10 October 2016
We’re seeing the dawn of a wind and solar power revolution. However, the growing energy requirements created by population gains and rising living standards in the developing world mean we see no associated twilight for non-renewable energy sources.
The rise of renewables has been remarkable and, backed by considerable policy support, wind and solar power generation have grown rapidly in the 21st century. Our projections see strong growth in renewable energy capacity continuing unabated for the next few decades.
In 2000, only a handful of countries had renewable energy support policies in place. Today, there are only a few countries without them. Furthermore, the Paris Agreement (an outcome of the UNFCCC COP21 meeting in 2015) set the groundwork for the transition of our economies to lower emissions, and renewable energy will play an important role in that journey.
Combined wind and solar power generation has increased nearly 50 times over since 2000. This expansion has helped to reduce wind power costs by more than half and decreased the cost of solar panels by nearly 90%.
On average, wind and solar energy are expected to reach cost-parity with incumbent technologies on a new-build, unsubsidised basis in about a decade. As an example, the chart below depicts the expected cost of building new wind and solar plants relative to new coal in China – the world’s largest power market. However, it must be noted that some markets with excellent solar or wind resources, such as Chile and Morocco, have today already passed these tipping points.
The trillions of dollars already ‘sunk’ in existing conventional, long-life power plants must also be considered. This will impact the speed of renewables uptake, but not the direction of change. We see India and China’s existing coal power assets and the traditional role of gas in the US to be a major influence on their multi-decade generation mix. However, the experience in Europe shows there is plenty of headroom for renewables to grow in these markets before the constraints of the current renewables technology begin to bite.
Notwithstanding the ‘revolutionary’ uplift in capacity since 2000, in 2015 wind accounted for only about 3½% of power supply and solar accounted for around 1%. And despite the fact that the ‘continuous revolution’ will see the combined share of wind and solar in power generation triple in the coming quarter century, the world will still require roughly four-fifths of its growing total energy needs (of which power is a subset) to come from non-renewable sources1.
There are a number of swing factors that could influence the long run share of wind and solar power. One is the future mix between rooftop and utility scale solar power; another is the path of the ‘experience curve’ in solar panel manufacturing, with the relative contributions of economies of scale and ‘pure’ technological progress a subject of debate. There is also the question of the rate of developments in storage technology, which is a panacea for renewables as a whole; and the uncertainty around the future level of policy support for both renewables and batteries in a world of stretched public sector balance sheets.
Countries and regions will respond differently to the challenge of growing energy demand while simultaneously addressing climate change. Diverse approaches will reflect the complexity of the decision making. However, it is unlikely that a simple substitution between fossil fuels will achieve the desired results (e.g. coal to gas). In addition to increasing the share of low emissions and renewable energy sources such as wind, solar, hydro and nuclear, to meet these dual objectives the world must pursue a range of alternate methods. These include continuously finding ways to improve energy efficiency; reducing emissions from the extraction and use of fossil fuels through solutions such as carbon capture and storage (CCS); and enabling solutions that have the potential to reduce emissions already in the atmosphere, such as afforestation / reforestation and bio-energy CCS.
Wind and solar have made impressive gains and there’s clearly much more to come. We believe, however, that demand for all of the energy commodities in our portfolio will continue to grow for decades to come - albeit at a much slower rate than at the peak of the China boom.
Our next edition of Prospects explores policy developments post COP21 and how these changes may impact on our portfolio as we move towards a 2 degree world.1 This is the central scenario from our in-depth scenario analyses that consider multiple potential pathways for the world to meet its future power needs. Non-renewables share of total energy includes nuclear.