IRENA’s World Energy Transitions Outlook sees renewables-based energy systems instigating profound changes that will reverberate across economies and societies. Sharp adjustments in capital flows and a reorientation of investments are necessary to align energy with a positive economic and environmental trajectory. Forward-looking policies can accelerate transition, mitigate uncertainties, and ensure maximum benefits of energy transition. The annual investment of US$4.4 trillion needed on average is high. But it is feasible and equals to around 5% of global GDP in 2019.
“This Outlook represents a concrete, practical toolbox to total reorientation of the global energy system and writes a new and positive energy narrative as the sector undergoes a dynamic transition,” said Francesco La Camera, IRENA’s Director-General. “There is consensus that an energy transition grounded in renewables and efficient technologies is the only way to give us a fighting chance of limiting global warming by 2050 to 1.5°C. As the only realistic option for a climate-safe world, IRENA’s vision has become mainstream.”
“Energy transformation will drive economic transformation,” continued La Camera. “Energy transition is a daunting task but can bring unprecedented new possibilities to revitalise economies and lift people out of poverty. IRENA’s Outlook brings unique value as it also outlines the policy frameworks and financing structures necessary to advance a transition that is just and inclusive. Each country will define what is the best for them, but collectively, we must ensure that all countries and regions can realise the benefits of the global energy transition for a resilient and more equitable world. We have the know-how, we have the tools, we need to act, and do so now.”
The next decade will be decisive to achieve the Paris and Sustainable Developments goals. Any delay will drive us to the direction of further warming, with profound and irreversible economic and humanitarian consequences, IRENA states.
Phasing out coal, limiting investments in oil and gas to facilitate a swift decline and a managed transition as well as embracing technology, policy, and market solutions will put the global energy system on track for a 1.5°C pathway. By 2050, a total US$33 trillion of additional investment are required into efficiency, renewables, end-use electrification, power grids, flexibility, hydrogen and innovations. The benefits, however, greatly exceed the costs of investments, states IRENA.
When air pollution, human health and climate change externalities are factored in, the payback is even higher with every dollar spent on the energy transition adding benefits valued at between US$2 and US$5.5, in cumulative terms between US$61 trillion and US$164 trillion by the mid-century, IRENA finds.
IRENA’s Outlook sees energy transition as a big business opportunity for multiple stakeholders including the private sector, shifting funding from equity to private debt capital. The latter will grow from 44% in 2019 to 57% in 2050, an increase of almost 20% over planned policies. Energy transition technologies will find it easier to obtain affordable long-term debt financing in the coming years, while fossil fuel assets will increasingly be avoided by private financiers and therefore forced to rely on equity financing from retained earnings and new equity issues.
But public financing will remain crucial for a swift, just and inclusive energy transition and to catalyse private finance. In 2019, the public sector provided some US$450 billion through public equity and lending by development finance institutions. In IRENA’s 1.5°C Scenario, these investments will almost double to some US$780 billion. Public debt financing will be an important facilitator for other lenders, especially in developing markets.
As markets alone are not likely to move rapidly enough, policy makers must incentivise but also take action to eliminate market distortions that favour fossil fuels and facilitate the necessary changes in funding structures. This will involve phasing out fossil fuel subsidies and changing fiscal systems to reflect the negative environmental, health, and social costs of fossil fuels. Monetary and fiscal policies, including carbon pricing policies, will enhance competitiveness and level the playing field.
According to IRENA, enhanced international co-operation and a comprehensive set of policies will be critical to drive the wider structural shift towards resilient economies and societies. If not well managed, the energy transition risks inequitable outcomes, dual-track development, and an overall slowdown in the progress. Just and integrated policies will remain imperative to realise the full potential of the energy transition.
Today’s policies, finance and socio-economic analysis completes the outlined technological avenues for a 1.5°C-comptabile energy pathway, providing policymakers with a playbook to achieve optimal results from the transition. Launched by energy leaders at the Agency’s Global High-Level Forum on Energy Transition, this Outlooks aims to raise ambition towards UN High-Level Dialogue on Energy and Climate Conference COP26 later this year.