IRENA Rethinking FullReport Web View

8/11/2019 IRENA Rethinking FullReport Web View

1/94

2014

REthinkingEnergy


2/94

Copyright IRENA

Unless otherwise indicated material in this publication may be used freely shared or reprinted so long

as IRENA is acknowledged as the source This publication should be cited as IRENA () REthinking

Energy Towards a new power system

About IRENA

The International Renewable Energy Agency (IRENA) is an intergovernmental organisation

that supports countries in their transition to a sustainable energy future and serves as the

principal platform for international co-operation a centre of excellence and a repository

of policy technology resource and financial knowledge on renewable energy IRENA

promotes the widespread adoption and sustainable use of all forms of renewable energy

including bioenergy geothermal hydropower ocean solar and wind energy in the pursuit of

sustainable development energy access energy security and low-carbon economic growth

and prosperity wwwirenaorg

Acknowledgements

Principal authors Rabia Ferroukhi Dolf Gielen Ghislaine Kieffer Michael Taylor Divyam

Nagpal and Arslan Khalid (IRENA) Special thanks are due to Douglas Cook Gus Schellekens

and Hannes Reinisch (PwC) The report also benefited from the assistance of Mark Turner

(communications consultant) and from Agency-wide contributions by IRENA staff

Reviewers Jamie Brown (independent consultant) Paolo Frankl (IEA) Martine Kubler-

Mamlouk (French MFA) Georgina Lahdo (Cyprus Institute of Energy) Christine Lins (REN)

Giacomo Luciani (The Graduate Institute Geneva) Lisa Lundmark (Swedish Energy Agency)

Daniel Magalln (BASE) Eric Martinot (ISEP) Dane McQueen (MOFA UAE) Mostafa Rabiee

(SUNA Iran) Martin Schpe (BMWi Germany) and Riccardo Toxiri (GSE Italy)

IRENA would like to extend its gratitude to the Government of Japan for supporting the

publication of this first edition of REthinking Energy

For further information or for provision of feedback please contact Rabia Ferroukhi IRENA

Knowledge Policy and Finance Centre (KPFC) PO Box Abu Dhabi United Arab EmiratesEmail info@irenaorg

This report is available for download from wwwirenaorgpublications

Disclaimer

While this publication promotes the adoption and use of renewable energy, the International Renewable

Energy Agency does not endorse any particular project, product or service provider.

The designations employed and the presentation of materials herein do not imply the expression of any

opinion whatsoever on the part of the International Renewable Energy Agency concerning the legal statusof any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or

boundaries.
http://www.irena.org/mailto:[email protected]://www.irena.org/publicationshttp://www.irena.org/publicationsmailto:[email protected]://www.irena.org/


3/94


4/94

RETHINKING ENERGY|5

The global energy system is undergoing a transformation. Around the

world, renewable energy has gone mainstream and is advancingat extraordinary speed. Costs are plummeting, millions of jobs

are being created, and growth in clean power is outpacing all

competitors. Combined with international efforts to curb climate

change, calls for universal access, and a growing demand for

energy security, I believe it is no longer a matter of whether but

of when a systematic switch to renewable energy takes place and

how well we manage the transition.

That is why I am delighted to launch the 2014 edition of IRENAs new series, REthinkingEnergy. It is the first instalment of what I hope will become a definitive series exploring

the changes that are transforming the way we produce and use energy, and how they

will affect governments, businesses and individual citizens alike.

The first edition of REthinking Energy focuses on the power sector. While progress

is being made across the spectrum of energy use, it is electric power that has driven

much of the current transformation, and which continues to make the headlines.

The power sector is changing so fast that policy makers are finding it hard to keep up.

Solar photovoltaic costs alone fell by two thirds between the end of 2009 and 2013:

a speed of change comparable to that seen in the IT revolution. In Denmark, wind

recently became the cheapest energy source of all, beating out even coal. In Germany,

almost half of all renewable generation is now owned by households and farmers,

marking a profound shift in control.

This report offers a chance for opinion leaders to take stock of the state of play, to

explore the drivers of this transformation, and to ask important questions about its

impact. Let us make no mistake: this is no business-as-usual evolution. A world in

which power generation is distributed, in which a billion more people gain access to

affordable electricity, in which countries shed their dependence on imported fossil

fuels, and in which harmful emissions are made a thing of the past, is a very different

world to the one we have today.

It is an exciting time to be in energy. If this publication can open more eyes to the

moment at hand, and give a sense of the magnitude of the transformation, it will have

succeeded.

Adnan Z Amin

Director-General

International Renewable Energy Agency

FOREWORD


5/94

6|IRENA

CONTENTS

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 THE WORLD OF ENERGY IS TRANSFORMING. . . . . . . . . . . . . . . . . . . . . . . . . . .

Drivers of electricity sector transformation. . . . . . . . . . . . . . . . . . . . . . . .

The increasing role of renewable energy . . . . . . . . . . . . . . . . . . . . . . . . . .

2 RENEWABLE ENERGY DEPLOYMENT IS ACCELERATING AS COSTS FALL. . . . .

The falling costs of renewables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Increasing deployment opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recommendations for policy makers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 FINANCING RENEWABLE ENERGY PROJECTS IS BECOMING

EASIER AND CHEAPER BUT VARIATIONS REMAIN. . . . . . . . . . . . . . . . . . . .

Addressing risks to reduce the cost of capital . . . . . . . . . . . . . . . . . . . . .

Growing sophistication of financial products . . . . . . . . . . . . . . . . . . . . . .

Adapting support to changing market conditions . . . . . . . . . . . . . . . . .

Transforming utility business models . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recommendations for policy makers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 RENEWABLES CAN ADDRESS ECONOMIC, SOCIAL AND

ENVIRONMENTAL GOALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Improving the balance of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adding local value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Increasing gross domestic product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Creating jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expanding energy access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reducing environmental impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recommendations for policy makers . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


6/94

RETHINKING ENERGY|7

5 MAKING THE PROMISE OF RENEWABLES A REALITY. . . . . . . . . . . . . . . . . . .

Theclimatechangeimperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supportingthetransformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adoptingasystem-levelapproachtopolicy-making . . . . . . . . . . . . . .

Improvingmarketconditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Facilitatingtheintegrationofrenewableenergy . . . . . . . . . . . . . . . . . .84

Forgingajointvisionforasecureprosperousplanet . . . . . . . . . . . . .

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FIGURES

Figure 1 Electricity generation and population growth . . . . . . . . . . . . . . . . . . . . .

Figure 2 Developing countries 2030 outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Figure 3 Direct electricity emission intensity (1990-2010) . . . . . . . . . . . . . . . . . .

Figure 4 Renewables as a share of global capacity additions (20012013) . . .

Figure 5 Annual renewables capacity addition by technology (2001-2013) . . .

Figure 6 LCOEforutilityandoff-gridpowerOECDcountries

(rangesandaverages) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure 7 Rural populations lacking energy and their access profiles in 2010 . .

Figure 8 New power capacity additions (2001 and 2013) . . . . . . . . . . . . . . . . . . .

Figure 9 Projected solar PV system deployment cost (2010-2020) . . . . . . . . . .

Figure 10 Solar PV system costs by country (2010-2014) . . . . . . . . . . . . . . . . . . . .

Figure 11 Residential solar PV cost breakdown in Germany and the

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Figure 12 LCOE for recently commissioned and proposed onshorewind farms in non-OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


7/94

8|IRENA

FIGURES

Figure 13 Smart grids and renewables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Figure 14 Total investment in renewable energy and cumulative

installed capacity for solar PV and wind (2004-2013) . . . . . . . . . . . . . .

Figure 15 Sample national renewable energy finance strategy . . . . . . . . . . . . . . .

Figure 16 Cost breakdown of a utility-scale PV plant

over its productive life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Figure 17 Investment progression through technology and market

development stages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Figure 18 German feed-in-tariff and capex (systems


8/94

RETHINKING ENERGY|9

Box 1 The power of hydro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Box 2 Sustainable Energy for All initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Box 3 IRENAs Costing Alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Box 4 Less mature renewable technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Box 5 Partnering new and old: hybrid applications using CSP . . . . . . . . . . . .

Box 6 New corporate players in the renewables market . . . . . . . . . . . . . . . . . .

Box 7 International finance institutions and development banks . . . . . . . . . .

Box 8 Green bonds: writing rules to attract new players . . . . . . . . . . . . . . . . . .

Box 9 Community-sourced capital drives wind deployment in Denmark . . .

Box 10 Challenges to traditional utility business models . . . . . . . . . . . . . . . . . . .

Box 11 Net metering to support decentralised renewables . . . . . . . . . . . . . . . .

Box 12 Local content requirements: creating an industry in Brazil . . . . . . . . . .

Box 13 Local content requirements: focus on socio-economic

goals in South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Box 14 Economic impact of renewables: new insights . . . . . . . . . . . . . . . . . . . . .

Box 15 RenewableenergyprovidesjobsandenergyaccessinBangladesh .

Box 16 Developing skills for the sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Box 17 Off-grid solutions: key to universal electricity access by 2030 . . . . . .

