Global renewable energy funding gap is more acute in emerging markets, S&P Global says

The global renewable energy funding gap is highly concentrated in emerging markets because of higher risk and lower appetite from investors, according to S&P Global Ratings.

Money inflows are particularly pronounced in the US, China and the EU. However, they still fall short of what is needed to meet net-zero greenhouse gas emissions goals as laid out in the Paris Agreement, the agency said in a new report.

“Governments are turning to capital markets because of the immense scale of investment expected to be needed in the coming decades,” S&P said.

“It is estimated that current targets agreed to by the world’s major economies under the Paris Agreement would require at least tripling of global energy transition investment to more than $5 trillion each year between 2023 and 2050, well beyond what government balance sheets can handle alone.” Current clean energy efforts are falling short of meeting global climate goals because of insufficient investment and deployment, a report by the International Energy Agency, the International Renewable Energy Agency and the UN Climate Change High-Level Champions has shown.

The report called on governments to strengthen collaboration in key areas such as standards and regulation, financial and technical assistance, and market creation to “turbocharge” the energy transition.

Annual renewable power capacity must add an average of 1,000 gigawatts annually by 2030 to meet Paris Agreement goals, according to Irena.

Investment in renewable generating assets is a key part of the energy transition, with estimated annual investment of $1.4 trillion through 2050, according to the S&P report.

The market’s funding response is heavily tilted towards investments in generating assets, particularly solar photovoltaic assets, the agency said.

“We see capital flows currently strongly favouring renewable power generating assets, namely wind and solar, with less focus on, for example, transmission and storage.

“This dislocation between policy intent and current investment is likely to result in integration bottlenecks and dysfunctional energy markets unless market design evolves quickly.”

China’s energy transition will require a substantial increase in investment over the next few decades, even though it already accounted for nearly half of the global energy transition sectoral spending in 2022, the research showed.

The country’s power sector is taking the lead in this transition through accelerated investments, mainly in renewables generation capacity, power grids and energy storage, S&P said.

“Its central and key local state-owned enterprises dominate investments in the power sector,” according to the report’s findings.

“Greater contribution from the private sector would be necessary to achieve China’s ambitious carbon neutrality goal. Policymakers have been trying to promote private investment, yet incentives for private capital and appropriate regulatory frameworks would need to be expanded through deepening market reform.”

In the US, the federal structure limits the degree to which central government mandates can directly shape energy investment, the report noted.

“It is the Inflation Reduction Act of 2022 that most clearly unleashes the private sector to freely direct investment that can qualify for incentives,” S&P said.

“In the 10 months since the passage of the IRA, private equity firms have committed more than $100 billion to new renewable energy investments that would qualify for tax credits in the next six years.”

The wave of new investment in renewable power assets is accelerating faster than the broader capital market funding of investment in energy storage, the research found.

Meanwhile, the European energy crisis has accelerated the impetus for the development of renewables, with ever-higher goals of achieving 1,200 GW of installed renewables capacity (wind and solar) by 2030 compared with 513 GW in 2021, according to the report.

Environmental considerations are no longer the only motivation for renewables development; keeping power costs down for consumers and ensuring security of supply for the EU are now vital priorities, it said.

The EU assumes that renewables will need to deliver approximately 70 per cent of the power to meet the overall renewable energy target by 2040.

“Accelerating renewables growth will require more than goals and subsidies, and a series of non-financial complexities and hurdles must be overcome,” S&P recommended.

“Non-financial challenges stem from the lengthy permitting process in the EU, a growing shortage of grid capacity and bottlenecks in the global supply chain.”

“Across Europe, it typically takes between three and six years to get a project fully permitted, as well as the grid connection, and the timeline is often longer in the case of wind power. This protracted process materially limits the market’s ability to deploy new renewables at scale and at pace over the short to medium term.”