Jonathan Andrews met with Adnan Amin, Director-General of the International Renewable Energy Agency (IRENA), to ask what is needed to make more projects bankable and whether the industry can reach its 2030 goal to double its capacity
How have the agency and the market for renewables grown since IRENA was established?
It was the Germans who managed to get political consensus around the idea of renewables in a development organisation. There was a conference in Bonn [in 2004] and they had about 57 original signatories followed by a preparatory process about setting up the organisation and more countries started coming into the fold. At the same, time the UAE suddenly came out of the blue and offered to host the agency, which then really ratcheted up the interest in what was happening. Here was an oil producing country competing to host an international renewable energy agency, ‘What’s going on?’ The fact that the UAE was so keen to host the agency really sparked people’s imagination about what this technology meant for the future.
By the time the organisation was formally constituted in early 2011, the industry had started going through a growth phase that we hadn’t seen before. What we’ve seen in terms of performance over the last four years– we cannot claim credit for this–is that the majority of new power capacity addition to global power output has come from renewable energy, more than any other source.
The costs of the technology have declined tremendously, solar photovoltaic (PV) during that same period fell by about 75 percent, driven first of all by German innovation and investment, European investment, and then the huge Chinese entry into manufacturing, this really dropped the price of solar. Wind was also becoming a mature technology at this time and we’ve seen in the same period about a 30 percent cost decline in wind. We now have a phenomena where modern renewables like wind and solar, in an increasing number of countries, are cost competitive on the grid with any conventional generation, and cheaper than many others in some cases.
Has it all been smooth sailing, what have been the challenges?
Our first medium-term programme had three strategic aims. One was to become the global voice for renewable energy based on the best information available, and we’re more or less there; the other was to become a network hub for cooperation and that’s happened in a very powerful way. The fact that there was no other dedicated international framework for cooperation on renewables has meant that countries, private sector organisations, and civil society have all become part of our network.
The third strategic aim was to be an advisory resource and there we have been fortunate enough in the last four years to develop a very strong technical framework. This is the basis on which we do technical advisory services which can be anything from cost to grid integration–which is a big issue for developing countries–to how you balance different power sources, providing specific advice on policy frameworks and legislation, regulations for renewable investments in countries and so on, and that’s proved also very successful.
Has your funding received a similar boost as the industry has grown?
We started from a small funding base. Our first assessed budget was about US$11 million and on top of that we had another US$10 million from the UAE and Germany–we have an office in Germany, which they [Germany] are financing. We’ve had growth, which is remarkable for an international organisation these days on assessed contributions, year-on- year in the region of 10 to 15 percent. Our annual budget together is about US$25 million a year. What we are also finding is that a lot of countries that have taken an interest in what we are doing are ready to provide voluntary contributions for specific programmes in different countries, so that is growing also.
The one instrument which is interesting is that as part of its commitment to hosting the agency, the UAE committed to a financing facility, through the Abu Dhabi Fund for Development which will be run by IRENA, of US$350 million to be dispersed over a seven-year period. Now, IRENA is much more a knowledge networking and policy- oriented organisation, so this was a little departure from the core, but what it’s actually revealed is a tremendous amount of interest that there is in renewables investment and the huge number of bankable project proposals that we are getting every year.
We disperse on a three-to-one gearing, so if we finance projects which have a total worth of around US$200 to $US300 million a year, we receive projects which we believe are viable which are in the region of US$1 billion a year. That shows you that with concessional financing there is a flow of projects today that are quite transformative for many countries and there is huge demand for it, and this has been over a three-year cycle, so it’s quite remarkable.
A lot of renewable energy projects and initiatives cannot get off the ground without subsidies: Will there be a day when renewables can exist without subsidies? Subsidies for fossil fuels dwarf any subsidies for renewables by a factor of 100. There was a recent IMF report that spoke of over US$1 trillion of subsidies for different applications for fossil fuels, so we have to look at everything in context, that’s number one. The second is if you factored in the externalities, which are not reflected in the price of energy, you could say that the subsidies that were being provided to renewables in the early stages, actually were a payment for the fact that renewables were not providing those external impacts like carbon, health and so on. But what we’re seeing today is that in more and more countries, renewables are beginning to compete without subsidies.