Box 18 Supportingelectricitysectortransformation

recentpolicytrendsfromGermany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BOXES


9/94

10|IRENA

ACRONYMS

BMU GermanFederalMinistryfortheEnvironmentNature

ConservationandNuclearSafety

BNEF BloombergNewEnergyFinance

BoS BalanceofSystems

BRL BrazilianReal

CIF ClimateInvestmentFund

CO2 Carbondioxide

CSP ConcentratedSolarPower

EDF ElectricitdeFrance

EDP EnergiasdePortugal

EIB EuropeanInvestmentBank

EUR Euro

FS FrankfurtSchool

g Gram

GCF GreenClimateFund

GDP GrossDomesticProduct

GE GeneralElectric

GW Gigawatt

GWEC GlobalWindEnergyCouncil

GWh Gigawatt-hour

IDCOL InfrastructureDevelopmentCompanyLimited

IEA InternationalEnergyAgency

IEA-ETSAP InternationalEnergyAgency-EnergyTechnology

SystemsAnalysisProgram

IMF InternationalMonetaryFund

IOREC InternationalOff-GridRenewableEnergyConference

IPCC IntergovernmentalPanelonClimateChange

IRELP IRENARenewableEnergyLearningPartnership

IRENA InternationalRenewableEnergyAgency

kWh Kilowatt-hour


10/94


11/94

12|IRENA

Analignmentofeconomicsdemographicsclimatechangeandtechnologyhassetin

motionanongoingtransformationoftheglobalenergysystem

Growingpopulationswithimprovedlivingstandardsandincreasinglyconcentratedin

urbancentreshavedramaticallyraisedthedemandforenergyservicesAtthesame

timeagrowingconsensusoverthedangersposedbyclimatechangehasprompted

people and governments worldwide to seek ways to generate that energy while

minimisinggreenhousegasemissionsandotherenvironmentalimpacts

Rapid technological progress combined with falling costs a better understanding

offinancialriskandagrowingappreciationofwiderbenefitsmeansthatrenewable

energyisincreasinglyseenastheanswerREmapaglobalroadmapdevelopedby the International Renewable Energy Agency (IRENA) shows that not only can

renewableenergymeettheworldsrisingdemandbutitcandosomorecheaplywhile

contributingtolimitingglobalwarmingtounderdegreesCelsiusthewidelycited

tippingpointforclimatechange

AtechnologyonceconsideredasnicheisbecomingmainstreamWhatremainsunclear

ishowlongthistransitionwilltakeandhowwellpolicymakerswillhandlethechange

Asthistransformationgetsunderwayitwillaffecteveryaspectofsociety REthinking

EnergyanewseriesbyIRENAwillexplorehowrenewableenergyisfinancedproduced

distributedandconsumedandwillchartthechangingrelationshipsitisbringingabout

betweenstatescorporationsandindividuals

This first volumefocusesupon the powersector Ittellsa storyabout the trends

drivingthischangehowthetechnologyisevolvingwhoisfinancingitandthewider

benefitsitwillbringFinallyitexamineswhatanenergysystempoweredbyrenewables

mightlooklikeandhowpolicymakerscanfurthersupportthetransformation

Why the world of energy is transformingAttheheartoftheenergytransformationliesdemandtheaimtostrengthenenergy

securityandtheimperativeofasustainablefuture

Overthepastyearstheworldspopulationgrewfrombilliontobillionpeople

AnincreasingproportionismiddleclassandlivingincitiesDuringthesameperiod

electricitygenerationgrewbymorethan

ThisgrowthwillcontinueIntherewillbemorethanbillionpeoplewithbillionin

urbanconglomerationsGlobalspendingbythemiddleclassesisexpectedtomorethandoublefromUSDtrillionintoUSDtrillioninWorldelectricitygeneration

isforecasttogrowbyfromterawatt-hour(TWh)intoin

EXECUTIVE SUMMARY


12/94

RETHINKING ENERGY|13

ButthisenergyiscomingatacostThereisgrowingconsensusonthethreatofclimate

changebrought onby increasing atmospheric concentrations ofgreenhousegasespromptingworldwideeffortstoreduceemissions

If business continues as usual these efforts will not succeed The average emissions

intensityofelectricityproductionhasbarelychangedoverthepastyearsGainsfromthe

increasingdeploymentofrenewablesandlessintensivefossilfuelssuchasnaturalgashave

beenoffsetbylessefficientpowerplantsandtherisinguseofcoalWithoutasubstantial

increaseintheshareofrenewablesinthemixclimatechangemitigationwillremainelusive

REmapshowsthatundercurrentpoliciesandnationalplans(businessasusual

case)averagecarbondioxide(CO )emissionswillonlyfalltogkWhbyThatisinsufficienttokeepatmosphericCO

levelsbelowpartspermillion(ppm)

beyondwhichsevereclimatechangeisexpectedtooccurAdoublingintheshare

ofrenewablescouldhelpmitigate climatechangeby reducingthe global average

emissionsofCOtogkWhequivalenttoaintensityreductioncomparedto

levelsasseeninthefigurebelow

Thereisalsoincreasingconcernaboutthedirecthealthimpactofburningfossilfuelsasfast-growingeconomiesconfrontrapidlydecliningairqualityandasharprisein

respiratorydiseaseTheUnitedStatesEnvironmentalProtectionAgencyrecently

Source: International Energy Agency (2010) and IRENA (2014a)

CO2emissions intensity per kWh 2030 outlook

Coal Oil World average Natural Gas Nuclear Renewables

500

0

1,000

BAU

CO2 intensity per kWh

(2010 world average)

Renewables and nuclear

REmap 2030 -

doubling share of renewables

LOW

HIGH

gCO2/kWh

800

0 0 00

450

586 565

349

498

960Coal

Oil

Natural Gas

1990 20302010

World


13/94

14|IRENA

foundthatillhealthcausedbyfossilfuelsnationallycostsbetweenUSD billion

and USD billion annually The European Unions Health and EnvironmentAlliancefoundthatemissionsfromcoal-firedpowerplantscostitscitizensupto

EURbillioninyearlyhealthcostsLocalisedcatastrophessuchastheDeepwater

HorizonoilspillintheUnitedStatesortheFukushimanuclearaccidentinJapanare

becomingglobalnewswithprofoundimplicationsGovernmentshavetakennote

Countriesareincreasinglylookingtoreducetheirdependenceonimportedfossilfuels

Byreducingenergyimportscountriesarestrivingforgreaterenergyindependence

avoidingpotentialsupplydisruptions(forexampleincaseofconflictsordisasters)high

energypricesandpricefluctuations

There is growing pressure meanwhile to bring electricity to the billion people

currently without electricity access many in remote areas for whom traditional

large-scalepowerplantsandtransmissionsystemshavenotyetprovidedananswer

Alsobillionpeoplerelyontraditionalbiomassandcookusingtraditionalstovesthat

causeseverehealthimpacts

Thesetrendshavepromptedawidespreadconvictionthatsomethinghastochange

Fossilfuelspoweredthefirstindustrialrevolutionbutevenintheneweraofshale

oilandgasquestionsremainabouttheircompatibilitywithsustainablehumanwell-beingThestageissetfortheeraofmodernrenewableenergythatiscostcompetitive

mainstreamandsustainable

The cost of renewable energy plummets as deployment increases

Large-scalehydrogeothermalandbiomasspowerhavebeencompetitivefor some

timebutformanyyearswindandsolarpowerstruggledtocompetewithcoaloiland

naturalgasOverthepastdecadehoweverandinparticularoverthelastfiveyears

thatpicturehaschangeddramatically

Renewableenergytechnologieshavegrownmorerobustandmoreefficientandare

increasinglyabletogeneratepowereveninsuboptimalconditionssuchaslowwind

speeds and low solar irradiation Energy storage technologies are improving fast

BuoyedbystatesupportinEuropeandtheUnitedStatesandboostedbytheriseof

newmanufacturingpowerhousessuchasChinacostshaveplummetedThesetrends

areillustratedinthegraphicbelowwhichchartsthelevelisedcostofelectricity(LCOE)

fordifferentformsofutilityandoff-gridpower

Solarphotovoltaic(PV)priceshavefallenbysinceandareexpectedtokeep

droppingIncommercialsolarpowerreachedgridparityinItalyGermanyand

SpainandwilldososooninMexicoandFranceIncreasinglysolarPVcancompete


14/94


withoutsubsidiespowerfromanewmegawatt(MW)solarfarmunderconstruction

inChileforexampleisanticipatedtosellonthenationalspotmarketcompetingdirectly with fossil fuel-based electricity Thecost ofonshore wind electricity has

fallensincewithturbinecostsfallingnearlysincemakingitthe

cheapestsourceofnewelectricityinawideandgrowingrangeofmarketsMorethan

countriesnowusewindpowerOffshorewindisalsoexpectedtogrowrapidly

ascostsfallwiththeUnitedKingdomleadingthemarketwithgigawatts(GW)of

installedcapacityasofmid

Theseandotherdevelopmentshavemaderenewablesincreasinglyattractiveinmany

moremarkets Inforthefirst timenewrenewablecapacity installationswere

higherincountriesnotmembersoftheOrganisationforEconomicCo-operationand

Development(OECD)ChinasdeploymentofsolarPVandwindinwasestimated

atGWnearlyfourtimesmorethanthenextlargestJapan

Worldwiderenewablepowercapacityhasgrownoverthepastyearsreaching

GWinandrenewablestodayconstituteofallinstalledpowercapacity

Thechallengehasmovedonfrom whether renewable energycanpowermodern

lifestylesatareasonablecostwhichwenowknowitcantohowbesttofinance

andaccelerateitsdeployment

Source: IRENA Costing Alliance (n.d.) for renewable energy technologies and PwC database for non-renewableenergy technologies.

