If the pledges from COP21 are to be met, investors need to start treating renewables as a standalone asset class, argues Graham Smith
The Paris climate deal has been heralded as "the end of the fossil fuel era". But now that the delegates have gone home, it's time for the real work. To limit warming to 1.5°C above pre-industrial levels, we need to focus on channeling private funds into the technologies that will propel us towards a low-carbon future.
While research and development into new technologies, including carbon capture, will be a critical part of the solution, equally as important is accelerating the deployment of existing technologies that have proven to be effective.
Solar stands out as a proven technology that can reach the scale required to help reduce carbon dioxide emissions.
Today, solar generates approximately 1% of all electricity in the US, but there is a realistic path towards 10% – if not more – over the next 10 to 15 years. Hard costs have decreased by 60% since 2011, according to Deutsche Bank, and are estimated to fall another 30% to 40% in the coming years.
With solar finally cost-competitive against traditional sources of electricity in some markets, the next focus must be on increasing access to solar financing in order to accelerate penetration.
Insurance companies, pension funds and other institutional investors need to recognise the opportunity and value proposition at hand and start allocating capital to renewables
One successful example of solar penetration is Germany, which already has 28%, with plans for further expansion.
This success is due largely to favourable treatment of 'soft cost' factors such as financing, permitting, installation and grid access. If the US focuses on increasing access to financing and decreasing soft costs, solar's value proposition will become more compelling to businesses and consumers, and attractive versus traditional electricity prices as a simple economic proposition.
According to Bloomberg New Energy Finance, global clean energy investment totalled $310 billion in 2014, largely driven by investments in solar.
While this is a significant number, the International Energy Agency estimates that we need to invest $70 trillion by 2040 to achieve Paris's objectives. Indeed, this figure encompasses technology and action beyond solar, but it gives a broad idea of the amount of capital needed to propel growth in the renewables sector to reach the target carbon dioxide emission reductions. We're getting there but a further step change is needed.
We have an incredible opportunity to structure and get behind the existing technologies, in particular solar, that are proven; it's time to roll them out at a huge scale.
Practically, that means the financial community must allocate investments towards renewable energy as a standalone asset class.
Solar is fast emerging as an attractive investment asset class, and policymakers have sent a clear signal to the market that now is the time to capitalise renewables. Insurance companies, pension funds and other institutional investors need to recognise the opportunity and value proposition at hand and start allocating capital to these technologies.
Commercial solar investments are of particular interest as they are resilient against volatility in the market and provide attractive savings for business owners, and returns for investors. Plus there is a large installed base already to point to.
Once installed, a solar photovoltaic facility can reliably generate electricity for up to 30 years with relatively minimal additional investment costs. This offers investors lower risk and stable returns over a long period of time, a compelling proposition during a time of high volatility in the market due to low oil and natural gas prices.
The US has a track record of financial innovation and the capacity to access the capital markets to drive down the cost of capital for emerging asset classes – we're currently on that path for solar, and with more investor commitments we will make big steps towards a carbon emissions solution.
We have an incredible opportunity to structure and get behind the existing technologies, in particular solar, that are proven; it's time to roll them out at a huge scale. The structures are already in place, now we simply must usher the capital from the private sector and help the industry grow.
Graham Smith is CEO of Open Energy
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