Report - Five percent renewable energy investments

REPORT EN

2015

© Brian A Jackson / Shutterstock

FIVE PERCENT RENEWABLE ENERGY INVESTMENTS IN A TWO DEGREES WORLD An illustrative case of allocating five percent of Norway’s sovereign wealth fund into infrastructure for renewable electricity worldwide.

Written by Lars Erik Mangset and Stefano Esposito We would like to thank the following contributors and reviewers (any errors that remain are the sole responsibility of the two authors): Kristian Petrick (Consultant and IEA-RETD Operating Agent) Jan Schelling (Statkraft) Tabaré Arroyo Curras (Advisor on Energy Economics, WWF International) Hugo Lucas Porta (Adjunct Professor, Faculty of Environmental Studies, York University) William Blyth (Associate Fellow Chatham House, Honorary Research Fellow, Imperial College London, Director at Oxford Energy Associates).

Santiago Lorenzo Alonso (WWF’s Global Climate and Energy Initiative) Stephan Singer (WWF International) Matthias Kopp (WWF Germany) Ester Rønsen (Student at the University of Oslo) And a special thanks to Svensk PostkodStiftelsen, for the unconditional financial contribution to our work on sustainable finance.

Contact persons: Lars Erik Mangset, Senior advisor, sustainable finance, +47 93 20 94 94 lemangset@wwf.no Stefano Esposito, Advisor, sustainable finance, +47 94 43 81 64 sesposito@wwf.no WWF-Norway: +47 22 03 65 00 Graphic design: Stefano Esposito (report), Lene Jensen (front/last page) Front cover photo: © Brian A Jackson / Shutterstock Published in November 2015

by WWF-World Wide Fund For Nature (Formerly World Wildlife Fund) Oslo, Norway Any reproduction in full or in part must mention the title and credit the above-mentioned publisher as the copyright owner. © 2015 WWF All rights reserved WWF is one of the world’s largest and most experienced independent conservation organizations, with over 5 million supporters and a global network active in more than 100 countries.

WWF’s mission is to stop the degradation of the planet’s natural environment and to build a future in which humans live in harmony with nature, by conserving the world’s biological diversity, ensuring that the use of renewable natural resources is sustainable, and promoting the reduction of pollution and wasteful consumption.

Five percent renewable energy investments in a 2 degrees world

CONTENTS CONTENTS ............................................................................................................................................... 2 FOREWORD ............................................................................................................................................. 3 INTRODUCTION ....................................................................................................................................... 4 METHODOLOGY ...................................................................................................................................... 7 #1 Forecast of the future market value of the investor ..................................................................... 7 #2 Allocating investments to different technologies for renewable electricity generation............... 8 #3 Estimation of electricity generation associated with the investment ........................................... 9 #4 The effect of replacing a mix of electricity from fossil energy sources with renewable energy . 11 MODELLING RESULT.............................................................................................................................. 13 5 percent investment by the GPFG ................................................................................................... 13 5 percent investment by UNPRI’s signatories................................................................................... 15 5 percent investment by CERES’s International Network on Climate Risk ....................................... 17 DISCUSSION........................................................................................................................................... 19 Technical discussion on the model ................................................................................................... 19 What is the role of investments to be able to stay below 2-degrees global warming? ................... 21 REFERENCES .......................................................................................................................................... 24

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Five percent renewable energy investments in a 2 degrees world

FOREWORD Our planet faces a massive challenge. Scientists are now certain that human activity is changing the global climate.

Production and consumption of fossil fuels in all sectors of modern economy is the largest single source of global greenhouse gas emissions.

The consequences are already affecting people’s lives and all natural ecosystems. In order to hinder further catastrophic consequences, it is necessary to contain global warming within 1.5 - 2 degrees. To do so, the world urgently needs to shift from an energy system based on polluting fossil fuels, to a world powered by clean renewable energy.

To build low-carbon and resilient societies we require a new approach to finance, which has the power to change the way investments shape our economies and promote some sectors instead of others. To achieve the necessary changes, global investments must shift away from companies and projects that are causing the problem, and over to renewable energy infrastructure, such as wind and solar power plants. These technologies are increasingly becoming cost-competitive, and there is a growing need for investments. However, many countries struggle to mobilise the necessary finance to achieve this change. Sovereign wealth funds and other public financial institutions can play a key role in expanding access to capital and reducing financing costs, as underlined in the UN’s New Climate Economy Report (2014).

Norway’s sovereign wealth fund – the «GPFG» - is the world’s largest fund of its kind, owning 1,3 percent of the world’s listed companies. WWF is advocating a mandate for the fund to invest up to five percent of its value directly in renewable energy and related infrastructure. In this report, WWF asks the question: what would happen if the GPFG would adopt such a mandate? The illustrative results show that by gradually allocating five percent of the GPFG´s capital holding, the fund has a huge potential to finance new renewable power plants that will generate clean electricity for many decades and, at the same time, avert a large quantity of greenhouse gas emissions.

Considering its size, the GPFG can be a key driving force in the ongoing transformation of the world’s energy markets, in which renewable energy will need to take over the dominating role fossil fuels have today, as many analyses show (IEA 2014, Bloomberg 2013). When a huge and trustworthy institution like the GPFG changes its priorities, one can expect significant ripple effects in the wider realm of finance. This would also contribute to develop and facilitate the creation of market structures, which are necessary to build more sustainable energy system and markets.

Humankind is on the eve of another industrial revolution. The energy sector is at the core of it and opportunities will rise for investors to be at the forefront of this change. Early movers will be able to better position themselves for this new economy. There is no doubt that uncertainties exist, but being conservative will not help in avoiding risks (Mercer, 2015). Sustained and sustainable investments, together with new business practices, are necessary to build the energy system of the future. Norway has a unique possibility to affect this development in a positive way by changing the investment strategy of the GPFG. This report illustrates the potential climate benefit of doing so.

Santiago Lorenzo Alonso Head of Green Finance for WWF’s Global Climate and Energy Initiative.

