Several months after COP28, when parties made some progress to boost the net-zero energy transition, key challenges persist. We assess the current situation and provide an outlook for renewable investments in the coming years.
- Despite continuous growth in clean energy investments and production, the phasing out of fossil fuels needed to meet net zero targets remain elusive and will continue to negatively impact relative prices for more complex renewable energy projects.
- Unfavourable global macroeconomic conditions – notably high interest rates – will hamper the development of more complex clean energy projects in the one-to-two-year outlook.
- Geopolitical competition will also hamper energy transition momentum, particularly impacting technology sharing, policy coordination and access to critical resources.
- Regulatory uncertainty, infrastructure deficiencies and supply-chain disruption will be the key risks for businesses with ambitious decarbonisation plans in the coming years.
Energy transition or renewables addition?
Clean energy generation continues to increase at a rapid pace. According to the International Energy Agency (IEA), renewable capacity additions increased by approximately 50% in 2023, the 22nd year in a row that such an indicator has reached a new record. However, there is effectively no transition if fossil fuels consumption and investments continue to increase, which has remained the case despite the increased urgency of the climate crisis. As per IEA data, investments in clean energy have expanded their lead vis-à-vis investments in fossil fuels in the past three years, but these have also increased.
Although the IEA expects fossil fuel consumption to peak by 2030, this is perceived as an overly optimistic assessment by some industry players, as new, large-scale oil and gas projects continue to be implemented around the world.
The Persistent investments into fossil fuels is a global phenomenon, reflecting, notably, the effects of the Ukraine and Gaza conflicts and the associated energy security and affordability concerns in both developed and emerging economies. It also reflects strong economic fundamentals for oil and gas projects in traditional and emerging producers, including the Middle East, the US, Canada, Brazil and Guyana. All these producers retain considerable short-term financial incentives not to phase-out their growing production, as they enjoy the benefits of increased exports and better energy security prospects.
As a result, relative prices to fossil fuels will pose challenges to many renewable projects, as fossil fuels remain a favourable option for countries and businesses wanting to secure energy supplies without raising costs in the short-term.
Renewable expansion
This does not mean that the expansion of renewables capacity will decelerate as overall demand for energy (and electricity in particular) continues to increase. On the contrary, positive technology developments, policy support (even if ambiguous) and economies of scale will continue to drive the rise of clean energy investment in the coming years. Solar and wind will likely continue to be the main leaders of growth, with green hydrogen and nuclear power holding significant potential as governments and investors work to de-risk such projects.
Renewable energy capacity has increased across multiple regions in recent years, notably in Europe, the US and middle powers such as India and Brazil. However, China has presented the most significant growth: for example, in 2023 China commissioned as much solar energy as the entire rest of the world did in 2022, while additions from wind grew by 66%. Given its significant domestic policy coordination capabilities and dominance of critical supplies (including minerals and equipment), China will likely remain the main powerhouse for clean energy globally in the coming years. This will in turn fuel its growing strategic competition with the US and its allies further.
However, the pace of overall renewables growth will likely be erratic, as it remains contingent on volatile geopolitical and macroeconomic circumstances. These circumstances will comparatively disincentivise sustainability as governments weigh the so-called “energy trilemma” of energy security, affordability and sustainability, especially while geopolitical animosity persists. This will ultimately prevent more ambitious green rhetoric by governments from being translated into concrete, pro-renewables policies. Meanwhile, elevated interest rates due to stubborn inflationary pressures will hamper the economics of more complex projects at least in the one-to-two-year outlook. Although rates have likely peaked in developed economies, they will probably remain higher for longer as supply-chain disruption risks slow disinflation.
>This does not mean that the expansion of renewables capacity will decelerate as overall demand for energy (and electricity in particular) continues to increase. On the contrary, positive technology developments, policy support (even if ambiguous) and economies of scale will continue to drive the rise of clean energy investment in the coming years. Solar and wind will likely continue to be the main leaders of growth, with green hydrogen and nuclear power holding significant potential as governments and investors work to de-risk such projects.
Renewable energy capacity has increased across multiple regions in recent years, notably in Europe, the US and middle powers such as India and Brazil. However, China has presented the most significant growth, for example, in 2023 China commissioned as much solar energy as the entire rest of the world did in 2022, while additions from wind grew by 66%. Given its significant domestic policy coordination capabilities and its dominance of critical supplies (including minerals and equipment), China will likely remain the main powerhouse for clean energy globally in the coming years. This will in turn fuel its growing strategic competition vis-à-vis US and its allies further.
