Transition Center of Expertise: Renewable Power

Key takeaways

• The solar and wind industries hit record installations in 2023, even amid disruptions to the supply chain and the macro environment.
• Growth drivers for the renewables sector include falling costs, policy support for the transition to a low-carbon economy and, increasingly, energy security.
• Solar and wind are starting to benefit from new green industrial policies in the U.S., EU and around the globe.
• China’s dominant position in the production of solar panels and components contributes to supply chain risks.
• Permitting and grid connections are perennial sticking points for infrastructure projects across many jurisdictions.
• Behind-the-meter energy generation is an opportunity, allowing regions and businesses to sidestep utility-scale bottlenecks.
• Jurisdictions with fewer regulatory restrictions have seen a recent windfall of investment in renewable power.

Introduction

Renewable power technologies are the draft horses of global emissions reductions – and most of them are just entering their prime. In the BlackRock Investment Institute Transition Scenario, we see global electricity demand growing two-and-a-half times by 2050, as the electrification of energy demand across industries accelerates. Paired with the near-total decarbonization of the global grid by mid-century, these trends will combine to address 37% of total global energy demand from low-carbon electrons by mid-century.

The shift is already well underway. Largely due to renewables deployments and some coal-to-gas switching, power sector emissions have been falling in most OECD markets for more than a decade.¹ More than one-third of global power generation will likely be renewable as soon as 2025, including hydropower and biomass.¹ Low-carbon sources of power, including nuclear, will represent just under half of global electricity supply by 2026.¹

In jurisdictions with advanced power markets and flat load growth, renewables deployments are displacing more emissions-intensive sources in the generation mix. But a recent return to demand growth in much of the OECD (driven by data centers and demand for artificial intelligence, reindustrialization and cryptocurrencies) means renewables will be positioned to both outcompete new-build alternatives and displace existing coal and gas fleets.

In the U.S., for example, solar alone made up more than half² of new capacity additions in 2023, and solar and wind are set to comprise over 70% of new additions in 2024.³ Similarly, in many emerging markets, with strong positive load growth, new renewables are additive to meet growing or unmet demand and can displace higher-carbon alternatives that might have been built. But this demand growth is not uniform: many emerging, regulated power systems across Africa have seen low to zero load growth for decades and very low penetration of renewables to date.

Boom time

In 2023 the renewables industry installed nearly 400 GW of photovoltaics (solar panels) and 100 GW of wind capacity.⁴ This represents nearly 50% year-on-year growth, the fastest rate of growth in two decades and the 22^nd straight year of growth.⁴ Solar PV became a terawatt-scale market in 2022, and onshore and offshore wind together are expected to comfortably cross that threshold in 2024.⁵

China is responsible for much of the boom. Last year, it installed as much solar as the entire world⁴ and as much as the U.S. has ever installed.⁶ In wind, China saw 66% annual growth in installations while the rest of the world saw an 11% contraction.⁵

Exceeding expectations

The growth in renewables deployments has been underestimated by researchers and modelers for years, mostly based on the assumption of linear growth amid exponential trends. But solar or wind are the cheapest forms of new bulk power¹¹ in countries comprising two-thirds of the global population and 90% of global electricity generation. After a bounce in prices in 2022 due to macro headwinds and inflation, costs resumed falling in 2023. Solar PV generation costs fell 9%, wind generation costs fell 13%, and benchmark solar module prices dropped 50% - driven in part by supply overcapacity in China.¹²

Despite a historically patchy policy environment, solar and wind value chains are starting to experience tailwinds from new green industrial policies around the world.

And against a backdrop of rising global instability, energy security is becoming a key driver in the adoption of renewable power. Countries across the EU, as well as Japan, Korea and even the U.S., are taking steps to reduce their dependence on energy imports and eliminate supply chain vulnerabilities. The wind and solar industries have an essential role to play in helping nations meet their targets.

The world will almost completely rely on China for solar panel and component production through 2025, however, as it dominates the solar PV manufacturing chain.

What’s your current view of renewable energy?

Alastair Bishop: To be very clear: 2023 was a record year. Everywhere you look, across wind, solar and energy storage – all of these things were record years for installations. But if you ask the average public-markets investor, that would not be their impression. They perceive that there was a demand issue, and the business model is broken in some way. There were high-profile issues in a very small part of the market, which is U.S. offshore wind. These reflected challenges to the supply chain and the nature of power price contracts that were fixed many years ago before the re-emergence of inflation.

