The collective urgency for addressing climate change continues to grow. In August, the U.N.’s Intergovernmental Panel on Climate Change (IPCC) published a landmark report making clear that limiting global warming to 1.5°C is still possible but requires immediate and rapid change.
At COP26, the U.N. Climate Change Conference in November, governments around the world will gather to try to make that change—by adopting plans to drastically reduce their greenhouse gas (GHG) emissions.
A major part of those plans—and the transition opportunity—must address the energy sector, which is the source of 73% of total emissions.2 Because power needs are universal, it’s clear what the world needs to do: make the leap to clean energy.
Another record year of growth but with new boom and bust deployment cycles
Despite the persistent pandemic-induced supply chain challenges, construction delays, and record-level raw material and commodity prices, renewable capaci
ty additions in 2021 increased 6% and broke another record, reaching almost 295 GW. This growth is slightly higher than the forecast last year in the IEA’s Renewables 2021. Globally, the 17% decline in annual wind capacity additions in 2021 was offset by an increase in solar PV and growth in hydropower installations. The expansion of bioenergy, concentrated solar power (CSP) and geothermal was stable in 2021 compared with 2020. In terms of speed of growth, renewable capacity’s year-on-year increase last year was slower, following an exceptional jump in 2020 when Chinese developers rushed to connect projects before the phase out of subsidies, especially for onshore wind.
Outside of China, the European Union was the second largest market in terms of increased capacity, with the region surpassing for the first time the all-time-record in 2011. Solar PV alone accounted for the majority of the European Union’s expansion last year due to project acceleration in Spain, France, Poland and Germany, which was driven by a combination of government-led auctions and distributed solar PV incentives. In the United States, lower production tax credit (PTC) rates led to onshore wind additions declining by one-quarter. Solar PV expansion continued to increase thanks to the investment tax credits (ITC) available until 2023-2024 providing a relatively stable policy environment, even as supply chain and logistical challenges hampered much faster growth.
Renewable capacity is expected to increase over 8% in 2022 compared with last year, pushing through the 300 GW mark for the first time. Solar PV is forecast to account for 60% of the increase in global renewable capacity this year with the commissioning of 190 GW, a 25% gain from last year. Utility-scale projects account for almost two-thirds of overall PV expansion in 2022, mostly driven by a strong policy environment in China and the European Union driving faster deployment.
Higher solar PV and wind costs are here to stay in 2022 and 2023 but they do not challenge competitiveness
Prices for many raw materials and freight costs have been on an increasing trend since the beginning of 2021. By March 2022, the price of PV-grade polysilicon more than quadrupled, steel increased by 50%, copper rose by 70%, aluminium doubled and freight costs rose almost five-fold. The reversal of the long-term trend of decreasing costs is reflected in the higher prices of wind turbines and PV modules as manufacturers pass through increased equipment costs. Compared with 2020, we estimate that the overall investment costs of new utility-scale PV and onshore wind plants are from 15% to 25% higher in 2022. Surging freight costs are the biggest contributor to overall price increases for onshore wind. For solar PV, the impact is more evenly divided among elevated prices for freight, polysilicon and metals.
High prices for oil, natural gas and coal also contribute to rising production costs of manufactured materials for renewable electricity technologies since fossil fuels are used in both industrial processes and power generation.
While significant in absolute terms, the increase in renewables costs have not hampered their competitiveness because prices of fossil fuels and electricity have risen at a much faster pace since the last quarter of 2021. Globally, power prices are breaking historic records in many parts of the world, especially where natural gas is the marginal technology setting the final hourly or daily price in many wholesale electricity markets. This is especially prevalent in European Union countries, where wholesale power prices in Germany, France, Italy and Spain have increased more than six-fold on average compared with mean values from 2016 to 2020.
Historically, long-term contract prices from solar PV and wind auctions have been higher than wholesale prices in many large European Union markets. However, even the highest-priced onshore wind and utility scale contracts signed over the last five years are half of the average wholesale prices seen today in the European Union. For newly contracted projects, despite cost increases, onshore wind and solar PV ventures are offerin
g long-term contracts significantly lower than wholesale price averages over the last six months. For instance, prices for utility- scale solar PV and onshore wind projects increased 15-25% in the recent Spanish auction held in December 2021, to USD 37/MWh and USD 35/MWh, respectively. Today, these results are one-tenth of average Spanish wholesale electricity prices over the last 14 months.
In the European Union, solar PV accounts for the majority of upward revisions, with faster policy implementation driving growth in Germany, the Netherlands, Poland, Italy and France. However, the European Union’s onshore wind growth was revised down due to ongoing permitting challenges slowing deployment in Germany, Poland and Italy.
