Grid + renewables spend hikes beyond fossil fuels

In this week’s edition of Smart Energy’s Power Playbook, Yusuf Latief reports on an investment update from the International Energy Agency (IEA) which has found that of the total $3 trillion expected to be invested in energy, the lion’s share will go into renewables and the power grid, surpassing fossil fuels.

The IEA yesterday released its World Energy Investment 2024 report and although it is not the first such report to come from the Agency, its findings still spark interest.

This year, they state, investments into renewable power and the power grid, together, are higher than all fossil fuel investments, spanning coal, oil and gas.

“This shows the strong momentum renewables, electricity (…) has in terms of attracting investments.” So said Fatih Birol during a webinar on the report’s findings.

Grids and renewables outpacing fossil fuels

The main key finding from the report is that, for the first time, it is projected that clean energy will push global energy investments above $3 trillion, which is “quite a big change from where we were quite a few years ago,” said Tim Gould, IEA chief energy economist.

Gould refers to the late 2010s when the situation was more static and there were similar amounts of money into fossil fuels as for clean energy.

The $3 trillion is split in a 2:1 ratio between clean energy and fossil fuels.

When referring to clean energy in its report, the IEA’s use of the term spans various aspects of energy, including renewables, low emissions fuels, grids and storage, as well on the demand side, including electrification and energy efficiency.

But what’s striking from the new report, says Gould, is that when isolating the investment for just renewables and the grid, the amount of capital for those two specifics is now greater than the amount spent specifically on fossil fuel supply.

“For us, that’s a very striking symbol for the shift towards a more electrified, renewable-rich energy system.”

Easing supply chain pressures but rising costs

Supply chain lags are a frequently cited barrier to project development. However, the report points to a positive development in this space, indicating projections of eased pressures going forward and a downward trend in costs across the board.

For oil and gas on the other hand, pricing remains stable.

However, a new bottleneck is presenting itself in terms of high costs.

Says Gould: “There’s a new headwind (…) the era of cheap borrowing is over, interest rates are higher and the cost of financing energy projects is considerably higher.”

This new trend will mainly affect projects that are capital-intensive.

“It hurts the economics of both mature renewables as well as emerging technologies like hydrogen. It’s less of an issue for upstream oil and gas operators whose balance sheets are in reasonable shape…”, added Gould.

With these barriers in mind, the IEA’s figures are still laudable. In 2022 and 2023 the costs of getting the grid ready for net zero was reiterated as one of the most pressing challenges.

The IEA’s report adds that in 2023, the investment in the grids was about $375 billion, up from less than $350 billion in the previous year.

So, the trends are pointing in the right direction.

Private sector domination and continued challenges

Another point of interest from the report is that most investments in the energy sector are made by corporates, with firms accounting for the largest share of investments in both the fossil fuel and clean energy sectors.

The report adds that three quarters of global energy investments today are funded from private and commercial sources, and around 25% from public finance. Just 1% came from national and international development finance institutions (DFIs).

However, the report adds some notes of concern that should remain front of mind.

According to the IEA, certain financing options for the energy transition continue to face challenges.

In 2023, sustainable debt issuances exceeded $1 trillion for the third consecutive year, but were still 25% below their 2021 peak, as rising coupon rates dampened issuers’ borrowing appetite.

Market sentiment for sustainable finance is wavering, with flows to ESG funds decreasing in 2023, due to potential higher returns elsewhere and credibility concerns.

Transition finance is emerging to mobilise capital for high-emitting sectors, but greater harmonisation and credible standards are required for these instruments to reach scale.

Despite the positive figures and projections from the report, the IEA has made it clear, it simply isn’t enough.

Specifically, an extra $500 billion per year is required in the IEA’s Net Zero Emissions by 2050 Scenario (NZE Scenario).

Still, seeing the figures for grids and renewables gradually hike beyond those of fossil fuels is a positive note to keep in mind as we labour towards net zero. What do you think?

Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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