Forward-looking policies can accelerate the transition, mitigate uncertainties, and ensure maximum benefits of the energy transition. This is the message from IRENA’s latest World Energy Transitions Outlook.
The report outlines that sharp adjustments in capital flows and a reorientation of investments are necessary to align energy with a positive economic and environmental trajectory. The annual investment of $4.4 trillion needed on average is high. “But it is feasible and equals to around 5% of global GDP in 2019,” states the report.
Francesco La Camera, IRENA’s Director-General, said: “This Outlook represents a concrete, practical toolbox to total reorientation of the global energy system and writes a new and positive energy narrative as the sector undergoes a dynamic transition.”
Change in investment and capital markets
IRENA’s Outlook sees energy transition as a big business opportunity for multiple stakeholders including the private sector, shifting funding from equity to private debt capital.
The latter will grow from 44% in 2019 to 57% in 2050, an increase of almost 20% over planned policies. Energy transition technologies will find it easier to obtain affordable long-term debt financing in the coming years, while fossil fuel assets will increasingly be avoided by private financiers and therefore forced to rely on equity financing from retained earnings and new equity issues.
But public financing will remain crucial for a swift, just and inclusive energy transition and to catalyse private finance. In 2019, the public sector provided some $450 billion through public equity and lending by development finance institutions. In IRENA’s 1.5°C Scenario, these investments will almost double to some $780 billion. Public debt financing will be an important facilitator for other lenders, especially in developing markets.
Outlook on coal, oil and gas
Phasing out coal, limiting investments in oil and gas to facilitate a swift decline and a managed transition as well as embracing technology, policy and market solutions will put the global energy system on track for a 1.5°C pathway.
By 2050, a total $33 trillion of additional investment are required into efficiency, renewables, end-use electrification, power grids, flexibility, hydrogen and innovations. The benefits, however, greatly exceed the costs of investments.
When air pollution, human health and climate change externalities are factored in, the payback is even higher with every dollar spent on the energy transition adding benefits valued at between $2 and $5.5, in cumulative terms between $61 trillion and $164 trillion by the mid-century.
Policy direction can change the energy narrative
Just and integrated policies will remain imperative to realise the full potential of the energy transition.
As markets alone are not likely to move rapidly enough, policymakers must incentivise but also take action to eliminate market distortions that favour fossil fuels and facilitate the necessary changes in funding structures.
This will involve phasing out fossil fuel subsidies and changing fiscal systems to reflect the negative environmental, health and social costs of fossil fuels. Monetary and fiscal policies, including carbon pricing policies, will enhance competitiveness and level the playing field.
Enhanced international cooperation and a comprehensive set of policies will be critical to driving the wider structural shift towards resilient economies and societies. If not well managed, the energy transition risks inequitable outcomes, dual-track development and an overall slowdown in the progress.
Today’s policies, finance and socio-economic analysis complete the outlined technological avenues for a 1.5°C-compatible energy pathway, providing policymakers with a playbook to achieve optimal results from the transition.
Launched by energy leaders at the Agency’s Global High-Level Forum on Energy Transition, this Outlooks aims to raise ambition towards UN High-Level Dialogue on Energy and Climate Conference COP26 later this year.
Read the full World Energy Transitions Outlook.