Global Trends

Market snapshot and growth potential

In 2015, several countries across the world signed the Paris agreement to tackle the climate change problem. A total of 189 countries submitted their national commitments with targets to increase investment in renewable energy, energy efficiency, sustainable infrastructure, and climate-smart agriculture, signalling businesses and investors that a low-carbon future is coming.

If the commitments are realised, they would create over $23 trillion of investment potential across 21 large emerging markets by 2030. A recent IFC Climate Investment Opportunities Report, “Creating Markets for Climate Business”, provides a snapshot of the progress in grid-connected and off-grid renewables and the upcoming opportunities in clean energy in the areas of climate-smart agriculture, green buildings, climate-smart urban transport and logistics, climate-smart urban water infrastructure and climate-smart urban waste management. The following are excerpts from the report…

Grid-connected renewable power

Renewable power deployment continued to break records in 2016. More than 160 GW of new renewable power capacity was added in 2016, the highest-ever annual capacity addition in the sector. This represents about 62 per cent of the total power added to the grid that year, which means renewables outpaced fossil fuels by a ratio of almost 2:1.41. Amongst renewables, solar photovoltaic (PV) recorded the highest capacity addition, with 75 GW added in 2016, followed by wind (55 GW) and hydro (25 GW).

Investment in renewable energy (including large hydropower) stood at $297 billion in 2016, a marginal decrease of 3 per cent on account of falling costs and fewer hydro plants coming online. Emerging markets accounted for over half of this investment. China remained the largest investor, accounting for almost 30 per cent of global renewable financing in 2016. After China, India ($8.7 billion) and Brazil ($7 billion) were the other two developing countries among the top 10 markets for non-hydro renewable energy investment.

Renewable power markets are expected to maintain their strong growth. As per the International Energy Agency, the total deployed renewable capacity is expected to grow from about 2,100 GW in 2016 to 2,800-3,000 GW by 2021 at an investment of $7 trillion-$11 trillion in the sector.

Between 2009 and 2016, the costs of wind and solar power decreased by 66 per cent and 85 per cent respectively. These costs are expected to reduce further by 2020, with a 66 per cent decrease in solar PV, 47 per cent in onshore wind and 71 per cent in offshore wind. These projected reductions can be largely attributed to cheap technology and equipment, better operations and maintenance regimes and increased efficiency, especially in wind. According to Bloomberg New Energy Finance, installed solar capacity is expected to increase 14-fold by 2040, while wind is projected to grow fourfold.

The nascent energy storage market is also poised for growth. Clean Technica expects global energy storage to grow sevenfold, from about 3 GWh in 2016 to more than 20 GWh in 2025. Although costs are more difficult to predict, a steep fall in the cost of energy storage is anticipated. The year 2016 saw a 12 per cent drop in utility-scale lithium-ion batteries over the previous year. This trend is expected to continue as production ramps up globally.

Favourable prices and policies have led to increased corporate interest. Commercial and industrial demand is becoming a key growth driver for the renewable industry. Corporate renewable energy demand has increased from about 500 MW in 2010 to a peak of 5.3 GW in 2015, with 3.25 GW in the US alone. Although the demand dropped to 4.5 GW in 2016, largely due to changes in the US market, record capacity addition in Europe, the Middle East, Africa and the Asia-Pacific region helped sustain demand. Initiatives like RE100 are enabling further growth, with some of the largest companies in the world committed to procuring 100 per cent of their electricity from renewable sources.

Solar PV

Solar PV overtook wind as the fastest growing renewable energy technology in 2016. A total of 75 GW of solar PV capacity was built around the world in 2016, the equivalent of 31,000 panels installed every hour. China was the global leader, followed by the US, Japan, India and the UK, which together accounted for 85 per cent of the new construction. The largest additions in Africa were by South Africa (over 500 MW), followed by Algeria (over 170 MW), while Zambia recorded the lowest solar PV bid on the continent.

Continued cost reductions may see the global solar PV market double by 2021. In 2016, the solar PV segment attracted $114 billion in investment. This represents a decline of about 4 per cent year on year, demonstrating that cost reductions are allowing more capacity to be built at less investment. Achieving cost-competitiveness is expected to increase investment in solar, creating major demand for energy storage. Installed solar PV capacity is expected to increase from 303 GW at the end of 2016 to 550-650 GW by 2021.