Policy uncertainties and trade measures
n the European Union, rapid implementation of previously announced ambitious policy targets and already awarded auctions, combined with continuous incentives for distributed solar PV, drive the expansion. In response to the Russian invasion of Ukraine, many European Union countries announced plans to accelerate renewables deployment aimed at reducing their dependence on Russian natural gas imports. Germany, the Netherlands and Portugal either increased their renewable energy ambitions or moved their initial targets to an earlier date. We expect that the impact of these new policies will be limited by 2023, especially for large-scale projects that require development timelines of more than 18 months. However, our forecast sees some upside on distributed PV as residential and commercial installations enable consumers to reduce their electricity bills through self-consumption.
Countries are turning Paris Agreement targets into credible climate policies and legislated objectives. These could be in the form of clean electricity stand
ards, the implementation of carbon pricing, or government spending toward building electric vehicle charging stations and a more resilient grid. For example, U.S. President Joe Biden plans to enact legislation that would mandate that 80% of U.S. electricity generation come from clean energy sources by 2030—and 100% by 2035.8 Meanwhile, Canada recently passed legislation that enshrines climate targets into law.9
These pledges are cascading down from the country level to the company level—and that is the opportunity. Companies will need to work with partners that have substantial operating expertise, as well as large-scale capital, to implement these decarbonization plans—and demonstrate that they are, in fact, transitioning to net zero. As a first step in reducing emissions, companies will look to enter into contracts with renewable energy suppliers. Actions could also include acquiring onsite or offsite renewable power, electrifying industrial processes, and implementing green hydrogen and battery storage.
The greening of global power grids is the single largest decarbonization opportunity around the world today, and we must take action right now.
New design and advanced manufacturing technology are improving the economics of clean energy projects. Within solar, for example, efforts to boost power generation per panel mean developers can deliver the same amount of electricity from a smaller and less expensive operation.19
While advancements have made solar panels smaller, they’ve had the opposite effect for wind turbines. Here, manufacturers are incorporating stronger materials into their design, thus allowing their turbines to reach unprecedented sizes. The result is the ability to generate much more electricity—and revenue—per turbine
(see Figure 7).
Figure 7: Wind Turbines Have Grown Bigger and More Efficient
Source: Company materials, Brookfield Public Securities. Turbine images scaled by approximate height. MW—megawatts.
Wind repowering provides another opportunity. Wind repowering is the combined activity of dismantling or refurbishing existing wind turbines and commissioning new ones.20 The market for repowerings is large: Within the next five years, almost 200 GW of global wind capacity will be at least 15 years old. With repowerings, turbine hardware can be replaced with more efficient versions while keeping the rest of the infrastructure unchanged, thereby increasing facility production.
We see significant runway ahead for this industry to further scale. The Biden administration, for example, is looking to jumpstart offshore wind energy. Offshore wind power has been led by Europe, which has already installed 25 GW of capacity (see Figure 8).21 But in March, the Biden administration set a target of 30 GW of offshore wind by 2030, up from a meager 42 megawatts now. Additionally, in May, the White House approved the Vineyard Wind project, the first commercial-scale offshore wind farm in the U.S.22
Wind and solar power are intermittent; therefore, as more industries become electrified, storage will play an essential role in the development of renewables and will be another investment opportunity going forward.
Electricity grids always need to be balanced between supply and demand. But this is increasingly difficult as power generation stacks move away from more carbon-intensive baseload thermal production, like coal and natural gas, to intermittent renewable power. This creates a need for increased storage to accompany and facilitate increased renewables penetration.
Battery storage technology needs to advance to allow renewables to meet full-scale demand peaks, shift energy across time and provide critical grid-stabilizing and ancillary services. Yet the development of battery storage has mainly focused on the electrification of transportation, not necessarily the electrical grid. While electric vehicles make up only 1% of the total U.S. vehicles on the road today, Goldman Sachs forecasts electric vehicles to comprise 13% of the automotive fleet by 2030—and 32% by 2040 (see Figure 9). As the auto sector drives improvements in battery technology, the power
sector should be able to take advantage.
In the interim, as more renewables come onto the grid, it highlights why improvements in battery storage are necessary. In August 2020, when extreme heat and wildfires led to power outages in California, a two- or four-hour battery was sufficient, as rolling blackouts soon ended and power came back online. But when longer outages occur, it becomes apparent that further emergence of long-duration energy storage, such as the iron-air battery, will be critical to the renewable energy value chain or simply to address overnight periods where the sun does not shine.
Battery technology will improve—and the global energy storage market will grow—with help from both governments and investors. It might come in the form of a standalone tax credit for energy storage. It could also come from the demand side. Investment in storage solutions could allow industrial consumers, or other large electricity users, to reduce their energy consumption needs from the grid during periods of peak power demand. Approximately $5.4 billion of new investment was committed to storage projects across the world last year, increasing the total cumulative investment to an estimated $22 billion.23 More investment is planned; by 2025, Wood Mackenzie forecasts the overall investment size will reach $86 billion.
The global energy storage market exceeded 15 GW/27 GWh (gigawatt-hours) in 2020. By adding 70 GWh of storage capacity per year, the market is expected to grow 27 times by 2030, such that it should surpass 729 GWh in 2030.24 Most of this growth will come from the U.S. and China.
