February 08, 2016 Categories: Clean Energy

The $12.1 Trillion Dollar Question

Back in 2010, Bloomberg New Energy Finance (BNEF) boldly projected that the $90 billion invested in renewable energy in the prior year would grow to a whopping $150 billion by 2020 – 67% growth in annual investment over 10 years. Not bad!

Last year, just five years after BNEF’s “bold” projection, $266 billion was invested in renewables. That’s an increase to more than 75 percent above what BNEF had projected in half the time. This goes to show how rapidly the clean energy revolution is taking hold.

The impressive growth of the clean energy industry has been driven by the convergence of several key trends: relentless improvements in technology, robust markets and finance, and successful implementation of policies to limit carbon in many states and countries. Meanwhile, the findings of climate science have become even more urgent. These facts, combined with the historic Paris Climate Agreement, send a powerful message to energy markets: the future belongs to renewables.

These developments prompted BNEF and Ceres to coauthor a new report called Mapping the Gap: The Road from Paris. The goal is to examine the long-term trends in renewable energy investment, both for our current “business as usual” trajectory, and for the increased level of investment that is necessary to meet the 2°C target established in Paris.

The first line of the report tells the story: “clean energy investment is poised for rapid growth.”

The report’s “business as usual” scenario expects $6.9 trillion to be invested in new renewable electric power generation over the next 25 years. That’s not a scenario anyone would have considered “business as usual” five years ago, and it goes to show the enormous progress we’ve made in that time.

While $6.9 trillion is a great start, BNEF estimates it will take $12.1 trillion in renewable investments globally over this period to reach the 2°C target we collectively set in Paris.

Now, a $12.1 trillion investment may sound immense, but it is well within the capacity of global financial markets. The difference between the “business as usual” estimate and the level of investment necessary for a reasonable chance of staying below 2°C of warming is a gap of $5.2 trillion over 25 years. In the past year alone, American consumers borrowed $542 billion to purchase cars and assumed $1.4 trillion in new mortgage debt. Even if you do not consider the economic boon of transitioning to a clean energy economy, investing an extra $208 billion per year makes good economic sense to help avoid the massive and growing costs of a failure to address the climate crisis.

 

And remember, this is an investment not a cost (many news outlets missed this crucial point, including BNEF’s sister publication Bloomberg Business). The return on this investment is reduced spending on fossil fuels, not to mention the added benefits of better health and a more stable climate.

More specifically, the $12.1 trillion figure would be offset by reduced investments in fossil fuel power plants and fossil fuel extraction–funds that could easily be redirected towards increased investments in renewables. Likewise, the $12.1 trillion of investment doesn’t account for savings on operating costs from the fuel and maintenance expenses associated with coal and natural gas fired power plants that are largely avoided with renewable energy sources.

Mapping the Gap didn’t estimate these savings, but a Citigroup report from last year did. According to Citigroup’s estimates, the total amount spent on energy by 2040 would be $1.8 trillion less in a clean energy scenario consistent with the Paris goals than under a “no action” case.

Both BNEF’s “business as usual” and 2°C scenarios have some cost reductions built in that reflect the continued decline in the cost of renewables that we have witnessed over the past few decades. These cost reductions, driven by lessons learned through on-the-ground technology deployment, are not accelerated in the 2°C scenario even though there is greater deployment in this case. This adds an additional conservative element to the model’s assumptions as costs are likely to decline faster than the model assumes in the 2°C scenario.

Not only do we expect investment to grow, but as the renewables market matures, the types of asset classes available to investors will diversify. Creative entrepreneurs will see the growth and opportunity of the renewables sector and will use many vehicles to raise the needed capital. BNEF projects that markets will move toward a broader array of capital sources. Institutional investors have an especially large role to play as both equity and debt providers. If institutional investors are intentional about selecting their portfolios to be consistent with their long-term goals, they can capitalize on the enormous economic opportunity of the clean energy revolution while helping to prevent the most devastating impacts of climate change.

Still, $12.1 trillion in renewable energy investment over the next 25 years is only one part of the clean energy investment landscape. Investments to increase energy efficiency in buildings and to replace internal combustion engines with electric vehicles will be even larger, but so will the benefits. Last August, with declining costs for solar, wind, and energy efficiency technologies and rising risks for fossil fuel investment Citigroup summed up the big question: “why would we not” shift to clean energy? As policy and decision makers consider the opportunities, costs, and risks of various energy economy pathways the stakes could hardly be higher.

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