The entire wind programme in Turkey has been done without subsidies, the solar price in Dubai has happened without subsidies, the new investments we are seeing in South Africa and Morocco–big concentrated solar plants, and in Chile–are happening without subsidies because these technologies are increasingly becoming competitive on the grid. What we are seeing is that the design of policy for investment in renewables has to be different. The financing of renewables has to be different. The cost of renewables, the capex [capital expenditure] is all upfront, there is no fuel cost that you can discount over the life of the project, everything has to be upfront. So that requires a different type of structuring of finance, which a lot of financial institutions haven’t come to terms with.
Is one way of improving finance for renewables through renewable energy auctions?
The real issue is, because of the rapid development of renewable technologies and rapid cost declines, that many financing institutions still haven’t come to terms with the fact that most of these projects are bankable. You still have a situation where unrealistic risk premiums are being attached to investment in renewable energy. One of the real game changers will be if we are able to have some kind of risk mitigation mechanism, linked to climate finance, which can help ‘de-risk’ investment in renewables.
When you look at it globally in recent projects, we have seen that renewable investments have around a 94 to 95 percent chance of success. Basically, the insurance would be covering a 5 to 6 percent loss possibility which is not a huge amount of money and in a time when we are moving away from the concept of ODA [official development assistance] and handing out bits of technical assistance and capital, to a time where you are reducing the cost of investment, it is going to be transformative for the way development happens, the way we develop public-private partnerships and the way international companies can come into domestic energy markets. We’ve seen tremendous interest from the private sector: financiers, developers, and technology companies, in terms of risk mitigation instruments for renewable energy finance. This, together with policy reforms and having a long- term secure investment climate in a country, with a clear regulatory framework, are the real ingredients for the next phase of dramatic growth in developing economies.
And compared to developed countries?
In developed economies, we already have tremendous growth. I visited eastern Germany which is run by a TSO [transmission system operator] called 50Hertz, they have a 40 percent renewables system penetration–largely wind but also solar. I was there shortly after the last big solar eclipse [March 2015] and if you remember there was all this hyperventilation about what the eclipse was going to do. Was there going to be a dramatic decline? Was there going to be an energy crash or a spike? What was going to happen?
And this system operator on the basis of balancing possibilities it has with different forms of generation, and without major storage capability, was able to weather the eclipse without absolutely any disturbance to the system. So, technology is changing the game also. Smart grid technologies, the ability to have demand-side management, the ability to have two-way flow, consumers, producers and vice versa, all of that is signalling the way to a very different future for energy.
Do you think the UN goal–through the Sustainable Development Goals and Sustainable Energy for All initiatives–that set a target of doubling the share of renewable energy by 2030 is realistic, considering energy demand will double, as you stated, by 2050?
We are part of the initiative and we are partly responsible for the renewables part of it. To take that responsibility seriously we decided to undertake a very ambitious study which we called REmap 2030, which was to examine in great detail from 27 economies that constitute about 75 percent of energy worldwide, what the realistic assumptions for the doubling were. Some of these are the biggest economies and the biggest investors in renewables: China, US, Russia, Turkey, and India. We found that it is absolutely feasible to double by 2030. Not only is it feasible but if you factor in declining technology prices, the learning rates for different technologies, innovation processes that are coming on stream, then this will be an economically beneficial investment compared to fossil generation, especially if you take into account the issue of standard assets.
Our REmap process now encompasses 40 countries and we have done specific country studies for a number of them. One of those was in China, which has a very ambitious deal with the US on climate. They have a huge plan for about 200 gigawatts of solar power, they have a commitment to peak carbon and declining carbon emissions and much of that is going to happen from penetration of renewables. Their target to 2030 for renewables was about 20 percent. Our REmap analysis found that 23 percent and possibly even 26 percent was achievable.
I was a bit nervous about presenting this in China, I went personally to do that and we didn’t know how they would take it but they were extremely interested and we had a very high level participation in the discussion. They agreed with our assumptions, that it is possible to do but they have a political commitment, which they are pursuing at this moment to a 20 percent target, so they won’t be discussing that but they know they can do more economically.