LCOE for utility and off-grid power OECD countries (ranges and average)

The black bar illustrates the average

0

0.10

0.20

0.30

0.40

0.50

0.60

0

0.10

0.20

0.30

0.40

0.50

0.60

Onshorewind

Offshorewind

CSP

SolarPVLarge

Biomass

HydroLarge

Geothermal

N

aturalGas($3/MMBtu)

NaturalGas

($3/MMBtu,Peaking)

N

aturalGas($8/MMBtu)

NaturalGas

($8/MMBtu,Peaking)

LNG($16/MMBtu)

LNG

($16/MMBtu,Peaking)

Nuclear

Coal(incl.CCS)

HydroSmall

SolarPV:small

Diesel(off-grid)

2011USD/kWh

Renewables Off-grid


15/94

16|IRENA

Financing renewables is getting cheaper, and easier

Renewableenergyiscompetitiveonacostperkilowatt-hourbasisAsmostrenewable

technologieshavearelativelyhighratioofupfronttooperatingcoststheirviabilityis

particularlysensitivetothecostofcapitalThatiswhygovernmentfinancialsupport

hastraditionallybeencriticalforpromotingrenewablesHoweverasthetechnology

hasgrownmorecompetitiveandpressureonbudgetshasincreasedgovernments

havebeenreducingtheirsupport

ThegoodnewsisthatprivatefinanceisincreasinglyreadytostepinDuetogrowing

experiencedevelopersaregettingbetteratforecastingcashflowandfinanciersare

moreabletoaccuratelyassessriskThecostofcapitalisfallingandproductsarebeingtailoredforawiderrangeofinvestorsfromsmall-scalecommunitiestolarge

institutionsCrowdfundinginitiativescanalsobeusedtoattractcapitalespecially

indevelopingcountrieswherecostofcapitalistraditionallyhighThefigurebelow

showshowsourcesofrenewableenergyinvestmentsevolvewithincreasingmaturity

oftechnologiesandmarkets

Investment progression through technology and market development stages

Time, technology scale and project volume

Project developers, venture capital, government grants

Increasing scale of

proven technologies,

including new settings

and larger scales

(returns 4%-10%)

Increasing scale of



and larger scales

(returns 4%-10%)

Refinancing of

demonstrated,

installed assets,focus on lowest risk

(accepting very low

return)

Refinancing of

demonstrated,

installed assets,focus on lowest risk

(accepting very low

return)

Early-stage funding

for small-scale

projects, including

technology

demonstrations

(returns 8% +)

Early-stage funding

for small-scale

projects, including

technology

demonstrations

(returns 8% +)

Target: < USD 50m

Target: USD 50-500m

Target: USD 100m+

Commercial banks, multi-lateral insitutions

Institutional investors

Attheotherendofthescaleinstitutionalinvestorsarealsostartingtogetinterested

Theyare increasinglytaking intoaccountthe riskattached to fossilfuelsandnew

long-term low-risk instruments are beingcreated to encourage them to invest in

renewablesEarly-moverprivatedevelopersinthisspaceattractedUSDbillionin

upinmonths


16/94


Large non-energy corporates are also becoming involved For example IKEAs

turbinesandsolarpanelsnowproduceofitsenergyconsumptionandGooglehasinvestedoverUSDbillioninwindandsolarinmostcasesbecauseofattractive

financialreturns

ButthesepositivetrendsarenotyetenoughTotalinvestmentinrenewableenergyrose

fromUSDbillionintoUSDbillionin(excludinglargehydropower)

ThisfallsshortoftheUSDbillionneededannuallyuntiltodoubletheglobal

shareofrenewableenergyandavertcatastrophicclimatechange

PolicymakershaveanimportantroletoplayIf theymake itclearthat renewable

energywillbealargerpartoftheirnationalenergymixandcommittolong-termnon-financialsupportmechanismstheycouldreduceuncertaintyandattractmore

investorsInemergingmarketspublicfinancingwillremainimportantasdomestic

structurestosupportthedeploymentofrenewablesaredevelopedInthiscontext

internationalcooperationandfinancialflowsplayanincreasinglyprominentroleWith

increasingcompetitivenessfinancialsupportcangraduallyandpredictablybescaled

back focusing instead on grid improvements education and industry standards

whichstrengthenthemarketasawhole

ThereisalsoanopportunityfortraditionalpowerutilitiestodomoreJointprojects

between large utilities small developers and clients could be a way forward as

businessmodelsadapttothechangingmarketconditions

The wider benefits of renewable energy

There is growing evidence that renewable energy has a positive ripple effect

throughoutsociety simultaneously advancing economic socialandenvironmental

goalsItscostsandbenefitsarebestunderstoodnotwithintraditionalpolicysilos

butaspartofaholisticstrategytopromoteeconomicprosperitywell-beinganda

healthyenvironment

Renewablesare good for a countrys economy A recent Japanesestudy looking

at a target of - renewables found the benefits were - times

higher than the costs including savings in fossil fuel imports CO emissions

reductions and economic ripple effects Spains use of renewables avoided

USD billionoffossilfuelimportsinwhileGermanysavedUSDbillionin

Forfossilfuel-exportingcountriesdeployingrenewablesathomemakesmore

resourcesavailableforsaleoverseas


17/94


18/94


19/94

20|IRENA

NEW CAPACITY

ADDITIONS

120 GWNew RE capacity

added in 2013

58%RE share of total

power capacity additions

TOTAL INSTALLED

CAPACITY

30%RE share of total power

capacity in 2013

ELECTRICITY

GENERATION

>22%Renewable electricity

in 2013

ELECTRICITY

DEMAND

60%Projected increase

in demand by 2030


20/94


Burgeoning populations increasing urbanisation and sustained economic growth

have ledto anexponential rise in the demand for energyservices particularly indeveloping countries At the same time growing concerns over climate change

and the environmental impact of fossil fuels are causing many governments and

communitiestoseeklower-impactoptionsRapidtechnologicalprogressmeansthat

renewableenergyhasbecomeanincreasinglyviableandcost-effectiveoptionwhile

contributingtoenergysecurity

Thesechangesarepromptingafundamentalrethinkofhowenergyismanagedmost

visiblyintheelectricitysectorThischapterlaysoutthemainsocio-economicdrivers

behindthechangeprovidesevidenceofthetransformationtodateandexplainsthe

increasingrolethatrenewablesmustplay

1.1 DRIVERS OF ELECTRICITY SECTOR TRANSFORMATION

Rapidly increasing electricity demand

Overthepastyearsdemandforelectricityhasgrownrapidlyandgreatlyexceeded

expectations particularly due to rapid industrialisation in emerging economies

(seeFigure)Thedriversofincreasingelectricitydemandincludedanexpanding

worldeconomygrowingdemographicsarisingmiddleclassexpandingurbanisation

andthewidespreadelectrificationofsociety

1 Middle class households have daily expenditures of USD 10-100 in purchasing power parity terms (OECD, 2010)

1The world of energy is transforming

Source: World Bank (2014), IEA (2014a), IRENA (2014a)

Figure 1: Electricity generation and population growth

7.0

22,126

1974 2011 2030

1974 2011 2030

Electricity 250%

billion people TWh electricity

4.0

6,200

8.2

37,000

Population 75% Population 17%

Electricity 67%


21/94


22/94


closertoinsteadoftheprojectedby(IEA)Inemergingeconomies

electricitydemandwillgrowsignificantlyevenwithefficiencymeasureswhiledemand

in the United States the European Union and other advanced economies might

slightly decline However even allowing for the most ambitiousenergy efficiency

gainssignificantlevelsofnewenergysupplywillbeneededglobally

The local and global environmental impact of conventional generation

Since the industrial revolution the generation of electricity from fossil fuels has

enableddramaticeconomicgrowthbuthascomeatsignificantenvironmentalcosts

and for many countries dependency on imported fuels Todays consumers are

increasinglyawareofthesecostsandgovernmentsarekeentomitigatethem

High-profilecatastrophessuchasJapansFukushimanuclearaccidentandtheUnited

States Deepwater Horizon oil spill have heightened opposition and consumers

whilestillpricesensitiveareincreasinglysupportiveofrenewableenergyoptions

Climatechangeisincreasinglybecomingamajorconcernasisapparentinnational

andinternationalpolicyeffortssuchastheUnitedNationsFrameworkConventionon

ClimateChange(UNFCCC)

These trends have led to a growing consensus that the world must move to

a lower-impact energy mix as soon as possible Yet the global CO emissions

intensity of electricity generation has changed little in years A kilowatt-

hour generated in emitted roughly gCO onaverage years laterby

theaverageemissionsintensitywas reducedby justtogCOkWh

(seeFigure)

ThereasonsbehindthisaresimplealthoughdifficulttoaddressThereissystemic

inertiagiventhelonglifetimesoftheplantsinvolvedTheeffectoftheinstallation

ofrenewablesandotherlower-carbontechnologies(nuclearandnaturalgas)andimprovements inefficiencyofelectricityproduction have been neutralised bythe

operationofexistingandnewinstallationsofcarbon-intensivetechnologies

Highly efficientcoalplantsin WesternEuropeanmarketshavebeenoffsetby less

efficientcoalplantsinsomedevelopingcountriesNaturalgashasalwaysemitted

relativelylessCOandhasremainedfairlyconstantGainsherecomelargelyfrom

a shift to closed-cycle plants Oil plantsactually emit more CO per kilowatt-hour

nowastheyhavebecomealmostexclusivelypeakingplantsandarethereforenot

runningasefficientlyastheycouldRenewablesandnuclearemitclosetozeroCO

buttheirnetcontributiontotheworldaverageiscounteractedbycoal


23/94

24|IRENA

The health impact of fossil fuels

Localisedpollution from electricity generationalso hasa direct impactonhumanhealthInMarchtheWorldHealthOrganization(WHO)reportedthatmillion

premature deaths annually were linked to air pollution by comparison the AIDS

pandemickilledmillionpeoplegloballyinitsworstyear(WHO)

AsthmaandotherrespiratoryailmentsnowaffectoverofDelhiresidentswith

airqualityamongsttheworstintheworldInMarchChinesePremierLiKeqiang

declaredawaronpollutioninrecognitionoftheincreasingconcernaboutitsimpact

onairwaterandsoilBeijingsmayorpromisedbillionYuan(USDbillion)to

improveairqualitywhiletheChineseNationalCentreforClimateChangeStrategyandInternationalCooperationcalledforthecountrytodecisivelycutitsrelianceon

coalInAugustBeijingannouncedabanoncoalusebeyondtocutair

pollution(Xinhua)

Thehealthimpactofglobalenergyuseissignificantbutitseconomiccostisdifficult

toquantifyAstudyconductedbyexpertsfromtheUnitedStatesEnvironmental

Protection Agency found that the national economic healthcost caused by fossil

fuels wasbetweenUSD billion andUSD billion annually (Macholand

Rizk) TheEuropean HealthandEnvironment Alliance found that emissions

fromEuropescoal-firedpowerplantscostitscitizensuptoEURbillioninhealth

everyyearWerethesecostsfactoredintopolicymakingfossilfuelgenerationwould

becomeconsiderablymoreexpensive

500

0

1,000Coal

Oil

CO2 intensity per kWh (world average)

Natural Gas

Renewables and nuclear

Coal Oil World average Natural Gas Nuclear Renewables

LOW

HIGH

gCO2/kWh

1990 2010

800

450

565586

731

490

0 0 00

960

984

Source: Based on IEA (2010)

