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Renewables capex to climb 14% through 2025: IHS Markit

18 January 2021 Keiron Greenhalgh

Global renewable energy capital expenditure is set to increase 14% in the five years ending 2025, compared with spending in the 2015-2019 period, according to IHS Markit. At the same time, overall global energy sector capex is set to decrease 8%, research published in January shows.

Renewables' share of energy sector capex will average about 20% over the forecast period, in line with 2020 levels, but an increase of 4 percentage points compared with 2015-2019.

"The renewables investment boom is reshaping the global power landscape. We expect combined global wind and solar PV installed capacity to surpass global installed natural gas-fired capacity in 2023 and coal-fired capacity in 2024," said Roger Diwan, IHS Markit vice president, research and analysis, adding that cost deflation is super-charging that boom.

"Policy choices in the near term can boost these numbers. Countries and companies are accelerating their renewables ambitions, often anchored in net-zero emission targets, and a number of key countries are likely to focus post-COVID crisis spending on new green initiatives," said Diwan, one of the analysts behind the research.

In 2021-2025, IHS Markit expects global energy sector capex to nudge slightly higher than 2020 levels, reaching around $1.3 trillion/year over the period.

The decrease in overall capex in 2021-2025 relative to 2015-2019 is predicated on a slump in spending across the fossil fuel sector, with investment in the upstream and downstream oil and natural gas sectors, coal mining, and fossil fuel-fired power generation (coal and gas) in the 2021-2025 period declining 20% compared with 2015-2019 levels, according to the analysis.

With renewable generation and related industries becoming more attractive than the oil and gas sector for investors, the energy transition is poised to speed up, a trend illustrated by stock market valuations.

Over the past five years, the stock price of Florida-based generator and utility owner NextEra Energy has trebled to more than $80/share. Its market capitalization is now above $160 billion, surpassing ExxonMobil's at one point in 2020. Although ExxonMobil re-asserted its position as the US' largest energy company in recent months, with its share price hovering either side of $50 in recent days after falling below $32 in late October, that is still just over half the $95 valuation seen in July 2016 and nearly $90 as recently as January 2018.

Fossil fuel demand is estimated to have dropped by about 7% in 2020 compared with 2019, with oil demand alone falling 10%, according to IHS Markit data.

The upstream sector's spending capacity will be further constrained by the trend towards environmental, social and governance (ESG) investing and tightening regulations around climate risk, according to the analysis.

Conversely, the wind behind the sails of the renewable sector is not dropping. IHS Markit saw resilient spending in the sector in 2020, even as the coronavirus pandemic jettisoned normality across the globe and financial markets in particular.

IHS Markit expects global non-hydro renewables investment totaled around $257 billion in 2020, roughly 2% above 2019 levels. As a result, non-hydro renewables capex as a share of total energy spending is expected to have risen to an all-time high of 20% in 2020, up from roughly 18% in 2019, and just 14% in 2015.

With cost deflation factored in, this represents a 9% increase in capex in 2021-25 compared with 2015-19 will translate into a 45% jump in renewable capacity additions, Diwan said.

Still, the picture is not all gloom and doom for hydrocarbon producers, with stronger-than-expected oil and gas investment in the near-term remaining plausible, especially as a price increase to the $60-$70/bbl range for Brent in 2023-2024 is possible, the analysts say.

The extent of the potential capex upside boils down to the rate of US onshore spending growth, whether majors and diversified international oil companies use revenues to fund dividends and debt or portfolio transitions, and the medium-term expansion or retrenchment of national oil companies, they say.

Posted 18 January 2021 by Keiron Greenhalgh, Editor, Energy and Natural Resources Group, IHS Markit

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