Global renewables growth is strong, but not enough to meet ambitious targets

Thomas van Lanschot, Associate Director, Power and Renewables and David Thoo, Industry Analyst, Power and Renewables at Fitch Solutions review the outlook for renewables growth globally.

• The global non-hydropower renewables sector will experience robust growth over the coming years supported by government climate commitments.
• Renewables growth will also be supported by the expansion of the green hydrogen sector, rising power consumption and policy instruments, such as carbon pricing.
• The EU, mainland China, India, Japan and the US, represent more than 77% of the world’s non-hydropower renewables sector, setting the pace for the expansion of the global renewables sector with new targets.
• However, current project pipelines and supportive renewables policies need to be strengthened to reach set targets with most major markets likely to fall short.

The global non-hydropower renewables sector will experience robust growth over the coming years supported by government climate commitments. We forecast global non-hydropower renewables generation will increase from 3,686TWh in end 2021 to 7,661TWh in 2031 at an annual average growth rate of 7.6%. Non-hydropower renewables capacity will more than double with over 2,100GW coming online over the decade. We highlight that government policies and commitments to decarbonising the power sector are core drivers of this growth.

Following the global climate change conference (COP26) in November 2021, various governments made their net zero carbon emissions targets. In its aftermath, governments announced agendas to meet such targets. As of May 2022, the UN reports that more than 70 countries, representing a contribution of 76% of global emissions, have put in place a net zero emissions target. A major part of most governments' plans is to tackle the power generation sector through the promotion of renewables. In markets where hydropower is not readily available, non-hydropower renewables, such as solar and wind power, will be the main contributor. In the map below, we compare markets and their share of non-hydropower renewables generation in the power mix.

More than half of global markets will have less than 50% generation from non-hydro renewables

Global - non-hydropower renewables generation, percentage of total electricity generation (2031 forecast)

Renewables growth will also be supported by the expansion of the green hydrogen sector, rising power consumption and policy instruments, such as carbon pricing. On the back of announcements to reduce carbon emissions, we have witnessed policies spurring the development of renewables. Prominent policy instruments that have been gaining traction over the past few years are carbon taxes and emission trading schemes (ETS). Other policy instruments include direct government investment, research and development funding, subsidies for renewable power projects, feed-in-tariffs (FiTs), renewable energy certificates, green loans and renewable portfolio standards. 

Over the coming years, global power consumption growth is set to even out beyond 2023 after extreme volatility, with a near term surge in power demand. While some markets have peaked in their power consumption, such as Japan, many emerging markets are experiencing rapidly growing power consumption. This has spurred emerging markets to develop renewables as the costs of renewables, such as solar and wind, have been falling.

With the expansion of the green hydrogen sector, we expect renewables adoption to increase accordingly. Governments across the world have announced large capacity growth plans with the current green hydrogen pipeline at 280 projects totalling 170GW. This new source of demand for renewables will act as a capacity growth enabler unlocking new regions with high renewable resource potential but poor demand or a lack of suitable infrastructure.

The EU, mainland China, India, Japan and the US, represent more than 77% of the world’s non-hydropower renewables sector, setting the pace for the expansion of the global renewables sector with new targets. Compared to their current non-hydropower renewables contribution to the total generation mix, these markets have ambitious renewables targets. These five markets make up about 77.8% of the global non-hydropower renewables generation in end 2021, and we expect this to increase to 79.4% in 2031. We highlight them in the table below, which compares targets that have been announced or proposed to their current position as of end 2021.

However, current project pipelines and supportive renewables policies need to be strengthened to reach set targets with most major markets set to fall short. While the targets proposed by governments are ambitious, developments in the renewables sector are limited compared to what is required. To this point, we forecast only mainland China will achieve its 1,200GW target for capacity of total installed non-hydropower renewables by 2030, maintaining its position as the world's largest driver of the sector's growth over the coming years.

Mainland China will contribute 34% of global non-hydropower renewables generation over the coming years

Global - non-hydropower renewables generation by country, TWh

e/f = Fitch Solutions estimate/forecast. Source: EIA, national sources, Fitch Solutions

As for the other countries we have shortlisted, we expect them to fall short of their targets owing to political headwinds and market challenges.

Japan's short term outlook for renewables remains strong, but faces long term risks
In the short term, Japan's renewables growth is being driven by FiT schemes. In the long term, the lack of support for the current auction mechanism for renewables will weigh on the sector's growth. Additionally, the market faces challenges in its wind power sector as suitable locations for onshore wind are isolated from high demand centres and Japan's deep waters make it costly for offshore wind farms. The government is also considering turning to nuclear power plant restarts to serve the market's electricity demand and rely less on Russian gas imports. This will place an upside risk on our conservative nuclear power forecasts which if realised, will hamper non-hydropower renewables growth.

US renewables sector faces headwinds from volatile political environment
The current administration has set ambitious targets of reaching 80% and 100% 'clean energy' generation in its power mix by 2030 and 2035 respectively. We expect the market to fall well short of this goal, reaching only 32.1% in 2030 (including hydropower). Our bearish view is backed by the fractured political situation in the US, which will hamper low carbon energy policy continuity and is blocking key tax reform.

EU renewables push is strong, close to meeting targets but faces roadblocks
The EU’s push for renewables has gained traction over the past few months, accelerated by the drive to reduce Russian energy imports. Markets in the EU are also bound to the EU’s renewables target as well as an overall target of net zero before 2050. However, renewables auctions in key markets have faced challenges, often being undersubscribed owing to permitting challenges. This has been most acute in Italy and Germany although the EU and its member states are now looking at ways to accelerate the development process.

India's policy mismatch for solar power places downward pressure on renewables growth
India has set ambitious targets for renewables capacity, with an impending target of 175GW by end 2022. We expect India to fall well short of this target, chiefly due to policy mismatches, despite registering robust growth in its non-hydropower renewables sector. Historic growth was supported by its solar power sector, which in 2021 alone contributed to 87% of its non-hydropower renewables. However, as of April 2022, the government imposed custom duties on any solar equipment imports, increasing the cost of solar. Furthermore, developers will have to source for domestic manufacturers, which might not be able to match the quantity and quality of solar equipment required by developers. This situation risks subduing the growth of the wider non-hydropower renewables sector further.

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