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Five percent renewable energy investments in a 2 degrees world

INTRODUCTION It is widely acknowledged that to achieve global sustainable development, we must transform our energy system from one which is heavily reliant on fossil fuels, to one which uses clean and safe renewable energy sources like wind, sun and water. However, neither today’s government policies nor current investment levels appear strong enough to drive this transition at the scale and speed that is necessary to limit global warming. To have a 50 percent chance of limiting global warming to 2 degrees Celsius, the concentration of greenhouse gases (GHGs) should remain below 450 ppm (IEA, 2014a; IEA, 2014b).

One key action to drive this energy transition in the right direction is to increase the direct financing of infrastructure for renewable energy (OECD, 2015a). While such investments have experienced relative high growth rates in the past decades (UNEP, 2015), the world needs further and sustained growth of financial resources to have a chance to reach the internationally agreed climate stabilisation goal (IEA, 2015b).

The shift from fossil to renewable energy will not only contribute to ensuring a more climate-friendly future, but it also presents merits from a pure business case perspective. In fact, clean energy sources, solar and wind in particular, are becoming cheaper and more cost competitive vis-à-vis the incumbent fossil-based alternatives (BNEF, 2015b). An historical milestone was reached in 2013, when new capacity for renewable electricity generation surpassed that of fossil electricity (BNEF, 2015a) – with forecasts suggesting that this trend will only intensify in the coming years (IEA, 2015a; BNEF, 2015b).

The focus of our report is the potential for institutional investors to increase their investments directly into renewable energy, and the associated societal and climatic benefits if they do so.

Institutional investors represent sovereign wealth funds, insurance companies, investment and pension funds, which together held about 83 trillion USD in assets in the OECD alone in 2012 (Kaminker et al. 2013; IEA, 2014b).

Such financial institutions appear particularly well suited to invest directly into renewable energy infrastructure considering their long-term investment horizon, and that energy projects could meet their needs by delivering lowrisk, predictable returns (UNEP, 2015; IEA, 2014. Ceres, 2014. OECD, 2013). However, latest figures on pension funds show that they invest on average less than 1 percent of their total capital holdings directly into infrastructure projects, with an even smaller percentage of this going to green infrastructure (OECD, 2013). CERES, a coalition of investors, has called for institutional investors to commit 5 percent of their holdings to clean energy investments (CERES, 2014).

Similarly to the proposal made by CERES, WWF-Norway has advocated that Norway’s Government Pension Fund Global (GPFG), the world’s largest sovereign wealth fund, should get a new investment mandate that allows the fund to invest up to 5 percent of its holdings directly in renewable energy infrastructure. Such a mandate would be similar to the existing one that allows the fund to invest into real estate.

With such a backdrop, this report presents a model that aims at illustrating what would be the theoretical impact if the GPFG were to invest 5 percent of its total holdings directly in renewable energy infrastructure, in terms of renewable electricity capacity, generation, and associated emission averted if the clean energy substitutes fossilbased electricity generation. In this report, we outline our methodological approach used to make these illustrative calculations taking the GPFG as a main case study, but also testing the model for two large coalitions of investors.

In particular, in our modelling approach we seek to respond to the following three high-level questions:

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Five percent renewable energy investments in a 2 degrees world

1.

Assuming that investments increase linearly in the period 2016-2020 – what is the annual volume of financing if the GPFG reaches a 5 percent allocation of its market value directly into renewable energy projects by the end of 2020?

2.

Theoretically, how much electricity generated by renewable sources can be associated with the investments volumes from the GPFG alone?

3.

Assuming that this new renewable electricity fully replaces electricity from a mix of coal, oil and gas – what is the quantity of averted emissions of greenhouse gas?

In the methodology chapter, we outline the modelling steps to respond to these problem statements. Then, in the result chapter, we repeat the same modelling approach for two other groups of investors: 

The first group includes all investors who have signed the UN Principles for Responsible Investment (UNPRI)1, representing about USD 45 trillion in assets in 2014.



The second group includes the Investor Network on Climate Risk (INCR), launched and managed by CERES, representing over 100 institutional investors and more than $13 trillion in assets. 2

It is important to note that the aim of this study is to provide an estimate of the potential theoretical effects of investing in renewable energy projects, and not to present a realistic investment case. In fact, we assume for instance that renewable energy projects are financed with equity capital only, from one or more investors. This suggests that our calculations may inherently underestimate how much added capacity a certain amount of equity capital may provide in terms of new infrastructure projects. We furthermore do not take any position as for the additionality aspects, i.e. the factors that actually drive new renewable energy capacity expansions, such as favourable policy frameworks and mitigation measures regarding political risk factors.

Finally, the model is also freely available online at the following link: http://webcalculator.wwf.no. Thanks to this tool, any interested user can create his/her own case study, change default parameters, background data, and more.

1

http://www.unpri.org/signatories/signatories/

2

http://www.ceres.org/investor-network/incr In this report, we will refer to this group as «CERES», and not INCR, for the sake of clarity.

5

Wind turbines funnel wind from the Columbia River Gorge, Washington-Oregon border, USA. Š National Geographic Stock / Mark Thiessen / WWF

Five percent renewable energy investments in a 2 degrees world

METHODOLOGY #1 Forecast of the future market value of the investor In order to estimate the amount of money that the investor would invest in new renewable energy projects worldwide, it is first necessary to determine the future market value of the fund and, on this basis, to calculate how much money needs to be invested to achieve a 5 percent target by 2020. For our main case study, we have obtained a forecast of the market value of the GPFG from 2016-2020 from the Norwegian Ministry of Finance (MOF) (MOF, 2014) as a basis for further calculations.

1 400 1 200

930

USD billion

1 000

1 176

1 113

1 051

991

800 600 400 200 0

2016

2017

2018

2019

2020

Figure 1 - Forecasted of the GPFGs total market value expressed in USD billions using the exchange rate at 1st January 2014, and expressed in USD2011 to be in line with other data used in the model (Source MOF 2014).

We assume that the GPFG starts to invest in 2016 in a new asset class focused on renewable energy infrastructure.