*Renewables excludes combustible renewables, gCO2/kWh are generation emission estimates for review

of life-cycle emissions across all technologies refer to Section 4

Figure 3: Direct electricity emission intensity (1990-2010)*


24/94


1.2 THE INCREASING ROLE OF RENEWABLE ENERGY

Moving to the majority investment and new capacity

WorldwidewelloverGWofnewrenewablecapacityhasbeenaddedeveryyear

sinceThatisequivalenttothetotalinstalledgenerationcapacityofBrazilortwicethatofSaudiArabiaRenewableshaveaccountedformorethanhalfofnetcapacity

additions in the global power sector since meaning more new renewables

capacity isbeing installedthan new capacity infossil andnuclearpowercombined

(seeFigure)Asaresultoftheseadditionsbytheshareofrenewablesintotal

electricityproductionexceededarecordofwhichwashydroandwas

solarPVandwind

Renewableenergydeploymentinemergingcountriesissupportinggrowthglobally

NewrenewablecapacityinstallationsoutsidetheOECDexceededdeploymentwithin

theOECDforthefirsttimeinwithChinadominatingnewcapacityadditionsof

bothsolarPVandwindInfactmarkedthefirsttimethatnewrenewablepower

capacitysurpassednewfossilfuelandnuclearadditionsinChina(RenewableEnergy

PolicyNetworkforthestCentury(REN))

Solar deployment outpaced wind for the first time in SolarPV deployment

reachedaroundGWfortheyearHydropowerwasalsoestimatedtohavehada

strongyearwitharoundGWofnewcapacity(seeBox) Newwinddeployment

Source: IRENA database

Figure 4: Renewables as a share of global capacity additions (20012013)

0%

20%

40%

60%

80%

100%

90%

70%

50%

30%

10%

19%

58%

42%

81%

Renewables

Non-renewables

(Coal, Gas, Nuclear and Oil)


25/94

26|IRENA

wasslightlydisappointingatGWaspolicyuncertaintydelayedprojects(Global

WindEnergyCouncil(GWEC)andWorldWindEnergyAssociation(WWEA)

)Howeverwindissettobouncebackfollowingarevisionofpublicsupportin

certaincountriesandisexpectedtobearecordyearforbothsolarPVand

windpowerFigureillustratestheannualcapacityadditionsofrenewableenergytechnologies

Investmentinnewrenewablecapacityhasalsoexceededinvestmentinnewfossil-

based power-generation capacity for three years running Global investment in

renewablegeneratingcapacityhasincreasedfive-foldoverthelastdecade(excluding

largehydro)fromUSDbilliontoUSDbillionbetweenandAfurther

USD billion was spent on large hydropower projects in (United Nations

Environment Programme (UNEP) Bloomberg New Energy Finance (BNEF) and

FrankfurtSchool(FS))

Therapidexpansionindeploymentisspurredbydecliningcostsofrenewableenergy

technologiesAsFiguredemonstratesrenewableenergyisoftencompetitivewith

fossil fuel power at utility scale and isgenerally cheaper indecentralised settings

Asthisbecomesmorewidelyrecognisedmarketswillexpandandcostsareexpectedto

fallfurtherMoreoverrenewablesareshelteredfromvolatileglobalfossilfuelcostsand

haveaproventechnologicalviabilitythatensureslong-termcashflowsforinvestors

Source: IRENA database

Figure 5: Annual renewables capacity addition by technology (2001-2013)

Hydropower Solar PV CSP Bioenergy Wind Geothermal Ocean

140

120

100

80

60

40

20

0

70%

60%

50%

40%

30%

20%

10%

0%

Share of renewablesin capacity additions

RenewablesPowerCapacityAdditions(GW)

ShareofPowerCapacit

yAdditions(%)


26/94


27/94

28|IRENA

Financialsupportforrenewableenergyprovidedbyearlyadopterstranslatedinto

ascale-upindeploymenttherebyleadingtoasubstantialdecreaseintechnology

costs and the development of the renewable energy industry These countries

recognisedthelong-termbenefitsbroughtonbyrenewablesfromanenvironmental

economicandsocialstandpoint

Renewable energy can increase energy security and reduce risks Scaling up

renewableenergydiversifiescountriesenergymixesmitigatingtheimpactofprice

volatility andhelpingto allaygeopolitical risksFinancial andeconomic risks for

governmentandbusinessarereducedthroughamorepredictablecostbasefor

energysupply(sincerenewableenergytechnologieshavelowerrecurringcostsand

lowerfuel-costvolatility)andanimprovementinthebalanceoftradeforfossilfuel-

importingcountries

By minimising domestic fossil fuel consumption through renewable energy

deployment fossil fuel-exporting countries can maximise their exports to the

globalmarketSeveralGulfCooperationCouncilcountriesforexamplehaveset

renewableenergytargetsinrecentyearswhichcouldsaveanestimatedbillion

barrelsofoilequivalentbetweenandThiscouldresultincumulative

savingsofapproximatelyUSDbillion(Ferroukhiet al)

Developing countries are well placed to exploit the rapidly decreasing costs of

renewable energy technologies and this is where the greatest net increases inpowercapacityareneededManyareblessedwithsignificantrenewableenergy

resources

The way forward

Renewable energy plays an important role today and can play an even more

crucial rolein the future oftheenergysectorREmaptheglobal roadmap

fromIRENAhighlightspossiblepathwaysandpriorityactionareastoaccelerate

thedeploymentofrenewableenergy(IRENAa)Itpresentswaystodouble

theshareofrenewableenergytobyREmapanalysesallaspectsofthe

energysystemincountriesrepresentingofglobalenergyconsumptionand

providesrecommendationstoreachthegoal

REmap also demonstrates that renewable energy presents an affordable

reachableandestablishedconduittoasustainableenergyfutureforallRenewable

energyisincreasinglythemostcost-effectivesolutionforexpandingruralelectricity

access indeveloping countriesThiscan improve living conditions for billion

peopleworldwidewhocurrentlylackaccesstoelectricityandforbillionpeople

withoutaccesstocleancookingequipmentmostlyconcentratedinsub-Saharan

AfricaandAsia(IEA)asshowninFigure


28/94


Netglobalpopulationgrowthmayalmostoffsetcurrenteffortstoexpandaccess

tomodernenergyservicesWithoutsignificanteffortstoincreaseaccesstheIEAprojectsthatalmostbillionpeoplewillstillbewithoutaccesstoelectricityand

billionpeoplewilllackaccesstocleancookingfacilitiesin(IEA)As

recognisedbytheUnitedNationsSustainableEnergyforAllinitiative(SEALL)(see

Box)ensuringsufficientcost-effectiveenergysupplyispivotaltomaintaininga

broadbasisforeconomicgrowthandimprovinghumanlivingstandards

While impressive business-as-usual renewables expansion will deliver neither

theeconomicnorenvironmentaloutcomesneededforsustainabledevelopment

IRENAs REmap analysis emphasises that doublingthe share of renewable

energy in the global energy mix is achievable but significant new efforts are

requiredinthepowertransportbuildingsandindustrialsectorsCurrentnational

planswouldonlyresultinanincreasetooftherenewableenergysharein

comparedtoin

In addition to the electricity sector heat and transport present significant

opportunitiesforrenewableenergyWhilenotthefocusofthisreportthesesectors

couldmakerealinroadsintothecostandenvironmentalimpactofprimaryenergy

demandAtpresentonlyafewcountriesutiliserenewableenergysourcestomeet

asizableshareofthesesectors

Source: IRENA based on IEA (2012), UN DESA (2011) and WHO (2010)

Figure 7: Rural populations lacking energy and their access profiles in 2010

Latin America and

the Caribbean

Sub-Saharan

Africa

Developing

Asia

100 millionpeople

500 millionpeople

1 billionpeople

No access to

Electricity

Clean cooking

47%

23%

73%

26%

94%

87%


29/94


30/94


31/94

32|IRENA

65%Reduction in PV

module costs (2009-13)

4%Annual increase

in module efficiency

93%Increase in cumulative solar deployment

in three years (2011-13)

30%Reduction in

wind turbine costs

since 2008

>20%Increase in capacity

factor in last decade

34%Increase in cumulative wind deployment

in three years (2011-13)

COST

REDUCTION

INCREASED

EFFICIENCY

GROWING

DEPLOYMENT

COST

REDUCTION

INCREASED

PERFORMANCE

GROWING

DEPLOYMENT


32/94


33/94

34|IRENA

Energien)Renewabletechnologiescanalsobecombinedwithfossilfuelplants

toincreaseefficiencysuchasCSP-naturalgasorCSP-coalhybridplantsRenewables

are increasingly being considered for different applications ranging from water

desalinationandstand-alonestreetlightingtoremotedevicecharging

2.1 THE FALLING COSTS OF RENEWABLES

SolarPVandonshorewindpowerhaveundergoneanindustry-widerevolutioninjust

afewyearsandareatorapproachinggridparitywhereelectricityisequaltothe

priceofpowerfromthegridinawidevarietyofsettings

Between and prices for solar PV modules declined by -

despite module pricesstabilising in The technology reached new levels of

competitiveness atboth distributed andutility scale Thecost of residential solar

PVsystems inGermanydeclinedby during thesameperiodandcommercial

solarpowerreachedgridparityincountriesincludingGermanyItalyandSpainwith

FranceandMexicoduetoattainparitysoon(IRENAbandEclareon)

Onshorewindisincreasinglytheleast-costoptionfornewgridsupplyThelevelisedcostof

onshorewindelectricityhasfallensinceonthestrengthofcheaperconstruction

costsandhigherefficiencylevelswithturbinecostsfallingnearlysince

Whencoupledwithmaturingmarketstructuresfallingcostshavestimulatedrapid

year-on-yeargrowthinboththescaleandthescopeofrenewableenergydeploymentIRENAsanalysisofmorethanutility-scalerenewableprojectssmall-

scalePVprojectsandarangeofliteraturesourcesconfirmsthattherapiddeployment

ofrenewablesalongwiththehighlearningratesforsometechnologieshasproduced

avirtuouscyclethatwillcontinuetodrivedowncosts(IRENACostingAlliancend

seeBox)

2PV module prices were stable in 2013 as manufacturers consolidated and in many cases, returned to positivemargins, after a period of manufacturing overcapacity and severe competitive pressures.3

The learning rate is the percentage reduction in costs for a technology that occurs with every doubling ofcumulative installed capacity. For solar PV modules, the rate is between 18% and 22%, while for wind turbinesit is around 10%.

