Rystad Energy estimates that capital spending in the global renewable energy sector alone will hit a record $243 billion in 2021, up from $224 billion a year earlier. They are gradually approaching the expected total capital expenditures in the oil and gas sector which are estimated at about $311 billion. Gross investment in clean energy technologies, including power generation, and energy efficiency could total $750 billion in 2021.
Continental wind projects will account for approximately $100 billion of this capex volume, while solar will receive $96 billion and offshore wind farms around $46 billion.
Regionally, Asia and Europe will continue to dominate. At the beginning of this year, the capacities under construction in them amounted to 156 GW and 32 GW, respectively. A trio of large wind farms, namely the 800 MW offshore project and the 2 GW continental wind park in China, and the UK Hornsea 2 project (1.4 GW), will act as the main investment driver during 2021.
According to official estimates, investments in renewable energy in Kazakhstan could reach $370 million in 2021. At the same time, in the period from 2014 to 2020, gross accumulated investments exceeded $1.5 billion, mainly due to support from a number of international financial institutions, such as the European Bank for Reconstruction and Development. The installed capacity of renewable energy sources in Kazakhstan this year will reach 2.03 GW, covering almost 140 generation facilities.
It is significant that renewable energy sources account for the overwhelming volume of investments in new generating capacities in the world. It is expected that their share in 2021 will be 70% of the total. At the same time, as the calculations of the International Energy Agency (IEA) show, one dollar spent on commissioning solar photovoltaic systems today gives four times more electricity than 10 years ago. All thanks to significantly improved technology and cost savings.
Political ambitions are clearly growing – more and more states and companies are committing themselves to achieving zero emissions or «Net Zero», including due to intensified green incentive programs.
So, about 54% of the volume of emissions recorded in 2016, currently fall under certain «Net Zero» obligations. This is an impressive increase from just 34% at the beginning of last year. Many institutional investors are committed to incorporating climate risk and ESG considerations into their investment decision-making processes. This factor acts as an important incentive for increasing industry investment in the foreseeable future.
It should be especially noted that if the dynamics of the first half of the year continue throughout 2021, then the share of capital expenditures of leading oil and gas companies allocated to clean energy could grow to more than 4% of their total capital expenditures (compared to 1% a year earlier).
Financial markets are also conducive to clean energy investments.
For example, in addition to the positive impact of ultra-soft monetary policy in major global economies, the volume of issuance of sustainable debt reached a record high in 2020, and companies operating with renewable energy sources and green transport performed significantly better in international stock markets compared to companies concentrated in the exploration and production of fossil fuels. For example, a positive investor sentiment helped electric vehicle makers raise about $28 billion in stock markets, up from $1.6 billion in 2019.
But clean electricity and electric / hydrogen transport will need to increase investments further as costs come down. In particular, technologies such as electric heating, carbon capture / storage (CCS) and hydrogen are attracting only a fraction of the investment they will need in the current decade to control emissions.
According to a number of expert data, investments in electric transport will surpass the renewable energy sources by 2025. Globally in these sectors, respectively, $357 billion and $306 billion will be allocated.
For service providers, changing capital allocation trends are likely to require a rethinking of their core business as renewable energy projects continue to gain momentum and liquid hydrocarbons exploration and production funding stagnates.
The pandemic has been a financial shock for oil and gas companies. According to the IEA, it caused a 30 percent decline in global sectoral investment last year. And investment is expected to grow «only marginally» in 2021. The IEA emphasizes that in the medium term, the capex of the largest companies will remain about 15% below the level of 2019. The volatility of demand and uncertainty surrounding its long-term recovery due to the impact of the pandemic continue to have a strong impact on investments in oil exploration and production.
Renewables have proven to be much more resilient during the crisis as many companies stepped up their low-carbon transition plans, especially to provide access to capital markets and maintain tax breaks in key markets. But in many developing countries, investments in renewable energy have been hit harder by COVID-19 than in developed countries.
Meanwhile, both oil and renewable energy companies were able to partially offset the decline in revenues with more efficient segments focused primarily on wind and solar.
As a result, the events of 2020 have prompted leading oil and gas companies to consider strategies to reduce their exposure to market risks.
Oilfield service providers, for example, have embarked on a structural transformation by offering services to the renewable energy market, hoping to become a more attractive option for investors. Rystad Energy's analysis shows that energy service providers operating in the oil and gas sector experienced a 23% drop in revenues in 2020 from the prior year, while those in the solar and wind energy sector grew by about 18%. Service companies associated with wind projects recorded an increase in annual revenues of 20%, and with solar projects - respectively, by 14% per year.
However, under the influence of the pandemic and macroeconomic conditions in renewable energy, the formation of some market trends can be traced that may have a constraining effect on the future growth rates and financial performance of industry projects.
In particular, new solar projects are showing appreciation due to rising commodity prices and transportation costs, along with rising global inflationary pressures. This potentially reduces the return on investment that can lead to delays in the implementation of some projects.
It is important to take into account that in photovoltaic projects, solar modules account for the largest volume of capital investments, as a result even small changes in their cost can cause significant problems for the economics of projects.
Judging by individual expert calculations, over the past 10 years, prices for solar modules have dropped by about 80% per 1 W (on FOB terms: from more than $1 per 1 W in peak mode in 2011 to less than $0.2 in 2020). However, as of this spring, the cost of modules from China already exceeded $0.22 per 1 W/peak. This was mainly driven by higher prices for key components used to manufacture silicon solar cells (polysilicon, silver, aluminum, glass).
In addition, traditionally the cost of transporting from China to key markets has been $0.006 per 1 W/peak. But this year, under the influence of the pandemic, it rose to $0.02. This also increased the costs for solar power projects – shipping now accounts for almost 10% of the cost of the module on FOB terms while in 2019 this figure was only 3%.
Rising costs will have a significant impact on project economics at large plants that are focused on gaining market benefits from economies of scale. For a typical 100-megawatt photovoltaic project, the increase in module cost from $0.18 to $0.24 per 1 W represents a 9 percent increase in project capital cost per watt.
At the same time, this trend is objectively temporary in nature, and will not have a critical impact on the situation in renewable energy.