For illustrative purposes, we assume that the fund will invest in total 1 percent in 2016, 2 percent in 2017, and so on, reaching finally 5 percent in 2020. For this modelling period, we assume that investments dedicated to infrastructure projects are “locked�, that is, once invested in one year, that financing is tied to a specific project throughout the modelling period. This is shown in Figure 2, where the light green bars represent the annual new investments in renewable energy projects, while the dark green bars show the cumulative investments. To determine the future market value of the funds in the other case studies in this report (i.e. funds under UNPRI and CERES), we assume an arbitrary annual growth rate of 2 percent, starting with the latest known market value.

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USD billion

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59

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20 9

9

14

13

12

11

0

2016

2017

5% mandate (cumulative)

2018

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2020

Annual investment needed to reach 5% in 2020

Figure 2 - Cumulative and annual allocations of money from the GPFGs directly into renewable energy. Value expressed in USD2011 billion using the exchange rate at 1st January 2014 (Source MOF 2014).

The model simplifies by assuming that the investor would cover 100 percent of the capital need in a project. This is however not common in practice, since usually several investors pool equity capital together, and projects will have a certain amount of debt capital. This implies that our model does not include a potential catalysing effect where one investor may unlock investment and credit from other institutions.

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Five percent renewable energy investments in a 2 degrees world

#2 Allocating investments to different technologies for renewable electricity generation This study takes into account the main renewable energy technologies as classified by the International Energy Agency (IEA), namely hydropower, bioenergy, geothermal, wind, solar PV, concentrated solar power (CSP) and marine. The annual investment from the GPFG (Figure 2) is allocated to these different technologies in accordance with their share of the world’s annual added electrical capacity. The renewable energy mix is defined in the IEA’s World Energy Outlook 2014 (IEA 2014), where different climate scenarios are presented. Based on data available, we rely on the IEA’s central scenario, called “New Policy Scenario” (NPS), in which currently discussed policies are adopted, for the period 2016-2019. For the year 2020, we rely on the 450 scenario (450S). Table 1 shows how investments are distributed every year among the different technologies, according to the electricity mix. This implies that the larger part of investments will go to wind power, followed by hydropower and solar PV. These three technologies will attract over 90 percent of annual investment.

Table 1 - The distribution of annual investment to different renewable energy generation technologies following the relative share of added capacity in renewable power, as provided by the IEA (2014).

Annual investment by GPFG ($ bn)

Technologies in the energy mix Hydro Bioenergy Wind Geothermal Solar PV CSP (concentrated solar pow er) Marine

2016 9,3

Share 29 % 6% 34 % 1% 29 % 1% 0%

$ bn 2,7 0,5 3,2 0,1 2,7 0,1 0,0

2017 10,5

Share 29 % 6% 34 % 1% 29 % 1% 0%

$ bn 3,0 0,6 3,6 0,1 3,0 0,1 0,0

2018 11,7

Share 29 % 6% 34 % 1% 29 % 1% 0%

$ bn 3,4 0,7 4,0 0,1 3,4 0,1 0,0

Arrays of solar PV panels on the Eigg off Scotland's west coast, UK. © Global Warming Images / WWF-Canon

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2019 13,0

Share 29 % 6% 34 % 1% 29 % 1% 0%

$ bn 3,8 0,7 4,5 0,1 3,8 0,2 0,0

2020 14,3

Share 24 % 5% 41 % 1% 29 % 1% 0%

$ bn 3,5 0,7 5,8 0,1 4,1 0,2 0,0

Five percent renewable energy investments in a 2 degrees world

#3 Estimation of electricity generation associated with the investment Once we have estimated the amount of money invested every year, we need to find out how many power plants can be financed, and how much electricity they typically will produce. To do so we rely on three variables, all provided by the data available from IPCC (2014): 

Overnight capital cost (in USD/kW): it is the capital cost, excluding financing cost for construction. In other words, it indicates the cost of building a power plant overnight as if there is no cost of capital during its construction (i.e. capital discount rate equals zero). It includes the bare plant cost and the owner's costs (land, cooling infrastructure, administration, site works, switchyards, project management, licences, etc.).

It excludes costs associated with financing, escalation due to increased material and labour costs, and inflation. For this reason, while overnight cost is useful to compare the economic feasibility of building various plants, it is not an actual estimate of construction cost. In particular, it does not take into account any unforeseen costs and transaction costs which emerge during the construction stage. IPCC provides a minimum, median and maximum value for overnight cost, in USD2010: this report is based on the median value, converted for consistency in this study to USD2011.



Capacity utilization/full load hours (in hours): it expresses, for each technology, the number of hours that a generator would spend at full load if it always operated at that level. There are 8 760 hours in a normal year: for instance, a hydropower plant has average full load hours of 4 850 (55%).

IPCC provides minimum and maximum values, and this report relies on the average value.



Plant lifetime (in years), the number of years a typical power plant will be functioning.

IPCC (2014) provides detailed data for some sub-technologies, such as wind onshore and wind offshore, or solar rooftop and utility. To align this dataset with the IEA’s industry classification, we calculate the average value for main technology level by sub cumulating average values of the sub-technologies3. All data used in this study is outlined in Table 2.

Table 2 – Key input data for every power generation technology (IPCC, 2014)

Technology Hydropower Biomass Wind (onshore and offshore) Geothermal Solar PV (utility) CSP (concentrated solar power.)

Ocean (Marine) Coal - PC Gas - Combined cycle

Overnight capital expenditure (USD2011/kW)

Full Load Hours (average, hr)

Plant lifetime

1 938 3 434 3 315 5 100 3 264 5 202 5 508 2 244 1 122

4 850 5 350 2 950 6 600 1 800 2 850 3 650 5 550 5 550

50 37 25 30 25 20 20 40 30

3

Solar PV rooftop is excluded from this analysis, since it is deemed not a relevant investment area for direct infrastructure investments by the GPFG and in general for large investors. Only Solar PV utility is included.