In the U.S., the trend of significant growth in large-scale battery capacity shows no sign of abating. Project developers plan to install more than 10 GW of large-scale battery storage capacity in the U.S. between 2021 and 2023, 10 times the storage capacity available in 2019, according to an August report from the U.S. Energy Information Administration (EIA).25
On the whole, storage is not commercially cost-effective in m
ost markets around the world today, but it is well on its way to get there. It will also become more commercially viable in a growing number of situations. Economies of scale in the sector, the global buildout of renewables, and technology improvements will all help.29 Federal regulation, as well as state and local mandates that address climate change, will further expedite this process.
In some markets, renewables combined with batteries are slowly becoming cost-competitive with gas-fired power plants. For example, in the U.S., the cost of discharging a 100-megawatt battery with a two-hour power supply can be achieved for as little as $140 per megawatt-hour.32 This compares favorably to a “peaker” gas plant, which fires up on demand when supplies are scarce. A peaker plant can generate power for as low as $151 per megawatt-hour. Meanwhile, solar farms paired with batteries are narrowing the cost gap with gas plants that can run all the time.
We expect battery prices to continue heading lower. In fact, over the next decade, BloombergNEF projects the cost of lithium-ion battery pack prices to decline by half.33 As costs fall, renewables plus storage will provide a cleaner and cheaper form of energy than fossil fuel generation in more regions around the world.
Hydrogen allows the storage and transport of energy in a usable form from one place to another.34 When it releases energy, it does not emit carbon. Because hydrogen has a high energy content per unit of weight, it can be used in a wide range of industrial applications.
Hydrogen is also the most abundant element in the world, yet it represents a small fraction of the global energy mix today. That’s because hydrogen is not readily available in pure form—releasing hydrogen requires an initial energy source and a technical application—and most of the hydrogen today is produced using natural gas.
Hydrogen produced with clean sources of power (often referred to as “green hydrogen”) could be a game changer. This is because green hydrogen can help decarbonize hard-to-abate emissions coming from high-polluting heavy-duty and industrial sectors, like long-haul transport and steel production.
Green hydrogen uses renewable energy to power an electrolyzer that splits water into hydrogen and oxygen; as a result, it is a clean source of power. Said differently, if the electricity used is clean, then it means producing and using hydrogen is a low-carbon process.
Stabilization benefits are another attractive feature of hydrogen; this allows for the creation and storage of a transportable energy source when wind or solar produce excess energy. This storable quality creates huge benefits in balancing the grid. The dynamic here will create further demand for renewables, which can then support green hydrogen production.
Hydrogen demand is projected to grow by 7x on the path to net zero by 2050 (see Figure 11). However, the technology and infrastructure necessary to support the development of green hydrogen remain in their infancy today, and the capital expenditure requirements are significant. Note that certain forms of existing infrastructure will need to be repurposed for hydrogen. Additionally, producing green hydrogen depends on having lots of renewable energy supply—another reason for the development of more renewables. When Naturgy, a Spanish gas utility, presented its five-year strategic plan for the energy transition, it addressed these ideas. Announced in July, Naturgy plans to invest €14 billion by 2025—with most of the capex allocated to boosting renewable generation capacity and adapting its networks.35
Green hydrogen today cannot compete on cost with alternatives like natural gas, fossil-fuel-derived gray hydrogen, or even blue hydrogen, which has most of the CO2 emitted during its production captured or stored. To achieve this, the industry needs to scale, which will help bring costs down to reach parity with other fuels.
Policy support, of course, will help the industry scale faster and lower production costs. Fortunately, this support is starting. For example, the European Commission’s hydrogen strategy, launched in 2020, involves an estimated investment of €470 billion by 2050.36 Against the current European electrolyzer installed base of 0.1 GW, the strategy aims to install 6 GW of green hydrogen electrolyzers by 2024, rising to at least 40 GW by 2030.37
European infrastructure for hydrogen is mobilizing as well. The European Hydrogen Backbone (EHB) initiative, a group of 23 natural gas systems operators from 21 countries, has proposed to build a 39,700-kilometer hydrogen grid by 2040.38 The EHB was formed with the aim of better facilitating and planning hydrogen transpo
rtation infrastructure across the continent. According to the EHB, some 69% of the proposed hydrogen network consists of repurposed existing natural gas grids; the remaining 31% would require new pipeline construction.
Net zero by 2050, according to the IEA’s roadmap, hinges on a significant leap toward clean energy in this decade. But the path to net-zero emissions is narrow—and staying on it requires immediate and massive deployment of all available clean energy technologies.
Going forward, the electricity grid will evolve. It will need to support mass adoption of electric vehicles, distributed energy resources, like rooftop solar, and more large-scale wind, solar and storage resources.45 And as renewables gain more market penetration, they will be able to power the production of green hydrogen as well.
Yet, during this time, the one constant will be that companies will need to decarbonize. Procurement of clean energy leads to the avoidance of carbon emissions—and demonstrates to their various stakeholders that they are on the right path.