Sponsored by: MFS Investment Management
In 2021, there was roughly $785 billion deployed at the global level for energy transition technologies. And despite questions being asked about ESG strategies, there are still tons of financial firms that are looking to invest in green bonds and other areas of sustainable finance.
Luiza Demôro, the Head of Energy Transitions at BloombergNEF, joins the show to discuss a pair of reports that the team at BNEF recently released. One is their annual Power Transition Trends 2022 report and the other is a special look at the state of clean energy funding in emerging markets and developing economies.
Demôro explains how banks and other private investors have become more willing to deploy capital to emerging markets, but they are looking for certain country-specific and project-specific risk criteria to be met before they go all in.
Demôro also offers her insights on what to expect from COP27 and how the policies discussed in Egypt can reshape energy markets around the world.
(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)
Colin Hogan 00:14
Hello, everyone and welcome to the Modern Money SmartPod. I’m Colin Hogan.
Sean McMahon 00:18
And I’m Sean McMahon.
Colin Hogan 00:20
You know Sean, ESG, investing has been on a wild ride lately. It certainly has, you know, after being the darling of the investing world and attracting record amounts of capital, questions are now starting to be asked about the efficiency and even the legitimacy of some ESG metrics and trends.
Sean McMahon 00:38
And as you’ve probably heard, policymakers in some GOP strongholds here in the US are even trying to punish investment firms that embrace certain ESG principles.
Colin Hogan 00:46
Yeah, you know, sometimes it’s hard to differentiate the signal from the noise. But our guest today is going to help us sort through the noise and give us an update on where things stand when it comes to capital flows and the energy transition.
Sean McMahon 00:59
Luiza Demôro is the Head of Energy Transitions at BloombergNEF. And she’s going to walk us through a pair of reports that the team at BNEF recently released. One is their annual Power Transition Trends report, and the other is a special look at the state of clean energy funding in emerging markets and developing economies.
Colin Hogan 01:17
After all, we are talking about some serious amounts of capital. In 2021, there was roughly $785 billion deployed at the global level for energy transition technologies. And despite all the anti ESG noise, there are still tons of financial firms that are looking to invest in green bonds and other areas of sustainable finance.
Sean McMahon 01:40
For sure. Luiza is going to explain how the private sector has become more and more willing to deploy capital to emerging markets. But investors are looking for certain country specific and project specific criteria before they go all in.
Colin Hogan 01:51
This should be a great conversation. But before we get rolling, here’s a quick word from the exclusive sponsor of today’s episode, MFS Investment Management.
Low returns, volatility, risk. Today’s bond markets can be challenging for institutional investors. At MFS Investment Management, our disciplined yet flexible, active 360 fixed income approach allows us to navigate changing markets, striving to drive long-term returns across market cycles. To learn more visit MFS.com/fixedincome.
Sean McMahon 02:34
Hello, everyone, and thank you for joining me today. My guest is Luiza Demôro, the Head of Energy transitions at BNEF. Luiza, how’re you doing today?
Luiza Demôro 02:41
Hi, Sean, I’m great. Thank you for having me here. How are you?
Sean McMahon 02:44
I’m doing well. I’m doing well. So we brought you in today. Obviously, you know, you’re an expert in this field. And your team recently released the power transition trends for 2022. You know, a report that dives into where things are going in the in the global energy landscape. So what were the some of the key takeaways that your team found?
Luiza Demôro 03:01
This is a report that we launch every year with, as you mentioned, looking at where we are and where we are going in terms of transition of the power sector. This report came with like a bittersweet pace and includes really bad, but also good and promising news. The bad news is that the word recorded an unprecedented spike in coal generation. Coal generation jumped at point 5%, between 2020 and 2021. And this is quite sad, because when the pandemic started, the globe was hoping that would actually see generation from fossil fuel technologies and emissions going down which has proven to not be through. There are a few main reasons why we saw coal generation going up significantly last year, the word has started rebounding from the pandemic really quickly. And there was a need to provide and supply this growing demand. Coal was a solution in many cases. We also saw in 2021, much lower hydrogen aeration due to droughts in many countries around the world. And of course, we started seeing gas prices going up. So many countries saw coal as a solution to just lower the cost of generating electricity. And there’s of course, suddenly led to a significant increase in emissions, which was a direction that was the opposite of what most people were actually hoping to see. Right. When the pandemic started. That was like one of the bright sides of the pandemic in 2020. That ended up not not really happening.