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Five percent renewable energy investments in a 2 degrees world

This study links (i) the amount of money invested annually with (ii) the cost of building power plants with different power generation technologies, as expressed by overnight cost of capital. Specifically, we match the amount of capital that can be invested from a 5 percent allocation of the GPFG into renewable energy projects with the average cost of building 1 kW of electrical capacity, by using equation (1):

(1) đ??źđ?‘›đ?‘ đ?‘Ąđ?‘Žđ?‘™đ?‘™đ?‘’đ?‘‘ đ?‘?đ?‘Žđ?‘?đ?‘Žđ?‘?đ?‘–đ?‘Ąđ?‘Ś(đ?‘˜đ?‘Š) =

đ??´đ?‘›đ?‘›đ?‘˘đ?‘Žđ?‘™ đ?‘–đ?‘›đ?‘Łđ?‘’đ?‘ đ?‘Ąđ?‘šđ?‘’đ?‘›đ?‘Ą đ?‘‚đ?‘Łđ?‘’đ?‘&#x;đ?‘›đ?‘–đ?‘”â„Žđ?‘Ą đ?‘?đ?‘œđ?‘ đ?‘Ą

The resulting new installed capacity will be represented by new hydropower plants, solar plants, wind parks, geothermal facilities, and so on. These plants will generate a given amount of electricity every year, and to estimate this we apply equation (2): (2) đ??´đ?‘›đ?‘›đ?‘˘đ?‘Žđ?‘™ đ?‘?đ?‘œđ?‘¤đ?‘’đ?‘&#x; đ?‘”đ?‘’đ?‘›đ?‘’đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘œđ?‘› = đ??źđ?‘›đ?‘ đ?‘Ąđ?‘Žđ?‘™đ?‘™đ?‘’đ?‘‘ đ?‘?đ?‘Žđ?‘?đ?‘Žđ?‘?đ?‘–đ?‘Ąđ?‘Ś ∗ đ?‘›đ?‘˘đ?‘šđ?‘?đ?‘’đ?‘&#x; đ?‘œđ?‘“ đ?‘“đ?‘˘đ?‘™đ?‘™ đ?‘™đ?‘œđ?‘Žđ?‘‘ â„Žđ?‘œđ?‘˘đ?‘&#x;đ?‘ đ?‘?đ?‘’đ?‘&#x; đ?‘Śđ?‘’đ?‘Žđ?‘&#x; Based on the above, we finally calculate the total electricity generated over the lifetime of the power plant (Figure 3), in order to derive the total electricity generation associated with a 5 percent investment mandate for the GPFG implemented over the period of 2016-2020 (equation 3): (3) đ?‘‡đ?‘œđ?‘Ąđ?‘Žđ?‘™ đ?‘™đ?‘–đ?‘“đ?‘’đ?‘Ąđ?‘–đ?‘šđ?‘’ đ?‘?đ?‘œđ?‘¤đ?‘’đ?‘&#x; đ?‘”đ?‘’đ?‘›đ?‘’đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘œđ?‘› = đ??´đ?‘›đ?‘›đ?‘˘đ?‘Žđ?‘™ đ?‘?đ?‘œđ?‘¤đ?‘’đ?‘&#x; đ?‘”đ?‘’đ?‘›đ?‘’đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘œđ?‘› ∗ đ?‘™đ?‘–đ?‘“đ?‘’đ?‘Ąđ?‘–đ?‘šđ?‘’ đ?‘–đ?‘› đ?‘Śđ?‘’đ?‘Žđ?‘&#x;đ?‘ đ?‘“đ?‘œđ?‘&#x; đ?‘’đ?‘Žđ?‘?â„Ž đ?‘Ąđ?‘’đ?‘?â„Žđ?‘›đ?‘œđ?‘™đ?‘œđ?‘”đ?‘Ś

60

50

50

37

Years

40

25

30

30

25

20

20

CSP (concentrated solar power.)

Ocean (Marine)

20 10

0

Hydropower

Biomass

Wind

Geothermal

Solar PV (utility)

Figure 3 - Average lifetime of renewable energy technologies (in years) (IPCC 2014).

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Five percent renewable energy investments in a 2 degrees world

#4 The effect of replacing a mix of electricity from fossil energy sources with renewable energy In order to achieve the goal of limiting the concentration of atmospheric greenhouse gases to 450 ppm by 2050, renewable electricity generation must replace electricity generated from fossil energy sources. To illustrate the potential effect on greenhouse gas emissions (measured in carbon dioxide equivalent, CO2 eq. 4) of a 5 percent GPFG renewable investment mandate we ask the following question: what are the associated theoretically averted GHG emissions if the electricity generated from the GPFG’s investment would have instead been generated by a mix of fossil fuels?

IPCC (2014) provides data on how much greenhouse gas emission is produced per 1 kWh of electricity generated with different technologies, both renewables and fossil-based. Table 3 shows these emission factors for each technology, based on average life-cycle emission from electricity generation. We use the median values for our calculation. Using the emission factors, we calculate the theoretically averted emissions if the same amount of electricity would have been instead generated using a mix of coal, oil and gas, based on the outlined electrical capacity mix by the IEA in the period 2016-2020. The mix of fossil fuels is calculated by allocating 100 percent of the power generation from renewable energy to coal, oil and gas, based on their relative share of installed capacity in the IEA scenario. The lifetime emission produced by fossil fuels is then matched against the lifetime emission produced by renewable energy, and the difference between these emission levels constitute the amount of averted emissions.

Table 3 – Lifecycle greenhouse gas (GHG) emissions of selected electricity supply technologies (gCO2-eq/(kWh) (IPCC 2014)

Power segment Coal Oil (from IPCC 2011) Gas - Combined Cycle Nuclear Hydropower Biomass (cofiring and dedicated)

Grams CO2eq/kWh 820 840 490 12 24 485

Power segment Wind (onshore and offshore) Geothermal Solar PV (utility) CSP (concentrated solar power.)

