Scaling up energy transition investments to meet the 1.5°C goal

In 2022, global investments in energy transition technologies – including renewable energy, energy efficiency, electrified transport and heat, energy storage, hydrogen and carbon capture and storage (CCS) – reached USD 1.3 trillion.

This marks a new record, up 19% from 2021 investment levels, and 70% from before the pandemic in 2019, despite prevailing macroeconomic, geopolitical and supply chain challenges.

Keeping the world on track to achieve an energy transition in line with the 1.5^°C Scenario presented in IRENA’s World Energy Transitions Outlook 2023 will require a cumulative USD 150 trillion, averaging investments of more than USD 5 trillion per annum between 2023 and 2050.

Overall, an additional USD 47 trillion in investment is required by 2050 to remain on the 1.5^°C pathway.

Although the trend is positive, the current pace of investment is not sufficient to put the world on track to meet climate and socio-economic development goals.

Global investment in renewable energy reached a record high of USD 0.5 trillion in 2022. Yet this still represents less than one-third of the average investment in renewable power and direct use of renewables needed each year between 2023 and 2030 under IRENA’s 1.5^°C Scenario.

Achieving an energy transition in line with the 1.5^°C Scenario also requires the redirection of USD 1 trillion per year from fossil fuels to energy-transition-related technologies.

Following a brief decline in 2020 due to COVID-19, fossil fuel investments are now on the rise, largely driven by energy security concerns. In addition, the fossil fuel industry continues to benefit from subsidies, which doubled in 2021 across 51 countries.

The phasing out of investments in fossil fuel assets should be coupled with the elimination of subsidies to level the playing field with renewables. However, the withdrawal of subsidies needs to be accompanied by measures to ensure adequate standards of living for vulnerable populations.

Decentralised solutions have a vital role to play in achieving universal energy access, and improving livelihoods and welfare under the 2030 Agenda. Thus, efforts must be made to scale up investments in the sector. Despite record high investment in 2021, overall investments are far short of the USD 15 billion needed annually between 2021 and 2030.

Investment in off-grid renewable solutions reached record high 0.5 billion in 2021 owing to:

• Strong investment growth in Africa – particularly West Africa and East Africa – while investments in other regions have yet to return to pre-pandemic levels.
• Increased support from public financing institutions, particularly from development finance institutions (DFIs).
• Increased concentration of investments among a limited pool of large companies driving the majority of investments.

To best support the energy transition, more funds need to flow to less mature technologies, as well as to sectors beyond electricity such as heating, cooling and transport.

Investments are concentrated in specific technologies and end uses, with solar and wind consistently attracting the largest shares. Between 2013 and 2020, power generation assets attracted, on average, 90% of renewable investments each year, and up to 97% in 2022.

Investments in end uses including heat generation and transport are lagging. They will need to increase from USD 13 billion in 2022 to an average of USD 269 billion each year between now and 2030 to achieve the energy transition.

Investments are increasingly concentrated in a few regions and countries.

Regions home to about 120 developing and emerging markets continue to receive comparatively low investment. Across these regions, the bulk of renewable energy investments are concentrated in only three countries: Brazil, Chile and India.

In other words, more than 50% of the world’s population – mostly residing in developing and emerging countries – received only 15% of global investments in renewables in 2022.

Sub-Saharan Africa received less than 1.5% of the amount invested globally between 2000 and 2020.

Investments in the region have been on a downward trend, despite the widespread understanding engendered by the COVID-19 pandemic of the critical role energy plays in enabling health care, sanitation, telecommunication and resilient livelihoods.

Disparities in per capita investments between North America (excl. Mexico) or Europe, and Sub-Saharan Africa have more than doubled between 2015 and 2021.

Globally, the private sector committed 75% of total investment in 2013-2020. Private capital flows to the technologies and countries with the least risks, highlighting the need for more public investment.

For example, in 2020, 83% of commitments in solar PV came from private finance. Meanwhile, geothermal and hydropower rely mostly on public finance; only 32% and 3% of investments in these technologies, respectively, came from private investors in 2020.

The share of debt financing increased from 23% in 2013 to 56% in 2020. This is likely linked to the maturation and consolidation of major renewable technologies such as solar PV and onshore wind that are able to attract high levels of debt, as lenders are able to envision regular and predictable cash flows over the long term, facilitated by power purchase agreements (PPAs) in many countries.

Public funds are limited, so governments have been focusing what is available on de-risking projects and improving their risk-return profiles to attract private capital.

Globally, the public sector provided less than one-third of renewable energy investment in 2020. The majority of public investments are made domestically with relatively little international collaboration.To achieve a just and inclusive energy transition, public financing – including through international collaboration – has a critical role to play across a broad spectrum of policies, beyond mitigating investment risks.

Stronger international collaboration – including a substantial increase in financial flows from the Global North to the Global South – is crucial to mobilise finance more equitably and in a more impactful manner.

Grants and concessional loans accounted for just 1% of total renewable energy finance in 2020, and financing from development finance institutions is provided mainly at market-value interest rates.

To achieve a just and equitable transition, public funding must flow into the renewable energy sector, the wider energy sector and the economy as a whole, including through an increase in the provision of concessional finance and grants.

Furthermore, public finance and policy should continue to be used to crowd in private capital, requiring policies and instruments beyond those used to mitigate risks.