Why isn’t global renewable energy investment growing faster?

Guest blog by Stephen Spratt, Research Fellow at the Institute of Development Studies

Last Friday I was a discussant at a fascinating seminar given at SPRU by Marianna Mazzucato and Gregor Semieniuk, where we heard details of new research on global renewable energy investment. Despite some shortcomings, the best current source of data is Bloomberg New Energy Finance (BNEF), which Mariana and Gregor have had access to for the last year. At a price of course…

Their first task has been to map who is doing what and where, and we saw some interesting preliminary results on this. The central role that continues to be played by public development banks in different parts of the world is little known, for example. While an important step in its own right, this research will lay the foundation for detailed work to understand which types of financial institution invest in which aspects of renewable energy projects, and under what conditions.

Given that I work on accelerating equitable ‘green transformations’ at IDS, this is important stuff. Those who share these concerns should follow the progress of Mariana and Gregor’s research closely.

In the interim, what do we already know? Well, global investment rose 17% in 2014 to $270 billion, a welcome reversal of the falls of the last two years. Despite this, it remains far short of what is needed. At current rates, renewables would be just 20% of the global energy mix by 2030. To be compatible with the 2 degree global warming target, it needs to be double current levels now, and three times this by 2025.

This sounds a lot (and is) but we need to keep in perspective. Whatever else it may be, the problem is not a lack of money. Globally, investable capital is about $140,000 billion – we need to invest less than half of one percent of this each year in ‘green’ energy.

It is not just the amount of money, but its form that matters.

As described in my chapter in The Politics of Green Transformations, almost 90% of global finance is commercial, more than half of which is invested short-term in search of relatively high rates of return. But clean energy needs long-term capital with reasonable return expectations. The most promising source are institutional investors like pension funds, which control almost half of global capital, and have long-term liabilities to meet that should be matched to long-term investments. Green energy infrastructure would appear ideal.

But, if this is such a good idea, why are they not investing at the scale that is needed (and would seem to make sense for them), and what might be done about this?

Long and short term investments

First, while they certainly do invest long-term, they also invest in short-term assets, and this has increased over the past 20 years. To start to reverse this, they need to be incentivised to act like long-term investors, perhaps through reforms to fiduciary responsibility and pay structures.

Differential with fossil fuels

Second, while costs have fallen sharply, there remains a differential with fossil fuels in many – though not all – cases. Institutional investors are required to earn competitive returns for their members. Increasing R&D to lower the cost of renewables, and implementing mechanisms like carbon taxes so fossil-fuel prices reflect their true costs, are the best way of addressing this issue.

The role of public subsidies

Third, public subsidies of various kinds tend to be used where cost differentials remain. While this boosts returns it also introduces risk – if an investment depends on government support to be viable, this support can be withdrawn. Public institutions have a key role to play in reducing these risks, though it is important that this does not go too far: investors get returns in exchange for taking risk, which should not just be passed onto the public sector, particularly not in low-income countries.

Returns and vested interests

Fourth, even where renewables are competitive we often do not see investment at the scale expected. Sometimes this is because of a lack of appropriate finance or ‘investable’ projects, because good returns are available elsewhere, or because vested interests (e.g. in the fossil fuel sector), are blocking necessary reforms. To make progress we need robust mechanisms to identify constraints and the policy measures to address them. We are currently piloting an approach in Kenya and Ghana called ‘green investment diagnostics’, which aims to do precisely this.

An important part of this research is to examine how policy change happens in the real world. Understanding what is needed to increase access to affordable clean energy is important, but not much use if the necessary processes and policies don’t happen. Ultimately, financing equitable and legitimate ‘green transformations’ will depend, as is so often the case, on getting the politics right.

Stephen Spratt is one of the authors of the STEPS Centre book The Politics of Green Transformations (Routledge 2015). 

A workshop on Low Carbon Development in Africa takes place from 10-12 June 2015 in Nairobi, Kenya.