If the Watergate era advice to “follow the money” was right, investors need to turn their attention to renewable energy. 

Of the $12.2 trillion that will be invested in the energy sector over the next 25 years, two-thirds will go into renewables. That money will make renewables 60% of all new generation, according to a Bloomberg New Energy Finance (BNEF) forecast.

With the cost of solar expected to fall 48% and the cost of wind to drop 32%, “economics – rather than policy – will increasingly drive the uptake of renewable technologies,” BNEF anticipates.

The shift is already happening. Wind is now the most cost-effective source of new electricity generation in Europe, Australia and Brazil. By 2026, it will be lead almost everywhere, BNEF forecasts. Around 2030, utility-scale solar will replace wind as the best buy for new generation.

The big surprise

The most surprising thing that came out of the global forecast for lead author Seb Henbest, who heads BNEF’s Europe, Middle East, and Africa studies, is how much bigger the growth will be in emerging economies than in developed economies. Because of the demand for new power supply in the developing world, "it is almost as if there are two paradigms,” he said.

“For every 1 GW of new build in the Americas, 3.4 GW will be installed in [Asia Pacfic nations]. China alone will attract $3.3 trillion of new investment – nearly double the total for the Americas,” BNEF reports.

Emerging economies like those of India, Southeast Asia, and China, which remain outside the Organization for Economic Cooperation and Development (OECD), will see some $370 billion per year invested in power generation.

That is 80% of the sector’s annual global play. It will build three times the new capacity as gets built in OECD economies, some 7,460 GW of the 9,786 GW total forecasted. At least half will be renewables.

“Coal and utility-scale PV will be neck and neck for additions as power-hungry countries use their low-cost domestic fossil-fuel reserves in the absence of strict pollution regulations,” BNEF reports.

OECD economies will move their renewables capacity from 2014’s one-third of power generation to over half by 2040. The growth will be led by a shift to distributed generation. “With about 882 GW added over the next 25 years, small-scale PV will dominate both additions and installed capacity in the OECD, shifting the focus of the value chain to consumers and offering new opportunities for market share,” BNEF reports.

In the developing world, support for growing economies leads to a push for electrification, Henbest explained. “India is the classic example, but it is India, China, all through Southeast Asia, and Africa. They are all developing quickly.”

But there is a “decoupling” in the developed world. In 2014, for the first time, global economic growth was greater than electricity demand. In the U.S. and Japan, electricity demand has been flat “and we see it falling,” Henbest said. “We have mapped this out fairly carefully. In the post-financial crisis returning economy, we are using more energy efficiency and doing more with less.”

“In OECD countries, power demand will be lower in 2040 than in 2014,” BNEF reports.

This new paradigm has important implications in the growing effort to cut greenhouse gas emissions, typified by the Obama administration’s Clean Power Plan.

“Once upon a time and not so long ago, everyone could embrace renewable energy because it was additional to all the conventional thermal power needed to grow electricity at 2% plus per year in line with economic growth,” Henbest explained.

“Now, if demand is flat and you still want to decarbonize your economy, you have to enable power plants to close. That is a politically fraught situation and there are a lot of interests at play in the U.S., Western Europe, Australia, Japan, and other developed countries.”

The temporary success of natural gas

In the U.S., as much as 90% of new generation through 2020 could be natural gas. But after 2020, small-scale solar will take over, BNEF reports. OECD economies will build 86% of new natural gas capacity, primarily as a “transitional” measure.

“Right now, gas is cheap and coal plants are under a lot of pressure from existing emissions standards and those likely to come,” Henberst explained. “The challenge comes beyond 2020 and into the rest of the forecast.”

The falling cost of other utility-scale technologies, first onshore wind and then solar, will make gas "a less obvious choice,” he added. BNEF doesn’t precisely detail what forces the drop in levelized costs for variable renewables. But it assumes, he said, “cheaper technologies will be facilitated into a market of some description where price has the chief power.”

By 2040, almost half of Europe’s electricity will come from variable renewables. Because of the affordability of small scale PV and utility-scale renewables, natural gas additions beyond 2020 “will not overtake the whole power sector.”

The need for flexibility

By 2040, renewables will be 46% of world electricity and variable renewables like wind and solar will grow from 2014’s 5% to almost one-third of global power. To integrate this variability into the world’s grids, new flexible capacity will be needed to meet “peakier” loads, BNEF explains.