Ocean (Marine)

Grams CO2eq/kWh 12 38 48 27 17

4

CO2 equivalent is a quantity that describes, for a given mixture and amount of greenhouse gas, the amount of CO2 that would have the same global warming potential when measured over a specified timescale (generally, 100 years).

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A photo voltaic solar power station near Caravaca, Andalucia, Spain, with wild flowers. Š Global Warming Images / WWF-Canon

Five percent renewable energy investments in a 2 degrees world

MODELLING RESULT 5 percent investment by the GPFG If the GPFG invests 5 percent of its market value directly in infrastructure for renewable energy by 2020 – what is the potential volume of new installed electrical capacity and the associated electricity generation output worldwide?

Figure 4 and 5 summarize the main results from this modelling exercise.

In the first figure, the orange bars represent the new electrical capacity that is added every year due to the investments by the GPFG, while the blue bars sum up these annual contributions. In total, 5 years of investments will add 21 163 MW of new capacity, which is equivalent to Belgium’s total installed capacity, or ca. 20 nuclear reactors.

25 000 Belgium total power capacity 20 000

MW

15 000 10 000

10 typical nuclear reactors

5 000

0

2016

2017

2018

2019

New capacity installed annually, MW

Cumulative capacity installed, MW

Belgium, total capacity (2011)

10 avg. nuclear reactors (2015)

2020

Figure 4 – Annual and cumulative new installed electrical capacity (MW) resulting from GPFG investing 5 percent in renewable energy production (with 2016-2020 being the investment period).

In the second figure, the blue bars represent the annual electricity generation output (TWh) in a lifetime perspective (see Figure 3) estimated on the basis of the GPFG´s investment volume from 2016-2020. The orange bar represents, for comparative purposes, Norway’s hydropower generation output as a constant over time, which was 142 TWh in 2012 (SSB 2014). The GPFG’s investment in electricity generation theoretically results in an average renewable production of 55 TWh each year from 2016-2069, equivalent to 38 percent of Norway’s total hydropower generation in 2012. The maximum electricity generation can be observed to be 75 TWh in the period 2020-2040.

160 140 120

kWh

100 80

60 40 20

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069

0

Figure 5 - Annual, electricity generation output (TWh) resulting from GPFG investing 5 percent in renewable energy production (with 2016-2020 being the investment period). Blue bars represent the annual electricity output derived from GPFG investment, while the orange line shows Norway’s total hydropower generation in 2012 (142 TWh) for matters of comparison.

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Five percent renewable energy investments in a 2 degrees world

Aggregating the electricity generation over the estimated lifetime of the different renewable technologies gives 2959 TWh, which by comparison is almost equivalent to all electricity generated in the 28 countries of the European Union in 2012 (3 260 TWh), and 21 times Norway’s annual hydropower production in 2012.

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3 500

TWh

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Lifetime power gen. GPFG 2016-2069

Annual power gen. USA (2012)

Annual power gen. EU-28 (2012)

Annual hydropower gen. Norway (2012)

Figure 6 - Comparison of total lifetime electricity generation from GPFG’s investments in renewables (SSB 2014, Eurostat 2014).

If we calculate the amount of emissions averted by generating the same amount of electricity with renewables, instead of a mix of fossil fuels, the results show that the world would save 1859 million tonnes (Mt) of CO2 equivalent. The following figure puts this number in perspective by comparing it with annual GHG emissions from different countries and sectors such as aviation.

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million tonnes CO2 equivalent

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1343

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584

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729

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Norway (2012)

UK (2012)

Aviation sector (2010)

Japan (2012)

Theoretical GHG emissions saving from GPFG in 20162069

Figure 7 - Averted GHG emissions from GPFG, compared with other sources (in million tonnes, Mt CO2 equivalent) (UNFCCC 2014, SSB 2014, Ecofys 2013).

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Five percent renewable energy investments in a 2 degrees world

5 percent investment by UNPRI’s signatories What would happen if other funds would commit to invest 5 percent of their holdings directly into renewable energy, similar to that of the GPFG as modelled in this study? We decided to apply the same model to a large number of institutional investors, namely those who signed the United Nations-supported Principles for Responsible Investment (UNPRI5). The goal of these principles is to support signatories to incorporate environmental, social, and corporate governance (ESG) issues into their investment decision making and ownership practices. Hence, UNPRI signatories is a population of investors relevant for the consideration of which investors that may pioneer in scaling up renewable energy investments.

In 2014, there were 1318 institutions signing the principles: 284 asset owners, 851 investment managers and 183 professional service partners, all together managing about 45 trillion and representing roughly half the total assets controlled by institutional investors worldwide (83 trillion). The signatories of the UNPRI as such is 50 times the size of the GPFG. In our case study, we analyse what would be the effect on added renewable energy capacity and averted emissions if all UNPRI’s signatories would follow exactly the same investment pattern as the GPFG (i.e. starting to invest directly into renewable energy infrastructure in 2015 and reach 5 percent of their market value by 2020). While we acknowledge that this would be a very optimistic achievement, we underline that this exercise is useful to make a comparison with the previous simulation. The model can then be used in further exercises to test different time periods and a longer time horizon. For this reason, we developed a free web-based calculator that can be used to easily use our model with other investment cases.

Figure 8 summarizes the main results from this modelling exercise. The green bars represent the annual electricity generation output (TWh) in a lifetime perspective estimated on the basis of the UNPRI’s investment volume from 2016-2020, assuming an arbitrary growth rate of the UNPRI fond around global inflation levels of 2 percent annually. The orange line represents, for comparative purposes, EU-28’s power generation output, which was 3 260 TWh in 2012 (IEA 2014). The UNPRI’s investment in electricity generation theoretically results in an average renewable energy production of 2 267 TWh per year from 2016-2069, equivalent to 70 percent of EU’s annual power generation in 2012. The maximum electricity generation can be observed to be 3 101 TWh in the period 2020-2040.

3 500 3 000

TWh

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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069

0

Figure 8 – The green bars represent the annual electricity generation (TWh) resulting from all UNPRI’s signatories investing 5 percent in renewable energy production (with 2016-2020 being the investment period, and the plants producing electricity until their end of life). The orange line shows EU-28’s total power generation (3260 TWh) in 2012 for matters of comparison.