TheIRENARenewableCostingAlliance(wwwirenaorgcosting)waslaunchedinearly

Alliance members recognise that a lack of accurate transparent and reliable

data on the cost andperformance of renewable technologies isa significantbarrier

to accelerated uptake To this end they agree to share with IRENA confidentially

real-worldprojectcostandperformancedatafacilitatinganalysisbasedonthelatest

andbestpossibleinformation

BOX 3: IRENAS COSTING ALLIANCE


34/94


Localenvironmental conditions andtheir impactonpower generationcontinueto

affect renewable energy capacity factors However improvements in technology

meanthattheamountofwindorsolarradiationneededtogeneratepowerisfalling

Meanwhilesignificantinvestmentsinelectricitystoragetechnologiesmeantheseare

likely tobecomemorewidely availablesoonIncreased penetrationof renewableshas also created a wider geographic spread meaning less favourable resource

conditionsinoneareacanbeoffsetbymorefavourableconditionsinanotherFurther

interconnectionsandgriddevelopmentwillhelptapintorenewableresourcesacross

largergeographicalareas

Renewableenergytechnologieshavesignificantpotentialforfurther improvement

dependingontheirmaturityDeliveredcostsofrenewableenergydeclinesignificantly

asmarketsgrowlearningaccumulatesandeconomiesofscaleareachievedThese

dynamicsaremoreprominentinthecaseofsolarPVasindicatedinFigureandonshorewindThisisincontrasttolessmaturetechnologiessuchasoceanenergy

thatarestillapproachingthecommercialisationstage(seeBox)

Solar PV

Solar PV systems are the most accessible renewable energy technology as their

modularity means that they are within reach of individuals co-operatives and

small-scalebusinessesWithrecentcostdecreasesandinnovativebusinessmodels

theyrepresenttheeconomicoff-gridsolutionforthemore thanbillionpeopleworldwidewithoutaccesstoelectricity

Source: IRENA (2014c)

Figure 9: Projected solar PV system deployment cost (2010-2020)

5

4

3

2

1

0

5

4

3

2

1

0

Module Inverter Balance of Plant Engineering, Procurement and Construction Other

USD/Watt

4.90

3.98

2.972.75 2.62

2.402.23 2.14 2.06 1.97 1.92

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020


35/94

36|IRENA

Recentcostreductionshavemeantthatatleastathirdofnewsmalltomid-sizesolar

energyprojectsinEuropearebeingdevelopedwithoutdirectsubsidies(Parkinson

)InChileanewMWsolarfarmunderconstructionisanticipatedtosellon

thenationalspotmarketcompetingdirectlywithelectricityfromfossilfuel-based

sourcesTechnologycostreductionshavebeendrivenby

EfficiencyimprovementsTheefficiencyofsolarPVmodulesinconvertingsunlight

intoelectricityhasimprovedbyaround-peryearforthelastyears

Economies of scale Integrated factories are scaling up processes providing

competitiveequipmentpricesandamortisingfixedcostsoverlargeroutput

ProductionoptimisationMoreefficientproductionprocessesandimprovements

insupplychainmanagementcontinuetoprovidecostreductionopportunities

Thecombinationofreductions inPVmodulepricesandbalanceofsystems(BoS)

costs hasallowed the LCOEto fall rapidly Assuming a weightedaverage cost of

capitalofLCOEforsolarPVhasdeclinedtoaslowasUSD kWhandis

typicallyintherangeofUSD tokWhforutility-scaleprojects(Fraunhofer

ISE)ThecostofdeploymentandtheLCOEhoweverdifferfrommarketto

marketFiguredemonstratesthesedifferencesforinstalledcostsofPVsystemsin

certainkeymarketsTheprimaryreasonforsuchdifferentialsisthatBoScostsinclude

softornon-hardwarecostswhicharehighlymarket-specific

BoScostsnowmakeupalargerproportionofprojectcostsalongsidethecapitalcosts

ImprovingthecompetivenessofPVwillthereforeincreasinglydependontheextent

4Silicon input costs have been falling, and the amount of silicon required for a panel has fallen by 30% to just6 grams per watt-peak in 2013 on average. These help reduce capital costs.

Beyond hydro geothermal solar and wind power there are noteworthy emerging

technologiesthatareonlyjustbeginningtobeexploitedatcommercialscaleTheseeither

offergreaterefficiencythantheirmorematurepredecessorsorpresentopportunitiesto

exploitnewrenewableresources

Enhancedgeothermalsystemsadaptexistingtechnologiesforuseinawiderrangeof

locationsusingdeeperdrillingtotargethottertemperaturesclosertotheearthscore

Astechnicalandeconomicchallengesareovercomethesecouldgreatlyexpandtheuse

ofgeothermalenergytoprovidebaseloadheatandpower

Oceanenergytechnologiesareadvancingquicklyandtheoutlookforcommercialisation

isgoodFivemainwavepowertechnologiesand-tidalcurrentpowertechnologies

are close tomarket readiness while numerous concepts are in earlier development

stagesHowevertidalenergyisamongtheleastdeployedofrenewableenergysourceswitharoundMWinstalledworldwideofwhichmorethancomesfromtwotidal

barrages

BOX 4: LESS MATURE RENEWABLE TECHNOLOGIES


36/94


thatBoScostscanbereducedWhilethetrendinBoScostsisdownwardsatpresent

thisisadiverseareawithsignificantnationalvarianceItismuchcheapertoinstall

thesamesolarpanelinGermanythanintheUnitedStatesorJapanforinstanceas

indicatedinFigureThiscanbeafunctionofregulationtheavailabilityofskilled

Residential Annual

Germany

US residential

US non-residential

US utility

8

USD/Watt2013

20 06 2007 2008 2009 2010 2011 2012 2013 2014

6

4

2

0

8

6

4

2

0

Australia

China

Italy

Japan

Figure 10: Solar PV system costs by country (2010-2014)

Source: IRENA Costing Alliance (n.d.)

Module Balance of system

5

4

3

2

1

0

5

4

3

2

1

0

USD/Watt2013

Germany United States


Figure 11: Residential solar PV cost breakdown in Germany and the United States


37/94

38|IRENA

installationprofessionalsandotherfactorsMoreanalysisisrequiredtoexaminethe

reasonsbehind cost differentials identify future cost reduction opportunitiesand

formulatepolicyrecommendationstoenablesuccessindifferentcountries

Onshore wind powerSolar PV has not been the only beneficiary of falling technology costs Onshore

windpowerisalsofastapproachinggridparityinpurelyfinancialtermsTechnical

innovationandcostreductionsarecombiningtomakeonshorewindthecheapest

sourceofnewelectricityinawideandgrowingrangeofmarketsTheLCOEforwind

powerisapproachingwholesaleelectricitypricesinChinaGermanyItalySpainand

theUnitedKingdomandhasalreadyattainedparityinBrazilandDenmarkDevelopers

ofBrazilianwindfarmshavewonofcontractsinelectricityauctionssince

aspricesforwindenergyhavefallentoBRL (USD)permegawatt-hour

(IRENAc)Electricityfromwindisalreadycheaperthannuclearpowerandwould

alsobecostcompetitivewithnaturalgasandcoalgloballyifhealthandenvironmental

costswereincludedinprices

Therangeoflevelisedcostsofwind-generatedelectricityiswidebutwindisincreasingly

the most competitive source of new generation capacity for the grid Energias de

Portugal (EDP) now reports that the LCOE foronshore wind across Europe is

cheaperthanfornaturalgasandone-thirdcheaperthanforcoal(EDP)Figure

demonstratestherangeofLCOEforwindfarmsinnon-OECDcountries

Mostofwindscompetitivenesshasbeendrivenbytheincrediblepaceoftechnological

evolutionamongtheworldslargestturbinemanufacturersGrowthinthescaleofthe

windmarkethasencouragedcompetitiondrivingdowncostsThecapitalcostsof

windturbineshavealsodeclinedsinceTheturbineisthesinglelargestcost

componentofawindfarm(-oftotalcost)sothishashadamaterialimpact

0.20

0.15

0.10

0.05

0.00

0.20

0.15

0.10

0.05

0.00

USD/kWh

China Africa Eastern

Europe and

Central Asia

Other

Asia

India Latin

America


Figure 12: LCOE for recently commissioned and proposed onshore wind farms in non-OECD countries


38/94


ontotalprojectcostsInnovationsallowtodaysturbinestoharvestsignificantlymore

windata givensiteHigherhubheightslarger sweptareasand improvementsin

bladedesignandwindturbineoperationhaveincreasedthecapacityfactorsofnew

installationsDatafortheUnitedStatesandDenmarkshowsthatthecapacityfactors

forwindturbines(atagivenwindspeed)haveincreasedbyormoreinadecade(Islamet al)

Offshore wind

Offshorewindisanemergingfieldwhichisexpectedtogrowrapidlyascostsfall

Unlikeonshorewindfarmswhichcanbeassmallasasingleturbineoffshorewind

farmstendtobeaslargeaspossibleTheaveragesizeofoffshorewindfarmsis

currently around MW At the end of over GW of world wind power

capacitywasinstalledoffshorewiththelargestmarketintheUnitedKingdom

Theoffshoresectorisinterestingasitbenefitsfromhighersocialacceptancehasless

visualornoiseimpactandcanreachsignificantlyhighercapacityfactors(-)

thanonshore due tostrongerandmoreconsistent winds enhancingtheabilityof

offshorewindtoprovidebaseloadreliabilityWheredenselypopulatedareasborder

theseatheproximityofloadcentrescanmakeoffshorewindespeciallyattractive

Whilecapitalcostsarehigherthanthoseofacomparableonshorewindprojectthe

investmentcostforoffshorewindturbineswithfixed-bedfoundationsisprojectedto

decline-by(FichtnerandPrognos)

TheexpectationisthatthiswillresultinafallintheLCOEfromapproximatelyUSD-perkWhinto

USD-perkWhin

Offshorewindfarmsaremorecomplicatedthanonshoreasgridsneedtobeexpanded

further The average distance from shore to turbine is projected to increase to

kilometresby(RolandBerger)Asaresultthesearchforsiteswithgreatwind

resourcesmayprovideacheaperkilowatt-houronsiteonlytoentailhighertransmission

costsCommercialoffshoreturbines available todayhave a capacityof- MWand

turbineswithacapacityuptoMWarebeingdevelopedwhichreduceoverallLCOE

ThereismajorgrowthpotentialintheoffshorewindmarketInEuropealoneoffshore

windcapacityisprojectedtogrowtoGWbyPowergenerationgiantssuch

asGeneralElectric(GE)andSiemensenteringthemarketaroundintroduced

innovationandintenseindustryrivalryresultinginadvancementsthatfewexperts

hadthoughtfeasiblesoquicklyAlloffshoreturbinescurrentlybuilthavefixed-bed

foundationsalthoughfloatingplatformsarebeingtestedinDenmarkJapanNorway

andtheRepublicofKorea

5At the same time, operation and maintenance costs are projected to decline 19%-33%, the nominal weightedaverage cost of capital (WACC) will decline from 9.9% to 7.7%, and electricity generation per kilowatt installedwill increase by around 10%.


