“Developments in renewable energy won’t stop in 2050”

These days, it seems that one investment after another in renewable energy is being trumpeted. Will the market for sustainable infrastructures such as solar and wind farms become saturated at some point? Or is the sky the limit? We turn to Robert Szatkowski (Senior Portfolio Manager for Infrastructure at APG) for answers.

The average annual growth of investments in green energy was no more than a paltry 2 percent in the five years after the signing of the Paris climate agreement (2015). As of 2020, it rose to 12 percent. Still not enough to meet the targets set in Paris, but nonetheless a substantial increase.

Do you expect this growth to continue to increase, or will there be a kink somewhere?
“I think this growth will remain strong in the coming years. After all, there’s a movement towards more renewable energy everywhere. Renewable sources such as solar and wind energy are increasingly making our future independent of fossil fuels. Moreover, sustainable technology is still being developed, which means that investments in these types of projects remain attractive. What does pose a challenge is the capacity of the power grid, a common problem throughout Europe. Discussions about increasing this capacity keep popping up, partly because it requires huge investments from both governments and private parties. Unfortunately, to build up large power lines is time consuming and very few people want high-voltage cables in their backyard. In the Netherlands, an agreement has just been concluded between the government, the grid operator TenneT and the distribution system operators (Stedin, Enexis and Liander). These parties are prepared to invest billions in the energy network in the coming years, which should solve much of the current capacity problem in the Netherlands.”

Tapping into renewable energy sources requires huge investments. How long will those projects remain profitable?
“We expect the technological efficiency – the ability to convert the wind speed or solar radiation into Megawatt hour (MWh) produced – of these types of projects to keep increasing in the coming years. On the one hand, after the very difficult year 2022 with extremely high commodity prices and inflation, we see some potential for CapEx to stabilize again. In consequence, the cost of producing a MWh of energy from renewable source should be decreasing.  On the other hand, profitability of each energy generating project depends on the power price. This has been extremely volatile over the last year, but is also stabilizing. In the case of renewables, the major question connected with the future power prices is the timing of the renewable energy supply. As the production depends on the availability of sun or wind, the supply side might not fully match the demand of power on the market and result in a negative pressure on the power price in particular hours.”

What might be a consequence of that?
“As a result, the so-called ‘captured price’ for renewable energy might be lower than the average market price. This effect might be mitigated by the development of energy storage solutions, being not only batteries but also hydrogen, biomethane or eFuels. For this reason, I am convinced that the long term success of renewables depends on the technological progress of such energy storage solutions. We will likely see less stand-alone PV or wind farms and more hybrid solutions including elements of energy storage. Also keep in mind that the profitability of energy projects is not decided by a few good or bad years. A project has a long technical lifespan. For wind energy, for example, it’s 30 to 35 years, for solar energy about 40 years and for hydro up to 100 years.  We’re  talking about a very long-term horizon here.

To what extent do government subsidies and tax measures play a role in the profitability of these types of projects?
“Subsidies were certainly important when renewable energy was just taking off, otherwise the projects wouldn’t have been viable. There’s much less need for financial support from the government now, especially for major technologies like wind, solar or hydro energy. They’re either already competitive in the energy market or the level of subsidies for them has significantly decreased. Some other technologies like biogas, tidal energy or to a certain extent geothermal energy still depend on subsidies. Nevertheless, further progress in decarbonization of energy supply – leading to phasing out of fossil energy sources – will ultimately result in an increased economic viability of those green technologies. In order to maintain the development of renewables energies and flow of private capital to these projects, the governments should focus on keeping the investment framework transparent and predictable. This is in my view the major driver for increased generation and use of renewable energy. Nevertheless, I am convinced that new technologies and new smart solutions will be invented and will require certain level of subsidies. This is more likely to be driven by one off investment subsidies than by continuous subsidization of each MWh produced.”

The best-known example of government support measures is undoubtedly President Biden’s Inflation Reduction Act (IRA). Are its impacts already visible in the market?
“Not yet in terms of investments in infrastructure, although I am convinced that the IRA will have a very positive impact on the US economy and investment environment in the US. From a European perspective, there is a risk that the IRA will have a negative impact on investments in Europe. The law mainly focuses on subsidizing companies in the US that develop innovative sustainable products. Those are grants for new technologies like electrolysers, batteries’ components or other technical hardware and software equipment. To support innovation and strengthen the global supply of new technologies, it would be best if we avoid competition on subsidies between Europe and the US. In the long run this would mitigate dependencies on supply sourcing and increase market-based competition.”

The EU would like to be climate neutral by 2050. What will happen to investments in renewable energy after that?
“Nobody knows what will happen yet, although there are a few different scenarios. With that said, no one is expecting investments in renewable energy to stop after 2050. As the technology has a limited lifespan, we will for sure replace current facilities with new ones. This is the certain element. On the visionary side, if technology keeps developing over the next 25 years, we can start talking about targets to remove CO2 from the atmosphere in the second half of this century. Already now, pilot projects in this area are operational. So, this goes a step further than the goal of just being climate neutral. Viewed in this way, developments won’t stop in 2050. That year is just a goal that everyone is working towards, but there’s always a chance that the goal will become more ambitious over time.”

Investments in renewable energy have grown significantly since ‘Paris’. However, growth is still mainly limited to developed economies. In developing and emerging economies, spending in this area is still at 2015 levels. Do you expect this to change in the coming years?
“I definitely think there’s potential there and it can be a huge game changer in terms of increasing renewable energy capacity. However, it depends heavily on political stability in countries in Africa and Asia, except for India and China. Investing needs a clear and stabile economic and legal framework to be in place, and that still isn’t the case in many of these countries. Local capital likely isn’t sufficient to develop sizable renewable energy projects, and access to the international capital market isn’t optimal there either. Without foreign investors, the development of renewable energy infrastructure will be somewhat possible in these types of countries, but will stay limited. This is not satisfactory. Take the natural conditions for solar, for example. Most African or South Asian countries have much higher solar radiation levels than most of Europe. Building facilities there would theoretically allow to produce hydrogen in a much more efficient process. I hope in the future we will therefore see more projects being developed in emerging countries.”