Wind investment and COP 28

COP 28 will urge a big transfer of money to the emerging world so these nations can invest in clean energy. It looks like it won't be enough.

| 7 min read

The COP 28 climate change conference organised by the United Nations (UN) will take place between 30 November and 12 December this year. Hosted by the United Arab Emirates (UAE), it will come from one of the heartlands of the world oil industry. The UAE claim to be well advanced with its own carbon reduction plans and it has made strides to diversify its economy away from heavy reliance on fossil-fuel revenues.

The Conference is likely to place great emphasis on trying to direct more money to the emerging countries. The Conference papers estimate their need for $5.8 trillion of extra finance for green matters by 2030.

The attendees will have to tackle the headwinds to a smooth and fast transition. They seem, in the run up, to want to concentrate on the money. They recognise the huge sums that will need to be invested by the advanced world as well as the emerging in renewable energy, electric transport, energy transformation of industry, more grid capacity, new domestic heating and insulation systems and the rest sector-by-sector to get to ‘net zero ‘in time.

They will wish to see the private sector pledge more cash, to harness the capital markets and the banks. They will need governments to use subsidy and tax breaks selectively to foster both the investments and more end use of the electrical products and processes. They wish to ensure that past COP pledges of $100bn of transfers each year from the advanced countries to emerging-market nations are fulfilled – and see what appetite there is for some increase. If the needed $5.8 trillion budget for emerging markets over the next seven years is only supported by $700bn of transfers, it leaves plenty of the rest to be a strain on emerging country budgets and balance sheets. It will need a lot of goodwill from the private sector.

An electrical revolution required lots of renewable electricity

There are acknowledgements that more needs to be done to lift the amount of renewable electricity in the world. Whilst some countries have made good strides raising the proportion of their present electricity that is generated from renewable sources, there needs to be so much more if electricity is going to capture a bigger share of the total energy market. With the world relying on fossil fuels for around 80% of its direct energy – with only 20% of the energy coming as electricity – just converting all present electricity generation to renewables falls well short of the climate targets.

The world needs more renewables to increase the current proportion in electricity supply. In 2022, wind and solar were just 12% of total electricity generated worldwide, with hydro contributing 15% (Statista). This means a need to at least treble current renewables to decarbonise present levels of electricity production.

The governments and companies then need to increase the amount of electricity in total by a major amount. If electricity is to go from the current 20% to, say, 80% of all energy used, there needs to a fourfold increase on top to achieve that. These twin demands imply the need to increase wind and solar many times. Nuclear, which currently accounts for 9% of world electricity, will fall as a percentage as plants close. It will take a step-up in the numbers of new projects just to maintain current levels of capacity. As total electricity output rises, nuclear will become very small as a proportion unless there is a very big step up in new plants.

Investments blown by the policy winds

Recently there have been reversals for wind energy. Siemens reported problems with its larger turbines and led to a rethink on their longevity and maintenance costs. Difficulties with future returns have arisen, as there has been a substantial escalation of costs providing wind farms whilst power prices are not thought to offer sufficient future profits. Orsted has cancelled its two planned large offshore investments in the north east of the US, Ocean Wind 1 and 2. It took a $4bn write off to avoid the large future costs of the build.

There has been little or no interest in recent auctions to provide more wind and solar power on both sides of the Atlantic. Siemens is seeking $16bn of state guarantees or help for its energy business as it counts the costs of its turbine activities. China presses on and can produce much cheaper turbines than western companies. Chinese dominance of the world market has so far been mainly for home use.

The world of wind is dominated by Chinese companies mainly serving their large domestic market

The wind sector has required considerable help to get to the current size from governments. Most offered favourable prices or contract terms to get the industry established. It is also a sector directly backed by government capital and subsidy, with Orsted 50.1% owned by the Danish government, Shanghai Electric state owned, and Equinor majority owned by the Norwegian government.

Private sector competitors must recognise that these companies have longer term profit horizons, can be agents of government policies other than profit maximisation and are likely to get government support if they get into financial difficulties. Iberdrola’s biggest single shareholder is the Qatari Investment Authority.

The world of wind is dominated by Chinese companies mainly serving their large domestic market. Whilst Goldwind, Envision, Mingyang, Windey and many of the others are private-sector companies they are also working in a very managed sector with the Chinese state as their main customer. There can be good returns on established assets, and a company such as Equinor has delivered some good profits. Meanwhile, last year Vestas was in loss. The first nine months of this year saw Orsted reporting heavy losses. Goldwind suffered a large fall in its third quarter profits for 2023.

COP 28 has focus on delivering existing targets

COP 28 has much else to talk about, which we will visit in a later piece. In the run up, we should expect more to be said about the need to harness big increases in capital to carry through the task. We should expect more attention to be directed to the current obstacles to more wind and solar power, and more thought to the complex web of subsidies, price controls, discounts, windfall taxes and the other interventions in what is a very state dominated marketplace.

They might conclude that renewable power has faltered owing to the difficulty of seeing future profits on current costs for new projects at current electricity price forecasts. They will need to try something to kickstart enough activity to hit future targets. Investors should watch for signs that the outlook for future renewable profits lifts. That will require a change of direction from the headwinds of lower prices and more regulations to a more supportive framework.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Wind investment and COP 28

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