Macroeconomic uncertainties will not stop the energy transition from moving forward in 2024 and beyond. Here's why
COP28 will be remembered as the summit that achieved a remarkable last-minute victory. For the first time, the world has a new common language on the transition away from fossil fuels, and more than 110 countries have agreed to triple renewable energy capacity by 2030.
The new commitments negotiated by its chair, Dr Sultan al Jaber, have been made possible by months of intense climate change preparation and diplomacy in the run-up to the summit, and mark a turning point in the fight against the climate crisis.
An obvious question I was asked several times at the COP, and which is on many people's minds, is whether these ambitious targets are feasible, especially in a context of macroeconomic uncertainties.
Given that meeting the targets has to start today, the question of feasibility is a valid one, given the huge scale of investment needed for the transition from fossil fuels to green energy. But I firmly believe that in the next six years the targets are achievable.
COSTS AND BENEFITS ARE CHANGING
In 2023, global investment in clean energy reached a record $1.75 trillion, according to the IEA, and this trend is expected to continue, driven by the need for additional energy sources to support economic growth.
If new electricity capacity is to be built, renewables are more cost-effective than any other generation technology in terms of cost, safety, risk and environmental benefits. There is no doubt that renewables are unmatched by any other generation technology.
And by replacing ageing and polluting fossil generation with renewables, many developed countries, such as those in the EU, improve their balance of payments by reducing their huge energy imports.
The sector has already shown that it can meet ambitious targets. When the EU launched the 20/20/20 initiative in 2010, few believed that we could significantly alter the status quo to reduce emissions by 20% and increase the amount of green energy in the system to current levels. We have shown that change is possible.
THE CHALLENGE OF HIGH INTEREST RATES
Cost inflation has affected renewables, like all other industrial sectors. Some recent auctions of renewable energy projects, such as AR5 in the UK, did not take this into account. And in other cases, long periods of time elapsed between the conclusion of the auctions and the time when investments were made. This has created difficulties, especially for companies that did not have the opportunity to cover their costs.
However, policy makers are already reacting, recognising that renewables remain the best way to secure new electricity capacity, and new auction designs and mechanisms are being put in place. The recently announced AR6 offshore wind turbine auction in the UK is a clear example. By setting a realistic price ceiling, allowing for increases in supply chain costs and borrowing rates, companies will have the right incentive to bid and compete. This has been the basis for the huge cost reductions experienced in the renewable energy sector for decades.
Of course, meeting the targets set at COP28 will not be easy, nor will it happen by inertia. But rather than macroeconomic issues or lack of ambition, progress relies on urgent action to address the barriers that have held us back in the past. This includes ensuring stable and positive frameworks for investment, simplifying permitting processes, putting in place a truly "green" tax system, strengthening global supply chains to ensure they are robust and secure, investing in green skills to drive the energy transition, and promoting consumption of green products.
The transformation may seem enormous, but it is already underway. As we embark on a new year, fresh from a "COP for action" that has forged a global partnership for change, we are in the best position in history to deliver a real energy revolution.
* This article was originally published on Fortune.com.