Investment theme Climate: The electricity market at a turning point

In 2025, an important milestone will be reached in the decarbonisation of electricity generation. According to the International Energy Agency (IEA), the share of renewable energies in global electricity supply rose to 30% by 2023. By 2025, renewables are expected to reach 35%.

At the same time, the IEA expects dependence on coal to decrease, with its share falling from 36% to 33% over the same period. This means that coal is likely to fall behind renewable energies for the first time (see chart below). 

Global development of the various power generation technologies, 2014-2025e

Development in Terawatt hours (TWh), dashed lines are estimates

Solar and wind are at the forefront of this technological shift. Their combined share is expected to increase from 13% in 2023 to 15% in 2024 and 18% in 2025. The IEA expects wind and solar PV together to add 750 terawatt hours (TWh) in 2024 and more than 900 TWh a year later. The annual increase in 2025 is equivalent to the combined electricity demand of France and Italy. To put this in perspective, on a global scale, renewable electricity generation is roughly equivalent to the electricity demand of China.

Demand could double by 2050

Global electricity demand is growing steadily, by an average of almost 3% per year since 2010 alone. There is no end in sight to this trend: According to the IEA, electricity demand will double or even triple by 2050, representing an annual growth rate of 3 to 4.5%. Demand for electricity is therefore likely to grow faster than the global economy.

China now accounts for around a third of global electricity demand (see chart below). Electricity demand there will grow by around 6% per year until 2023. Per capita electricity consumption in the People's Republic will already exceed that of the European Union by the end of 2022. Together with increasing electrification, the IEA expects electricity demand in China and India to grow by between 6% and 7% between 2024 and 2025. Despite the strong percentage growth in both countries, China will account for the largest share of demand growth in terms of volume over the next three years.

Electricity demand in China, India, the US and the EU

Evolution in TWh, dashed lines are estimates

Meanwhile, the hunger for electricity in Europe and the US is also likely to increase as new sectors such as transport and heating are electrified. In addition, data centres, which are growing rapidly due to the boom in artificial intelligence (AI), require a lot of electricity.

Coal's share of power generation could fall

In the past, the additional global demand for electricity could not be met without fossil fuels. In particular, new fossil fuel power plants have been built in countries such as China and India. By 2025, however, the tide is expected to turn: on average, all of the additional global power generation capacity will come from renewables and nuclear. Whether this will lead to a significant comeback for nuclear power, which is independent of wind and weather, remains to be seen: according to the IEA, nuclear power generation is expected to double by 2050. Over the same period, the contribution of renewables is expected to quadruple.

Coal-fired power generation, on the other hand, will decline slightly, according to the IEA. It is worth noting that this statement applies to China alone. The People's Republic will generate around 700 TWh more electricity in 2025 than in 2024, and this will be achieved using low-carbon technologies alone.

A key driver of this development is cost. In 2022, the levelized cost of electricity (LCOE) for new power plants in China will be around $45 per megawatt-hour (MWh) for new onshore wind and $50 per MWh for solar PV. By comparison, coal-fired power was significantly more expensive at $65 per MWh (source: IEA World Energy Outlook 2023).

Conclusion:

In summary, the growth in electricity demand in recent years has been largely met by new renewable capacity. Over the past decade, China's electricity demand and global renewable energy supply have each increased by around 5,000 TWh. This is a remarkable achievement from a climate change perspective.

However, if the power generation sector is to be decarbonised, further efforts are needed to reduce the operating hours of existing fossil fuel power plants, even though they are still needed in many cases as back-up capacity. In the future, low-carbon energy will not only have to meet additional demand, but also replace existing fossil fuel plants. This is the only way to reduce CO2 emissions, which is urgently needed if the Paris climate change target is to be met.

For investors interested in the sustainable investment theme of climate change, this could create interesting investment opportunities in renewable energy. These are now cheaper than the alternatives in many places. However, investors need to keep an eye on the return on investment in renewable energy. This is currently low for many companies, with the result that these companies often do not earn their cost of capital. From this point of view, the need for grid expansion becomes clear: growth rates are very attractive and returns on capital are generally higher than for renewables.

The video accompanying this article is part of the 'Thematic Fund Talk' series. This article is a revised version of the Swisscanto Blog of 2 October 2010 by Dr. Gerhard Wagner and Kristijan Faltak.