However, the pace of overall renewables growth will likely be erratic, as it remains contingent on volatile geopolitical and macroeconomic circumstances. These circumstances will comparatively disincentivise sustainability as governments weigh the so-called “energy trilemma” of energy security, affordability and sustainability, especially while geopolitical animosity persists. This will ultimately prevent more ambitious green rhetoric by governments from being translated into concrete, pro-renewables policies. Meanwhile, elevated interest rates due to stubborn inflationary pressures will hamper the economics of more complex projects at least in the one-to-two-year outlook. Although rates have likely peaked in developed economies, they will likely remain higher for longer as supply-chain disruption risks slow disinflation.
Cooperation falling short
Geopolitical competition will continue to be a key problem for the energy transition. It will pose risks to both businesses directly involved with energy projects, as well as those that are not but still need to decarbonise their supply chains reliably and quickly.
As repeatedly stressed by the scientific community, global cooperation will be key to mitigating climate change. From technology sharing to policy coordination and the establishment of fluid flows of trade for critical resources, recent COP agreements envision multilateralism as the backbone of an orderly green transition. However, precisely due to its strategic nature, the energy transition has instead become a battlefield for competition, as major powers work to secure self-sufficiency and block the development of comparative advantages by adversaries.
This has mostly manifested in trade controls focused on critical minerals and emerging technology, the weaponisation of regulation (for example around ESG issues, which are relevant in both mining and energy projects) and domestic subsidies, particularly around electrical vehicles (EVs). Recent examples in the energy transition space include China’s ban on rare earths processing technologies, the US Inflation Reduction Act (IRA)’s subsidies for domestically produced EVs and the EU’s probe into Chinese subsidies for solar panels.
There are a few exceptions, but even they underline the growing momentum of competition, as partnerships have formed along a clear “US-allies versus China” axis. On 10 April, for example, Japan and the US announced a partnership to accelerate developments in engineering, manufacturing and other areas related to floating wind farms. On 5 April, the EU, the US and other members of the 14-member Minerals Security Partnership (MSP) together with Kazakhstan, Namibia, Ukraine, and Uzbekistan, announced the creation of the so-called MSP Forum, which will be an important platform for cooperation in the critical minerals space. On the other side of the geopolitical divide, the BRICS+ bloc continues to work to reduce their dependence on Western economies, by working to promote de-dollarisation and establishing alternative investment routes (such as in Africa, South Asia and Latin America).
AI enters the stage
A key element driving the energy transition and, at the same time, making it more complex will be electricity. Significant adoption of EVs coupled with the electrification of industrial systems will help countries and businesses decarbonise their energy matrices faster. New AI-based tools will further improve the prospects for positive technology shocks that could advance the energy transition.
However, the energy demands of these technologies will likely also lead to more frequent overloading of electricity grids, which generally remain poorly prepared to absorb growing demand across both developed and emerging economies. According to the IEA, global electricity demand will grow by an average of 3.4% annually in the next three years. The agency expects demand from data centres, cryptocurrency and AI specifically to double in such a period, making it a significant part of overall demand growth.
Growing electricity demand coupled with more frequent and severe episodes of heat stress due to climate change will raise operational risks related to power shortages. These have increased both in frequency and duration around the world – a trend that will only intensify in the coming months and years as global temperatures continue to rise.
Business risks
As in all-things climate change, the main risks from the energy transition relate to global action not being fast and strong enough, as the climate crisis increasingly affects businesses and day-to-day life around the world. In addition to that, an erratic energy transition will add instability to an already fragile state of geopolitics (and vice versa), which will represent increased disruption risks for the global economy.
Against this backdrop, businesses will be exposed to a set of risks that will likely compound each other, including regulatory volatility and operational disruption. Decarbonisation will remain an imperative for companies intending to future-proof their investments and meet growing regulatory compliance requirements. Such a process will require a sound assessment of geopolitical trends and, a robust economic planning and long-term-oriented mindset. Without this, businesses may find themselves pursuing decarbonisation goals that may become technologically or politically impossible to achieve. However, the successful navigation of such a landscape will most likely be a strong competitive advantage, as it will help businesses overcome the energy trilemma and significantly improve operational resilience.