“It is true the wind doesn’t always blow and the sun doesn’t always shine,” Henbest said. But that should not limit variable renewables over the long term if grid operators provide the right price signals for system services.

That includes firm capacity to meet peaks and flexible ramping capacity for when there is a lull in renewables production. “We are not yet sure what the make-up of system services called flexible capacity will be,” Henbest said. “The more renewables there are on the system, the more of these more sophisticated system services you need.”

Such system services, Henbest said, will likely include:

• better interconnection between electricity systems to better manage variability
• peaking gas plants that ramp up and down quickly to provide firm capacity
• more demand response services to manage the demand side
• more sophisticated supply side aggregation
• more sophisticated supply-demand balancing businesses to minimize supply-demand differences 
• battery and/or power storage.

The solar boom

Facilitated by rising electricity prices and the increasing affordability of battery storage, rooftop PV will “reach socket parity in all major economies and provide a cheap substitute for diesel generation for those living outside the existing grid network in developing countries,” BNEF explains. “Solar will boom worldwide." 

Divided evenly between its utility-scale and distributed sectors, solar will draw $3.7 trillion in global investment and be the biggest source new power, providing 35% of new capacity. It will be almost 13% of the world’s electricity and 22% of Europe’s capacity mix in 2040. 

Rooftop solar PV will be “a major phenomenon” after 2020 because the ability of households and businesses to offset their cost with payback periods that are reasonable is “a powerful dynamic,” Henbest said. “At ten years or less there is an organic uptake that leads to a real boom in small scale PV.”

The persistence of coal

“Fossil fuels will maintain a 44% share of generation in 2040,” BNEF reports. That is down from 2014’s two-thirds share. Developing economies will build 99% of new coal capacity.

Renewables are cheap to run because the fuel cost is zero, Henbest said. The system will increasingly turn to them and load factors for coal and natural gas will fall off.

Even in China, the falling price of renewables and the understanding of how to use them for system service will drive out coal, especially after 2021.

The cost of coal in China is expected to rise for two reasons, Henbest said. First, BNEF anticipates there will be a cost imposed by state authorities for pollution controls.

It also expects China’s seven pilot emissions trading schemes to result in a China-wide carbon price by 2020. “It starts at about $6 per tonne to $7 per tonne, which is the average price it is trading at across the pilots, and we get to about $20 per tonne by 2040,” Henbest said. “That is a material price factor when wind and solar are coming down the cost curve.”

But the story is very different in India, Southeast Asia, Eurasia, and other developing economies “where coal is local and cheap and there are not strong greenhouse gas and pollution emissions-related policy checks in place to make coal non-competitive,” Henbest said.

As those economies add renewables, they will use coal for system balancing. “If it is already warm and spinning, it can ramp up very quickly and can be effective at providing flexible services,” Henbest explained. “India essentially overtakes China. There is a lot of coal added in China for the next 5 or 6 years but when it starts drop off, India comes in, adding coal capacity as well wind and solar and hydro.”

'A long and arduous process over the rest of our generation’s lives'

The coming of renewables will cut greenhouse gas emissions “but we don’t do it fast enough to avoid a warmer world,” Henbest said.

There is uncertainty around the forecast for distributed PV because it is “a very different dynamic” for the power sector. Historically, electricity has been about “big infrastructure pushing electrons in one direction down to a consumer who had very little choice,” Henbest said.

As with any consumer technology, the accuracy of the forecasted cost curves for rooftop PV will be critical but market penetration will also be decisive. “People are more likely to put solar on their roofs if their neighbors and friends have solar,” he said. “That is the uptake dynamic that creates billionaires. We don’t know that curve. We don’t know how quickly things will change.”

For that reason and others, he said, "this is not a forecast of where we are confident the world will be but a forecast of the trajectory we are now on, in the absence of new aggressive decarbonization policy."

“We hope this is a contribution to the decision makers going to Paris in December but we are realistic about international negotiations,” Henbest said. “We are optimistic about progress in Paris but we are not optimistic it will be the end the effort. It will more likely be a long and arduous process over the rest of our generation’s lives to re-route the global economy to a more sustainable energy system.”