Last year was transformative for renewable energy. War in Ukraine escalated the urgency of finding alternatives to fossil fuels, while new renewable energy capacity additions and clean energy output peaked.1 But with fossil fuel subsidies reaching a record USD 1 trillion2 and higher interest rates threatening investment, is the clean transition still on track? And what will the future renewable energy mix look like?
Amid the challenges of 2022 there was significant progress in renewable energy capacity and clean tech solutions.
We expect progress to accelerate following the positive policy developments of the US Inflation Reduction Act and European Green Deal Industrial Plan.
Solar and wind will replace hydro as the dominant sources of power in a renewable energy mix that will have to grow its proportion of the total global energy mix from 15–20% today to 60–80% by 2050.
Expansion of renewable energy remains dependent on investment in solutions and enabling technologies in critical areas such as key materials, grids and mass storage.
In 2022, when fossil fuels appeared to be at the centre of energy availability, affordability and security, growth in renewable energy capacity and output hit record levels. Over 80% of new installed power generation capacity was renewable3 (dominated by solar and wind as indicated in Exhibit 1) and grew by 300GW year-on-year.4 Considering these trends, the International Energy Agency (IEA) now estimates that renewable energy capacity will account for 90% of global electricity expansion5 which means growth of 2,400GW in the next five years – equivalent to all the capacity added in the last 20 years. The IEA also forecasts that renewable energy will be the leading source of electricity by 2025, mostly driven by China but also by contributions from the European Union, India and the US.
Yet, despite this progress, it is surprising to see long-term targets and forecasts have not changed6 , which means the world is still not on track to meet the 1.5°C scenario of the Paris Agreement.7 To align with this goal, capacity needs to triple by 2030 and rise 10-fold by 2050 (versus a 2021 baseline).8 This equates to 8,000–10,000GW by 2030 and over 20,000GW by 2050.
Exhibit 1: Current and forecast renewable energy power generation
*BECCS = Bioenergy with carbon capture and storage. Source: IEA World Energy Outlook 2022 and Allianz Global Investors.
Renewable energy is cost competitive, but still vulnerable to inflation
The steady lowering of renewable energy pricing coupled with rising fossil fuel prices has resulted in highly competitive pricing for clean energy – see Exhibit 2. However, investors need to be careful of inflationary pressures and potential related interest rate rises, supply chain constraints, or delay in core technologies. Significant upfront investment is required to develop the necessary infrastructure to support the expansion of clean energy, and rising interest rates will feed through into pricing. This sensitivity varies by renewable source, but wind infrastructure is an example where sizeable upfront investments are raising the sensitivity to interest rates, as noted in Exhibit 5.
Exhibit 2: Levelised cost of energy* (USD/MWh)
*Levelised cost of electricity: the long-term offtake price on a MWh-basis required to recoup allproject costs and achieve a required equity hurdle rate on the investment, Bloomberg. Source: Bloomberg NEF and Allianz Global Investors.
There will be significant demand for specific components and materials for the build-out of clean energy networks and the events of 2022 exposed supply chain vulnerability in meeting the demand for these components. Not only do these factors risk decelerating progress but they also risk significant inflation. This highlights the need to increase the scale and reach of circularity in the economy (especially e-waste) to fulfil climate mitigation and adaptation goals. The European Central Bank (ECB) has recognised the challenges that inflation and economic uncertainties present for the expansion of renewable energy.9
Lastly, there is the structural factor of intermittence.10 Fluctuations in output can result in additional costs incurred due to energy-balancing measures required in the decoupling of energy production and consumption. To date, intermittence has been mainly balanced by gas power plants. Mass storage is the solution to ensure cost-effective upscaling of renewable energy, countering marginal cost impacts from gas price inflation and lowering any association of clean energy growth with an increase in gas demand to address intermittency.
Developed countries have directed policy support to renewable energy through subsidies and fiscal stimulus packages like the Inflation Reduction Act in the US and the European Green Deal Industrial Plan. However, most developing economies do not have the same fiscal tools at their disposal. To address this point, the International Renewable Energy Agency (IRENA) has proposed the idea of a transfer mechanism, whereby developed countries can support developing countries. Exhibit 3 shows the concentration of renewable energy capacity globally.