5

http://www.unpri.org/

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Five percent renewable energy investments in a 2 degrees world

Aggregating the electricity generation over the estimated lifetime of the different renewable technologies gives 122 427 TWh, which by comparison is 5 times the total electricity generated in the world in 2012 (22 721 TWh), and 24 times China’s annual power production in 2012.

140 000 122 427 120 000

TWh

100 000 80 000

60 000 40 000 22 721 20 000 2 267

5 024

4 260

Annual power gen. China (2012)

Annual power gen. USA (2012)

0

Lifetime power gen. UNPRI 2016-2069

Annual power gen. UNPRI 2016-2069

Annual power gen. World (2012)

Figure 9 - Comparison of total lifetime electricity generation from GPFG’s investments in renewables (IEA 2014).

If we calculate the amount of emissions averted by generating the same amount of electricity with renewables, instead of a mix of fossil fuels, the results show that the world would save 76 944 Mt CO2 eq., equal to 2 times the world’s annual (2011) GHG emissions and 7 times China’s annual GHG emissions. The following figure puts this number in perspective.

90 000 80 000

76 944

Mt CO2 equivalent

70 000 60 000 45 914

50 000 40 000 30 000 20 000

10 260 10 000

6 135

4 263

0

Theoretical GHG emissions saving from UNPRI in 20162069

World GHG emissions (2011) China GHG emissions (2011)

USA GHG emissions (2011) EU-28 GHG emissions (2011)

Figure 10 - Averted GHG emissions from GPFG, compared with other sources (in million tonnes CO2 equivalent) (IEA 2014).

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Five percent renewable energy investments in a 2 degrees world

5 percent investment by CERES’s International Network on Climate Risk Our third case encompasses the Investor Network on Climate Risk (INCR), launched and managed by CERES, representing over 100 institutional investors and more than $13 trillion in assets.

In the simulation, we analyse what would be the effect on added capacity and emissions if all signatories would follow exactly the same investment pattern as the GPFG (i.e. starting to invest directly into renewable energy infrastructure in 2015 and reach 5 percent of their market value by 2020). Similar to the case of the UNPRI investors, we apply a 2 percent growth rate to the total market value of the signatories ($13 trillion) Figure 11 summarizes the main results from this modelling exercise. The green bars represent the annual electricity generation output (TWh) in a lifetime perspective, estimated on the INCR’s investment volume from 2016-2020.

The orange line represents, for comparative purposes, EU-28’s power generation output, which was 3 260 TWh in 2012 (IEA 2014). The investment in electricity generation theoretically results in an average renewable production of 655 TWh per year from 2016-2069, equivalent to 20 percent of EU’s annual power generation in 2012. The maximum electricity generation can be observed to be 896 TWh in the period 2020-2040.

3 500

3 000

TWh

2 500 2 000 1 500 1 000 500

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069

0

Figure 11 – The green bars represent the annual electricity generation (TWh) resulting from all CERES’s signatories investing 5 percent in renewable energy production (with 2016-2020 being the investment period). The orange line shows EU-28’s total power generation in 2012 for matters of comparison.

Aggregating the electricity generation over the estimated lifetime of the different renewable technologies gives 35368 TWh, which by comparison is 1,6 times the total electricity generated in the world in 2012 (22 721 TWh), and 7 times China’s annual power production in 2012.

40 000 35 368 35 000 30 000 22 721

TWh

25 000 20 000

15 000 10 000 5 024

4 260

3 260

Annual power gen. China (2012)

Annual power gen. USA (2012)

Annual power gen. EU-28 (2012)

5 000 0

Lifetime power gen. INCR 2016-2069

Annual power gen. World (2012)

Figure 12 - Comparison of total lifetime electricity generation from INCR-CERES’s investments in renewables (IEA 2014).

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Five percent renewable energy investments in a 2 degrees world

If we calculate the amount of emissions averted by generating the same amount of electricity with renewables, instead of a mix of fossil fuels, the results show that the world would save the equivalent of 2 times China’s annual GHG emissions in 2012 and 4 times USA’s annual GHG emissions. The following figure puts this number in perspective.

25 000

22 228

Mt CO2 equivalent

20 000 15 000 10 260 10 000 6 135

4 263

5 000 0

Theoretical GHG emissions saving from INCR in 2016-2069

China GHG emissions (2011)

USA GHG emissions (2011)

EU-28 GHG emissions (2011)

Figure 13 - Averted GHG emissions from INCR-CERES, compared with other sources (in million tonnes) (IEA 2014).

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Five percent renewable energy investments in a 2 degrees world

DISCUSSION Technical discussion on the model The calculations presented in this report are a theoretical exercise to illustrate the effect of investing 5 percent of a fund’s market value into renewable energy, seeking to estimate the new added power generation capacity, electricity production and the averted GHG emissions. In this section, we discuss some key issues and limitations related to this methodology.

Additionality In the real world, the modelled volume of investment would not alone, nor automatically, lead to the construction of new renewable energy capacity. The development of projects depends on many different factors such as policies, regulations, incentive schemes, subsidies, quotas, cost development, needs for associated transmission and distribution infrastructure, etc. (CPI 2013; OECD, 2015b). Availability of capital is one of the many necessary factors. The authors are aware that the investment of the GPFG would not act in a vacuum, but in concert with all other economical, regulatory, technological, social, environmental, and market factors. In this model, however, we make the assumption that all money invested by the GPFG would fund projects that would not have happened otherwise. This is a simplistic assumption in line with the goal of the report, which is to show the theoretical potential, and not make a real-world investment case and a realistic estimation of the added capacity given a certain investment volume.