39/94

40|IRENA

Concentrated Solar Power

CSPusesaseriesofmirrorstoconcentratesolarenergyontoaheattransfermedium

whichisthenusedtodriveatraditionalturbineGlobalinstalledcapacityisnearly

GWworldwideTheLCOEofutility-scalePVisnowaroundtwo-thirdsthatofCSP

butCSPsstoragecapacityisoftennotproperlyvaluedThermalstorageintheform

ofheatforexampleasmoltensaltcanbeusedtogeneratesteamwhichinturncan

beusedtogenerateelectricityTodaysuchstorageischeaperthanbatterystorage

butitisonlyapplicableonutilityscale(IRENAandIEA-ETSAP)

CSPstillfaceschallengesCSPplantsneedcapacitiesoverMWtoachieveefficiencies

ofscalehencetheamountoflandneededcanbealimitationwhereasPVisevidently

morescalable CSP will thereforeonly beappropriate forutilityscale deployment

andwilllikelymissoutonthedemocratisationthathasdrivenPVuptakeAdopting

ahybridapproachbycouplingfossil-fuelplantswithCSPisincreasinglybeingseenas an opportunity to overcome limitations associated with CSP development and

improveefficienciesoffossil-fuelplants(seeBox)

Developments in grid technology and energy storage

Thetemporalandspatialdivergenceofsupplyanddemandisoneofthebiggest

challengesfacingthetransformationoftheenergysector

Controllable energy storage at scale would allow renewable energy generated at

onemomenttobeusedlaterandgreatlyincreasethelevelofpenetrationofvariablerenewablesatleastcostIntelligentutility-scalestoragewouldsignificantlyreducethe

needforpeakingprovisionandbackupbyconventionalpowerplantsalongwiththeir

impactontheenvironmentFromatechnicalandeconomicpointofviewhowever

thenumberofavailable grid-scalestorage options remain limitedPumpedstorage

constitutesalmostofglobalenergystoragecapacityintherangeof-GW

(RENUSAIDandMNRE)Batterystoragetechnologieshavedeveloped

HybridCSPplantsareapromisingreliablepowergeneratingtechnologyHybridplants

usingheatgeneratedinCSPsystemstoincreasetheefficiencyoffossil-fuelgenerating

technologiescouldallowfor-hourlower-carbonco-generationAcoalplantretrofitis

beinginstalledinAustraliaandvariousnaturalgashybridplantsareoperatinginNorth

AfricaallofwhichincorporateCSPtoimprovesteamcyclesAlgeriasfirstsolar-tower

powerplantwillalsobesolar-gashybridwithatotalcapacityofuptoMWandthere

arehopesto replicate thiselsewhere inNorthAfricaCSPsteamproductioncanalso

supplementenhancedoilrecoveryoperationswithCSPfacilitiesbeingconsideredorin

operationintheUnitedStatesandOmanRetrofithybridscreatemanynewopportunitiesincountrieswiththerightclimaticconditions

BOX 5: PARTNERING NEW AND OLD: HYBRID APPLICATIONS USING CSP


40/94


over the last coupleofyearsandthe industry candeliveroperational solutionsfor

a varietyofgridandoff-gridapplications (IRENAd) Technicaldevelopments

are expected to transform the market for energy storage from approximately

USD millionlastyeartoUSDbillionby(IMSResearch)

Gridupgradeswillmeanthatlowcarbongenerationatadecentralisedlevelcanbe

collectedandredistributedamongdemandcentresInvestmentstodothisarelikelyto

includelong-distancetechnicalupgradesandreinforcedlocalcablesenergyimbalance

markets(allowingforthetradingofimbalances)technologiesthatincreasedispatch

speeds(tomatchthevariabilityofrenewables)andintegratedforecastingtools

Upgradinggridandstorageusedtocostmorethangeneratingelectricityinapeaking

plantSincearoundthoughtechnologieshavebeendevelopedthatcanprovide

utilityscaleload-levellingandfrequencyregulationcapabilitiesatatolerablecostand

pricesarefallingfastThebenefitscanincludewindsolarcurtailmentavoidancegrid

congestionavoidancepricearbitrageandcarbonfreeenergydelivery

2.2 INCREASING DEPLOYMENT OPPORTUNITIES

Renewabletechnologiesareeffectiveatavarietyofscalesandaremodularanddiverse

withapplicationsinheatingcoolingandtransportaswellaselectricitygeneration

Withinthepowersectorrenewableenergyisdrivingashiftfromcentralisedutilities

tomorediverselocalisedproduction

High rates of decentralised power generation are feasible in mature markets

Thefutureofmanypowergridsinvolvesabroadmixoffossilfuelsandrenewables

decentralised generation expanded storage capacity and improved demand and

supplyplanningthroughsmartreal-timedataflowsasillustratedinFigureThisis

commonlydescribedasasmartgrid

Amoredistributedgenerationmodelisemerginginmarketswithhigherrenewableenergy

penetrationenabledbythemodularnatureofwindturbinesandsolarpanelsGermany

alreadyexhibitssignificantlydecentralisedownershipofgrid-connectedrenewableswith

overofcapacityownedbyhouseholdsandfarmersOnlyofrenewableassets

areowneddirectlybyutilities(seeFigureAgenturfrErneuerbareEnergien)

Decentralisedmini-gridsareseenasawaytoimprovegridreliabilitybylocalising

generationandreducingtheriskoftransmissionfaultsparticularlyduringnatural

calamitiesIntheUnitedStatesforinstanceweathercausedofalloutagesfrom

toaffectingaroundmillioncustomerseachyearMostoftheseoutages

comefromdamagetolargetransmissionlinesorsubstationsasopposedtosmaller

residentialdistributionnetworks(ClimateCentral)NorthAmericaistheworlds


41/94

42|IRENA

leadingmarketformini-gridswithaplannedproposedanddeployedcapacityof

MWoroftheglobaltotal(Naviganta)

OverallthemarketismuchmorerobustthanfiveyearsagoInthesecondquarter

ofglobalmini-gridcapacityrosetoMWmarkinganincreaseofover

intheprevioustwoquarters(Naviganta)By global installedmini-

gridcapacityisforecasttoriseaboveGWWhiletheseprojectedcapacitiesneed

not beentirely renewables-basedandonly represent a fraction ofglobal installed

capacitytheydemonstrateanemergingdemandfordecentralisedtechnologiesin

maturemarketsalongwithothernicheapplicationsintelecommunicationsdefence

andmining

Renewables are the technology of choice for rural off-grid applications

Off-gridrenewableenergytechnologiesincludingstand-aloneandmini-gridsystems

arealsoemergingasacost-effectivealternativetocentralisedsolutionsindeveloping

regionswhereaccesstoelectricityisnon-existentorunreliable(IRENAc)Their

distributednatureallowsthemtobetailoredtolocalconditionsanddeployedcloser

tocentresofdemandThiscanreduce(orinsomecaseseliminate)theneedfora

centralisedgridinfrastructure

Stand-alone solutions such as pico lighting and solar home systems (SHSs) are

beingrapidlydeployedtoprovidebasiclightingandmobilechargingservicesSHSs

Source: Based on IRENA (2013a)

Figure 13: Smart grids and renewables

Consumption Distributed generation

Consumption

Demand response

Energy storage

Transmission

Large-scalepower

generation

End users

Transmission

Large-scalepower

generation

End users

Distribution


42/94


forinstancehaveexperiencedsustainedgrowthwithmorethanmillionsystems

installed(IRENAb)Bangladeshhasbeenattheforefrontofthisdevelopment

deployingalmostmillionSHSs(asofApril)atapaceofsystemsper

monthNearlyofBangladeshspopulationormillionpeoplenowbenefitfrom

electricityaccessthroughsolarsolutions(IDCOL)

Theglobalannualmarketfor solarPV consumerproducts includingoff-gridsolar

lightingisforecasttogrowfromUSDmilliontoUSDbillionbetween

andwithunitsalesofpicosolarandSHSsgrowingfrommillionannuallyin

tomillionin(Navigantbandc)Someofthechallengesin

benefitingfromthisopportunityarepresentedinChapter

Stand-alonesolutionsrepresentonlyafirststepinmeetingtheaspirationsofrural

householdsand enterprisesMini-grids whichcan range froma fewkilowattsto

severalmegawattsofcapacitytappingintoasingleormultipleresourceswillplay

anincreasinglyimportantroleastheycatertobasicandproductiveusesofenergy

Theycanalsobeintegratedintothecentralgridwhenitarrives(subjecttoenabling

regulatoryconditions)

