Foresight | Macro Trends

Policy support propels the case for renewable energy

April 7, 2023 10 Minute Read Time


Investors in renewable energy are steering through a sustainable energy transition amid a protracted energy crisis and an uncertain economic landscape. Estimated at about one-fifth on average1, the share of renewable energy in unlisted infrastructure portfolios has grown over time. Frequently, investors ask about the emerging risks in renewable investing and how the shifting focus on energy security after the war in Ukraine affects the set of investable opportunities.

Energy transition and energy security often pose conflicting priorities. Shortly after the war in Ukraine broke out, we warned that European governments have squared on energy security, and this could derail environmental priorities in the short term. We examine governments’ recent clean energy policies and conclude that now renewables appear to be the solution for everything: from the generation of clean power, independence from fossil fuel imports to affordable energy bills and jobs growth.

The road to a renewable-powered future will be long and winding. High and volatile power market prices have made the revenue streams from some renewable energy projects riskier and less predictable. Supply chain dislocations and rising interest rates led to a slowdown in greenfield investment by private infrastructure investors.  That said, the potential for renewable energy deployment seems better than ever. Encouraged by policy and market initiatives, the International Energy Agency (IEA) revised upwards by one-third its estimate for global renewable capacity compared to the previous year.2

High power prices are both friend and foe

Driven by elevated geopolitical risks due to the war in Ukraine, commodity and power prices skyrocketed in 2022. Consequently, the advantages of renewable energy versus fossil fuel have widened. The average onshore wind cost in the first half of 2022 stood at $46 per megawatt-hour (MWh) compared to $74 per MWh for coal generation, according to BNEF.

In addition, renewable energy is more competitive as a technology: the levelized costs of energy (LOCE), a measure of the cost of electricity generation for a generator over its lifetime, has seen a consistent downward trend for more than a decade. According to BNEF’s Energy Transition Factbook3, onshore wind and solar are cheaper than fossil fuel plants for two-thirds of the world’s population and 85% of global power generation.

More appetite for riskier merchant exposure

On the downside, the turbulence and price surges on the broader power markets made some renewable energy projects riskier. The record power prices seen in 2022 leave unsubsidized renewable projects with a sizable upside. The exposure of renewable developers to merchant power prices has increased–be it through shorter-term power purchase agreements (PPAs) or even deciding to forgo subsidies altogether.

MicrosoftTeams-image (6)

The unprecedented power market volatility discouraged many utility offtakers from entering into new renewable energy PPA contracts. Seeking fixed prices and a sustainability benefit, large industrial and manufacturing players have entered the PPA space, but the additional demand did not fully compensate for the waning appetite by utilities. Just 9GW of the total 13GW renewable capacity available for European PPAs was contracted in 2022; the remaining 4.3GW was reserved for merchant exposure4. The absence of buyers means that newly developed renewable projects are less able to hedge pricing through corporate PPAs.

A break or a pause in greenfield renewables investment?

In addition to PPA and power market trends, developers of renewable projects are still absorbing macro headwinds such as higher financing and input costs. These dual forces contributed to a sharp deceleration in greenfield renewables by private infrastructure investors last year (Figure 2). However, we see this slowdown as a deferral rather than a cancellation of projects.

MicrosoftTeams-image (7)

If we consider all actors in renewables investing and include China (which delivers about half of all clean energy investment), we see that the overall deployment of renewables continues to grow. Preliminary estimates show that new renewables globally reached $495 billion in 2022 (up 16% from 2021).5

Second, build cost inflation may have peaked. Short-term supply disruptions will continue and add to renewables costs in 2023, according to DNV, an independent assurance and risk management company. As the buildout of renewable capacity accelerates, costs for all technologies should continue to decrease. DNV forecasts the levelized cost of electricity for solar photovoltaics will decline to $30 per MWh by mid-century from approximately $50 per MWh currently. This will further support the case for renewables to lower consumer energy bills.

Renewable energy is a key enabler of the journey to net zero

Several pathways towards net zero are produced by international think tanks and organizations dedicated to climate change forecasting. The share of renewables in the final energy mix by 2050 in these scenarios ranges considerably – often between 60% and 80% - as does the pace of electrification6. In any scenario, the required increase is exponential compared to the current levels of renewables penetration. Investment in renewable energy increased in eight out of ten years in the last decade, yet wind and solar energy generation account for only 10% of total electricity demand in 2021.7 The chart below illustrates a potential trajectory for renewables uptake at the higher end of estimates.

