Investment In Low-Carbon Energy To Hit $620 Billion This Year
- Investment in green energy overtook related spending in oil and gas in 2022.
- Spending on low-carbon energy projects is expected to surge by 10% to hit $620 billion in 2023.
- Solar and onshore wind will contribute the most by a sizable margin.
Spending on low-carbon projects will increase by $60 billion this year, 10% higher than 2022, led by wind developments but helped by a significant rise in funding for hydrogen and carbon capture, utilization and storage (CCUS) infrastructure, Rystad Energy research shows. The growth in total spending is a slowdown from recent years – which averaged 20% annual increases – as cost-conscious developers tighten their purse strings after two years of soaring prices.
Investments in green sectors surged 21% in 2022 to overtake related oil and gas spending for the first time, but inflation-spooked developers seem set to rein in spending growth this year. However, as inflationary pressure weakens, we expect spending to rebound.
Investments in the geothermal, carbon capture, utilization and storage (CCUS), hydrogen, hydropower, offshore and onshore wind, nuclear and solar industries are set to hit $620 billion in 2023, up from about $560 billion last year. Service segments included in our calculations include project equipment and materials, engineering and construction, wells, operations and maintenance, and logistics and vessels.
Solar and onshore wind will contribute the most by a sizable margin. Spending on solar investments will total $250 billion this year, rising only 6% over 2022. However, thanks to the falling cost of polysilicon, the primary cost driver of solar PV cells, capacity growth will be more substantial than dollar investments suggest. Despite a relatively insignificant rise in investment value, installed capacity is expected to swell by roughly 25% to 1,250 gigawatts (GW).
Spending growth will vary widely across industries. Hydrogen and CCUS are expected to see the most significant annual increase, growing 149% and 136%, respectively. Total hydrogen spending will approach $7.8 billion in 2023, while CCUS investments will total about $7.4 billion.
In contrast, the hydropower market is expected to shrink over 2022, while nuclear investments are forecast to stay relatively flat. Onshore wind investments are projected to increase by 12% to about $230 billion, while offshore wind spending is expected to jump 20% to $48 billion. Expenditure in geothermal is expected to jump significantly – about 45% – albeit from a relatively low starting position.
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“The weaker-than-expected growth is not a reason to panic for those in the low-carbon sector. Rampant inflation typically triggers fiscal restraint across industries, and spending will likely bounce back in the coming years. The outlook for hydrogen and CCUS is especially rosy as technology advances, and the large-scale feasibility of these solutions improves,” says Audun Martinsen, head of supply chain research with Rystad Energy.
Low-carbon investments are more short-cycled than the fossil fuel industries and are, therefore, more sensitive to inflationary pressures. Project plans, permitting activity and awards from companies and governments indicate this year’s expected investment growth. Based on likely activity, investments for each project were calculated based on specific characteristics and where we forecast unit prices across 2023.
What sectors will benefit the most?
Looking at the individual segment types, operations and maintenance companies will achieve the most growth this year – 16%. These companies are more exposed to the overall installed operational capacity, which will grow this year at a similar pace to 2022, with last year’s additions entering their first full year of operations. These providers’ costs are also more labor-driven than other sectors, and high consumer inflation is likely to push up wages for skilled labor, inflating segment spending.
Logistics and vessel companies, heavily weighted towards offshore projects and marine trade, are estimated to take in 15% more this year. Spending in the equipment, materials, engineering, and construction sectors, where the bulk of global investment dollars are spent, are expected to rise by about 9% annually. The new and relatively tiny market of suppliers exposed to low-carbon, well-related services is forecast to climb 33% this year, driven by geothermal drilling and CO2 injection. Despite the significant increase, investments in this market will only total about $3.7 billion.
Regional considerations
Some suppliers are not targeting the global market, preferring to focus on regional clients and project hubs. The location of confirmed projects this year shows that Africa is set to attract the highest investment growth with a 26% increase, mainly driven by onshore wind projects in Egypt. Australia takes second place with 23% growth with expansion across almost all sectors.
Asian growth of 12% is heavily impacted by China’s ambitions within solar and wind, while the US Inflation Reduction Act and a step-up in renewables and CCUS will help push North American investments up 9% this year. Europe is challenged by high inflation and a regional supply chain in crisis, resulting in a projected investment growth of 7% – much lower than the tempo needed to meet the European Union’s REPowerEU ambitions.
By Rystad Energy
Energy Efficiency Is Now Critical For Europe
- Russia’s invasion of Ukraine worsened a global energy shortage that is unlikely to be resolved any time soon, demand is set to rise and there is simply not enough supply to meet it.
- As energy security becomes a central pillar for all governments, an emphasis on energy efficiency can be seen across Europe.
- The EU has focused on improving the efficiency of buildings and homes by upgrading insulation, installing heat pumps and digital thermostats, and supporting small business infrastructure.
Following the Russian invasion of Ukraine and the subsequent global shortage of oil and gas – due to sanctions imposed on Russian energy – governments worldwide have rushed to find alternative sources, as well as encouraging the public to massively reduce their energy usage in a bid to enhance energy security. Political leaders have rapidly introduced new energy policies to increase funding for renewable energy projects, nuclear power, and alternative oil and gas supplies, as well as encouraging energy firms and industries to come up with innovative solutions to help boost energy security. However, as we go into 2023, shifting towards the existing alternatives to Russian energy will not be enough to provide the power and heating needed as demand rises. Therefore, political powers worldwide are encouraging greater frugality when it comes to energy consumption, in a war-like effort to tackle the crisis. Shortly after the Russian invasion of Ukraine, the International Energy Agency (IEA) released a report entitled “Accelerating energy efficiency: What governments can do now to deliver energy savings”. This built upon previous publications focused on reducing the reliance on natural gas in a shift to renewable alternatives. It also supported the ambitious European Commission aim of making Europe independent from Russian fossil fuels by 2030. This is part of Europe’s bigger decarbonization plans, but it will also help ensure that Europe can reduce its reliance on Russia for its energy supply.
