To fight climate change, governments must redefine policies and regulatory frameworks to unlock private investments into renewable energy
Governments around the world are facing increasing pressure to raise their climate ambitions and speed up action to fight climate change. We know it’s possible – the foundation is strong, the technologies exist, and the required investments – though substantial in absolute amounts – are manageable if the capital is allocated in the right direction. With wind and solar now cheaper than ever, the private sector stands poised to invest billions of dollars to scale up and speed up the deployment of renewable energy, which is crucial to decarbonise our power systems, as well as help to decarbonise transportation and heavy industry through direct and indirect electrification. But change is not happening fast enough.
In the critical coming years, making the necessary green investments in time will be the difference between meeting our climate targets and not. Studies reveal that the private sector will need to deliver most of the necessary investments to transform our energy systems and stay within 1.5C. Here, governments play a vital role. By adjusting institutional and regulatory framework, governments can pave the way for the trillions of dollars in investments that are needed to accelerate the green transition.
“The policies put in place today will determine whether or not we can transition to clean energy fast enough to protect the earth’s climate,” says Jennifer Layke, Global Director, Energy Program at World Resources Institute. “It’s up to governments to set our course to a modern, clean, renewable electricity system and the right market signals to spur private sector action.”
Here are three primary actions governments can take to speed up deployment of renewable energy:
Design policies and commercial arrangements to improve the investment case
Renewable energy is already an attractive investment object around the world, as wind and solar are now cheaper than fossil-based power generation in two-thirds of the world. But if we’re to avoid the worst consequences of climate change, energy transition investment will have to increase to USD 4.4tn on average every year up until 2050 compared to the USD 1.8tn invested in 2019, according to IRENA figures.
To attract capital for green energy at a faster pace and scale, governments will need to put in place policies and market design that incentivise and de-risk investments into renewable energy, making it more attractive for investors. In short, governments need to reduce the cost of capital as much as possible for investments into renewable energy.
Different ingredients need to be in place to support this. Renewable energy targets – both short and long term – provide an outlook for investors and developers, large-scale auctions help reap the benefits of economies of scale, and the right auction design can reduce the cost of capital and provide certainty for investors by reducing remuneration risk.
One such example is the double-sided contract for difference (CfD) scheme. In countries like the UK and Denmark, the CfD scheme provides a stable remuneration framework for facilitating decarbonisation, smoothening out risk and reward for developers from volatile prices over a 15 to 20-year period. By introducing two-way CfD’s, governments are locking in the lowest possible cost for technology, enabling significantly lower capital cost than in alternative remuneration regimes.
Build inclusive processes that balance the needs of multiple stakeholders
To stay within 1.5, projections, studies show that global electricity generation will have to grow threefold by 2050, and that more than 90% of that future global electricity generation must come from renewables, up from around 25% today. This requires comprehensive spatial planning for the use of land and sea resources to balance the needs and existence of diverse users and protect biodiversity.
In the path towards a green economy, governments will benefit from engaging local communities, industries, and other key stakeholders to define priorities and roadmaps for transparent and sustainable land and maritime space allocation that also bring benefits for the local communities. Creating structured and inclusive processes that account for the needs of multiple stakeholders saves time and development expenses while also keeping socioeconomic, environmental and health benefits in mind.
Future-proof the grid
Wind and solar power may steal the limelight, but a robust electricity grid is the crucial enabler when it comes to transmitting and distributing renewable electricity across regions to where it is needed most. It connects demand with supply, boosts resilience and makes sure that power can be distributed across weather patterns and peak consumption times, which vary across time zones.
To future-proof the electricity grid, government support is crucial. They can, for example, implement targets and policies to increase and incentivise investment “ahead of need” in connections, deploy “interconnectors” to connect electricity systems of neighbouring countries. Furthermore, policies and incentives are needed to promote storage and demand-side solutions.
The recent US plan for a zero-carbon energy revolution with a $2tn plan to modern and sustainable energy infrastructure and increase renewable generating capacity by 2035 can increase energy reliability and reduce costs, while also making it possible to share energy production and grid services between regions.
Each of these levers can help governments create a virtuous cycle by providing a framework that offers a good investment case for investors and energy developers. This, in turn, can result in faster deployment and cheaper costs to the benefit of governments and consumers. Speeding up the energy transition will also help strengthen resilience, create millions of jobs around the world, and save millions of lives every year through cleaner air. And, crucially, it’ll help us fight climate change while we still have time.