Worldwide investment in the construction of wind, solar and other clean power plant will have to be ratcheted up to $1.3trn a year as the linchpin in a capital shift that would see a total $110trn channelled into building a net zero global economy by 2050 to mitigate against the worst impacts of climate change, according to a new report from the Energy Transitions Commission (ETC) think-tank.

Some 70% of the massive overall outlay, which would equate to an average of $3.5trn annually, up from $1trn today, $2.4trn for low-carbon power generation, transmission, and distribution, $900bn to expand and renovate power networks to be fit-for-purpose in the coming decades, and $200bn for improvements to grid flexibility via added battery and seasonal storage capacity, said the authors of ‘Financing the Transition: How to make the money flow for a net zero economy’.

“Though this report confirms that there are no big fundamental barriers to the energy transition – that was the hypothesis going in – it was striking that the numbers showed 70% of the finance that must be raised has to go [into electrification of power systems],” said ETC deputy director Mike Hemsley, speaking to Recharge ahead of the launch.

“This report also identifies that there are two conceptually different types of finance required: ‘classic’ investment which gives an economic return for money paid in, and concessional / grant payments, essentially paying someone to do something they might not do otherwise as there is no economic incentive,” he added, such as “cutting down a forest or continuing to run a coal-fired power plant, or in using technology to suck carbon out of the atmosphere”.

Along with market-shaping investment in global power networks, the ETC report spotlighted $80bn in expenditure needed to advance the nascent clean hydrogen sector, split between industrial-scale green hydrogen generation, and the supporting pipelines, refuelling stations, import and export terminals, and storage stations needed.

Photo: ETC

Decarbonising transport worldwide would call for $130bn a year to develop charging and refuelling infrastructure for road vehicles, $70bn for sustainable aviation, and $40bn to green shipping.

Making heavy-emitting industry carbon-neutral globally by 2050, according to ETC calculus, will require $70bn per annum, including $10bn to decarbonise steel production, $10bn to build-in carbon capture and storage to cement plants, $40bn to green chemical industry processes, and $10bn to deploy low-carbon technologies at aluminium smelters and refineries.

The ETC report highlighted that the average yearly spend needed to meet net zero targets could be expected “to be offset by an average annual reduction of $0.5trn in fossil fuel investment”, around 1.3% of prospective global gross domestic product over the next 30 years.

“At the global macroeconomic level, it is clearly feasible to achieve the net $3trn a year of capital investment described in this report. But the volume of these numbers is [nonetheless] staggering,” Hemsely noted. “In a world where we have struggled to raise $100bn a year in climate finance for the past decade or more, now we are talking about raising $300bn.

“Many of the financiers [interviewed for this report] are building a lot of renewables [plant] and suspecting ‘job done’. And yes, that’s very helpful and we need to develop a load more renewables, but, as a bank, for instance, a lot of your portfolio is real estate so you should be decarbonising that too.

“Do [the majority of our financial institutions] have that bigger picture thinking? Worryingly not.”

Hannah Audino, lead author of the report, emphasised the “reprioritisation” needed in investment in the wider energy transition: “When you start talking about concession finance and where to target scarce pools of money it is important that bring it all together to determine what needs to be targets, where this finance needs to be prioritized, which sectors, which countries, and how fast.”

Achieving net zero objectives globally, hinges on governments enshrining “well-designed real-economy policies [that] create strong incentives for private investment in the energy transition… including setting ambitious targets for renewable generation by 2030, carbon prices and product regulation to drive decarbonisation in heavy industry, aviation and shipping, and specified date bans on the sales of internal combustion engines”, she said.

“We have tried to frame the policy discussion [in this report] around the main areas investor focus on: confidence in a net zero trajectory and clear vision, returns [from renewables] versus high carbon alternatives and how to bridge to the ‘green premium’, downside risks, and supply side bottlenecks including planning and permitting.

“What is needed is a suite of policy options that all work together to address these areas and build a viable business case for investors,” said Audino.

The investment levels required, especially in the power system, is not “just a cost”, stressed the ETC report, but represents “both a major private investment opportunity and an attractive investment for society as a whole”.

ETC number-crunching suggests the transition to a net-zero economy globally will entail investment reaching a peak of some $4trn around 2040-45 and declining thereafter, “offset by increasing savings from reduced operating costs, primarily arising from reduced fossil fuel use”.

“Zero-carbon electricity systems, whether renewable or nuclear, are characterised by high upfront capital costs but far lower operating cost than fossil fuel-based systems,” the report noted, pointing to savings that could average $400-$800bn a year and reach $2-3tr per annum by mid-century.

“The true incremental cost of the required investment is therefore far below the gross investment need. But the scale of capital mobilisation and reallocation required will not occur without strong real economy policies in all economies and actions to address financial sector challenges in middle- and low-income countries.”

The ETC report delves into the differentials in scale-up of investment in industrialised versus developing nations through to 2030, where high-income economies building for net-zero will need to see “roughly double” the current spending levels” while in middle- and low-income countries, “a four-fold [investment] increase” is required.

“In some middle- and low-income countries, private financial flows alone cannot ensure adequate investment given the challenges created by high actual or perceived macroeconomic risks, inadequate domestic savings and other factors which increase the cost and reduce the supply of private finance. A significant increase in international financial flows to some lower-income economies is therefore required,” said Hemsley.

“Our breakdown [of investment data] by sector and country group and it points to how much is in high- versus low-income [economies] and really highlights the money is not yet reaching the latter and that this really needs to be accelerated if the energy transition is going to happen [in a ‘just’ manner].”