Future costs of electricity The cost of renewable energy has dramatically reduced in the past years, and the trend continues due to factors such as economies of scale, better financing mechanisms, and technology developments (UNEP 2015, BNEF, 2015b). Some technologies like biomass, hydropower, geothermal and onshore wind are already competitive with or cheaper than coal, oil and gas-fired power stations, even without financial support and despite falling oil prices (IRENA, 2014). The price of solar PV module costs fell 75 percent since the end of 2009, and all projections expect further reductions. BNEF (2015b) expects that solar project costs will fall by 47 percent and wind project costs by 32 percent between now and 2040. Deutsche Bank (2015) has recently forecasted that solar system costs will decrease 5-15 percent annually over the next 3 years, and that this could result in solar being at grid parity in up to 80 percent of the global markets within few years.

Our model does not take into account this reduction in prices, as it assumes that today’s costs will stay the same.

Conversely, we do not consider decreasing efficiency of the power generators, which usually occurs as power plants get older.

Considerations on deriving electricity capacity/generation from investment levels In our analysis, we “convert” money into electricity generation output by using overnight cost of capital, capacity utilization and average lifetime of the power plants. While this is a straightforward and accepted methodology, overnight costs of capital do not give a realistic reflection of the construction costs, which would include also for example financing costs, inflation, costs associated with delays or other unforeseen costs that may arise during the construction period. However, overnight cost of capital may be useful to compare the economic feasibility of building various plants at a very high level.

Furthermore, we do not consider financial structures in infrastructure financing, including the presence of debt/equity ratios and pooled investments. In other words, we make the very simplistic assumption that the

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Five percent renewable energy investments in a 2 degrees world

investor would cover 100 percent of the capital need in a project. This is however not common in practice, since usually several investors pool equity capital together, and projects will have a certain amount of debt capital. This implies that our model does not include a potential catalysing effect where one investor may unlock investment and credit from other institutions.

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Five percent renewable energy investments in a 2 degrees world

What is the role of investments to be able to stay below 2degrees global warming?

The international community has agreed on the common target of keeping global warming below 2-degrees, and the concentration of greenhouse gases below 450ppm, in order to avoid the most catastrophic consequences of climate change. To do so, we need a major transformation of our energy system.

The IEA (2014a) has developed the so-called 450S scenario in which it outlines how the electricity mix should change in order to keep the GHG emissions within the limit of 450ppm. This scenario is available for the period 2020-2040, and the figure 14 shows the vast changes in the electricity mix which occur under this scenario. This figure shows that there is an urgent need to reduce the consumption of coal substantially and that renewable energy needs to become the dominant source of electricity worldwide just 20 years from now. In particular by 2040 the cumulative reduction of coal in the global electricity mix (-22 percentage points) need to be replaced by an approximately equivalent increase in the share of renewable power generation (+24 percentage points). In addition to a shift from fossil to renewables, the IEA clearly underlines the necessity to reduce the consumption of electricity by applying energy efficiency to all relevant sectors of society (transport, building, industry, etc.).

It’s difficult to imagine how all this this could happen if the financial market, and investors like the Norwegian Government Pension Fund, do not shift their investments away from fossil fuels and into renewable energy and energy efficiency.

16 %

22 % 3%

1%

13 %

35 % 51 %

27 % 18 %

12 %

2020

2040

Nuclear

Res

Coal

Oil

Gas

Figure 14 – How the electricity mix changes in the IEA’s 450S scenario, 2020-2040. (IEA, 2014a)

Assuming that there will be a regulatory and technological enabling environment to foster to radical shift in how electricity is produced, what are the financing needs to make this shift happen? Following the focus of this report, we have conducted an investigation of secondary literature sources to assess if there is a practical estimation of the needed upscaling of renewable energy investment in context of achieving the 450S scenario. We have conducted a limited literature review, investigating IEA (2012); UNEP (2013); IPCC (2011); BNEF (2013), CPI (2013) and CERES (2014). From this review, we found little coherence between the different estimates and a general lack of details around the 2-degree scenario, which could not enable us to conduct a more rigorous comparison of the different estimations available. In particular, we can highlight the following main challenges: (1) several sources lack clarity in terms of defining the boundaries of what constitutes the “energy sector”; (2) there is a variability in terms of whether transmission and distribution is included in determining the overall investment need; (3) little

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Five percent renewable energy investments in a 2 degrees world

consistency in whether large hydropower is in/excluded (4); lack of data on the distribution of financial investment from e.g. direct investment, R&D, private equity etc. and, (5) generally that financing needs not necessarily are investment needs estimates does focus on the investment levels needed to achieve the 450S scenario. Estimates – which are not directly comparable - of annual investment required in a 2-degree scenario range from USD 210 billion for the nearest period up to 2020, to more than USD 500 billion per year in the period up to 2035. After our first review, the International Energy Agency published the “Special Report: World Energy Investment Outlook” (IEA, 2014b) which, for the first time, provided a more complete picture of global energy investment trends and needs. Although the report provides full details only on the central scenario, it contains enough details on the 450S to derive all the figures we needed for our study, and we have therefore decided to use those estimates to provide a context for our results.

The IEA’s report provides an estimate of what are the cumulative investment needs in both power generation – differentiating between nuclear, fossil fuels and renewables – and for transmission and distribution.

The cumulative investment need in renewable energy power generation for the period 20154-2035 amounts to USD 8.8 trillion, which is equal to a simple yearly average of USD 400 bn. To put this figure in perspective, the latest estimates (UNEP, 2015) for current investments in clean energy amounts to USD 243,5 billion, with USD 170bn in utility-scale renewable energy (projects larger than 1MW), also called asset finance, and USD 73,5bn in small distributed capacity projects financing.

In addition to power generation facilities, the IEA also estimates that the amount of investment required in transmission and distribution equals USD 72 billion and USD 194 billion per year respectively.

These figures provide a context to the results of our model. On the basis of the yearly average estimate provided by IEA (2014b), coupled with our estimation of how much a 5 percent allocation to direct renewable energy investment constitutes for the cases studied in our report, it can be observed that if all UNPRI’s signatories would commit to such an investment strategy, that would fulfil the required investment need. Further, the GPFG and the CERES coalition could alone provide respectively for 3 percent and 35 percent of the required investment within the 450S scenario.