Meanwhile, grid-tied distributed solar – that is, rooftop solar – for residential and commercial consumers is set to grow in key emerging markets like India. In 2016, nearly $40 billion was invested in rooftop and other small PV projects. The US accounted for the highest investment of over $13 billion, followed by Japan at $8.5 billion (down from about $27 billion in 2015) and China at $3.5 billion. India’s small-scale solar industry is poised for growth, given the government’s ambitious target to install 40 GW of rooftop solar by 2022.

Wind power

Wind power remains the second largest source of renewable energy after hydro, with a 22 per cent share in the total renewable capacity. A total of 55 GW of wind power was built in 2016, increasing the total global wind capacity by about 12 per cent to 487 GW. China led the segment, adding 23.4 GW of wind capacity, followed by the US, Germany, India and Brazil. Major investment and cost reductions may see wind power capacity more than double by 2026.

The sector attracted $112 billion in 2016, down 9 per cent year on year. However, it recorded a higher capacity addition owing to the low cost of installation. The average total cost of installing wind power capacity has fallen by two-thirds between 1983 and 2014, and may fall by a further 12 per cent by 2025. The cost of electricity from new turbines is likely to fall even further because of efficiency gains, increased use and better logistics, potentially falling by up to 34 per cent by 2025. The total installed wind power capacity is expected to rise from 487 GW at the end of 2016 to around 1,110 GW by 2026.

Utility-scale storage

Utility-scale energy storage is emerging as a high-growth market that can play a key role in supporting renewable energy development. Energy storage technologies can be broadly categorised into mechanical (such as flywheel and pumped hydro), electrochemical (batteries), chemical (hydrogen and synthetic natural gas), thermal and electromagnetic (capacitors) technologies.

These are deployed to address different needs such as managing demand and supply, and balancing loads. There is no single best storage technology. The optimal choice depends on parameters such as density, round-trip efficiency, cycle life, ambient temperatures, safety needs and cost. The cost of different storage options depends on their scale, application and siting. At present, the cost of large grid-scale battery storage systems is approaching $300-$350 per kWh, and is expected to be around $250 per kWh in the early 2020s. This is based on the current cost of a lithium-ion battery pack at $220 per kWh. Pumped storage remains the largest storage technology by capacity, while battery storage is also growing fast. Pumped storage is a conventional technology used in hydropower plants wherein water is pumped uphill into a reservoir during times of excess capacity, and then released through a hydroelectric turbine to generate electricity when needed. It accounts for 96 per cent of the world’s installed storage capacity. However, lithium-ion electrochemical storage technology has become the subject of growing interest, since it is the most common battery type used in electric vehicles (EVs). The technology has benefitted from major research and development investment in recent years, which has led to a 65 per cent reduction in its cost between 2010 and 2015.

Clean Technica expects global energy storage capacity to grow from about 2.9 GWh at the end of 2016 to 21 GWh by 2025. Half of this capacity will be installed on the customer’s side to reduce the customer’s utility bill. By 2025, the largest markets for grid-connected energy storage will be the US, Japan, China, Germany, Australia, the UK and India, with energy storage expected to cross 1 GWh capacity in these countries. Storage activity is also growing in Kenya, South Africa and the Philippines, although these markets are relatively much smaller.

Off-grid solar

All off-grid solar systems – solar lanterns and solar home systems, minigrids and microgrids, and off-grid storage – are developing rapidly. The most active markets are in Bangladesh, East Africa, Ghana, India and Nigeria. The largest market for solar home systems is India, where sales rose from 2.6 million units in 2015 to over 3 million units in 2016. The top five countries in sub-Saharan Africa with the highest sales in 2016 were Kenya with sales of 1.2 million systems, Ethiopia (0.5 million), and Tanzania and Uganda (0.4 million each).

With a low electrification rate (35 per cent of households connected to electricity), sub-Saharan Africa has the highest growth potential for off-grid solutions, though opportunity also exists in Bangladesh, India, Indonesia and Pakistan. South Central Asia is the second largest market for distributed solar systems, with sales growth of 19 per cent between 2015 and 2016.

