Weak returns threaten renewables’ edge over fossil-fuel investments

Investments in clean energy are roaring past spending on fossil fuels as the world decarbonizes. But to keep up the momentum, governments will have to make up for thin shareholder returns by helping fund green projects, executives say.

Energy investments around the world are expected to amount to about US$2.8-trillion in 2023, the Paris-based International Energy Agency said in a report this week. Of that, more than US$1.7-trillion is expected to go to clean technologies, such as renewables, electric vehicles, nuclear power, energy storage, lowemissions fuels and efficiency improvements. The remainder will be funnelled to coal, natural gas and oil.

“Clean energy is moving fast,” IEA executive director Fatih Birol said in the report. “Faster than many people realize.”

An estimated 24-per-cent growth in annual clean-energy investment between 2021 and 2023 is being driven by renewables and electric vehicles, the IEA said. That compares with a 15-per-cent rise in fossil-fuel investment. Five years ago, spending on fossil fuels and clean energy was even. Now, for every dollar that goes to fossil fuels, $1.70 goes to clean energy.

The IEA attributes the boost to a variety of factors, including volatile oil and gas prices that raised concerns about energy security, supportive government policies, and new industrial strategies countries have put in place as they seek to strengthen their footholds in the emerging cleanenergy economy.

Even so, a survey of 600 oil and gas, utility, chemical, mining, and agribusiness managers by the U.S. management consultancy Bain & Co. found fourfifths believe that failure to achieve acceptable investment returns will be the main hurdle to decarbonizing the world’s energy systems in the time frame that countries have agreed to.

Reticence among customers to pay up for EVs, clean energy and other green technology will make scaling up clean-tech businesses difficult, so a crucial factor in getting to net-zero greenhouse emissions will be government policy and regulatory support to bridge the gap, the survey’s respondents said. Accessing capital was a lesser concern: fewer than 20 per cent saw that as a barrier.

The IEA and Bain reports complement each other, said Baltej Sidhu, an environmental, social and governance analyst at National Bank Financial. Slim profit margins mean taxpayers will be called upon to shore up many clean-energy investments, he added.

The U.S. Inflation Reduction Act, which includes US$369-billion in green incentives, shows that already happening in a big way.

Meanwhile, spending on conventional energy production has all but stalled, as oil and gas companies instead use cash flow to pay down debt and increase dividends for shareholders.

“If we’re spending more on renewables and not on the conventional energy system, ‘greenflation’ is a real thing and you’re going to have to pass on these added costs to consumers. And how do you do that? It’s going to be through government subsidies,” Mr. Sidhu said.

The Bain respondents predicted on average that the world will reach net-zero emissions by 2057 – seven years beyond the commitments of the Paris Agreement.

The IEA has estimated annual clean-energy investments will have to more than double, to US$4-trillion, to hit the 2050 target. For that to happen, companies will need to achieve economic viability for their investments and not be constrained by insufficient materials, labour and supply chain availability, Bain said.

Oil companies that have avoided taking decarbonization measures haven't yet had their access to capital constrained, but that could change, said Gautam Jain, senior research scholar at Columbia University’s Center on Global Energy Policy. “In the short term it may look like decarbonization has a cost attached to it – especially if it’s carbon capture – but it may be necessary for them to do these things for the longevity of their businesses,” he said.

The IEA report showed 90 per cent of the increase in renewables is in advanced economies and China. Despite some bright spots in India, Brazil and parts of the Middle East, investment elsewhere is being curbed by unclear policy frameworks and market designs, weak grid infrastructure, financially strained utilities and a high cost of capital.