Putting muscle behind renewable energy’s push into 2030

This has been the position for renewable energy investment for most of 2024.  There is a wide road opening up for it globally in the run-up to 2030 and beyond, but it has had to swerve around some obstacles in recent years and will have to do the same again.

The rough patches include political volatility in many countries; increased costs in the supply chain and in financing; challenges with integrating unprecedented shares of variable generation; and cutbacks in project pipelines by some leading players.

Helping to smooth the route ahead should be an easing of those inflationary pressures and further improvements in technology. Meanwhile, there is a clear view to the faraway horizon – because the social and environmental imperative for green power is stronger than ever.

Decarbonisation remains essential to curb climate change, involving not just the phase-out of fossil fuel generation but also building up the affordable supply of green energy alternatives through the electrification of heat, transport and many industrial processes. The International Energy Agency said last year that a tripling of renewable energy capacity by 2030 will be needed to put the world on a 1.5C trajectory. 

At ING, we want to play a leading role in accelerating the transition to a low-carbon economy. As a bank, we do this through financing: working with clients on their transitions to net zero while financing the technologies and solutions needed for a sustainable future. And because the global transition needs to include everyone, we’re also finding new ways to enable people to stay a step ahead on climate change.

We see a powerful business case in financing the scale up in renewables investment implied by the IEA. We are gearing up, and staffing up, for a surge in our own target for power generation lending to for example wind, solar and batteries to 7.5 billion euros a year by 2025 (three times the 2.5 billion euros target announced in 2022).

Recent big deals in which ING has played a lead role have included a 570 million-euro financing for an 842MW solar project by Bruc Energy in Spain; a 674 million-euro credit facility for Recurrent Energy’s solar and battery projects across Europe; the acquisition by Sosteneo Infrastructure Partners of 49% of Enel Libra Flexsys, a portfolio of battery projects in Italy; and the financing of the Eavor-Loop deep geothermal project for district heating in Germany.

Below, I will look at the powerful engine driving renewable energy’s growth, and at ING’s ambition to take a front seat for that journey. But first we need to highlight the recent – and current – obstacles in the road.

Early-decade bumps

The early 2020s brought a reminder to the renewable energy sector that progress is rarely in a straight line for very long. The previous decade had ended on a euphoric note, with investment up, cost-competitiveness transformed, finance cheap, sector share prices high, and pressure on corporations to address sustainability greater than ever before.

The pandemic did not directly interrupt the roll-out of renewables very much, barring a few project construction delays. But its aftermath led to dislocation in supply chains and trade links, raising costs for everything from wind turbine components and offshore installation vessels to transmission cables and skilled labour.

Russia’s invasion of Ukraine in February 2022 had a more direct impact. It resulted in an energy price shock for consumers in Western economies and elsewhere, and sharp upward pressure on interest rates. Since renewables are highly capital-intensive, with most of the expense coming upfront in the construction phase, the cost of finance is vital to project viability – and in 2022-23 this cost shot up.

All-in financing costs for a European wind farm or solar park, which might have been around 2% in many countries in 2019, suddenly hit 4% or more on the back of materially higher base rates. Equity finance for renewable energy projects, which had been copious around the turn of the decade, also started to slow, in the face of much higher yields in government bond markets.

There were second-order issues too. Countries toyed with, or imposed, more import barriers and local content rules as the political mood shifted towards national security. There were taxes imposed in Europe to prevent renewable energy generators making excess profits at a time when electricity prices were sharply inflated by the continent’s move away from Russian gas. There was also more aggressive questioning by some politicians and some companies of the concept of ‘environmental, social and governance’, or ESG, investing.

Finally, there were more familiar worries that became a bit more pressing in 2021-2023 – such as network constraints and curtailment for new wind and solar capacity, and the danger of price 'cannibalisation’ as the share of renewables in overall generation increased. There were hiccups in the government-led programmes that awarded renewable energy tariffs, most notably in US offshore wind.

But investment has continued apace

Those issues have not been enough to halt the global momentum of renewables. Industry estimates are that world investment reached a record of more than $620 billion in 2023, spearheaded by China. It was 8% up on 2022, and nearly double the figure for 2015.