Sean McMahon 04:37
So what were some of the good news that your team found from the report?
Luiza Demôro 04:41
The good news relates to renewables. So renewables, specifically wind and solar saw some milestones in 2021. And one of them is that for the first time ever, wind and solar together were able to supply 10% of all power produced in the globe in 2020. One and this is a huge milestone a bit far from where we actually need to be. But it shows that we’re actually progressing. And we also saw big numbers in terms of wind and solar capacity installed in 2021.
Sean McMahon 05:14
So how much was that how much wind was added around the world wind and solar?
Luiza Demôro 05:19
At a global level, wind and solar are accounted for about three quarters of all capacity installed in the world. And we saw about from all technologies 360 gigawatts of capacity installed. So wind and solar together made up to about 270 gigawatts in 2021. And just for comparison, when we refer to those big numbers, this is almost three times the size of Mexico. So wind and solar together added almost three times the total capacity installed in Mexico today. So this is this is quite big.
Sean McMahon 05:55
Yeah, of course. And so with all those news sources coming online, were there any regions or countries that lead the way? Do you wanna guess? Do I want to guess? Well, I mean, China, I would guess, China, you know, brought on a lot. Europe, Middle East. Yeah, you’re the expert here. I got some guesses. But you got the report?
Luiza Demôro 06:14
Well, Asia, over the past few years, as always, the half, like no matter what we’re looking at age is going to be the half of the story. And China’s always going to be about a third of it.
Sean McMahon 06:24
So I was right, wait, my guess was correct, right. Yeah.
Luiza Demôro 06:29
You’re right. So both for generation, capacity stalled everything, Asia is about half of it. And China is about that 30%, or a third of the total global. This is true for the annual generation in 2021. Asia is also in a way the driver of part of the bad news. So Asia is division where we saw power demand growing the most, in 2021, following the pandemic, while the world saw it growing about like 5.5%, from 2022 to 21. Asia saw it growing 9%, and China alone saw it growing 10%. And Asia is highly fueled by coal. So that explains a lot of the growth in cogeneration. on the cold side, together with China and India, you as was the other driver of it, which is not good news, considering that developed nations should be actually just being at the forefront of the transition. But on the renewable side, Asia is also driving and leading the way. So for 21, for example, China in the US are the top markets for wind and solar additions, they are bigger than any other countries over two decades, but also last year, and for solar there, followed by India, Brazil, and Japan, for when they’re followed by Vietnam, Sweden and Germany. So we saw the two big markets China in the US at a global level. But we also set start seeing some variety, when we look at other countries that are becoming bigger markets for this two technologies.
Sean McMahon 08:14
So are there any countries where there’s just nothing going on in terms of developed countries where we should be expecting more I know, you’ve kind of talked about how there’s a plus and a minus to the story of China and the US and some other places, but but who’s kind of sitting on the sidelines? Is there anybody?
Luiza Demôro 08:27
The sad news is that the answer is most of them. While we see renewables, especially when on solar, and especially solar actually spreading to more and more countries every year, we still see in absolute numbers, the deployments very concentrated on the big markets. When we look at emerging markets, including China, the story is about China. But if we exclude China from this picture, then the 10 big markets concentrate at least 80% of the total capacity deployment, and the other over 100 emerging markets just split the rest, and even then not equally. And we have just launched a report looking at the state of energy transition emerging markets and how to start mobilizing more capital to those countries. And what we see is very concerning, to be honest, because while we need to ensure that emerging markets transition away from fossil fuels, and just start developing renewables, when we look at investment numbers, the numbers are only going down since 20. To add to 2019.
Sean McMahon 09:31
Wait, you said going down so it’s not a matter of there, the money is there and things are too expensive or whatever. It’s just the funding is not there. It’s actually declining.
