From Crisis to Clean: Renewable Energy Investment on the Rise

Last week the International Energy Agency (IEA) published its most recent World Energy Investment report, presenting a comprehensive analysis of energy investments worldwide. The report highlights a notable transition in investment patterns towards renewable energy, following the energy crisis and the global recovery from the Covid pandemic. Projections for 2023 indicate a significant increase in clean energy investment, with a projected growth rate of 24%, surpassing the 15% growth anticipated for fossil fuel investments since 2021.

One observable pattern is that these investments are highly clustered, with more than 90% of the growth coming from investments made in China, the EU, US, and Japan. Investment in these countries is driven by a variety of factors, which include the increasing prices of fossil fuels making the business case more appealing, government stimulation programs, and international climate agreements. Investment in these technologies can drive innovation, which makes the technology more efficient and ultimately cheaper. In the graph below, we can clearly see that average prices have decreased starkly since 2014. Although the average price decline has stagnated due to higher input costs, these technologies remain cost-competitive due to increased costs of fossil fuels.

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Source: IEA World Energy Investment (2023)

We might be worried that geographically clustered investments hamper a just transition, where countries that do not have the same means to adapt are not left behind. However, renewable investment in one country affects the worldwide supply of renewable technology.

In the latest paper of Gerarden (2023)we can see the causes and effects of innovation in renewable energy technology, by looking at the case of solar panels. In his paper, he models a market with 4 regions: Germany, Japan, the United States, and the rest of the world for the period 2010 to 2015. Through the model, we can learn how national subsidies affect supply and demand in one country, and how this affects the market outside of that country. Firstly, we can see that national stimulation packages have contributed large to the uptake of the solar market as a whole. Adoption over the period would have been 78% lower globally without any subsidies. Moreover, the model isolates the effects of subsidies in Germany, demonstrating that out of the total adoption resulting from innovation triggered by German subsidies, a remarkable 88% occurred outside the country's domestic market. Examining the temporal aspect, the research indicates that while initial adoption stimulation primarily takes place within the home market, the long-term effects of subsidies are more pronounced outside of Germany. This paper provides valuable insights into how local investments exert influence on the global market through long-term effects and spillover impacts.

While the benefits of clean energy adoption can eventually extend to other nations, potential obstacles may hinder technology uptake in the future, such as the insecure supply of critical minerals. Another contributing factor to geographical disparities in the energy transition is the variation in total energy demand among countries, influenced by the level of energy efficiency investment. Uneven distribution of energy efficiency investments and standards further amplify imbalances in fossil fuel dependency.

The paper also sheds light on an inefficiency where companies or governments tend to underinvest when the costs are borne privately, while the benefits are shared publicly. This market failure can be mitigated through international cooperation, which can facilitate coordinated investments, minimize inefficiencies, promote greater clean energy investment overall, and ensure a more equitable transition.