Global Landscape of Renewable Energy Finance 2020

INTRODUCTION

The landscape of renewable energy finance has evolved significantly in the past few years. In
support of recent record-setting levels of capacity additions in wind and solar technologies, finance for renewable energy represented 63% of total climate mitigation finance in 2017-2018 (CPI, 2019).

THE LANDSCAPE OF RENEWABLE ENERGY FINANCE FROM 2013 TO 2018

Finance commitments for renewable energy reached an all-time high of USD 351 billion in 2017, representing a 33% increase from 2016 levels driven by a spike in capacity additions,
particularly in China, India and the United States. Following 2017, a retrenchment among some larger institutions, particularly private financial institutions and development finance institutions (DFIs), led to an 8% decline in investments in 2018 to USD 322 billion. In addition to decreasing technology costs, the decline in investments was partly due to regulatory tightening and shifts in some domestic policies toward deleveraging and financial risk management, particularly in East Asia and the Pacific (CPI, 2019).

Annual financial commitments in renewable energy, by technology, 2013-2018

In 2017-2018, annual renewable energy investment reached, on average, USD 337 billion. The finance and investment landscape for renewables is depicted in Figure 2. The Sankey diagram depicts global renewable energy finance flows along the investment life cycle in 2017 and 2018, taking into consideration the full range of sources, instruments, regions and technologies, as well as the distinction between public and private finance intermediaries.In addition, declining costs imply that each dollar invested in a certain year bought more generating capacity than in previous years. Because of a combination of competition, innovation and upscaling of production, solar PV and wind technologies have seen their levelised cost of electricity (LCOE) systematically decline over time. In 2010-2018, the LCOE for solar PV, and onshore and offshore wind fell 77%, 35% and 21%, respectively.

Global levelised cost of electricity for solar PV and wind, 2010-2018

Investment by technology
Solar PV and onshore wind registered the greatest shares of investment in renewable energy financing between 2013 and 2018. In 2017-2018, solar PV and onshore wind consolidated their dominance in the renewable energy market, representing, on average, 77% of annual investment in the sector. This consistent trend is likely driven by increased maturity of these technologies, falling costs driven by economies of scale, manufacturing and technology improvements, and increasingly sophisticated procurement mechanisms, such as auctions, as a way of further increasing competition.

Investment by region
This section draws out distinctions in investment by region of destination as well as region of
origin.12 When looking into investment disparity by region, the analysis shows that the majority (83%) of renewable energy investment in 2013-2018 originated from and flowed to (78%) a handful of countries in East Asia and the Pacific, the OECD Americas, OECD Asia and Western Europe. In contrast, regions that represent approximately 120 developing and emerging economies (Central Asia, Eastern Europe, Latin America and Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa) attracted only 15% of total renewable energy investments.

nvestment in renewable energy, by region of destination, 2013-2018

The group of OECD Americas – which includes Canada, Chile, Mexico and the United States –
attracted the second-highest investment in 2017 and 2018, with USD 67 billion and USD 82 billion, respectively. This represents a 42% increase compared to an average annual investment of USD 52 billion in 2015-2016 – the largest growth rate recorded globally.

Investment by financial instrument Financial instruments captured in this analysis
consist of project-level finance (debt and equity), balance sheet financing (debt and equity) and grants.14, 15 Project-level financing is usually provided by sponsors relying on the project’s cash flow for repayment, whereas balance sheet financing is provided through equity and debt investments in the recipient institution or entity. The financing can be further categorised as conventional finance (referring to non-concessional finance, including debt and equity instruments at the project level or balance sheet) and concessional finance instruments (including grants and low-cost project-level debt, either at the project level or balance sheet).

 Investment in renewable energy, by financial instrument, 2013-2018

Over time, there has been a trend toward higher leverage in project-level financing structures,
which can be observed in increasing debt-to-equity ratios. This may be linked to the maturation and consolidation of main technologies such as solar PV and onshore wind over the years, making lenders more comfortable with the risks involved in such projects. In fact, 65% of project-level debt was directed to these two technologies. In addition, higher debt-to-equity ratios may be driven by stronger competition (e.g., in auctions), which requires developers and independent power producers to minimise the cost of capital.

