Investment in renewable energy: What policymakers must do to make it happen

Cultura/Janie Airey

There is enough capital out there and renewable energy technologies have become more cost-competitive, so why is investment still wanting? Policymakers hold the key.

Investment in renewable energy needs to increase annually by 150%–cumulatively by about $US16 trillion between 2015 and 2050 according to the IEA–to achieve the Paris Climate Agreement goal of limiting temperature rise to below 2°C by 2050. This target also backed by the UN Sustainable Development Goal (SDG) 7on affordable and clean energy.

The good news is that there is enough capital out thereto do it: the financial sector represents around €100 trillion of global assets, and OECD institutional investors alone manage an estimated $US54 trillion (including pension funds, insurance companies and public pension reserve funds, but excluding investment funds). In addition, renewable energy technologies have become more cost-competitive:the cost of solar energy has fallen by more than 60% and that of onshore wind energy by 20% since 2010. So why is investment in renewables still wanting?

New OECD research shows that incoherent policies, misalignments in electricity markets, and cumbersome and risky investment conditions are to blame.

Incoherent incentives towards investment are worrying on a number of fronts, not only for investment in deployed renewables but also for innovation in earlier-stage renewables technologies. Results show that feed-in tariffs, for instance, stimulate renewable energy patents, yet policy has instead been shifting towards public tenders to adjust to changing market conditions, control the deployment of large-scale renewables, and reduce costs for consumers. Innovation in renewable technologies is also impeded by very low government spending in R&D and sluggish deployment of low-carbon technologies despite research showing that public R&D expenditures play an important role in stimulating patenting in renewable technologies.

To meet renewable energy deployment goals, policymakers need to strengthen investment conditions across the policy spectrum and across all markets. We also need to take advantage of the fact that climate mitigation policies actually enhance each other's positive effects when combined. For example, setting carbon prices while providing public RD&D (research, development and demonstration) spending in renewable technologies has helped to mobilise investment. Denmark for instance has become a leader in renewable technologies by providing integrated, sector-wide policy support to the R&D and deployment of renewables.

Policy for deployment

Step one at the policy level is to design coherent and targeted investment incentives such as feed-in tariffs, renewable certificates and public tenders, with combined approaches to allow for virtuous circles. Feed-in tariffs and certificates have already driven investment in advanced countries: for example, they have led to a 11% increase in renewables investment for each additional unit. Meanwhile, auctions and public tenders have supported renewables investment in emerging markets. Explicit carbon prices, using the likes of carbon taxes and emissions trading schemes, have driven investment in renewables in both the European Union and in emerging economies, as well as among OECD and G20 countries in solar power. Yet pressure from fossil-fuel subsidies in the electricity sector has simultaneously deterred renewables investment in emerging economies.

Step two is to make the renewable energy investment environment–and especially solar and wind energy–far more attractive and business-friendly. At investment policy level, this means re-thinking things like property registration, corruption perception, regulatory quality, and licensing and permitting systems. At competition and trade policy levels, it means easing trade across borders. And in terms of financial access, it means providing access to domestic credit for the private sector and considering the possible unintended consequences of financial regulations on long-term renewables debt financing.

Step three is to ensure that the broader investment environment doesn’t work against climate mitigation action. For instance, the implementation of important Basel III banking regulations may have had the unintended consequence of constraining access to debt financing for capital-intensive renewable projects. Another example has to do with public tenders, which can interact negatively with state-owned enterprises, deterring investment from independent renewable power producers entering a market through tendering procedures.

So how can we shift incentives and strengthen enabling conditions to make renewable power more attractive to investors and meet this trillion dollar target? Governments need to understand how the broader investment environment influences those incentives and vice versa. They also need to set the right type of incentives to support both investment and innovation in renewable technologies. This is particularly relevant in the context of on-going incentive schemes reforms for renewable energy.

The OECD stands ready to support these critical goals.

NOTE: The OECD hosted its fourth annual Forum on Green Finance and Investment on 24-25 October 2017, gathering 600 senior policymakers and key actors in green finance and investment from around the world. The OECD Centre on Green Finance and Investment (www.oecd.org/cgfi/) was launched in October 2016 to support the transition to a green, low-emissions and climate-resilient economy.

References and links

Ang, G., D. Röttgers and P. Burli (2017), "The empirics of enabling investment and innovation in renewable energy", OECD Environment Working Papers, No. 123, OECD Publishing, Paris,
http://dx.doi.org/10.1787/67d221b8-en.

EU High-Level Expert Group on Sustainable Finance (2017), Financing a Sustainable European Economy, interim report, July 2017,
https://ec.europa.eu/info/sites/info/files/170713-sustainable-finance-report_en.pdf.

IEA/IRENA (2017), Perspectives for the Energy Transition, IEA, Paris. https://www.iea.org/publications/insights/insightpublications/perspectives-for-the-energy-transition.html

OECD (2015), Aligning Policies for a Low-carbon Economy, OECD Publishing, Paris,
http://dx.doi.org/10.1787/9789264233294-en.

OECD (2015), Policy Guidance for Investment in Clean Energy Infrastructure: Expanding Access to Clean Energy for Green Growth and Development, OECD Publishing, Paris,
http://dx.doi.org/10.1787/9789264212664-en.

©OECD Observer No 312 Q4 December 2017




Economic data

GDP growth: +0.6% Q4 2017 year-on-year
Consumer price inflation: 2.2% Feb 2018 annual
Trade: +2.7% exp, +3.0% imp, Q4 2017
Unemployment: 5.4% Feb 2018
Last update: 11 Apr 2018

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • Ambassador Aleksander Surdej, Permanent Representative of Poland to the OECD, was a guest on France 24’s English-language show “The Debate”, where he discussed French President Emmanuel Macron’s speech at the World Economic Forum in Davos.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Rousseau
  • Do you trust your government? The OECD’s How's life 2017 report finds that only 38% of people in OECD countries trust their government. How can we improve our old "Social contract?" Read more.
  • Papers show “past coming back to haunt us”: OECD Secretary-General Angel Gurria tells Sky News that the so-called "Paradise Papers" show a past coming back to haunt us, but one which is now being dismantled. Please watch the video.
  • When someone asks me to describe an ideal girl, in my head, she is a person who is physically and mentally independent, brave to speak her mind, treated with respect just like she treats others, and inspiring to herself and others. But I know that the reality is still so much different. By Alda, 18, on International Day of the Girl. Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Read some of the insightful remarks made at OECD Forum 2017, held on 6-7 June. OECD Forum kick-started events with a focus on inclusive growth, digitalisation, and trust, under the overall theme of Bridging Divides.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2018