Smart government policies have spurred rapid acceleration in renewable energy. They can do the same for building efficiency upgrades. Richard Roberts, Canary Media
Richard Roberts is inquiry lead at Volans, a research and advisory firm focused on sustainability, innovation and market transformation. This contributed content represents the views of the author, not those of Canary Media.
The renewables revolution has entered the rapid acceleration phase. Its momentum now appears unstoppable.
Last year, amid a global pandemic, the world added 280 gigawatts of new renewable power, 45 percent more than was added in 2019. The International Energy Agency just upped its forecast for how much renewable power the world will add in the next two years by 25 percent compared to its previous forecast published all of six months ago.
According to Carbon Tracker, the 2020s will be the decade in which solar and wind blow fossil fuels out of the water. Using only currently available technologies, renewables could meet total global energy demand 100 times over. By 2030, 90-plus percent of that technical potential will be cheaper than fossil fuels — up from 50 percent today and up from none as recently as 2015. The U.S. could get to 100 percent clean electricity by 2030, according to analysis by think tank RethinkX.
What we are witnessing in the energy sector is not a miracle — it’s a revolution with clear and identifiable causes. It’s worth reflecting on how we got here because there are lessons that can be applied to the many other industries and systems we need to transform in order to get to net zero.
The key to renewable energy’s rampant growth is the positive feedback loop between falling costs and increasing scale of deployment. Worldwide installed solar capacity is up more than a hundredfold since 2004. Solar costs have fallen by an average of 18 percent a year for the last decade. Put very simply, the more renewable energy capacity we build, the cheaper it gets. Once renewables become the cheapest option, as is increasingly the case, market forces kick in, driving an massive rollout of the new technologies.
Renewables have arrived at this self-sustaining phase because of decisions made by governments around the world to support those markets through their infancy. Starting in 2004, the German government began heavily subsidizing demand for renewable energy. Others followed suit, including the U.K. with its feed-in tariff that came into effect in 2010. The Chinese government, meanwhile, began massively subsidizing Chinese manufacturers of solar panels. Over time, many of these subsidies have been tapered down or phased out, but their aggregate effect has been sufficient to get solar energy to the tipping point where it can compete — and scale up — without subsidies.
From renewables to building retrofits
The challenge now is to apply the lessons from solar and wind across every sector. For example, in the recent briefing The Retrofit Revolution, we in the Bankers for Net Zero initiative set out how a well-designed package of policies can move the market for retrofitting homes and buildings to a tipping point where it too becomes an exponential success story.
In the U.S., homes and buildings are directly or indirectly responsible for roughly 40 percent of greenhouse gas emissions. Renovating properties to make them more energy efficient and to replace fossil-fuel-based energy and heat sources with low-carbon alternatives is one of the most effective ways to tackle climate change.
Like solar and wind, retrofitting relies on technologies and processes that become cheaper as deployment scales up. That means that once a tipping point is reached, the industry can and will go exponential. The tipping point for the retrofit industry will come when the (falling) market cost for renovations intersects with the (rising) market value for improvements. After that, just as we are now seeing for renewables, market forces will kick in and drive a rapid takeoff.
So what will it take to get to the tipping point? In a nutshell, three things:
1. Front-loaded market support that tapers off over time. In the absence of policy intervention, the knowledge that the costs of retrofitting will fall in the future has a dampening effect on demand today. By front-loading market support and making it clear from the outset that the support will be withdrawn in increments over time, policy can counteract the incentive that exists for property owners to wait for costs to come down. “Pump-priming” investments in retrofitting public buildings and social housing can be used to turbocharge demand and reduce costs quickly.
2. Long-term clarity about how minimum standards for the energy efficiency of buildings will ratchet up over time and what the penalties for non-compliance will be. This is the stick that complements the carrot of market support. Crucially, the stick, if it’s credible and quantifiable, will influence property valuations, driving value up for energy-efficient properties and giving manufacturers, installers and finance providers the confidence about future demand they need in order to invest today.
3. Financial regulation that supports the bankability of retrofit projects. The closer banks can get to lending against 100 percent of the value increase from retrofits, the faster the tipping point for subsidy-free market takeoff will come. Current loan-to-value ratios in the commercial property sector are typically around 60 percent. Additional guidance from regulators on the desirability of lending for retrofit projects could help push this higher, making more retrofit projects bankable sooner.
If we learn the right lessons from what has enabled the wind and solar industries to take off, retrofits can and should be the next success story of the net-zero transition. What’s more, it’s not just the climate that will benefit: A retrofit revolution will deliver significant economic and social benefits as well, ranging from job creation to health benefits and an end to fuel poverty.
But it won’t happen automatically. The central lesson of the renewables revolution is that government intervention is critical to build new markets.
Richard Roberts is Inquiry Lead at Volans, a research and advisory firm focused on sustainability, innovation and market transformation. He works on strategy development and corporate transformation.