Mechthild Wörsdörfer (@MWorsdorfer) has been recently appointed Deputy Director-General of the Directorate-General for Energy (ENER) at European Commission (the date of effect of this appointment will be determined later). At present, she still holds the position of Director of Sustainability, Technology and Outlooks (STO) at IEA. Ms Wörsdörfer plans and co-ordinates the IEA’s work on energy sustainability, encompassing clean energy technologies and climate change policy. Previously, Wörsdörfer held several senior management positions in the European Commission, where she coordinated the work on the 2030 Energy and Climate Framework, the Clean Energy Package and the 2050 Energy Roadmap. She had been involved with the IEA for a number of years as IEA Governing Board Representative for the EU, and served in the Cabinet of Commissioners, in charge of industry, competitiveness, trade and digital economy.
Are companies that invest in renewables more likely than others to emerge from the crisis and why?
In addition to generating higher total equity returns over the past decade, compared with fossil fuels and the wider equity markets, the financial performance of renewable power has remained more resilient during periods of crisis, owing to the contracted nature of their revenues, enabled by policy support, and falling costs.
In the latest joint report by IEA and Imperial College Business School, listed renewable-power companies outperformed listed fossil-fuel companies and public equity markets on average in all markets over the past 10 years. At a global level, the total return of renewable power portfolio was 423%, compared to 59% for fossil fuel portfolio.
In the past ten years, financial performance of renewable companies was more resilient compared to fossil-fuel companies and that of the wider market during three periods of economic crisis - the European sovereign debt crisis in 2010-12, global economic shocks in 2016 and covid-19 crisis in 2020 - implying a diversification benefit from investing in renewables.
During the Covid-19 market shock in February-April 2020, renewable companies held up better than fossil fuel companies, exhibiting a lower drawback (-19% vs -31% for total return) and lower volatility (41% vs 70% for annualized volatility) on average at a global level. Over this period, renewable companies also generated higher returns on average (-19% vs -21%) than the relevant market index and displayed lower volatility (41% vs 64% for annualized volatility).
Which countries in the world invest and will invest more in innovative technologies, with focus on renewables, for the energy transition?
The Covid-19 crisis triggered a drop in sorely needed energy-sector investment, with the exception of some renewable energy technologies. Given the trillions needed for investment around the globe to deliver the clean energy transition, countries should be starting today to ensure that clean energy is at the heart of their recovery packages – the largest and most visible being those of the US and the EU.
But not all countries are in a position to make expansive commitments to expand public support for clean energy, and I’d like to focus in these remarks on the issue of clean energy investment in emerging and developing economies. This is where the growth in energy demand is going to come from, as these countries urbanize and industrialize.
In our view, today there’s a dangerous mismatch between the scale of clean energy investment needed in developing economies and the capital that is actually available to support them. In aggregate, there is more than enough capital to make transitions a success, but no guarantee that it will get to where it is needed. Covid-19 has complicated the situation in many developing economies, both to mobilize domestic investment and to attract international capital.
We need to focus on bridging this gap and find ways to connect the available capital seeking clean energy projects, including the growing wave of sustainable finance in North America and Europe, with opportunities in developing countries in Asia, Africa, Latin America.
What does that mean in practice? This is what the IEA is working on in a major new piece of analysis to be released in June, in collaboration with the World Bank and the World Economic Forum. We are seeing what has worked, drawing on lessons from around the world, to mobilize and align private finance in support of clean energy investments.
Of course, there are messages there for developing economies, their policy and legal frameworks and so on. But we believe that more needs to be done on the international front as well: the $100 billion a year target of the COP is a start, but bigger structural change in global financing is needed. If we don’t accelerate in this area, this will be a major fault line in the global effort to address climate change and achieve sustainable development goals.
To what extent are the decarbonization goals really achievable in light of the structure of the current world energy markets?
Pathways to meet global objectives for limiting global warming below 2 degrees, and aiming for 1.5 degrees are still achievable, something we describe in our Sustainable Development Scenario and in our net-zero by 2050 Scenario, which is coming out on May 18th.
Reaching these goals will require swift, concerted action to achieve, however, with governments playing a critical role in redirecting markets toward the investments needed for these pathways. The current economic situation the world finds itself after the pandemic makes some of these changes harder, particularly in the developing world where strained economies further limit the ability for governments to use financial policies to direct markets.
Nonetheless, the economic-recovery spending that governments are mobilising in the wake of the crisis provide a once-in-a-generation opportunity to boost public and private spending in line with energy and climate goals. Our Sustainable Recovery Plan, published in June 2020 in co-operation with the International Monetary Fund, estimates that an additional 1 trillion USD a year between 2021 & 2023 would be required globally to put the world on a trajectory to achieving these goals, with around 30% of that total coming from public expenditure.
To date, only a small share of government spending on economic relief has been for clean energy. Governments have mobilized around 14 trillion USD in economic relief packages, with clean energy related measures well-below the 7% of recovery spending needed to meet the targeted spending in the Sustainable Recovery Plan. While a large sum, this share is modest, even compared to the 2008-09 crisis, where 16% of stimulus was spent on clean energy technology and environmental management measures.
Again, about recovery, what kind of fiscal and / or financial measures and policies could come to help energy technological innovation?
Half of the emission reductions needed to reach net-zero emissions must come from technologies that do not exist commercially today. While markets are vital for mobilizing capital and catalyzing innovation, they will not deliver net-zero emissions on their own. Governments have an outsized role to play in supporting transitions towards net-zero emissions, especially in mobilizing early investments toward needed innovations. Governments have a handful of levers at their disposal to foster faster innovation on emerging clean technologies. These include:
While direct funding will be a major financial measure for governments to support early-stage RD&D, other policy or fiscal measures can accelerate commercialization, including policies that drive up demand for new innovative products, such as portfolio standards, blending rates, and procurement requirements; and financial measures can eliminate risks in terms of early-stage investment, such as preferential loans, tax incentives, and providing procurement backstops.