This is an extract on global renewable energy financing trends from REN21’s recently released “The Renewables 2022 Global Status Report”

Global new investment in renewable power and fuels (not including hydropower projects larger than 50 MW) reached a record high in 2021, at an estimated USD366 billion. This was a 6.8% increase over 2020, due largely to the global rise in solar photovoltaic (PV) installations. Investment in renewable power and fuels has exceeded USD250 billion annually for eight consecutive years. These estimates do not include investment in renewable heating and cooling technologies, for which data are not collected systematically.

Solar PV and wind power continued to dominate new investment in renewables, with solar PV accounting for 56% of the 2021 total, and wind power for 40%. The strong growth in solar PV investment in 2020 expanded further in 2021, rising nearly 19% to reach USD205 billion. Wind power investment fell 5% to USD147 billion, reflecting a sharp decline in offshore wind power investment (down 45%) and a smaller increase in onshore wind power investment (up 16%). Investment in other renewable energy technologies, including biomass, waste-to-energy, geothermal power, and small hydropower, declined overall.

Investment in electric vehicles and associated charging infrastructure was up 77% to USD273 billion in 2021. This reflected the increased policy support for electrification in core auto markets, new battery technologies, lower expected costs and rising consumer adoption despite the COVID-19 pandemic. Investment in energy storage also reached a new record of USD7.9 billion in 2021, which may reflect falling technology costs and growing political incentives and targets.

Investment by economy

Investment in renewable power and fuels varied by region, rising in China, India, and the Middle East and Africa, but falling in the Americas (due largely to a decrease in the United States) and in Europe and Asia (excluding China and India). China continued to account for the largest share of global investment in renewables (excluding hydropower larger than 50 MW), at 37%, followed by Europe (22%), Asia-Oceania (excluding China and India; 16%) and the United States (13%). All other world regions accounted for 4% or less of the total.

China’s overall investment in renewables increased 32% to USD  137 billion in 2021. This was due largely to a bump in solar PV investment, which grew 115% to USD 79 billion, a high not seen since 2017. Investment in all other renewable technologies in China fell, including wind power (down 9% to USD 58 billion). Renewable energy investment in China is driven in part by the country’s long-term decarbonisation goals and by the growing demand for power, which is high in comparison with countries in the Organisation for Economic Co-operation and Development (OECD). Investment in solar PV in China was boosted by large-scale projects undertaken co-operatively by local and national governments. The decline in wind power investment reflects the comparatively lower price of Chinese wind turbines as well as the shift in the national feed-in tariff (FIT). Beginning on 1 January 2021, the FIT rewarded onshore wind power projects with the same remuneration as coal-fired power plants. Financial support for offshore wind power was scheduled to stop in 2022.

Investment in European renewable energy projects fell 5% to USD79.7 billion in 2021. Although solar PV investment grew nearly 8% to USD34.1 billion, investment declined in all other renewable energy technologies in Europe, including wind power. Despite ambitious national targets for wind power development in many countries, complex permitting rules and procedures together with disrupted supply chains were partly to blame for the drop in wind power investment across the continent.

In Asia-Oceania (excluding China and India), investment in renewables fell 11% to USD 56.8 billion. Contrary to the trends in most other regions, solar PV investment declined 17%, whereas the other renewable energy technologies saw moderate investment increases. The drop in solar PV investment is attributed largely to declines in Vietnam and to a lesser extent in Japan. Vietnam, which became a major solar PV market in 2019 and 2020, had a commissioning deadline for its national FIT in 2020, after which investment in solar PV was less attractive. In Japan, recent amendments to the national FIT negatively impacted investment. Outside of these two countries, solar PV investment in the region was more stable.

In India, total new investment in renewables increased 70% to USD11.3 billion. Investment in all renewable energy technologies increased in the country in 2021, with notable jumps in solar PV (up 68% to USD7.5 billion) and wind power (up 92% to USD3.4 billion). Investment in solar PV and wind power in India has been greatly supported by the implementation of auctions, which have been widely successful and have resulted in comparatively cheap renewable power purchase agreements for state-owned utilities.

In the United States, which attracted the most renewable energy investment among developed economies, investment fell nearly 17% to USD46.7 billion in 2021. Countering the trends in China and Europe, solar PV investment plummeted 29% to USD26.1 billion, and investment in wind power remained unchanged, whereas investment in all other renewable energy technologies increased. The drop in investment in the United States is attributed largely to supply chain challenges, combined with permitting and grid connection difficulties, the fall-off in available federal tax credits, and continued uncertainty about tariffs and other trade measures that impact module imports.