MicrosoftTeams-image (9)

Policy support for renewables has ramped up across regions

Lowering carbon emissions is just one reason why governments pursue renewable energy with an increased zest. In Europe, the move away from Russian gas supports greater use of fossil fuel-free generation and a quicker transition to a renewables-dominated power system. The European Commission, under its RePowerEU plan, proposed an increase in the renewables target from 40% to 45% of the energy mix by 2030. 

To catch up with Europe and China, the United States enacted new landmark energy initiatives as part of the Inflation Reduction Act. Half of the funds that will be available ($369 billion) are earmarked for new and extended tax credits for wind and solar power and clean energy investment in nuclear, hydrogen and clean vehicles. President Biden’s administration hailed the climate benefits of the Inflation Reduction Act. It also made it clear the billion-dollar worth of incentives aim to ‘lower energy costs for families and small businesses, [and] accelerate private investment in clean energy solutions in every corner of the economy and every corner of the country’8.  

These developments are not limited to Europe or the United States. Canada introduced a refundable investment tax credit to incentivize clean energy deployment; the base credit begins at 30% and eligible hydrogen projects may receive up to a 40% tax credit.9 In China, which aims to deploy 1,200 gigawatts of wind and solar power capacity by 2030, a green certificate system has been in place since 2017. The National Development and Reform Commission recently released a draft plan on certificates to include other clean power sources such as distributed wind, rooftop solar, hydro and biomass power projects.

There is no shortage of capital for renewable energy

Over time, unlisted infrastructure portfolios have increased their exposure to renewable energy. It accounts for more than a third of infrastructure funds’ portfolios and almost a quarter of institutional investors’ portfolios, according to a joint March 2023 study by EDHECinfra and Boston Consulting Group (BCG). Regional differences persist, with European pension funds seen as first movers as their U.S. and U.K. peers seek to catch up.

We see room for an even larger share of renewable energy, based on policy momentum and deployment potential. If we sum up all holdings of renewable energy assets by unlisted infrastructure investors, it is approximately only half of the levels being invested annually in new renewable capacity10. At the same time, BNEF forecasts that the levels of renewable energy investment will double by 2030 to $1.15 billion per year.11 And the demand side seems accepting to it: a global survey of infrastructure funds by BCG12 in the third quarter of 2022 found that 67% of general partners plan to increase renewable energy investment over the next three to five years.

MicrosoftTeams-image (10)


Renewable energy investment has entered a new phase amid major macroeconomic and power market shifts. Although investment has slowed because of inflation, an energy crisis and rapid interest rate hikes, we believe the slowdown is temporary. Across regions, renewable energy will continue to benefit from strong policy momentum. This in turn will expand the scope and scale of infrastructure investors’ exposure to the sector.

In our next article on renewables investing, we turn to the stability and predictability of wind and solar investments, and the investment strategies to optimise expected returns.

1 EDHECinfra 300, local currency, equally weighted, 20.7% weight of renewable power as of Q4’2022.
2 IEA (2022), Renewables 2022, December 2022. Forecast for 2022-2027.
3 Bloomberg New Energy Finance (BNEF) CEM Energy Transition Outlook, 21-23 September 2022
4 Inspiratia, European PPA Outlook, March 7, 2023.
5 Bloomberg New Energy Finance (BNEF) Energy Transition Factbook as cited by IRENA, Global landscape of renewable energy finance. Renewable energy includes wind, solar, biofuels and other renewables
6 IEA, IPCC, IRENA 1.5 Degree Celsius scenarios. 
7 Ember, an independent energy think tank:
8 White House, Inflation Reduction Act Handbook. 
9 Canadian Renewable Energy Association (CanREA), 2023 Federal budget ushers in new era for Canadian renewables
10 Preqin and IPE Real assets, BNEF Energy transition factbook (forecast is for 2023-2030). 
11 Bloomberg New Energy Finance (BNEF) CEM Energy Transition Outlook, 21-23 September 2022
12 Survey of 68 general partners in 2022.