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

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,

EU High-Level Expert Group on Sustainable Finance (2017), Financing a Sustainable European Economy, interim report, July 2017,

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,

OECD (2015), Policy Guidance for Investment in Clean Energy Infrastructure: Expanding Access to Clean Energy for Green Growth and Development, OECD Publishing, Paris,

©OECD Observer No 312 Q4 December 2017