Investment by source
Renewable energy investments tracked in this report are provided from a broad range of private and public actors. Public and private actors normally have distinct roles and approaches in renewable energy finance. The private sector, for example, while providing the majority of finance tends to focus more on regions and technologies with favourable investment
environments. Public finance, in contrast, concentrates on areas that still require more work
to reduce the cost of capital (for example, through risk mitigation instruments) and technology costs by demonstrating the business potential of hardto-enter sectors and markets.

 Public and private investment in renewable energy finance, 2013-2018

RENEWABLE ENERGY INVESTMENT IN CONTEXT

Investment needs for the energy transition IRENA (2020b) has explored global energy
development options under two broad future pathways. The Planned Energy Scenario is the
reference case and provides a perspective on energy system developments based on
governments’ energy plans, targets and policies, including Nationally Determined Contributions. The Transforming Energy Scenario describes an ambitious, yet realistic, energy transformation pathway – largely based on accelerated renewable energy deployment and energy efficiency improvements – that is climate-compatible.

 Cumulative energy-sector investment needed through 2030 and 2050 under IRENA’s
Transforming Energy Scenario

Impacts of COVID-19 on renewable energy investments The global economy has been thrown into disarray as a result of the COVID-19 pandemic. The lockdown measures implemented by most countries to curb the spread of the virus have resulted in plummeting
economic growth and tightening financial conditions, triggering widespread uncertainty in
virtually every country and economic sector.

THE LANDSCAPE OF OFF-GRID RENEWABLE ENERGY INVESTMENT

Ensuring access to affordable, reliable, sustainable and modern energy for all is the seventh of the United Nations’ SDGs. Energy access has an immediate transformative impact and can accelerate progress toward all other SDGs. Despite progress in energy access, approximately 789 million people had no access to electricity at the end of 2018, while nearly 620 million would still be without electricity and 2.3 billion would lack access to clean cooking facilities in 2030 under current and planned policies (IEA, IRENA, UN, WBG, and WHO, 2020). This shows
that the world is currently not on track to achieve universal energy access by 2030.

Population served by off-grid renewable energy solutions globally, 2008-2018

Overview of the off-grid financing landscape Between 2007 and 2019, off-grid renewables
attracted slightly more than USD 2 billion (IRENA analysis based on Wood Mackenzie, 2020). About 36% of total commitments during this period, or USD 734 million, was directed uniquely to access-deficit countries, i.e., countries that were home to about 80% of people currently lacking energy access (SEforAll and CPI, 2019).29 An additional USD 812 million went to companies or projects operating in several locations, including access-deficit countries, though the share of financing flowing to these countries is not specified.

Annual commitments to off-grid renewable energy and number of annual transactions, 2007-2019

Despite the growth observed over time in off-grid renewable energy financing, investments in these solutions still represent a very small portion of the overall energy access financing landscape.

Commitments by investor type Private equity, venture capital and infrastructure funds were responsible for 35% of investments in off-grid renewables from 2007 to 2019, having committed more than USD 710 million (IRENA analysis based on Wood Mackenzie, 2020).31 Their appetite for small businesses and start-ups with a short track record but exceptional growth potential makes these types of investors (especially venture capital providers) a particularly suitable source of capital for off-grid renewable energy companies operating in developing and emerging markets.

 Annual commitments to off-grid renewable energy, by type of investor, 2013-2019

The year 2019 saw a 57% drop in commitments from DFIs compared to 2018. This
reduction was driven by a drop in activities in Latin America and the Caribbean and Sub-Saharan Africa. By contrast, annual investment from private corporations more than tripled in 2019, and was directed mainly to East Africa and Southeast Asia.

Off-grid renewable energy commitments by type of financing instrument
Off-grid renewables saw a much larger use of equity and a much lower use of debt instruments, compared to the overall energy access sector.Between 2013 and 2017, about 17% of annual commitments, on average, went to access-deficit countries in the form of equity and 64% in the form of debt (SEforAll and CPI, 2019). Conversely, the share of annual equity commitments to offgrid renewables during the same period was, on average, 57% while debt accounted for less than 30% each year, globally.

Shares of cumulative commitments to off-grid renewable energy, by financing instrument
and region of destination, 2007-2019

Off-grid renewable energy commitments by destination
Sub-Saharan Africa is the main destination for investment in off-grid renewables due to
electrification rates in these countries being among the lowest in the world, with 573 million people in the region still lacking access to electricity .The region attracted at least USD 1.3 billion of the cumulative USD 2 billion committed to off-grid renewable energy during 2007-2019, accounting for large shares of annual investments starting in 2014. Since then, Sub-Saharan Africa accounted, on average, for 71% of investment each year.