550 500 450 400 350 300 250 200 150 100 50 0

448

2016

2017 GPFG

2018 UNPRI

14

13

12

11

9

CERES

151

145

140

135

129

523

504

485

466

2019

2020

Investment need

Figure 15 – Annual investment required in the IEA’s 450 scenario (purple line) and comparison with annual investments from GPFG, UNPRI and CERES to achieve a 5 percent target within 2020. In billion USD.

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Five percent renewable energy investments in a 2 degrees world

Š Shutterstock / isak55 / WWF

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Five percent renewable energy investments in a 2 degrees world

REFERENCES Bloomberg (2013). Peak fossil fuels is closer than you think: BNEF. http://www.bloomberg.com/news/articles/2013-04-24/-peak-fossil-fuels-is-closer-than-you-think Bloomberg (2015a). Fossil fuels just lost the race against renewables. http://www.bloomberg.com/news/articles/2015-04-14/fossil-fuels-just-lost-the-race-against-renewables Bloomberg New Energy Finance – BNEF (2014). Global trends in clean energy investments.

Bloomberg New Energy Finance - BNEF (2015b). New Energy Outlook. http://www.bloomberg.com/company/new-energy-outlook/ Central Intelligence Agency (2014) The World Factbook. Retrieved September 2014.

CERES (2014) Investing in the Clean Trillion: Closing The Clean energy Investment gap. January 2014.

Deutsche Bank (2015). Solar Outlook. Available at: https://www.db.com/cr/en/concrete-deutsche-banks-2015solar-outlook.htm?kid=crpvoutlook.inter-twen.tw Ecofys (2013). World GHG emissions flow chart 2010. Available at http://www.ecofys.com/files/files/asnecofys-2013-world-ghg-emissions-flow-chart-2010.pdf Eurostat (2014). Energy Statistics.

Carbon Tracker Initiative (2014). Oil and gas majors: fact sheets. http://www.carbontracker.org/wpcontent/uploads/2014/09/CTI-Oil-Gas-Majors-Company-Factsheets-August-2014-FULL.pdf Climate Policy Initiative (2013). The challenge of institutional investments in renewable energy March 2013.

Kaminker et al. (2013) Institutional Investors and Green Infrastructure Investments: Selected Case Studies.

OECD Working Papers on Finance, Insurance and Private Pensions, No.35, OECD Publishing.

Intergovernmental Panel on Climate Change (2011) IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation. Cambridge University Press, Cambridge; New York. Available at: http://www.ipcc.ch/report/ar5/wg3/ Intergovernmental Panel on Climate Change (2014) Working Group III contribution to the IPCC 5th Assessment Report "Climate Change 2014: Mitigation of Climate Change». IPCC, Geneva.

International Energy Agency (2010). Projected Costs of Generating Electricity‐2010 Edition. IEA, Paris, France.

International Energy Agency (2012).Energy Technology Perspectives 2012. OECD/IEA. International Energy Agency (2013). World Energy Outlook 2013. OECD/IEA. International Energy Agency (2014a). World Energy Outlook 2014. OECD/IEA. International Energy Agency (2014b). Special report World Energy Investment Outlook. OECD/IEA. International Energy Agency (2015a). Medium-Term Renewable Energy Market Report 2015. OECD/IEA. International Energy Agency (2015b). Tracking Clean Energy Progress 2015.

IRENA (2014), REthinking Energy: Towards a new power system. International Renewable Energy Agency, Abu Dhabi.

IRENA (2015a) Renewable Power Generation Costs in 2014. International Renewable Energy Agency, Abu Dhabi.

Mercer (2015). Investing in a time of climate change.

Norwegian Ministry of Finance (2014) Projection fund size, from the revised National Budget 2014. Latest update 28.08.2014. Available at: http://www.nbim.no/en/the-fund/market-value/forecast-for-the-size-ofthefund-/

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OECD (2013). Annual survey of large pension funds and public pension reserve funds. October 2013.

OECD (2015a). Enabling Investment in Sustainable Energy Infrastructure. http://www.oecd.org/dac/POST2015%20sustainable%20energy.pdf OECD (2015b). Overcoming Barriers to International Investment in Clean Energy. http://oecdinsights.org/2015/06/09/overcoming-barriers-to-international-investment-in-clean-energy/ Statistics Norway (2014) Electricity, annual figures, 2012. Published: 28 March 2014 http://www.ssb.no/en/energi-og-industri/statistikker/elektrisitetaar UNEP (2013). Global Trends in Renewable Energy Investment 2013. Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance and Bloomberg New Energy Finance.

UNEP (2015). Global Trends in Renewable Energy Investment 2015. Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance and Bloomberg New Energy Finance.

UNFCCC (2014). GHG emission profiles for Annex I Parties and major groups. Retrieved September 2014 at http://unfccc.int/ghg_data/ghg_data_unfccc/ghg_profiles/items/4625.php UN (2014), The New Climate Report, http://newclimateeconomy.report/ Wall Street Journal (2015). Oil Companies’ Spending Cuts Unlikely to Be Enough. http://www.wsj.com/articles/oil-companies-spending-cuts-unlikely-to-be-enough-1438720142 World Resource Institute (2014) Total GHG Emissions Including Land-Use Change and Forestry 2011 http://cait2.wri.org

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FIVE PERCENT RENEWABLE ENERGY INVESTMENTS IN A TWO DEGREES WORLD

FIVE PERCENT RENEWABLE ENERGY INVESTMENTS IN A TWO DEGREES WORLD 21 GW new installed capacity, equivalent to 7 000 wind turbines.

1859 MT lifetime avoided greenhouse gas emissions, equal to 3 times the annual emissions of the aviation sector.

$59 BILLION

55 TWH

5% of the GPFG* invested in renewable power in 2020.

average electricity generated every year in 2016-2069. It can power 9 million people in Europe.

www.wwf.no

*The Norwegian Government Pension Fund Global (GPFG) is world’s largest sovereign wealth fund, holding more than one percent of the world’s stocks.

WWF.NO

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