Fallingcostsandincreasingmaturitymakerenewableenergythemostappropriate

optionbothfornewmini-gridsandforhybridisingexistingfossilfuel-basedmini-

grids(IRENAc)SincethesChinahaspursuedthedevelopmentofsmall

hydropowerplantsfirstinstand-aloneconfigurationsandlaterintegratedintothe

nationalgridTodayChinahasroughlydieselandhydromini-gridsystems

From to Chinas Township Electrification Programme constructed

solarPVandPVwindhybridsystemsalongwithsmallhydrostationsto

provideelectricity tomillionpeople The toVillageElectrification

ProgrammeconnectedanothermillionpeoplewithrenewablesourcesBythe

endofChinaaimstoprovidepowertoanothermillionpeoplewithout

electricityincludingmillionbygridextensionandmillionbyindependent

solarPV

ThecaseforrenewableenergyisalsostrongforislandsInfactvirtuallyalloff-grid

electricitysystemsbasedonfossil-fuelswillseegenerationcostsfallbyintegrating

renewables (IRENA a) There are several hundred island mini-grids usually

poweredbydieseloroil-firedgeneratorstypicallyinthe-MWrangeIncreasingly

solar PV is being added as are wind geothermal biomass and ocean energy

Hybridisingmini-gridsreducesgenerationcostsinalldieselsystemswithoutaffecting

the reliabilityofsupplyTokelau for instancehasinstalled solarpanels and

batteriestogenerateofitselectricityfromPVTheremainingcomes

fromdieselwhichcanbesubstitutedbycoconutoilAsstoragetechnologiesmature

andcostsdecreasemore remote communitieswillbeable to receivegrid-quality

supplythroughdecentralisedsolutions


43/94

44|IRENA

2.3 RECOMMENDATIONS FOR POLICY MAKERS

Pastandcurrentpolicieshavehelpedtriggeraglobalexpansionofwindandsolar

allowingcoststodecreaserapidlyFurthercostreductionswillbedrivenbyasimilar

cycleoftechnologyimprovementsandincreaseddeploymentdrivenbylong-term

policysupport

Reducedcostsincreasethescopescaleandcompetivenessofrenewablesdriving

moreprojectsleadingtomoretechnologyimprovementsandevenlowercostsThis

does not mean however marketswill deliver a sustainable cost-effective energy

mixbythemselvesToensurethefuturegrowthofthesectorpolicymakersshould

considerthefollowing

Public policies can support and even accelerate renewable energy cost

reductions ThetechnicalandeconomicfeasibilityofrenewableenergyprojectsishighlydependentonthemarketswheretheyarebeingdeployedRenewable

energydeploymentcanincursignificantcostsassociatedwithpolicyregulatory

anddeploymentrisksspecifictolocalmarketsGovernmentscanaddressthese

risksbyensuringstabilityandpredictability inpolicies streamlining permitting

andgrid-connectionprocessespromotingcapacitybuildingtomeetskillsneeds

andintroducingfinancialriskmitigationtools

Renewable energy technologies require tailored support along some of

the stages of their life cycle from basic science research and development

to commercial deployment Less mature technologies for instance might besupported financially for research development and demonstration as well as

innovation-support mechanisms (such as intellectual property protection) and

marketreadinessmeasures(suchascapacitybuilding)

A new electricity market paradigm driven by technology advances creates

policy challenges Especially high shares of variable distributed electricity

generationincombinationwithinformationtechnologyandstorageallowfora

newwayofoperationTheroleofcentralisedgridswillreduceinfavourofmini-

gridsandotheroff-gridsolutionsespeciallyinruralareasandremotelocations

wherecentralisedgridsareuneconomicTheoptimalsystemdesignandpolicy

responseisnotyetevidentAninformedandsystematictrial-and-errorapproach

withregularevaluationsorlessonslearnedisrecommended

Policies need to adapt to changing market dynamics Therenewablessector

is developing quickly Governmentsneed to consider new types and levels of

supportasitevolvesInthecaseofsolarPVforinstanceoncegridparityhas

been attainednon-financial support may benecessary inthe form ofpolicies

suchasnetmeteringorreducingmarket-inducedbarriers(andcosts)forfurther

deploymentIngeneraltheimpactonvariousstakeholdersincludingincumbentsneedstobeadequatelyconsidered(seeSection)


44/94


Grid integration and management of variable renewable energy require

attention Adequate planning isnecessary for the timely development ofgrid

infrastructureinvestmentinsmartinfrastructureandstoragetechnologiesand

theformulationofenablingregulatoryframeworks

Technology innovation is a key driver for broadening the renewables base

raising the resource potentials and reducing the cost of energy supplyThis

is the basis for a seminal renewables transitionThereforefostering innovation

shouldbeakeyobjectiveofthepolicyframeworkMoreoverrapidprogressin

technologycanimpactpolicystrategychoiceandpolicymakersshouldensure

thattheirdecisionmakingisbasedonthelatestinformation


45/94

46|IRENA

SHIFTING

PATTERNS

CHANGING

OWNERSHIP

FUNDING

NEEDS

TOTAL

INVESTMENT

USD 214 billion(excluding large hydro 2013) 75%

wind turbines owned by

coopertives in Denmark

USD 550 billionannually to double the shareof renewables in the global

energy mix by 2030 (REmap)

46%

RE capacity

owned by

individuals and

farmers in Germany

43%of total investment

in developing countries

(29% in 2007)


46/94


Investmentsinrenewableenergyhaverisensignificantlyoverthepastdecadefrom

USDbilliontoUSDbillionbetweenand(excludinglargehydropower)

Despite investments inrenewable energydipping (in monetaryterms) in

renewable energy deployment hit record levels with solar PV and wind capacity

growingandrespectivelyreflectingdecreasingcosts(seeFigure)

Global investment in renewables is increasingly shifting to developing countries

ThesecountriesinstalledaroundUSDbillionofrenewablesincomparedtodevelopedcountriesUSDbillionThiswasadramaticchangefromwhen

developedeconomiesinvestedtimesmorethandevelopingcountries

The investment community has gained a vast amount of experience in financing

renewable energy This has come with the increase in the absolute volume of

investmentovertimecombinedwithanunderlyingincreaseinthenumberandtype

oftransactionsmoreaccurate local resourcedataandincreasingexperience with

differentstagesofprojectdelivery

3Financing renewable energyprojects is becoming easier and

cheaper but variations remain

USD billion GW

300

250

200

150

100

50

0

350

300

250

200

150

100

50

0

Developed countries

(USD billion)

Developing countries

(USD billion)

Solar (GW) Wind (GW)

Source: IRENA based on (UNEP, BNEF and FS, 2014) and (REN21, 2014)

Figure 14: Total investment in renewable energy and cumulative installed capacity for solar PVand wind (2004-2013)


47/94

48|IRENA

USDbillionisneededperyeartoscaleuprenewableenergytoormoreofthe

totalenergymixbyandkeeptheglobaltemperatureincreaseatanacceptable

thresholdaccordingtoIRENAsREmapanalysis(IRENAf)

Thebulkoffutureinvestmentinrenewableenergyislikelytocontinuetocomefrom

theprivatesectorAttractinginvestmentswilldependonthecostcompetitiveness

of renewables in target markets which is strongly influenced by i) the cost of

deployingthetechnology(procurement installation andoperation) and ii)market

risksforfinancingrenewableenergyprojectsCreatingtherightmarketconditions

for attracting private investment requires coordinated efforts by governments

internationalfinancinginstitutionsandotherstakeholders

Governmentshaveanimportantroletoplayinfosteringinvestmentinrenewables

Figuresuggestsfeaturesofarenewableenergyinvestmentstrategyacombination

of clearly stated objectives enabling regulations and targeted financial and non-financialinterventions(IRENAb)Creatinganinvestment-friendlyenvironment

involvesreducingrisksdesigninginnovativefinancialproductsadaptinggovernment

supporttochangingmarketconditionsandtransformingutilitybusinessmodels

Objectives

Tools

Incorporate externalities into the price of energy

(i.e.

align market price with true cost)Remove perverse incentives

Incorporate sustainability considerations into the financial sector

Reduce the cost of RE technologies

Overcome niche barriers to RE investment

Fill financing gaps that the private sector cannot address

Energy PolicyExamples:

Feed-in tariffs

Tax incentives

Quotas and targets

Auctions

Finance Policy

Examples:

Green Bonds

Differentiated interest rates

Public banking

Public finance programmesTailored package of financinginstruments (with flexible design)

Independent governancestructure, public-privatepartnership

Targeted Intervention

Non-financial interventions

Capacity building

Knowledge managementexpertise

Multi-stakeholdercoordination

Regulation

Source: IRENA (2012b)

Figure 15: Sample national renewable energy finance strategy


48/94


3.1 ADDRESSING RISKS TO REDUCE THE COST OF CAPITAL

Theviabilityofrenewableenergyprojectsisgreatlyaffectedbyamarketsriskprofile

Risksactualorperceivedstemfromregulatoryandpolicyframeworksandlimited

experience with new technologies These can impact the viability of projects by

increasingthecostofcapitalthatdevelopersareabletoraise

Traditionalfactorsthatdetermineenergy-sectorfinancingapplytorenewableenergy

onlyinadifferentmannerComparedwithfossilpowergenerationmostrenewable

energytechnologieshave a high ratioofupfrontcapitalcosts to operatingcosts

makingtheirviabilityparticularlysensitivetothecostofcapitalForinstanceIRENA

estimatesthattheLCOEonawindfarmprojectisaroundhigherwhenthecost

ofcapitalisratherthan(IRENAa)Therelativeimpactofthecostof

assetfinancewillcontinuetoincreaseastechnologycostsdeclineAnexampleofthecostbreakdownofautility-scalePVplantisprovidedinFigure

Thecostofcapitalforrenewableenergyprojectsisdecreasingbecauseperceived

risksarebeingmoreaccuratelyquantifiedItislikelytofallfurtherastheinvestment

communityunderstandsyetmoreaboutrenewabletechnologiesandtheopportunities

theypresentDependingontheexpectedcashflowoutputsoftheprojectandthe

risks involvedmarketfinancecan currentlybe obtained for an average return of

about-formostrenewableenergyprojectsindevelopedmarketswithhigher

returnsexpectedindevelopingcountries

Globally the cost of capital is decreasing as the volume of investment and the

cumulativeexperienceofthefinancingcommunitywithrenewableenergyprojects

increaseInparallelsophisticatedandtailoredproducts(discussedinthenextsection)

thatsuitawiderrangeofinvestmentprofilesfromsmall-scalecommunityfinancing

Development

Balance of system

PV modules

Financing

Operational expenditure

Source: First Solar (2013)

