Four things governments can do to attract more renewable energy investment
By Jakob Askou Bøss, Senior Vice President for Corporate Strategy and Stakeholder Relations, Ørsted and Jennifer Layke, Director of Global Energy Program, World Resources Institute
The technologies and the capital are available to accelerate the green energy transition, but the global transformation from fossil fuels to clean energy is not moving forward quickly enough. Governments need to adjust their institutional and regulatory framework to pave the way for the necessary private investments to get the job done.
It’s no secret that majority of governments need to raise their ambitions as the world is currently not on track to avoid the catastrophic impacts of climate change. But the good news is that the foundation is there for governments to speed up action.
First, we already have the renewable energy technologies needed to decarbonize the global power system. They are now cheaper than ever, and in 2/3 of the world renewables outcompete fossil-fuel based power. We have seen this with wind power, solar power and battery technology – which today are paving the way for a rapid green electrification of societies and a much-needed and accelerated retirement of fossil fuelled power generation.
Second, the private sector is now investing billions of green dollars into decarbonization, including clean energy. This will lower emissions and create millions of green jobs. And large pension funds and institutional investors - such as the Net Zero Asset Owner Alliance – who manage trillions of dollars have committed to align their investment portfolios with a 1.5°C scenario and reach net zero by 2050. This will free up vast amounts of capital for the clean energy transition. The clean energy economy is coming of age.
To mobilize private investment at scale, many governments will have to adapt their institutional and regulatory frameworks. We have identified four key areas of focus:
1. Set the right climate and renewable energy targets – and follow up with action
Many governments have set targets for emissions reductions. But the majority of these targets are not aligned with what is required by science to achieve the 1.5°C target, let alone staying well below 2°C. But bold targets won’t save our planet, they must translate into action. A visible pipeline for build-out of renewable energy capacity (i.e. wind and solar power), ambitious targets for energy efficiency improvements and sector-specific decarbonisation plans are just a few of these necessary actions. The private sector is key in turning targets into action, by bringing the green technologies and capital needed to ensure a greater pace and scale of the green transformation.
2. Build broad public support for clean energy – through inclusive planning processes to address the use of land and maritime resources and other social impacts
A nine-fold increase in renewable energy generation is required globally to meet the Paris agreement. Utility-scale wind and solar energy projects are expected to account for much of this new renewable generation. This requires comprehensive spatial planning for the use of land and sea resources to balance the needs of diverse users, protect biodiversity, and avoid competition with food production. As a prerequisite for making the green transformation happen, government should facilitate proactive stakeholder engagement to define long-term roadmaps for land and maritime space allocation. In addition, governments should recognize that new job opportunities in the clean energy sector may be in different locations and require different skills than those in fossil fuel industries. This will require governments to plan ahead and design thoughtful policies and social supports to ensure that fossil fuel workers and communities are not left behind in the transition to clean energy.
3. Strengthen the power grid to handle variability
For some, integrating variable renewable energy can appear challenging at first. But variability can be overcome to a large extent if governments and grid operators improve grid management and build new transmission. In addition, policies that drive broader deployment of energy storage and smart grid technologies will drive innovation and cost reductions in these technologies which further enable clean energy dispatch.
4. Improve the investment case
Policies and processes established by governments and regulatory agencies define power market design. This includes rules for auction schemes, setting market rules for payments for capacity, ancillary services and generation. Through these market design decisions, investment risks are examined. The development community, the investment community and citizens all look at the spread of risk across different actors. Stable, clear policy signals are important. Private companies are accustomed to managing performance risk and construction risks. Ensuring contract risk and political risk are managed and providing long term market design signals will reduce the cost of capital for developers and investors and lower the cost for societies for installing more renewable energy.
How to best address these challenges vary across geographies and power market structures, but a common denominator is that they can be solved through the right institutional and regulatory frameworks. We will publish new research in Q1 2021 to identify concrete steps for governments across the world to unlock the necessary private investments to accelerate the clean energy transition.
We have a decade for governments, business and civil society to unite and decarbonize our global economy. Preserving our common home, Planet Earth, requires us to solve these challenges. Climate Week NYC is a tremendous opportunity to strengthen the momentum. And, Ørsted is proud to be the Clean Energy Transition Program partner for the week.
On October 27, we will take a next step when World Resources Institute and Ørsted will discuss the energy transition challenges during a one-hour virtual dialogue with leaders from national and local governments, energy companies and investors. Sign up here to join us in our quest to speed and scale the renewable energy transition.