Exhibit 3: Share of primary renewable energy in the energy mix by location in 2021
Renewable energy comprises a broad range of energy sources, each at its own stage of maturity, with its own future trajectory, risks and opportunities. Hydroelectric power is currently the world’s third-largest energy source and by far the largest renewable energy source. IRENA estimates that it will account for 37% of renewables, equal to 1,250GW, by the end of 2022 (solar: 31%; wind: 27%). However, by 2050 while we expect hydroelectric power to have increased slightly, its share of the overall and renewable energy mixes is expected to have fallen sharply. Solar and wind are expected to be the leading sources of energy in the renewables mix – see Exhibit 4.
Our own renewable energy heatmap – Exhibit 5 – incorporates an assessment of the key areas of dependency and risk materiality. Some can be counterintuitive like climate change, where the very factor renewable energy is trying to solve, may also negatively impact its future adoption. It is also important to understand the extent to which future development is a function of processes, technologies and enabling infrastructure (grids and grid connections) that do not currently exist. Some of these factors may be subject to political volatility to the extent that progress may be policy-related (eg, reducing the delay on permits).
The heatmap reinforces the need for both in-depth analysis and targeted investor engagement to fully understand the risks and opportunities for the different renewable energy sources. These factors, even if sometimes highlighted less often and with more abstract modelling, are considered in the forecasts of the agencies (eg, IRENA in its World Energy Transition Outlook 202211 devotes a whole chapter to the problem of critical materials and the IEA12 also discussed this point in its Net Zero Emissions by 2050 scenario).
Exhibit 4: Renewable energy capacity expected growth
*Concentrating solar power = solar thermodynamic power. Source: Allianz Global Investors, IEA, IRENA.
Record investments still falling short
While USD 1.3 trillion13 of energy transition investments in 2022 was a record, it falls significantly short of what is required. IRENA has estimated that at least USD 35 trillion needs to be invested by 2030 to meet the 1.5°C target14 – this means annual requirements of over USD 5 trillion15 globally. For renewable energies, this equals an uplift in annual investment from USD 500 billion to USD 1–1.5 trillion16. The rest (and bulk) of energy transition investments are focused on assisting adaptation within fossil fuels.
In addition to expanding the scale of investment, there is a need to increase the reach. Most renewable energy investment flows will go to solar photovoltaic and wind in the key markets of China, Europe, and the US. However, there needs to be greater allocation to developing markets – Africa accounted for a mere 1% of new renewable energy capacity installations globally last year.
The private sector has a major role to play. Public finances have been challenged by successive crises, and ongoing economic uncertainty could threaten the ability of governments to meet such enormous financing needs. The depth and breadth of the private sector can also ensure the fullest investment across renewable energy sources across the world.
Exhibit 5: The future potential for each energy source and their risks measured by key indicators
*Piloting: controlling the generation of electricity according to demand.
Source: Allianz Global Investors, IEA, IRENA.
Investment implications of the future renewable energy mix
The gap between current and required investment is significant and the expectations of both public and private investments are very high. What is the answer? There are different ways to support the depth and breadth of investment required:
Financing renewable energy: this can be achieved either through direct investment in projects in the private markets or through investment in companies looking to significantly expand their renewable energy infrastructure.
Investing in supporting infrastructure: similar to above, this can be achieved through both private and public markets to support the necessary infrastructure required for renewable energy expansion – such as connection to the grid and pipelines. It is worth noting the potential to invest in private equity, which has been very involved in this segment.14
Considering energy enablers: Exhibit 5 highlights the areas of key dependency, and significant potential investment opportunities exist, for example:
Development of mass storage solutions for solar and wind energy.
Sourcing of critical minerals and metals – including local, more sustainable mining, but significant opportunities also could also arise in the circular economy and e-waste solutions.
Monitoring the evolution of disclosures: the past year has seen increasing company disclosures on the contribution of renewable energy to total energy consumption and, renewable energy targets, and even greater granularity on location-based versus market-based scope emissions. Improved disclosure will assist further refinement of key investment reporting requirements like “sustainable investment share”15 and Do No Significant Harm17, which should bring benefits. Similarly, it will assist the alignment of activities to the UN Sustainable Development Goals18, specifically SDG 7: affordable and clean energy and, even more specifically, SDG 7.2: focused on increasing the renewable energy share of the global energy mix.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/ or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).
Disruption – opportunities in change
Read how disruption is creating opportunities through change, for both corporates and investors, across a range of industries and sectors.
Growing pains? China’s property sector challenges signal an economy in transition
China’s property sector is a significant engine of the country’s economy, and uncertainty around the outlook is weighing heavily on market sentiment. But we view these challenges as growing pains in the shift of China’s economy to a more consumption-led model. What are the opportunities of this transition?