Challenges and strategies for accelerating renewable energy investments in the global context

The remarkable expansion of investments in clean energy has recently been driven by renewable sources. Annual investments in solar and wind projects have risen to over 300 billion dollars in five years, representing one-third of the total projected $1.8 trillion for clean energy in 2023.

During the 2010s, investors in renewables and governments became accustomed to two favorable trends: cheap capital in a period of low interest rates and ever-decreasing costs. However, the situation changed with the post-pandemic energy crisis.

Renewable energy: rising rrices since 2020 have disrupted economic balances

With higher interest rates, financing becomes more burdensome, impacting renewables in various ways. Projects are more difficult to finance; corporate profitability decreases due to greater reliance on expensive shares; and the risk of default increases for highly indebted companies.

Renewable energy investments are particularly vulnerable to rising financial costs due to their high initial costs offset by lower operating expenses.

Higher financing costs exacerbate challenges for renewable project developers in emerging and developing economies, where the cost of capital is two to three times higher than in advanced economies and China. According to the IEA Observatory, 90% of respondents expect an increase in the cost of capital in these economies in 2023.

Additionally, the long phase of cost reduction for major clean energy technologies has been interrupted by commodity price volatility and supply chain constraints. The IEA index tracks the prices of solar modules, wind turbines, and lithium batteries.

In 2020, many prices increased. Rising financing and production costs have disrupted the economic balances of projects, making them difficult or impossible to realize. This has forced wind developers to renegotiate prices, leading to delays and cancellations. There has also been low participation in new auctions, especially in Europe.

In 2022, unassigned capacity globally reached a record, with only 85% of capacity assigned, compared to 90-95% in 2020 and 2021. Europe had 14 of the 20 GW of unassigned capacity.

Renewable energy: challenges to address

This uncertainty impacts supply chains, with wind plants under stress. Many European and American manufacturers have had negative net margins for seven consecutive quarters. However, current difficulties also highlight structural issues that policymakers need to address.

In particular, four main challenges have been identified:

1. Inflexible Auctions: in past years, auctions favored ever-lower prices in a context of low costs and interest rates. This created unrealistic expectations among governments, leaving no room to adapt to changing macroeconomic conditions or cost pressures.

2. Lengthy Authorization and Connection Times: financial pressures are exacerbated by the time required for grid connections and permits. The recent IEA report highlights that 3,000 GW of renewable projects, including 1,500 GW of advanced projects, are awaiting connection; this is equivalent to five times the capacity added in 2022. In some countries, contracts are awarded before obtaining permits and connections, complicating final cost estimates.

3. Need for Policies Addressing Current Challenges: flexible auctions that adapt to macroeconomic and cost changes; secure and diversified clean energy supply chains; regular auctions and faster authorization processes; reducing the cost of capital in emerging and developing economies.

4. Increasing Confidence in Demand Reliability: supply chains need a reliable flow of projects. Inconsistencies in auction volumes and slow authorization processes hinder the increase in confidence. Regular auctions, fast authorizations, and network improvements are crucial elements in this regard.