Off-grid solar home systems

Solar PV costs are falling rapidly, a trend that is expected to continue, making solar home systems an increasingly attractive solution. Increased production and innovations have reduced the price of solar PV by 58 per cent since 2010. Increased cell efficiency has driven down costs by reducing the surface area and associated materials needed to produce the same output. Additional cost reductions are to come from improved solar modules and other components, with the total cost of rooftop systems expected to fall by more than 20 per cent by 2021 in countries like India and China.

Sales of off-grid solar systems are also growing rapidly, particularly in India. The use of off-grid solar systems (including pico-solar and systems less than 100W) grew by 42 per cent globally between 2015 and 2016 to 8.1 million systems, representing about 50 per cent of the total sales of off-grid products during the year. The sales of off-grid solar systems in 2016 were led by India (3.1 million systems), followed by Kenya (1.2 million) and Ethiopia (500,000 million). Pico-scale products which are lightweight and portable solar panels are the most common types of systems, comprising 94 per cent of all off-grid solar products. Sub-Saharan Africa and South Asia together accounted for more than 80 per cent of global sales in 2016.

The pay-as-you-go (PAYG) business model is changing the viability of rural electrification, and companies which have adopted this model are attracting significant investment, especially in East Africa. PAYG solar companies raised $223 million in 2016, up from just $3 million invested in 2012. This model allows people to make small payments over time, making solar products accessible to low-income households. It is being used by over 32 companies across 30 countries. Companies such as Lumos Global, Mobisol, M-KOPA, d.light, and BBoxx are already connecting thousands of homes each month using rooftop solar home systems. The model is now being applied to other areas such as clean cooking and water pumping. Mobile PAYG is particularly well established in East Africa, where mobile phone penetration is relatively high, and is also gaining popularity in West Africa and southern Asia. In the future, data from PAYG customers may be used to establish credit histories and improve access to finance.

New business models will expand energy storage markets. But high upfront costs for residential products remain a challenge, especially among poor households. Another major challenge for distributed energy storage is developing ways to share the financial benefits of energy storage systems between consumers and project developers.

Mini-grids

The falling cost of renewables is making micro- and mini-grids more cost-effective than extending the grid in some markets. Investment in micro- and mini-grids continued to accelerate in 2016, with the global market expected to reach $200 billion. The markets are maturing to allow grids to accept power for less than 24 hours, so that systems can be turned off when there is insufficient renewable energy to meet demand. In addition, mini-grid systems that can provide constant power are widely available.

Small islands are becoming an attractive market for distributed solar and storage mini-grids. This is largely driven by the need for small islands to reduce their overreliance on imported petroleum products, which pose cost, ecological and energy security risks. The World Bank’s Energy Sector Management Assistance Program is behind the Small Island Developing States “DOCK” Support Program, which provides advice and investment support to small island developing states looking to transition to clean technology. Solar projects include the Regional Solar PV Scale-up Project in the Caribbean and the Cabo Verde Distributed Solar Energy Systems. Tesla and SolarCity recently helped the island of Ta’u in American Samoa to completely move from petroleum to solar and storage.

Distributed energy service companies are attracting investment for micro- and mini-grids. These companies tend to provide fee-for-service electricity and usually follow a build-own-operate structure. Distributed energy service companies typically use solar hybrid systems with smart metering technologies, although applying the PAYG model to the companies’ mini-grid systems is also being explored. In 2016, $75 million was raised in debt and equity finance by distributed energy service companies in East Africa and Southeast Asia alone. Blended finance approaches can help accelerate commercial viability for new business models by encouraging new investors to enter the market.

Off-grid storage

Major investment and deployment is expected in energy storage, which is a key component of off-grid systems. Energy storage in emerging markets is likely to grow by more than 40 per cent annually in the coming decade, adding about 80 GW of new storage capacity to the existing 2 GW, though only a small fraction of this will be for off-grid applications. Annual investments in storage in emerging markets are expected to grow from about $2.5 billion in 2016 to $23 billion in 2025. About half of the growth is expected in China. India is likely to witness investments of $7 billion followed by $4 billion in South Asia, $3 billion in North Africa and the Middle East, $2.5 billion in sub-Saharan Africa, and $2 billion in Latin America and the Caribbean. Including energy storage in off-grid systems increases reliability and user satisfaction, and allows mini-grids to provide power 24 hours a day.

