The prestigious American investment bank and financial services company Goldman Sachs Group expects renewable energy spending to overtake that of oil and gas in 2021 for the first time in history, leading to a total investment opportunity of up to $US16 trillion ($A23.2 trillion) by 2030.
In a research note published on Tuesday, Goldman Sachs Equity Research made the somewhat anticlimactic claim that “clean tech has a major role to play in the upcoming economic recovery.” Specifically, Goldman Sachs expects clean technology to drive as much as $US1-2 trillion ($A1.45-3 trillion) per annum in infrastructure investments and create between 15-20 million jobs worldwide through public-private collaboration.
For the first time ever, renewable power will become the largest area of spending in the energy industry in 2021, overtaking the oil & gas industry.
“Renewable power will become the largest area of spending in the energy industry in 2021, on our estimates, surpassing upstream oil and gas for the first time in history,” Goldman said in the note.
Investments under the header of “renewable power” include “mostly renewables, biofuels and the infrastructure investments necessary to support a new era of electrification” as well as, “more marginally – a growing focus on natural sinks, hydrogen, and carbon capture, utilisation and storage.”
In aggregate over the next decade, Goldman Sachs sees “a total investment opportunity of up to US$16 trillion by 2030 in a scenario that would be consistent with the global ambition to contain global warming within 2°C.”
As many experts have been predicting, Goldman Sachs believes that the global COVID-19 pandemic will result in a shift towards renewable energy sources as traditional fuel sources take a dramatic hit in demand.
“Whilst the growth in investment in clean energies moderated during previous economic downturns,” Goldman Sachs noted, “the much more abrupt fall in investments in other parts of the energy system (particularly upstream oil & gas) resulted in the overall share of clean energies (renewables including bioenergy) in the total energy supply capex increasing from 15% in 2014 to c.25% by 2021E on our estimates, making capex in renewable power supply larger than capex in upstream oil & gas for the first time in history by 2021E.”
With renewable power investment expected to increase to a quarter of all energy spending next year, the question becomes what has happened to so dramatically increase investment and expectation of investment.
Goldman Sachs points to the “significant divergence in the cost of capital of oil & gas investments” – which suffers under minimum acceptable rates of return, or hurdle rates, of between 10-20% – as compared to the cost of capital of renewable projects – which boasts hurdle rates of between 3-5% for regulated investments in Europe.
Goldman Sachs estimates that this “divergence in the cost of capital for high carbon vs. low-carbon investments implies a carbon price of US$40-80/ton, well above most carbon pricing schemes.”
Further, rising capital markets engagement in climate change drives a significant share of “this seismic shift in capital allocation” with the number of climate-related shareholder proposals almost doubling since 2011, and the percentage of investors voting in favour tripling over the same period.
Even despite the COVID-19 pandemic, 2020 has so far been another year of record shareholder engagement on climate change with the year-to-date climate-related shareholder resolutions exceeding that of 2019 on an annualised basis. Similarly, the year-to-date vote in favour has also increased.
“Concerns around affordability and manufacturing cost competitiveness may, however, delay the development of carbon markets … similar to the aftermath of previous recessions,” Goldman Sachs warns, citing today’s average global carbon price of only $US3/tonne.