Top recipient countries and cumulative investment in off-grid renewables, 2007-2019

Off-grid renewable energy commitments by energy use and product

Decentralised renewable energy technologies can serve a variety of purposes, from providing basic access to electricity for rural households (e.g., through solar lanterns) to powering operations of commercial and industrial (C&I) consumers.

Annual commitments to off-grid renewables, by energy use, 2013-2019

In terms of geographical destinations, Sub-Saharan Africa was responsible for at least 77% of the cumulative investment into residential uses, likely because this region has the lowest
levels of household electricity access and large populations that live off the grid. Next was
Southeast Asia, which accounted for 6% of cumulative investment directed to residential
uses, followed by Latin America and the Caribbean (4%).

Shares of cumulative commitments to off-grid renewable energy, by energy use and region, 2007-2019

Sub-Saharan Africa was also responsible for the majority (63%) of cumulative investment in C&I uses. The Middle East accounted for 6% of total C&I investment, followed by South and Southeast Asia (5%) and Latin American and the Caribbean (2%). Agriculture and fishing form a large part of income-generating opportunities for many living in developing countries. Between 2007 and 2019, 12% of C&I investment went into these productive uses. Sub-Saharan Africa, mainly East and Southern Africa, was responsible for almost all of agriculture and fishing investment (IRENA analysis based on Wood Mackenzie, 2020).

 Shares of cumulative commitments to off-grid renewable energy, by energy use and off-grid
product, 2007-2019

these products enable more intensive use of energy and offer a wider range of electricity
applications, including powering carpentry tools and large-scale agricultural processes. SHSs,
solar lanterns and solar refrigerators accounted for 14% of cumulative commitments to C&I
purposes, mainly providing energy access for small-scale businesses, such as barber shops and
restaurants. Solar water pumps were responsible for 8% of cumulative C&I investment, mainly for commercial and irrigation purposes.

RECOMMENDATIONS AND WAY FORWARD

A global energy transition, in line with international climate and development objectives, will require a massive re-allocation of capital toward renewables and the mobilisation of all available capital sources. This chapter provides actionable recommendations targeting policy makers and other stakeholders, on how to mobilise additional investment in the sector.

Increase national climate ambitions and raise renewable energy targets
In the post-COVID recovery period through 2021, measures should be taken to induce a decisive shift toward resilient energy systems – partly to avoid locking in unsustainable practices. Energy investments undertaken as a short-term response to the pandemic’s impacts can have the effect of supporting increasingly ambitious longer-term targets for renewables and efficiency in all sectors, reinforcing enhanced climate pledges, creating employment, and fostering economic growth.

Use public finance to crowd in private capital
With the COVID-19 crisis putting additional constraints on public resources, limited public
capital (i.e., from governments and DFIs) should primarily be used with the specific purpose of
crowding in additional private finance.

Mobilise institutional investment in renewables
With about USD 87 trillion of assets under management, institutional investors represent one
of the largest capital pools in the world and have a key role to play in the ongoing global energy transition. Mobilising a greater share of institutional capital in renewables will necessitate a range of coordinated actions that combine effective regulations and policies, capital market solutions and a host of internal changes on the part of institutional investors.

Promote greater use of green bonds for renewables
Green bonds represent a major opportunity to attract institutional investors in the renewable
energy sector and channel considerable additional private capital in support of the global energy transition.

Enhance the participation of corporate actors
Non-energy-producing corporations should seize the opportunity to drive renewable energy demand through the development of new medium- to long- term renewable energy targets that factor in the advancements and cost reductions of renewable energy technologies.

Scale up financing for off-grid renewables
As off-grid renewable energy solutions are key to ensure universal energy access and just and
inclusive economic development, investment in these technologies needs to be scaled up. Achieving universal access by 2030 requires annual investment in modern energy estimated at USD 45 billion.

 Global renewable energy investment estimates based on new renewable installed capacity and
technology costs, 2010-2019

Another important difference is that financial commitments may not always translate into actual capacity additions, which generally means that annual committed investments are larger than annual delivered investments.

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