A renewed push for renewables

Last week, the IEA released its annual World Energy Outlook,[1] a flagship publication exploring future energy trends. Even in the most neutral Stated Policies Scenario (STEPS), the authors see a definitive upward trend in global demand for fossil fuels, with coal demand to peak in the next few years, natural gas demand to reach a plateau by the end of the decade, and oil demand to hit a high point in the mid-2030s. And this scenario looks quite realistic, despite the challenges prevalent on the global energy market.

While there is a raft of news stories claiming that the world’s biggest economies are widely switching back to fossil fuels and aren’t going to give them up soon, the stats paint a different picture. As shown in Fig. 1, the share of renewable energy[2] in electricity generation has not declined, but rather increased[3] in the first nine months of this year – to 23.1% in the US and 29.8% in China, compared with 21.2% and 27.6% in the whole of 2021, respectively, while in the EU, battered by the energy crisis, it has risen from 37.3% to 39% in the same period. Though renewables are picking up pace in some countries and regions, fossil fuels will continue to dominate the global energy mix until 2050 (see Fig. 2).

Regardless of risks and perils, investors are ramping up bets on renewables. According to Rystad Energy,[4] capital investments are set to reach $494 billion in 2022, outstripping upstream oil and gas for the first time ever, with the latter expected at $446 billion this year. In countries like Germany, France, Italy and the UK, a price of €350-€380 per MWh would result in a payback period of only 12 months, making renewable energy projects highly appealing to investors.

While investments in renewables were driven mostly by environmental concerns in the past, today the focus has shifted towards improved energy security for importers. Yet investments in the renewable sector might take a nosedive if the economics become less compelling. Let’s wait and see.