The IEA highlighted the need to decrease energy consumption in Europe, in which average dwellings use around double the amount of energy for heating per square meter than in other countries with similar climates. The ongoing Russia-Ukraine conflict demonstrated the need for faster action to reduce Europe’s dependency on both Russia and fossil fuels in general, to ensure the future of its energy security.
The report focused on decreasing energy consumption by improving the efficiency of European homes and buildings by upgrading insulation, accelerating the installation of heat pumps, installing digital thermostats, and supporting small business infrastructure. The IEA also urged individuals to turn down their heating thermostat by at least one degree. It also recommended the acceleration of sustainable building renovation, although this has been met with resistance during a time of economic crisis with rising inflation. However, this aim has been supported by the introduction of tax incentives and other initiatives across the region. For example, Spain introduced a recovery and resilience plan that will provide around $3.65 billion to encourage people to undertake energy renovation projects.
Over the last year, the EU has focused closely on small and medium-sized enterprises (SMEs), helping them to tackle the financial crisis and stay afloat. The EU and IEA worked together on several initiatives, aimed at enhancing SME resilience through energy savings and energy efficiency. The organizations aimed to help SMEs reduce their short- and long-term energy consumption through energy audits and energy monitoring and control tools, as well as workforce training. The EU and IEA also encouraged governments to support SMEs with tax incentives and other schemes to enable them to invest in technologies for energy efficiency, new energy-efficient equipment, and sustainable renovation projects.
Having tackled SMEs, which the EU highlights as “the backbone of Europe's economy”, countries across Europe are now asking the public to respond more drastically to the energy crisis by cutting their consumption even further. In the U.K., a cross-party committee of MPs determined that a national “war effort” on energy efficiency is required to cut energy bills, reduce climate-heating emissions, and ensure energy security.
A report from the U.K.’s Environmental Audit Committee (EAC) suggests that the government already missed a “crucial window of opportunity” last summer to get homes and businesses to cut their energy consumption. The energy crisis became clear following the Russian invasion of Ukraine early in 2022, but the financial crisis brought on by the resignation of Prime Minister Boris Johnson, followed by the assigning of two new Prime Ministers, overshadowed the energy crisis. The report recommended that funds from the windfall tax on oil and gas companies should be assigned to speed up efficiency funding and fulfill the government’s 2019 manifesto commitment to invest $10.9 billion in energy efficiency, suggesting “A national ‘war effort’ on energy saving and efficiency is required.”
The chair of the EAC, Philip Dunne, explained, “Bold action is needed now.” He added, “We must fix our leaky housing stock, which is a major contributor to greenhouse gas emissions, and wastes our constituents’ hard-earned cash. The government could have gone further and faster.”
After almost a year of calls for greater energy efficiency and enhanced government efforts to reduce their reliance on Russia’s oil and gas supplies, more must be done to achieve greater energy security. New analyses show that governments can introduce incentives and schemes to accelerate energy efficiency improvements, as well as policies to ensure that new infrastructure is approached more sustainably. But, according to the U.K., it will require a war effort to achieve these goals.
Goldman Sachs: Europe Risks Clean Energy Investment Exodus
- Goldman Sachs: U.S. Inflation Reduction Act could drive up to $1.5tn of capital mobilisation into clean energy projects by 2032.
- Goldman: attractive level of support for clean energy in the US could draw away investment from the EU.
- Electrification investments in EU member countries could fall short of expectations.
Europe risks an exodus of clean energy investment to the US, unless it brings in its own inflation reduction strategy, Goldman Sachs has warned.
The investment banking titan has estimated the US Inflation Reduction Act could drive up to $1.5tn of capital mobilisation into clean energy projects by 2032, with $675bn in direct investments.
It argues this could kick-start the “electrification of America” by vastly transforming its power generation and infrastructure.
This would include boosting the base of installed renewable projects from 300GW to over 1,000GW in the next ten years, while also promoting the manufacturing of solar, renewable energy storage and carbon capture technologies.
In a research note, published yesterday, Goldman Sachs warned, however, that this “attractive level of support” could pose a risk to Europe’s leadership in clean energy.
The bank also said that a successful effort to “Electrify America” could mean cement the gap between US and EU energy bills, where EU energy costs are roughly 60 per cent higher, potentially causing a further de-industrialisation of Europe.
Goldman Sachs raised concerns that frequent regulatory changes in Europe, such as MIFIDII, and the lack of meaningful reforms, in areas such as easing planning restrictions and boosting green subsidies, could hamper the trading bloc.
It fears electrification investments in EU member countries could fall short of expectations, and be worsened by inflation.
Goldman Sachs has drafted its own European inflation reduction act plan, based on the RePowerEU proposals established by the European Commission, to help boost renewables and reduce its reliance on Kremlin-backed fossil fuels following Russia’s invasion of Ukraine.
To achieve this, it has called on the European Union (EU) to bring in granular legislation to cut down the approval time of green energy projects to about one year, alongside incentives to support “out of the money” technologies such as storage, renewable hydrogen and carbon capture and storage.
The financial giant has also suggested incentives to promote the re-shoring of the supply chain for solar panels, renewable energy storage and hydrogen power technology.
It said that implementing its proposed plan could mobilise €4tn of capital over the coming ten years.
“This backdrop could drive an energy policy “race to the top” between Europe and the US, to attract capital into clean energy,” the bank said.
By CityAM