Isabella Pacheco: Renewable energy is a major theme across Asia. Europe is expected to phase in tax on imports from all over the world based on the quantity of climate-changing carbon dioxide emitted during their production, which means that many businesses are already taking steps to decarbonize their supply chain. So you see a lot of the manufacturing that happens in non-OECD countries across Asia, like clothing manufacturers, moving to renewable energy so that the whole supply chain can become greener. You see global shrimp producers, for example, starting to buy renewable power privately so that they will not be penalized once these new regulations come into effect.

David Giordano: The growth of renewables in the U.S. is significant, but it’s happening quietly in the background. Among renewable sources, I think solar will continue to be the highest growth. Onshore wind continues to be interesting, especially in the U.S. Some of the best wind sites in the world still have early-2000 vintage turbines operating on them. At the same time, they've been collecting data, and manufacturers in this space have gotten smarter and developed a kit that can utilize existing tower infrastructure. That’s why I think that there's an underappreciated opportunity onshore, both for new build and repowering.

Peter Raftery: Certainly in solar it's an up arrow. Costs are at unbelievably low levels, and that's partly due to oversupply in China. Batteries also, to a significant extent, are an area where there’s a lot of room for growth. Offshore wind is going through a hiatus and, to me, onshore wind is somewhere in the middle.

What role does surging power demand for AI and digital infrastructure play?

A.B.: So, for context, data centers today account for a little more than 1% of global electricity consumption. The rapid emergence of AI, which requires the use of more power-intensive processing chips, has the potential to notably increase this. In fact, the International Energy Agency estimates that within three years, AI servers alone could represent an additional 0.5% of global electricity consumption.

P.R.: Totally agree – we do think that AI data center demands will have a profound effect on electricity systems. To some extent, they are likely to be strongly overlapping with renewable generation resources due to the lower cost electricity as well as their environmental credentials. We have already seen the beginning of this trend with purchase power agreements we’ve signed in Nordic countries, where the climate is conducive for data centers.

I.P.: There are also opportunities for AI to help spur renewables growth even while contributing to more electricity consumption. For example, grid operators may be able to better optimize existing infrastructure and match demand loads more efficiently or even by anticipating weather patterns to predict renewable power availability.

How do concerns about energy security play into what you’re seeing in renewable power?

A.B.: The supply chain is changing. For decades, this industry – especially solar - was always solving for lowest cost, which effectively meant using China. And I think that has shifted meaningfully over the last couple of years in many countries to being about solving for energy security. That means that you have to be prepared to pay a higher price. The solar panel price is the cheapest it’s ever been, everywhere apart from the U.S. – because the U.S. is making it very clear that it wants to have a domestic solar supply chain, and it will nurture that. Geopolitics is an impetus for deploying domestic sources of energy. And energy security is a non-partisan issue in every country. Right now, Europe has an energy security problem and we’re starting to see more deployment there, notably in Germany. The U.S. doesn’t have that issue today. But it has become more cognizant of its reliance on outside suppliers, especially in solar. That’s one of the dynamics that informed the Inflation Reduction Act.

Where do you see the best opportunities?

D.G.: I think solar is a major opportunity, but especially behind the meter, which as we’ve talked about avoids some of the grid-congestion issues. I think you're going to finally start to see the virtual power plant technology start to take shape, as well. That’s where you've got these behind-the-meter systems talking to each other to manage load at the distribution level. And I think the data and tech piece is an opportunity that will unfold over time.

I.P.: The opportunity set varies widely by region. In Vietnam, for example, there's a huge amount of solar. But the curtailment rates we've seen can vary between 30% and 50% because the demand/supply load is mismatched. There's too much solar and there's no storage. As David says, we remain long on solar, but it's going to be a solar-plus-storage story going forward on a utility-scale basis.

A.B.: In the public equity space, there has been a clear disconnect between the strength of demand and the valuation of the companies exposed, which have meaningfully de-rated as a result of concerns around interest rates, supply chain challenges and question marks over future political support. This divergence looks interesting to us.

P.R.: Battery is poised for exponential growth as far as we can see. Across all these cycles, we remain interested in the projects themselves. But to finish things up, I’d say that good, high-quality projects in the right places remain limited.

It's hard to find the right land with the right resources and obtain the land leases, the permits, and get the right grid connection. And, ultimately, that’s where the expertise comes in.