For one thing, cost-competitiveness for wind, and especially for solar and batteries, has remained a huge driver. Solar module costs have continued to tumble, reaching 11 US cents per Watt in early 2024 in markets with no trade barriers. The comparative figure was $2.2 per Watt in 2010, some 20 times as high.

In addition, large corporate energy users discovered that having their electricity costs guaranteed by a long-term power purchase agreement (PPA) with a renewable energy provider could protect their profits at a time of extreme fossil fuel price volatility.

Corporate PPAs were pioneered in the US, and then taken on by a few sectors in Europe, including the aluminium industry. However, interest in them is now intense from a wider swath of the economy, including cars, chemicals, telecommunications and data centres.

There has also been political impetus, notably from the Inflation Reduction Act in the US, which extended and expanded tax credits for renewables. This comes on top of existing, ambitious targets – such as the European Union’s binding 42.5% goal for renewables as a proportion of total energy by 2030, up from 23% in 2022, and the UK’s target for all electricity to be low-carbon by 2035.

Now, as we approach the middle of the decade, the chance is opening up for a further acceleration of investment. For instance, the financing cost issue that emerged in 2021-2023 may be past its worst, now that inflationary pressures are easing. The European Central Bank started to reduce interest rates from their peak in June this year, and other central banks, such as in the US and the UK, have since begun to do the same

The brightest markets and technologies

Renewable power additions will happen all over the world in the run-up to 2030, but each investor or lender will concentrate on those markets where it has local expertise. For ING, that means Europe, North America and Australia.

ING’s biggest deployment of capital is likely to be in the US, reflecting the size of that market and the momentum behind electricity demand in many states (both ‘red’ and ‘blue’ ones, politically). Demand is rising thanks partly to the spread of data centres and the need for new computing capacity to develop artificial intelligence systems. Meanwhile, the US offers the availability of land for new, large-scale solar and onshore wind parks, and access to tax incentives and other government support.

In Europe, land is in much tighter supply, and electricity demand is weaker (at least it has been so far). But governments are driving decarbonisation and electrification, and the offshore wind sector in particular has a massive pipeline for the next five to 10 years. In Australia, the opportunity arises as that country phases out coal-fired generation and needs new renewables capacity to replace it.

Solar has huge advantages – such as steep cost reductions and the speed at which projects can be built – and these will continue to make it a compelling proposition for utilities and developers. Its main limiter may be the ‘duck curve’ (the imbalance between the hours of maximum solar output and the daily pattern of electricity demand, and this could lead to overbuild of solar in a few markets.

ING aims to balance its portfolio approximately between solar and wind. Of the two, wind has the advantage of a more varied generation pattern, in terms of output during the day and night and between different locations. Also, for debt providers, there is the attraction of scale: offshore wind financings, for instance, tend to be in the billions rather than the hundreds of millions.

As for battery projects, ING will manage its exposure in the light of their greater revenue uncertainty. Battery projects will be able to arbitrage, charging at times of low electricity prices and discharging at times of high prices, but the opportunity to do this may come and go.

Demanding route to 2030 targets

So, renewable energy has the potential to grow strongly into the end of the decade and beyond. But are ambitious government targets for 2030 really deliverable? They look like a stretch at the current rate of growth.

In offshore wind, progress on projects depends not just on the award of capacity in national or state auctions but also on the availability of vessels, cabling, foundations, grid connections and qualified labour. In solar, grid connection and the capacity of the network to deal with its generation cycle are both challenges.

In onshore wind, it can take five years for permits to be granted by the planning system, so a project announced today may have to wait until 2029 for the start of construction.

Governments can do more, and they will have to if 2030 targets are to be met. They can streamline the administrative side of the permit process, while still leaving plenty of room for local consultation and debate. Legal recourse, which can involve challenge-rejection-challenge cycles, could be limited by law.

Control of auction processes also rests with government, and in parts of Europe and the US these are having  to be reset after the cost spike of 2022-2023 led to some failed rounds. And of course, political volatility as elections come and go can lead to project delays and uncertainty for investors and lenders.

In the world of today, hoping for less political uncertainty may be unrealistic. But investors and the energy sector should keep up the pressure on governments to do their bit to smooth the road ahead for green power for the rest of this decade.

Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on our climate approach.