Regulations and rate cuts to drive renewable energy growth

REAL ECONOMY BLOG | March 27, 2024

Authored by RSM US LLP

As renewable energy projects contend with volatile energy markets, battles over permits and a challenging investment climate, it’s easy to lose sight of the progress that is being made in the transition away from fossil fuels.

Sustained investment in renewables continues, despite the hurdles, and will translate into enduring growth as economic activity becomes less dependent on fossil fuel prices and supply fluctuations.

Ultimately, as the transition accelerates and renewable electricity generation increases, economic prosperity will ensue as emissions fall.

But getting there is a challenge, driven by the push and pull of government regulation and market forces.

On the push side of the equation, for example, the Securities and Exchange Commission recently tightened disclosure requirements for greenhouse gas emissions.

The new rules mark the latest in a series of regulations and laws, including the Inflation Reduction Act, that will cut emissions and, in the end, help increase demand for renewable energy.

On the pull side are the market forces leading to investment in renewable energy products. Interest rate cuts in particular—likely this year—will fuel these investments, as will technological advancements.

There is ample evidence of the substantial progress that has already been made. In most developed economies, the once-tight correlation between economic growth and greenhouse gas emissions has been broken. Since 1990, emissions in the United States and the European Union have been steadily declining. Between 2005 and 2021, emissions in Canada decreased by nearly 10%. One question, now, is if the decline is fast enough to meet ambitions targets on reducing carbon emissions.

But expanding the use of renewables is about more than meeting net zero goals and seeking alternative low-cost energy sources. Some countries, after all, have little choice. For example, many countries in the European Union do not have a readily available fossil fuel source, so the development of renewable energy is necessary to reduce dependency on fossil fuels and achieve energy security.

A snapshot

Wind, hydro and solar provided 22% of total U.S. electricity generation last year, slightly more than generated by nuclear plants. Renewables’ contribution to the global electricity mix has also been climbing and is expected to account for almost a quarter of U.S. electricity generation this year, according to the U.S. Energy Information Administration. The growth is coming mainly from solar, followed by wind, while hydro power generation remains steady.

• Solar accounted for 5.4% of total electricity generation last year. With the increased use of solar farms and household installations, the solar outlook is bright. Solar electricity generation is expected to climb 43% in 2024, according to the EIA. Globally, the growth in solar capacity is on track through 2030 to achieve net zero by 2050.
• Wind contributes to 11% of total electricity generation in the U.S. and is expected to jump by 6% this year after slow growth last year. The slowdown was brought on by supply-chain issues and higher interest-rate costs, among other factors, that affected both onshore wind farms and the fledgling offshore wind industry. U.S. wind developers are expected to install 8.4 gigawatts of onshore wind this year, with new installations reaching nearly 20 gigawatts in 2030, according to Bloomberg. One gigawatt is about the amount of electricity generated by a big power plant and can power hundreds of thousands of homes.
• Hydro sources produced 5.6% of total electricity generation in the United States last year, which given physical restraints seems like its maximum contribution for now. Even though hydro is a renewable energy source, its carbon emissions are extremely variable, ranging from very low to higher than natural gas. Reservoirs are associated with negative environmental impacts such as methane emissions, deforestation and habitat destruction. The expansion of hydropower is often less favorable than wind and solar from an emissions and climate perspective.

China is still the global leader in renewables investments and electricity production. But the U.S. and the European Union are catching up fast. The U.S., EU, and the U.K. accounted for over two-thirds of global growth in energy transition investments last year. As the macroeconomic outlook promises recovery and expansion in Western economies this year, solar will continue to surge and wind will most likely turn a corner.

Regulatory tailwinds

The growth of renewable energy benefits the pull forces of governments’ financial incentives, such as the Inflation Reduction Act, and the push forces of regulations.

There is perhaps no bigger catalyst in the energy transition than the IRA, which uses investments to accelerate the deployment of renewable technologies. The act is the single largest investment in climate and energy in American history.

Since its inception, the IRA has helped realize over $300 billion in public and private investments in renewables. The IRA investment and tax credits bring down the cost of renewables projects, making them competitive with fossil fuels, or even cheaper. As requirements of the IRA become clearer over time, investments in renewables are only going to climb.

The European Union’s Net Zero Industry Act will streamline regulations and prioritize funding for technologies necessary to help the EU reach net zero. The goal is for the EU to meet at least 40% of its own clean energy demand by 2030. By making the development of renewables easier and cheaper, from research to manufacturing, the legislation will foster supply of renewables in Europe.

Then there are the disclosure mandates. In addition to the SEC’s climate rules, California has implemented even stricter disclosure rules. In Europe, the Sustainable Finance Disclosure Regulation mandates ESG disclosures.

These regulations will drive demand for renewable energy as businesses seek ways to cut emissions. The supportive regulatory environment will make renewables a more attractive option for both private and public sector investments.

Rate cuts to fuel investments

A major barrier to the renewable energy sector last year was the high cost of borrowing because of high interest rates. Companies that development renewable energy projects tend to be sensitive to interest rates because of their high capital costs.

But this year will be different. The Federal Reserve is expected to cut interest rates, perhaps in June, with other central banks following suit. In the second half of the year, the financial conditions and macroeconomic environment is likely to improve, leading to the increase in renewable projects as well as greater funding in research and development.

At the same time, technology will improve, which will lower the costs of production and deployment as efficiency improves. Each dollar invested in renewables projects will yield greater return on investment. Even modest gains in investments can result in sizable gains in deployment.

Cheaper and more efficient renewable technologies also make them more appealing for businesses and households, which will speed their adoption.

Challenges remain in the renewable energy sector, though. Energy storage and transmission are prime examples. Renewable energy production and consumption are still limited to when and where the sun shines and the wind blows, unlike fossil fuels that can be stored and transported.

This is where a lower-carbon fuel like natural gas can come in and fill the gaps between supply and demand, acting as a bridge in the energy transition until further technology enables adequate storage and transmission.

The takeaways

To reach net zero, renewables will need to become the primary source of energy worldwide.

Growing the renewables sector and transitioning to renewable energy are a critical part of nations’ pathways to energy security and independence.

Laws such as the IRA, combined with interest rate cuts and technological advancement, will lower costs, creating a favorable macro environment for solar to expand and wind to recover this year and beyond.