coming years to mitigate the pace of climate change and achieve the goal of net zero. IEA estimates that over 88% of global energy production needs to be shifted to sustainable sources by 2050 to limit global warming to 1.5 degrees Celsius. Wind, solar, and nuclear power will be critical in achieving this target.

Capital investment into renewables is being directed in multiple ways. The most common option is an investment into downstream products that are directly supporting the transition to net zero. Key examples include lithium-ion batteries and carbon capture technologies that are being used in broader applications. Automakers are relying on these technologies to reach the 40% electric vehicle fleet target by 2030.

Investors are also looking to optimize ways to upstream the raw materials that are used in the creation of green energy products. Thematic investment strategies are being implemented through ETFs that give investors exposure to these disruptive sectors.

Viability of Nuclear Power

Nuclear power is an effective tool in the shift towards green energy. The zero-greenhouse emission nature of nuclear power plants has made them essential for a net zero economy. The power generated from these plants is also highly dependable and does not depend on external climate conditions. The plants continue to operate with optimal efficiency and are generally safe for the surrounding habits.

Development of Modular Nuclear Reactors in the UK and US

The US Department of Energy (DOE) greenlit the development of modular reactors by announcing a “risk reduction funding” of $30 million for developers. The announcement came as part of a broader $600 million funding initiative from the DOE’s Advanced Reactor Demonstration Program (ARDP). The funding will be used to match the contributions made by recipients.

According to the DOE, the primary goal of the program is to facilitate the expansion of safe reactor technology that can be used over the next 10 to 14 years.

In the UK, the Small Modular Reactor (SMR) program has been supporting the development with over $294 Million in governmental funding. The spending package will be matched by private-sector investments and will be delivered to the United Kingdom Research and Innovation agency. The funding will be directed through the directives of the UK SMR consortium to build modular reactors for the export market. Reactor deployment is expected to proceed in the early 2030s to add green energy to the national grid.

Challenging Factors Elevating the Energy Crisis

Diverging governmental policies have significantly impacted progress towards green energy. Leading economies like India and China have continued to look towards coal and gas as a way to support economic development.

Cheap Coal Power

Leading Asian economies have continued to look for ways to optimize economic performance to counter the productivity loss from the pandemic. A major warning sign has been the 10% increase in investment observed in coal power in 2021. Despite China’s pledge to stop building new coal-powered plans, a significant increase in coal power capacity is being witnessed in the domestic market.

Estimates suggest that global coal consumption is expected to increase even further this year. Backed by global energy turbulence, consumption estimates are projected to increase to 8 billion tonnes in 2022. The total would match the levels observed in 2013. The role of coal in electricity generation and industrial production makes it a critical requirement for developing economies that are struggling to meet their energy requirements. Global coal demand is also increasing due to rising natural gas prices which have forced Asian economies to shift towards coal as the alternative.

However, concerns are mounting regarding the impact of this shift on climate change, with the largest annual increase in global CO2 being observed this year.

Russia-Ukraine Conflict

The Russian invasion of Ukraine played a critical role in increasing energy prices for consumers and enterprises worldwide. Entire economies have been affected by the resulting impacts of the conflict, with the most severe impacts being observed in developing countries with struggling economies.

Russia has been a leading energy exporter to some of the biggest economies in the world. The recent conflict resulted in major shortfalls that need to be met by production from other areas. Specialized LNG and natural gas infrastructure are required to facilitate the diversification of supply away from Russia. While investment in oil and gas is up from past levels, it is still below levels recorded in 2019.

Weak Policy Frameworks

Despite the improvements observed in areas such as solar adoption, developing nations are still struggling to make progress since the Paris Agreement was reached. Public funds for the development of sustainable projects are scarce due to economic headwinds, and policy frameworks are still vulnerable to political policies.

Increasing Borrowing Costs 

The core of the global energy infrastructure is based upon the ease of borrowing from banks and capital firms. 2022 witnessed record increases in policy rates by central banks around the world. Even in stable economies like the US, rates are expected to increase to historic levels to counter the impacts of inflation. These borrowing costs are a major deterrent to the development of green energy infrastructure.

The impact will be highly elevated in developing economies that are now struggling to keep up with the increasing power of the US dollar. Central banks in countries like Turkey and Pakistan have responded by announcing double-digit interest rates. These figures are making it challenging for companies to set up infrastructure. International development institutions need to come forward with sustainable investment options to facilitate green energy projects and mitigate the impact of climate change.

Even though gas producers and energy companies have managed to witness record profits and sustained demand, producers need to recognize the toll exerted by climate change and diversify into sustainable energy products. Even though there was an increase in spending by oil and gas companies on green energy, there is still a significant need for a broader overhaul that focuses on sustainability.

Need for Sustainable Mineral Mining

Despite the surge of investment observed in the green energy sector, there is still a pressing need for companies to embrace sustainable mining practices for the minerals required for clean energy. The mining exploration process has been recognized as a critical factor in elevating the environmental toll of green energy.

According to a recent study by the Internal Energy Agency, global investment in resilient energy supply chains increased by 30% in 2021. The majority of the spending increase was observed in leading North American economies, including Canada, the United States, and Latin America.

While recognizing the progress, the agency still emphasized the need for diversified investment to curb the price pressures and challenges persistent in the global economy. Leading stakeholders need to come together to explore ways to improve energy supply chains and decrease the toll exerted by critical mineral exploration.

Sustained Energy Demand Can Be the Perfect Catalyst

The pricing pressure resulting from reliance on fossil fuels has exerted a significant toll on global consumers. Global leaders have called for an aggressive transition towards green energy as the only viable solution to mitigate the damage resulting from reliance on fossil fuels.

According to Fatih Birol, the IEA’s executive director, “A massive surge in investment to accelerate clean energy transitions is the only lasting solution.”

Others leading stakeholders, including thought leaders from the Dubai Investment Fund (DIF), are also emphasizing the importance of green energy investments. The fund’s energy experts pointed toward the importance of green energy to combat the energy and climate crisis threatening global economies. The current demand landscape provides the perfect environment for corporations to pivot toward a low-carbon future where nuclear and green energy acts as the backbone of a growing economy.

The urgency of the green energy transition is higher than ever before. The recent energy crisis has highlighted the need for countries to pivot away from heavy oil dependence and for businesses to reshape production. Consumption patterns and fuel supply chains are also turning green by integrating wind, solar, and nuclear power to mitigate the effects of climate change. In the journey to deliver reliable solutions to climate change, the application of efficient green energy solutions is critical for a sustainable future.

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