Lithium-ion batteries are the dominant storage technology for off-grid applications, and continue to decrease in price. The cost of these batteries used in portable electronics and EVs has fallen by 65 per cent since 2010, opening up new off-grid applications that were previously too expensive. Cost reductions have been driven by rapidly increasing production capacity, as well as technical advances, including thicker electrodes and higher voltages. Lithium-ion batteries are estimated to account for 80 per cent of global energy storage installations by 2025.

Green buildings

Resource-efficient building practices are helping economies move on to a greener development path. Green building is the practice of creating and using more resource-efficient and environment-friendly models of construction, renovation, operations, maintenance and demolition. While environmental pressures are compelling reasons to build responsibly, green buildings create additional benefits. Operational savings quickly recover capital costs; renewable energies reduce infrastructure investment; innovative products stimulate job creation; and reduced reliance on fossil fuels leads to energy security.

About $388 billion of the $4.6 trillion spent on construction was invested in green buildings in 2015. Global investment in energy-efficient buildings in 2015 was $118 billion, up 9 per cent from the previous year. Most of this investment was in developed countries, as well as in China and India, which accounted for 19 per cent and 2 per cent respectively.

Markets for constructing buildings are expected to grow at the highest rate in the Asia-Pacific region, led by China. This creates an opportunity to create new markets for green buildings, driven by the increased uptake of green practices, standards and technologies in new construction. Among building types, the residential sector shows highest growth potential.

Climate-smart urban transport

Rapid urbanisation in emerging markets presents transport challenges and opportunities. By 2050, an additional 2.5 billion people are expected to live in urban areas. According to the International Transport Forum’s Transport Outlook 2017, global demand for urban mobility will be 95 per cent higher in 2050 than in 2015, with a 185 per cent increase in non-OECD (Organization for Economic Co-operation and Development) countries. Global road freight activity is also expected to more than double between 2016 and 2050. Emerging market countries, particularly China and India, will account for 90 per cent of that increase.

Making urban transportation and logistics sustainable will require new thinking in terms of urban design, infrastructure investment, energy efficiency technology and business models. Most developing country cities will require efficient cars and new technologies, as well as new investment in public transport infrastructure. Businesses are already responding with mobility and logistics solutions that reduce trip lengths, reduce carbon emissions and enhance non-motorised transport options.

Electric vehicle (EV) sales are increasing rapidly, with China leading the growth. EV markets are growing faster than anticipated. In 2016, annual sales grew by 40 per cent year on year to reach 750,000. Today, the total global stock of EVs exceeds 2 million. Annual sales in China reached over 330,000, followed by 160,000 in the US, 215,000 across Europe, and most of the remainder in Japan and Canada. About 60 per cent of these sales were of battery EVs, with plug-in hybrid EVs making up the balance. China also leads in the electrification of other modes, with 200 million electric two-wheelers, up to 4 million low-speed EVs, and more than 300,000 electric buses. Market penetration remains concentrated in the developed world – Norway leads with a 29 per cent market share, followed by the Netherlands with more than 6 per cent, and Sweden with over 3 per cent. China, France and the UK have a collective market share of nearly 2 per cent.

Summing up

Rapid growth in the clean energy sector is expected to continue. Bloomberg New Energy Finance projects $6 trillion in new investment in wind and solar power by 2040. Global electricity markets will be completely reshaped, with wind and solar emerging as the two largest power generation sources and fossil fuels making up less than a third of capacity. Almost half of the global investment in new power capacity up till 2040 will be in Asia-Pacific, with $4 trillion going to China and India.

Successful markets for the climate business will also be on the rise. Around $388 billion was invested in energy-efficient buildings globally in 2015, up 9 per cent from the previous year. While this investment has been centred in developed countries, rapidly growing urban populations in countries like China and India will account for much of the new growth. Energy-efficient heating, ventilation and air conditioning is currently a $76 billion global market. Businesses and cities are collaborating to develop a resilient low-carbon urban infrastructure to provide citizens with sustainable transport, water and waste management services. Over the next decade, trillions of dollars will be invested in transport infrastructure, opening up many climate-smart investment opportunities for businesses, including EVs, BRT, light rail, and multimodal transport and logistics.

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