Introduction

Currently the share of renewables is nearly 29% of electricity generation globally. But to achieve the 2050 net-zero goal to limit global warming to 1.5 degrees above pre-industrial level, re-affirmed recently during various COP meetings, several countries agreed that renewable power needs to increase significantly in the next decade to nearly 60% of global generation mix. Even though the science has developed significantly, scaling up renewables have several economic challenges which needs to be understood and suitably mitigated if we want to successfully combat the climate crisis.

Economic Challenges

Supply chain issue for raw material is a major concern. Critical metals like Nickel, Lithium, Cobalt, etc. are important parts of battery technology. Platinum and rare earth metals form the basic components of wind turbines and electrolysers required for the hydrogen economy.  Most of these metals are mined in only handful of countries and most of the refining is currently undertaken by China. This dependence creates a supply chain challenge for the required scale-up of renewables. Geo-political issues, like the currently ongoing Russia-Ukraine war, the recent pandemic related lockdowns, etc., have already substantially increased many raw material prices and could soon counter the past years of reduction in wind and solar project costs.

High Initial Investment required for renewables will increase the cost of supplying electricity in the short term. Increasing renewables in the energy mix also substantially increases the marginal cost per unit of providing peak load electricity as the network operators will then need to pay for maintaining and operating the backup baseload fossil fuel power plants. This also increases the cost of production of other goods and services making them uncompetitive in the global markets.

Energy Poverty is currently emerging as one of the biggest economic challenges for large scale renewable deployment, as some developing economies cannot simply afford such expense. Most of Africa, many developing countries in South America and southeast Asia have this challenge to overcome. After years of disagreement, during the recent COP27 in Egypt, the richer nations have finally agreed for a “Loss and Damage” fund to be created to help developing nations which are most effected by the climate crisis.

Low profit renewable projects are less attractive to large private investors looking to make quick money from their investments. This becomes even more exacerbated when large scale intermittent renewable power sources are added to the grid, which reduces the overall revenue generated by reducing the wholesale electricity price at which the network can sell power to consumers. Whereas the fossil fuel industry, which pays much higher dividends, is generally backed by billionaires, and this is a huge economic issue for the investments required for large scale renewable projects. Some small to medium size renewable project developers have been crowdfunding their projects, which will not be suitable for large scale-up needed in the next decade.

High discount factors are generally used in all economic modelling and analysis for large scale investment decisions, which means assuming high economic growth in terms of increased GDP, which may not be sustainable. Instead, some economists are now suggesting the use of a lower ‘social discount factor’, which considers the investment needed to counter the negative impact of climate change. Using high discount factors increases the LCOE of renewable projects which make them less attractive.

Resource competition is also a challenge in scaling-up of renewable generation. Some renewable projects like solar and onshore wind farms take up a lot of land space, which can compete with agricultural and other industries creating a tension in the local economy.

Another challenge is to grow the corresponding demand for electricity in the other sectors at the same pace, like electrical vehicles and charging points along with large scale investments in suitable grid upgrades to allow for intermittent renewables’ integration. To make large-scale renewable projects economically viable, their curtailment needs to reduce, thus increasing their capacity factors. This means larger investment in connected hydrogen, hydro, battery, and other storage technologies. This is a financial challenge for even the richer economies, with growing cost of living crisis and rising inflation.

Current Global trade dynamics will be impacted by large scale renewable energy development specifically for the fossil fuel exporting countries like Russia and many Middle Eastern countries, whose GDP is heavily dependent on energy trade. Those economies could try to resist this large-scale energy transition.

Trained labour shortage for this fast-growing industry will be another challenge that all economies will have to carefully consider when scaling-up renewable generation. More experienced personnel are reluctant to move out of the fossil fuel industry and new generation seems to be disenchanted with the energy industry in general.

Waste management will become an economic issue with scale-up of the renewable sector in the next decade. The decommissioning costs for old wind turbines and solar panels will need to be understood better, otherwise this is another externality which might conveniently get missed from any economics and the green transition might not remain that green.

Recommendations for Policymakers

To tackle the above indicated economic challenges, the following points are recommended for policymakers.

• Encourage recycling and investment in the circular economy to tackle the impact of supply chain issues and waste management.
• Encourage private investments in renewable energy projects by providing tax incentives, risk mitigations measures like government protection for failed projects if trying out new technologies.
• Governments of richer countries could implement policies to set aside particular percentage of their national GDP to help develop renewable projects in poorer countries, with a realisation that climate change is a global issue, which needs to be funded by people who have. This can happen once governments can start promoting alternative to GDP growth as economic indications of prosperity like the Human Development Index and employ policies like the EU’s ‘Beyond GDP’ initiative.
• Implement more low carbon Feed-in tariffs, to protect the renewable sector with fixed purchasing pricing even if the wholesale prices fall with increasing renewable penetration.
• Impose carbon tax on the fossil fuel industry making the renewable projects more attractive.
• Encourage investments in associated infrastructure like transmission lines, suitable storage, and hydrogen projects.
• Encourage more collaboration with neighbouring countries, to help build interconnections, thus reducing the cost per unit of renewable power generated.

Conclusion

The predicted global climate crisis is almost upon us, and alternative technologies are being developed to harness natural sustainable energy resources like wind, solar, geothermal, hydro, ocean etc. But a large-scale implementation of renewables faces numerous economic challenges, which can only be resolved by governments of various countries working together and formulating suitable policies. The United Nations 17 sustainable development goals is one such effort which needs to be really converted into national policies.

This article was published in Mar-2024, in the Project Control Professional which is the journal of The Association of Cost Engineers.

This article was awarded the “CaSA Article of the Year 2024” award by Controls & Skills Authority UK (previously known as ACostE UK)