Figure 16: Cost breakdown of a utility-scale PV plant over its productive life


49/94

50|IRENA

tolargeinstitutionalinvestmentsarereducinginvestmentrisksandbringinginnew

investorsInthiscontextlargebusinessesfromoutsidethetraditionalenergysector

areincreasinglyinvestinginrenewables(Box)

As markets and technology mature renewable energy projects are attracting a

progressivelywiderrangeofinvestorsfromprivateequityfirmsprojectdevelopers

andgovernmentstocommercialbanksandinstitutionalinvestors(seeFigure)

Box charts the growing importance of multi-lateral institutions in spurring the

internationalflowoffinance

Institutional investors are more comfortable with low-risk long-term investment

opportunitiesofwhichthereareanincreasingnumberintherenewablessectorOfthe

USDtrillioninassetsundermanagementworldwideapproximatelyUSD trillion

areinvestedinlong-termlow-riskobligationssimilartotheprofileofthelargest

demonstratedinstalledrenewableenergyassetsIndeedinachoicebetween-yeargovernmentsecuritiesyielding-anddeployedsolarandwindassetsina

domesticmarketreturning-withPowerPurchasingAgreement(PPA)backing

renewablesshouldlookincreasinglyattractiveHowevertheseprojectsfirsthaveto

meetthestrictcriteriaofinstitutionalinvestors

6A 4%-6% return for an institutional investor does not represent the cost of financing to the project developer,which is significantly higher especially in emerging economies.

Somelargenon-energycompaniesarenowmajorplayersintherenewablesmarketThey

arelookingtoreducetheirriskinlong-termoperatingcostsdiversifytheirenergysupply

and hedgeagainst volatility in fossil fuel markets while also earninga market-based

returnoninvestmentThisisincreasingtechnologydemanddemonstratingnewbusiness

modelsandloweringthecostofcapitalforprojectdevelopers

AttheendofIKEAhadinvestedinwindturbinesandsolarpanelsin

eightcountriesaswellasinenergyefficiencyInthecourseoftheyearIKEArenewables

producedgigawatt-hour(GWh)ofelectricityequivalenttoofthecompanys

totalenergyneedsThecompanyaimstoberenewableby

GooglehasinvestedoverUSDbillioninwindandsolarprojectsSomeofthiswasforin-houseusesomeforsocialgoodandsomebecauseitgeneratesattractivefinancialreturns

Walmart isworkingtowardsrenewablepowerThisincludesgeneratingenergyat

storesandfacilitiesreducingemissionsandmakingthevehiclefleetmoreefficientAtthe

endofWalmarthadactiverenewableprojectsacrossitsglobalportfolio

More than two-thirds of Fortunes Global companies have renewable energy

commitments greenhouse gas emissions reduction commitments or both and the

remainderarelikelytofollowsuit

BOX 6: NEW CORPORATE PLAYERS IN THE RENEWABLES MARKET


50/94


Figure 17: Investment progression through technology and market development stages

Time, technology scale and project volume

Project developers, venture capital, government grants

Increasing scale of



and larger scales

(returns 4%-10%)

Increasing scale of



and larger scales

(returns 4%-10%)

Refinancing of

demonstrated,

installed assets,

focus on lowest risk

(accepting very lowreturn)

Refinancing of

demonstrated,

installed assets,

focus on lowest risk

(accepting very lowreturn)

Early-stage funding

for small-scale

projects, including

technology

demonstrations

(returns 8% +)

Early-stage funding

for small-scale

projects, including

technology

demonstrations

(returns 8% +)

Target: < USD 50m

Target: USD 50-500m

Target: USD 100m+

Commercial banks, multi-lateral insitutions

Institutional investors

Thebulkofrenewableenergyfinancecomesfromprivateinvestorsincludingdevelopers

commercialbanksandinstitutionalinvestorsandthiswillincreaseasmarketsmature

Howeverpublicfinancingwillremainimportantinnewandemergingrenewableenergy

marketsandinternationalcooperationwillplayaprominentrole

Internationalfinancialinstitutionsanddevelopmentbankshavesteadilyincreasedtheir

fundingof renewableenergyprojectstoaboutUSDbillion in(UNEPBNEF

andFS)Muchofthiscamefromnationalsub-regionalandbilateraldevelopment

financeinstitutionscoordinatedwithintheInternationalDevelopmentFinanceClub

Greaterfundingofrenewableenergyhasalsostemmedfromtheclimatefinanceactivities

ofmultilateraldevelopmentbanksRegionaldevelopmentbanksandtheWorldBankhavebeencooperatingwithintheframeworkoftheClimateInvestmentFunds(CIFs)

andtheGreenClimateFund(GCF)intendedtobeatthecentreofinternationalclimate

financeflowsisbecomingoperationalTheGCFsinitialresourcemobilisationofaround

USD-billionwillhavebeencompletedbytheendofandsomeofthesefunds

willbeusedtosupportrenewableenergyinvestments

BoththeCIFsandtheGCFplaceemphasisonstimulatingadditionalprivateinvestment

Itisimportanttoensurethatpublicfundswhichcanbedisbursedonconcessionalterms

donotcrowdoutprivateinvestmentsOnekeyobjectiveistodevelopstructureddeals

anddevisefinancialinstrumentssothatconcessionalpublicfinancecanaddresssomeof

therisksthathinderinvestmentinrenewableenergyThiswillbeaprominentpartofthestrategytoincentiviselargeinstitutionalinvestorstoentertherenewablessectoratscale

BOX 7: INTERNATIONAL FINANCE INSTITUTIONS AND DEVELOPMENT BANKS


51/94

52|IRENA

Investment thresholds and risk perceptions are significant barriers Institutional

investors traditionally like refinancing proven long-term low-risk opportunities

withvalueswellover USDmillionWhilemanyrenewablesprojects are under

construction that might eventually satisfy this few of these projects are seeking

financetoday Potentialfuture candidates might include large-scale windfarms inBrazilChinatheUnitedStatesandtheNorthSeapluscertainlargesolararraysas

wellassomebiofuelplantsAsthetotalnumberofrenewableprojectsincreasesand

theirscaleexpandsmoreopportunitieswillarise

AnticipationhelpsDevelopersandgovernmentsshouldmakesurethatinstitutional

investors requirements regarding quality security and resilience are taken into

considerationinprojectdesignEarlysustainedengagementcanensurethatwhen

theseprojects doseek refinancing institutional investorswillbe able to reclassify

themawayfromalternativeinvestments(alwaysasmallerpoolofmoney)intobroader

energyinvestmentsandwillhavedevelopedthenecessaryhumancapitaltoproperly

appraiseeachopportunityGreaterfamiliaritywillresultintheacceptanceoflower

ratesofreturn

Institutional investors are increasingly concerned about the longer-term risks of

fossil fuel energy investments In latea coalitionof investorscollectively

responsibleforUSDtrillioncalledontheworldslargestfossilfuelandelectricity

companiestoassessrisksunderclimateactionandbusinessasusualscenariosand

specificallydemonstratehowtheirbusinessplansfareinthelow-carbonfuture(Ceres

andCarbonDisclosure)IfclimatepolicytightensrenewablesbecomemoreattractiverelativetofossilfuelsCeresinvestorssaytheyarefindingupstreamfossil

energy investments increasingly difficult to justify If historical fossil investments

eventuallybecomestrandedassetspolicymakerswillfacedifficultdecisionsaround

theassetsheldbytodaysbiggestenergycompaniesparticularlygiventheirongoing

pensionliabilities

Institutionalinvestmenthasa two-foldeffectMorerenewableenergyassetfinance

notonlyensuresmoreprojectsaredevelopedbuttheincreasedsupplyalsohelps

lowerthecostofcapitalmoregenerallymakingothercleanenergyprojectsfeasibletoo Refinancing also liberates project finance from long-term assets allowing

developersandmultilateralorganisationstoinitiatenewprojects

Wheregovernmentfinancialsupportinitiatesrenewablesprojectsandcommercial

debt is available the national debt rating becomes an indicator of stability and

growthforacountryInstitutionalinvestorsusethistohelpdefinetherisklevelfor

lending to andwithinthecountry Inshortthedebt rating becomesthemarkets

defactoevaluationofthecountrysabilitytosustaintherenewableenergysupport

mechanismStabledependableandlong-termframeworksforthenationalenergy

7 Ceres (www.ceres.org) is a non-profit organisation advocating for sustainability leadership mobilising a net-work of investors, companies and public interest groups to accelerate and expand the adoption of sustainablebusiness practices and solutions.


52/94


mixandnationalfinancialcredibilityarecrucialtoriskreductioneffortsMoroccos

Ouarzazate CSP plant offers a successful example Upon completion the plant

isexpectedtobethelargestintheworldatMWwiththefirst-MW

expectedtobecommissionedbyTheprojectisuniqueinthatsevenlenders

wereinvolvedafterthegovernmentandinternationalfinanceinstitutionspartneredtoreducetheprojectriskanddemonstratethelongtermfutureofCSPinMorocco

(ClimatePolicyInitiative)

Ifprojectdevelopers canmeet major investorson theirterms capitalis available

TheEuropeanInvestmentBank(EIB)reportedinthattherewasadearthof

investment-worthyrenewableenergyprojectsavailableandthatfundingwasnotthe

problem(EIB)

Thereisalsoanissueinthetypeoffinancesoughthistoricallyprojectswerefinanced

onaone-offbasisusingcomplexstructuresInstitutionalinvestorsgenerallydontinvestdirectlyintosmallprojectsIfbundledandstructuredintoaportfolioofdeployed

assetsindividualrenewableenergyprojectshighinitialcostsandvariablecashflows

canaggregateintoonesteadylow-risklong-termcashflowapproximatingabond

with which institutional investorsare very familiar Early-mover private renewable

energydevelopers in this space attractedUSD billion inequity investments in

upinmonths(UNEPBNEFandFS)

Documents

IRENA Rethinking FullReport Web View