Brazil’s total investment in renewables was up 27% to USD11.6 billion in 2021, surpassing for the first time the high of 2008, when the country’s biofuel boom was in full swing. Solar PV and wind power saw notable investment increases of 27% and 31%, respectively, whereas investment in all other technologies declined. Solar PV investment was supported in part by low interest rates resulting from the COVID-19 pandemic as well as skyrocketing electricity prices exacerbated by the country’s worst drought in nearly a century. Auctions, which were not held in 2020 due to the pandemic, resumed in 2021, helping to support the investment boom in both wind power and solar PV. Importantly, a revision of a law (5829) set to pass in 2022 will introduce grid-access charges for residential and commercial system owners after a 12-month grace period, which has created a rush in solar PV development. Outside Brazil and the United States, renewable energy investment in the Americas totalled USD9.7 billion in 2021, up 7% from the previous year but still well below the highs in 2012, 2017 and 2019. Solar PV investment fell substantially (24%), whereas investment increased for wind power (up 34%) and the other renewable energy technologies. The decline in solar PV investment in the region is due largely to drops in both Argentina and Mexico, where auctions for renewable energy that had once driven investment were placed on hold in 2021. Chile’s market remained strong in 2021 with USD3.4  billion in renewable investment, although its total was not as high as in recent years. Colombia, still a nascent market for renewables, is showing promising investment growth and reached a new high in 2021 of USD 750 million, most of which was in wind power.

Investment in renewables in the Middle East and Africa increased 19% to USD12.8 billion. Although wind power investment fell substantially, solar PV investment grew 41% to an all-time high of USD10.9 billion. Investment in the other renewable energy technologies also saw notable increases.

Developing and emerging economies face unique challenges to financing renewable energy projects compared to the developed world. Investment in these countries is complicated by political instability, macroeconomic uncertainty (related to inflation and exchange rates), policy and regulatory issues, institutional weaknesses and a lack of transparency. Country-related risks and underdeveloped local financial systems also can directly affect the cost of capital. For example, nominal financing costs can be up to seven times higher in emerging and developing countries than in developed countries, such as in Europe and the United States.

Shifting frameworks for investment in renewables

Investors wishing to address climate change and support renewables are increasingly turning their attention to sustainable finance options, in consideration of regulatory requirements, risk management imperatives, and/or changes in demand and asset allocation strategies. Three frameworks are increasingly relevant for renewable energy finance and investment: 1) the development of sustainable finance taxonomies at the national and regional levels to provide information on the environmental and/or social performance of enterprises and financial products; 2) systems rating the performance of enterprises according to environmental, social and governance (ESG) criteria to help assess the suitability of a company, activity or fund for investment; and 3) green bonds, the proceeds of which may go to renewable energy.

Innovative financing options such as peer-to-peer trading models based on blockchain technology also have begun to emerge. By connecting renewable energy producers with potential buyers via a decentrally managed transaction, such platforms can finance projects that otherwise may not be funded.

  • Sustainable finance taxonomies: Sustainable finance taxonomies provide a classification of economic activities with the aim of clarifying which investments and/or activities may be defined as sustainable or “green”. Such taxonomies can be relevant for renewables in two main ways: 1) for companies producing or manufacturing renewable energy technologies; and 2) for the owners or operators of renewable energy assets (such as a utility that operates a wind farm as part of its broader portfolio). Such stakeholders would be eligible for the technological screening of the taxonomy and thereby be pre-screened for interested investors. The number of sustainable finance taxonomies in use or under development has increased rapidly since the Paris Agreement was signed in 2015. This expansion continued in 2021, particularly in the lead-up to the UN climate talks in Glasgow.
  • Environmental, social and governance (ESG): ESG has shifted from being a niche focus to becoming a component of mainstream finance in many OECD countries. Net inflows of investment into exchange-traded funds with ESG traits totalled USD128 billion in 2021, up 57% from USD 81.3 billion in 2020. Despite this growth, there is no universally accepted standard framework for companies to report on ESG metrics, and the ESG market itself has mushroomed into several different types of structures. ESG financing is further complicated by a lack of reliable data and by data inconsistencies.
  • Green bonds: Although various instruments are available to finance renewable energy projects, green bonds in particular have become prominent in recent years. Green bonds differ from traditional bonds in that the proceeds are earmarked for qualifying investments in renewable technologies or in various forms of climate adaptation and mitigation. Investors obtain a certain interest rate over a stipulated time period, and the funds must be used for the purposes for which the bond was issued. This provides investors with greater visibility over the actual use of the funds than is the case for traditional bonds.

The complete report can be accessed here