There’s a growing gap between current investment in low-carbon energy and what’s needed to meet world demand while avoiding the worst impacts of climate change. The good news is there’s sufficient capital and investor interest to close much of this gap. However, policies that encourage market certainty and level the playing field between different energy sources are needed to attract the volume of investment required, according to a special International Energy Agency (IEA) report, the World Energy Investment Outlook, released this month.

Trillions of Dollars in Investment Needed – and Trillions in Benefits Gained

The report underscores the importance of creating the right policy, regulatory, and institutional conditions to shift markets and drive investment toward getting more low-carbon energy services, more affordably, to more people. Carefully targeted climate finance can help shape electricity markets and create the enabling conditions to unlock low-carbon, low-cost energy investment.

If business as usual continues, IEA estimates $48 trillion of overall investment in energy would be needed to meet global demand between now and 2035. But to avoid the worst impacts of climate change and keep the world on a path that could limit global warming to 2 degrees C, IEA projects that an additional 18 percent, or $5 trillion, in cumulative investment would be needed through 2035. Specifically, investments in low-carbon power would need to more than triple from current levels to $730 billion per year in 2035 and investments in energy efficiency would need to increase more than eight times to $1.1 trillion per year in 2035. While this sounds like a lot, this investment would be offset for consumers by an IEA estimated $115 trillion in total fuel cost savings by 2050.

Furthermore, recent trends suggest that we could achieve the required renewable energy deployment at lower cost than previously thought.

Reproduced from World Energy Investment Outlook. Credit: OECD/IEA

New Opportunities in Lower-Cost Renewables

More efficient and lower-cost renewable energy, spurred in large part by supportive policy, regulatory and institutional conditions, is already helping cut the amount of investment needed to meet growing demand. Another new report, the REN21 Renewables 2014 Global Status Report, shows the cost of renewable energy declined sharply while global renewable energy capacity grew 8 percent to 1,560 gigawatts (GW) in 2013.

Solar photovoltaics, in particular, had a record year with 39 GW of new capacity installed globally, up 32 percent over new capacity added in 2012, despite a 22 percent decline in overall investment. Most of the investment decline is due to lower technology costs.

The Global Status Report gives other encouraging examples of the falling cost of renewables, especially in major emerging markets. Wind power costs dropped so low in Brazil that they priced fossil fuel energy sources out of the market. Brazil’s national energy agency introduced a separate category for wind projects as a result. And for the first time, renewable power capacity added in China surpassed fossil fuel and nuclear capacity additions.

Figure 2: Global capacity additions and annual investment in Solar PV

Effective Climate Finance Models Should Be Scaled Up

Given the scale of investment required and the scarcity of public funds, public climate finance should strive to create markets conditions that spur the necessary investment.

The Global Status Report notes that Mexico and Uruguay were among the countries that attracted the most investment in renewable energy in 2013, as a proportion of their GDP. Both have taken steps, supported by public climate finance, to create the conditions that drive renewable energy investment.

In Mexico, public investments in regulatory reform, research and development, and demonstration projects helped to create market conditions that encouraged investment in wind energy.

Similarly, in Uruguay, modest but strategic climate finance investment by UNDP and the GEF in electricity market regulatory reform, combined with ambitious targets from the Uruguayan government, has spurred rapid growth in the country’s wind industry and helped to leverage billions of dollars of investment.

Leveraging Climate Finance to Attract Investment

These examples show that climate finance has a key role to play in driving low-carbon energy investment. Climate finance institutions like the Green Climate Fund can learn from these and other successful examples as they decide where to invest. To achieve the paradigm shift that the Green Climate Fund seeks, its financing will need to go beyond investing in individual low-carbon energy projects, and focus on the policy, regulatory and institutional conditions that will unleash financing for low-emissions development. These conditions have already helped drive down the cost of low-carbon energy. As the World Energy Investment Outlook notes, it is only with “consistent and credible policies” that we can close the growing gap between energy investment today, and the investment required to meet growing energy demands while avoiding the worst impacts of climate change.