Global Renewable Energy Market Sees Strong Growth despite Supply Chain Difficulties and Capacity Issues—But for How Long?

In 2022, global investment in the low-carbon energy transition reached a record US$1.1 trillion, according to BloombergNEF, up 17% from the previous year. Through these investments and other drivers, the global renewable energy market has skyrocketed with the International Energy Agency (IEA) predicting that renewables will account for over 90% of global electricity capacity expansion in the next 5 years. Technological improvements, combined with the falling costs of renewables, have helped drive consumption in many regions around the world, increasing their competitiveness with traditional fossil fuels. Improvements in Artificial Intelligence (AI), digital twins, and Internet of Things (IoT) technology have enabled the development of smart grids, increasing the efficiency of renewable power generation and demand forecasting, as well as driving intelligence in distributed energy markets. Since 2010, the cost of developing solar Photovoltaic (PV) systems fell by 89%, while cost of onshore wind has dropped by 70%, according to a report by the International Renewable Energy Agency (IRENA).

Government incentives and policies are also driving the use of renewable energy, including in the European Union (EU) and the United States, through feed-in tariffs, tax incentives, and renewable portfolio standards. The EU’s pledge to become carbon neutral by 2050, as part of the European Green Deal, has increased the urgency to shift the energy system from fossil fuels to green energy. Similarly, the United States has pledged to be carbon neutral by 2050 and use 100% carbon pollution-free electricity by 2035. Key transformative energy policies that will drive investments in clean energy in 2023 and beyond include the following:

European Union:

• REPowerEU: Announced in May 2022—In light of the Russia-Ukraine conflict, the REPowerEU initiative is the European Commission’s (EC) plan to reduce dependence on Russian fossil fuels and accelerate the green transition. Through this initiative, the EC aims to increase the share of renewables in the energy mix to 45% and increase energy efficiency by 13% by 2030.
• Fit for 55: Announced in July 2021—Fit for 55 refers to the EU’s target of reducing net Greenhouse Gas (GHG) emissions by 55% by 2030, including a proposal to revise the EU’s renewable energy directive with a focus on sectors with a slower integration of renewables, including industry, transportation, and buildings.

United States:

• IRA: Announced August 2022—Provides US$391 billion in funding toward renewable energy development, forecast to more than triple current U.S. clean energy production.
• Infrastructure Investment and Jobs Act (IIJA): Announced November 2021—The IIJA provides almost US$75 billion in funding to support investment in renewable energy infrastructure, including storage and transportation, carbon capture, and support for clean hydrogen.

There are significant obstacles to developing renewable energy, with emphasis on the need for resiliency throughout the energy transition. While the production of critical raw materials has expanded rapidly over the last decade, it is projected that demand will eventually exceed supply, impeding the growth of renewable energy technologies and projects. Minerals like lithium, cobalt, nickel, graphite, and manganese are crucial for electric batteries, while other rare earth elements are necessary for solar PV panels, wind turbines, and Electric Vehicle (EV) motors. Prices of these essential materials have soared in recent years due to a combination of growing demand for EVs and energy storage systems, and supply chain disruptions arising from the pandemic and the Russia-Ukraine conflict. Prices of lithium almost doubled last year, with prices of cobalt and nickel remaining high after peaks in 2022. Supply volatility is also compounded by market concentration of materials in China, which controls over 60% of global capacity for refining battery materials.

One of the most significant challenges for renewable energy developers is also the lack of adequate infrastructure, particularly grid capacity, which is not designed to accommodate large-scale renewable energy projects. This is delaying plans as developers must invest in new infrastructure, including transmission lines, to connect more projects to the grid. For example, according to research from BloombergNEF, in the United Kingdom there are around 200 Gigawatts (GW) worth of energy projects waiting for a grid connection, with many unlikely to move ahead. The Energy Networks Association (ENA), which represents grid operators in the United Kingdom, has reported that the industry has received 164 GW worth of new connection requests in the year leading up to October 2022, around 3X more than the current grid capacity. Insufficient grid infrastructure means that planned projects, including solar arrays and windfarms, could be delayed by 10 to 15 years, slowing the energy transition.

The renewable energy market has seen strong growth over the last decade, as material inventories and capacity have typically met downstream demand. Many industries have made significant progress in incorporating renewable energy into operations. For example, Schneider Electric, Siemens, and Bosch, which were assessed in ABI Research’s “Sustainability Assessment: Large Industrial Solution Providers" reported that 82%, 78%, and 89% of electricity consumption was from green sources, respectively, developing on-site PV systems and securing long-term energy supply agreements. Companies like ABB are also helping facilitate the energy transition by offering their own technology, including solar inverters and PV energy storage units, to integrate renewable energy into the electricity grid. Many globally-leading telco operators have already reached 100% renewable energy use, including Swisscom and KPN, which achieved this in 2010 and 2011, respectively. Ericsson reported that the carbon footprint of the Information and Communication Technology (ICT) sector could be reduced by over 80% if all electricity consumed was from renewable sources.

However, the challenges have not yet fully been realized. The extent of the impacts of rising commodity prices, potential material shortages, and insufficient grid infrastructure may not be observed for another few years, as the number of global renewable projects continues to increase. Governments and renewable energy developers and suppliers must work closely to develop effective risk countermeasures to avoid any obstacles throughout the global energy transition process. Proactive risk identification must become a commonplace practice in managing the renewable energy sector, with consideration given to the price volatility and access to raw materials, capacity constraints, and the regulatory environment. Key strategies to overcome these challenges are outlined below:

• Diversify Material Sourcing: While there is currently no shortage of the supply of critical materials for renewable energy infrastructure, constraints will likely arise from future demand competition and geopolitical risk of material sourcing. Solar PV plants, wind farms, and EVs typically require more materials than fossil-fuel based counterparts. According to the IEA, an offshore wind plant requires 13X more mineral resources than a similarly sized gas plant. Furthermore, the IEA reports that the average quantity of mineral resources needed for a new unit of power generation capacity has increased by 50% since 2010 due to increasing renewable energy generation. As demand grows, governments and energy suppliers must consider potential vulnerabilities in supply and improve resiliency by diversifying material sourcing to avoid reliance on Chinese imports, accelerating technology transfer, and increasing foreign direct investment in other mineral-rich countries. Efficiency of material use through recycling end-of-life batteries and other renewable energy infrastructure will also help reduce new demand.
• Invest in Power Grids: While capacity for renewables has seen a drastic rise over the last 5 to 10 years, the increasing number of planned renewable energy projects is placing increasing pressure on current energy grids. The power infrastructure of many regions around the world are not yet capable of facilitating the necessary connections for new renewable energy projects. Building sufficient capacity to continue ramping up renewable energy production will require vast investment in smart grids, new connections, and long-distance transmission lines across countries and regions. Administrative issues, lengthy procedures, and localized pushback mean grid development is a complicated and time-consuming process, so expansion plans must be a top priority. Developing microgrids would create opportunities for growth by limiting loads on electricity grids in remote or high energy-intensity hotspots.
• Accelerate Regulation and Permits for Renewables: The physical installation of solar PV and onshore wind power infrastructure is significantly faster than traditional oil & gas infrastructure; however, permit requirements and legal challenges can delay installation for many years. Governments must look to streamline permit requirements and procedures, accelerating current timelines for permit procurement to avoid further delays of stalled renewable projects worldwide.