RSM Global

The Future of Renewable Energy

The global development of renewable energy encounters a number of obstacles:

  • Slow GDP growth in developed economies that dampens the allure of investments in renewable energy ventures with uncertain returns
  • The continued dependence of developing/emerging economies on fossil fuels to sustain their energy-centric growth paths
  • The shale gas boom that has lowered natural gas prices and weakened the commercial case for renewable energy investments
  • Fiscal constraints that have compelled Western governments to reduce financial incentives for renewable energy development
  • Persistent uncertainties over the policy and regulatory environment of renewable energy that discourage potential investors
  • The absence of major breakthroughs in renewable energy technologies that would bridge the price gap between renewable and conventional energy
  • The diminished political imperative of greenhouse gas reductions, illustrated by the United Nations Climate Change Conference in Copenhagen that failed to produce a robust successor to the Kyoto Protocol

Despite these impediments, the future of renewable energy remains optimistic. Consumption of renewable energy continues to expand on a global basis, signaling improved price competitiveness with conventional energy sources. While renewable energy investments are declining in North America
and Western Europe, they are rising in China, South Africa, Turkey and other emerging markets. Furthermore, developed countries like the United States and Germany that are experiencing a
slowdown in renewable investments display a steady increase in renewable energy capacity.

Global and Regional Trends in Renewable Energy
As shown in Exhibit 1, renewable energy (biofuels, geothermal, marine, solar and wind) comprises just 2 percent of the global energy mix. But consumption of renewable energy is growing much more rapidly than that of hydrocarbons (coal, natural gas and oil) and nuclear power. Addition of hydroelectricity raises the overall clean energy share of global consumption to 8 percent.

Exhibit 2 reports regional patterns in renewable energy. Europe surpassed North America in renewable energy consumption in the early 2000s, and currently represents over 40 percent of global onsumption. Despite the economic malaise prevailing in much of Europe, renewable energy consumption is growing more rapidly there than in any other region, illustrating the impact of the European Union’s “20-20-20” mandate and other policy directives aimed at accelerating renewable energy development. But renewable energy penetration rates diverge widely among the EU-27. Unsurprisingly, the Scandinavian countries exhibit the highest shares of renewables in total energy consumption (22.2 percent in Denmark, 32.2 percent in Finland, 47.9 percent in Sweden). The large continental European countries show more modest renewable consumption shares: Italy 10.1 percent, Germany 11.0 percent, France 12.9 percent. The United Kingdom reports one of the lowest renewable energy consumption shares
in the EU (3.2 percent of total consumption against a 2020 target of 15.0 percent). British energy officials are pushing expansion of the country’s solar and wind capacity to speed convergence
toward the 2020 goal. While a number of renewable technologies originated in North America, that region now ranks a distant second to Europe in renewable energy consumption. The shale gas revolution is proving a clear boon for the U.S. economy, but the resultant fall in natural gas prices is weakening the American investment climate for renewables. 

With a compound annual growth rate of nearly 15 percent, Asia Pacific is poised to overtake North America as the second biggest renewable energy consumer. This development is the consequence of the surge in renewable consumption in China (38.1 percent CAGR between 2001 and 2011) and India (26.2 percent). With annual renewable consumption of 17.1 millions of tons equivalent, China now ranks third behind the U.S. (45.3 mtoe) and Germany (23.2 mtoe). Brazil dominates the renewable energy market of Central and South America with two-thirds of regional consumption. Renewable energy consumption in Brazil is growing at CAGR 10.4 percent, matching the growth rate of the U.S. The second-tier economies of South America (Argentina, Chile, Colombia, Peru)show higher growth of renewables, albeit at modest consumption volumes. Similarly, the small economies of Central America
report high renewable growth rates from low starting bases. The Middle East and Africa lag well behind the other regions with a combined renewable energy consumption of only 1.4 mtoe in 2011. This reflects (1) the dominance of hydrocarbons in the oil and gas producing countries of the Middle East and Africa, and (2) the region’s standing as a late mover in renewable energy. But the natural resources of Sub-Saharan Africa (sun, water, biomass) offer great potential for renewable energy, and the region is now attracting significant investments that promise to hasten renewable energy development. 

Renewable Energy Investments
Global investment in renewable energy totaled $269 billion in 2012, down from $302 billion in 2011. As shown in Exhibit 3, the major developed countries (U.S., Germany, U.K.) are experiencing declines in renewable investment. An exception to this pattern is Japan, where renewable energy investments are growing sharply in the aftermath of the Fukushima disaster. 

Renewable energy investments are on a downward path in all of the key technology groups (solar, wind, biofuels, geothermal). Biofuels exhibits the weakest investment performance, demonstrating (1) the contraction of biofuels subsidies in the U.S. and other countries, (2) competition between food and energy producers for biomass feedstocks and (3) technical and operational barriers to deployment of next generation biofuels such as cellulosic ethanol. Parallel with the decline in developed market investments, emerging markets are enjoying strong growth in renewable energy investments. China captured $65.1 billion in renewable investment in 2012, nearly 25 percent of the global total. South Africa, whose national energy strategy faced repeated delays in the 2000s, is now the world’s fastest growing renewable investment market. South Africa’s success in attracting major investments in solar ($4.3 billion in 2012) and wind ($1.1 billion) illustrates both the country’s natural assets and its ability to leverage technological advances in renewables by first movers like the United States and Germany. 

Falling Investment, Rising Capacity
Despite the decline in renewable investments, renewable energy capacity continues to expand on a global, regional and country basis. Exhibit 4 reports current capacity levels in leading renewable energy countries. China is now the world leader in renewable energy with 152 gigawatts of installed capacity. China is also the global leader in wind power and ranks sixth in solar energy and biofuels. Other emerging markets occupy key positions in the global renewable energy market: Brazil in biofuels, India in wind, Czech Republic in solar. The rise to prominence of these emerging markets reflects strong growth rates in renewable energy investments over the past decade. But a new study by Pew Charitable Trusts (“Who’s Winning the Clean Energy Race?”) finds that even the developed economies that are experiencing declining renewable energy investments are enjoying strong increases in renewable capacity. The U.S., which reported a 37.3 percent reduction in renewable investments in 2012, added 3.6 GW of solar power and 13.6 GW of wind power. 

Germany (27.2 percent investment decrease) added 7.5 GW of solar and 2.4 GW of wind. Italy (51.2 percent investment decrease) added 3.4 GW of solar and 1.3 GW of wind. Despite a 17.0 percent fall in renewable investment, the U.K. added 4.2 GW of new wind capacity. Globally, a record 88 GW of renewable energy capacity entered service in 2012 notwithstanding an 11 percent fall in investment.
The coincidence of falling investment and rising capacity reflects the following:

  • The results of prior investments in large-scale renewable energy projects that are now coming on line
  • Innovations in renewable energy financing, particularly instruments for investments in small-scale distributed power (e.g., residential solar units) that speed the operationalisation of new capacity
  • Advances in technology and realisation of scale economies that lower the costs of renewable energy capacity and enable deployment of previously cost-prohibitive alternative energy systems

Conclusion: The Promise of Energy Efficiency
In addition to augmentation of renewable capacity, improvements in energy efficiency are critical for the development of a clean energy economy. According to the International Energy Agency, two-thirds of the economic potential of energy efficiency remains to be tapped.

Exploitation of that potential requires both capital-intensive investments (e.g., grid modernisation) and micro-scale investments (e.g., heat recovery systems in factories, improved insulation in homes and offices). This suggests that there remains substantial scope for growth in energy conservation even if the current trend of declining investment in renewable energy supplies continues.

David Bartlett
Economic Advisor
RSM

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