Article summary
- The world needs $130 trillion in clean energy investments by 2050 to reach climate goal targets.
- The bulk of these investments will need to focus on renewable energy, energy efficiency, electrification, and enabling infrastructure.
- Clean energy investments need to vary by sector – power, buildings, industry, and transportation.
- G20 countries need to help enable the scaling up of clean energy financing in developing and emerging economies because they account for around 80% of the global gross domestic product (GDP).
The International Renewable Energy Agency (IRENA) has said that the world needs to invest $130 trillion in clean energy by 2050 to reach the 1.5°C climate goal target.
The agency stated this in its May 2023 Low-Cost Finance for the Energy Transition report. According to the report, half of the investment in the 1.5°C Scenario will be required in renewables, both for direct use and on the supply side as well as electrification, and a further one-third for energy efficiency.
The remainder is split between investment in fossil fuels and CO2 removal. A part of the report stated:
- “To enable an energy system aligned with the 1.5°C target, investment in energy transition technologies and related infrastructure will need to rise to over $130 trillion by 2050 in the 1.5°C scenario, complemented by a simultaneous redirection of investment away from fossil fuels. The bulk of the investment will need to focus on renewable energy, energy efficiency, electrification, and enabling infrastructure.”
The report also notes that in the transition to net zero, clean energy investments need to vary by sector. The sectors identified in the report include:
Buildings
In buildings, much of the investment is needed in energy efficiency including retrofits to the building envelope, heating and cooling, efficient appliances, and the requirement that new construction are generally at, or near, zero-energy standards. Investment is also required in heat pumps, solar thermal systems, clean cooking, and other technologies.
Transportation
Transport investments will need to focus on electric mobility in the road segment, including the adoption of electric vehicles and related charging infrastructure. Energy efficiency measures would also account for a large share and should adopt the “avoid, shift, and improve” principle.
- The avoid, shift, and improve principle is an approach to environmental sustainability that seeks to increase efficiency by modifying consumer behavior.
Industry
Industry investments are diverse, ranging from efficiency using the best available technologies, to principles of the circular economy and the direct use of renewables such as sustainable bioenergy. Clean hydrogen is also needed, the majority of which should be supplied through the green route, which is renewable-electricity-based electrolysis.
- The industry will also require some level of CO2 removal.
Power
Significant investment is required in the power sector, which will need to become predominantly renewables-based. This will require significant investment in renewable power capacity as well as related infrastructure such as grids and storage.
More insights
The report also highlights the importance of G20 countries helping to enable the scaling up of financing in developing and emerging economies. This is because G20 countries represent the largest economies in the world and account for around 80% of global gross domestic product (GDP).
The report also states that the cost of capital for renewable power generation technologies is a very important driver of total costs. A part of the report states:
The cost of capital is a major determinant of the cost of electricity from renewable power generation technologies. Access to low-cost finance reduces the cost of energy to consumers and unlocks the potential for greater deployment.
The cost of capital for a renewable energy project will differ based on a range of different drivers, the three most important of which are:
Country risk
The country where the project is located represents the general cost over a risk-free rate due to the country’s political, institutional, and regulatory risks. These can be a major driver of the cost of capital differences.
Off-take risk
Where the revenues of a project are secured through a bilateral contract of some sort, the investors’ perceived risk in relation to their ability to pay will influence the expected rate of return. This can also be influenced by regulatory risks, where the off-taker is a public entity.
- Where international developers are involved, exchange rate risk also has an impact, although hedging can mitigate this risk, at a cost.
Technology risk
Different technologies have different risk profiles, based on the technology maturity, the level of experience to date in specific markets, and the developer’s experience.