Luiza Demôro 09:39
I think it’s a combination of manufacturers. If we look at global level, we can see that money to fund clean technology and energy transition specifically is there. Every year we reach a new record. In 2021. We saw about $785 billion deployed at a global level for an As you transition technologies, including power, transport and buildings, for example, but 2021 was also the year where emerging markets accounted for the smallest share of this total, about only 8% of the total. And those countries are responsible for a big share of global emissions. So if we don’t start now focusing on those countries where demand is growing, that would opt tribute coal or fossil fuel capacity, and then accelerate the transition, we’re not going to get anywhere close to staying below 1.5 degrees of global warming.
Sean McMahon 10:35
You mentioned the global investments going down. But are there any other factors that are preventing some of those emerging markets from deploying more capital? I mean, is it really the cost of these things, or lack of supply chain or any factors like that?
Luiza Demôro 10:46
The thing is, it’s not really the cost at all right? When we look at cost of wind and solar, we see very clearly that, at least in two thirds of the word, those technologies, one of those technologies, at least, is already the cheapest source of new power. So it’s not about costs. But in many emerging markets, there is either lack of policy or barriers that artificially increase the cost of deploying those technologies, meaning that they can not make use of the learning curves and the steep drop in technology cost. So I said that it’s not about the money not being there, it’s really not the money is there, private sector is more and more willing to start deploying capital to emerging markets, but they need and they will always need some specific criteria related to country risk and project risk to be able to go in. And that’s not going to change that might become a bit more flexible over time, but it’s not going to completely change. So what is needed there is to make sure that all the key stakeholders that are responsible for ensuring the transition, do their job and focus on the areas where they can actually reach greatest potential. To provide more examples. It means like making sure that policymakers implement the policies that are fundamental to lower project risk, lower the perception of risk, and provide clarity on the direction that the country has to go, while reducing some of those barriers which relate to infrastructure, for example, or to specific regulations that don’t serve the market. Well. development agencies, philanthropic organizations and other international agencies have two jobs to do. First one is help some of those policymakers to implement the policies that we know that will start transitioning the market and open the market for those sources of private capital. And then once those are in place, they are the players that can help kick off the first projects, which will then lower project risk and welcome private investors to the market.
We’ll be right back.
In today’s complex bond market, it can be challenging for institutional investors to meet their fixed income goals. That’s why MFS Investment Management’s active, 360, fixed-income approach strives to capitalize on market volatility, Seeking Alpha to drive long term results. To learn more visit MFS.com/fixedincome.
Sean McMahon 13:28
And now, back to our conversation, okay, and when it comes to new sources of energy being deployed, when we take the global snapshot, or more countries, when they choose to build out more capacity, are more countries choosing renewables, are they still just tapping fossil fuels?
Luiza Demôro 13:44
Solar specifically has become the top of mine of countries all over the world, which is great, this is what we need. Right? This is only the starting point. But this is what is going to get us to where we need to be based on our research country level research that we do every year for climate scope. We saw that in 2021, at least 120 countries in the world have added some solar capacity. This is big. This is up from only over 50 in 2012. The other interesting thing that we found is that when we look at what is the technology that countries are adding the most, we see that 50% of the countries in the globe have added more solar capacity than anything else.
Sean McMahon 14:28
Wow. So half the countries in the world have added more solar than anything else. So what’s wrong with the other half the countries?
Luiza Demôro 14:38
Some are also focusing on clean technologies, when for example, accounts for 13% of the countries in the world. So 13% of the countries in the world have chosen to add more wind than anything else. And then hydro represents 15%. They’re still the countries that are choosing gas and oil. The good news is that number of countries was choosing coal has gone down by a lot.
Sean McMahon 15:01
Okay, so I’m trying to imagine a graph here. So if countries are choosing to add more sources of energy, sounds like solar is more than 50%. Wind is in there, at what percentage coaching, okay, and then hydro and geothermal and kind of other renewables, what are those?
Luiza Demôro 15:18
Hydro is at 15. So 15% of the country’s Joe’s hydro, geothermal is not really there, it doesn’t mean that those technologies are not being added, it means that they’re not being the main one installed in a year. And, for me, this is a huge thing. And it’s huge when we understand that the reason why we’re seeing this number, of course, policy plays a great role in that. But if we look back at like, five years ago, 10 years ago, policy was the only driver of those choices. So only countries in Iraq, for example, a few years ago, we’re seeing more wind or solar added than any other technology. And that was because they had they were at the forefront of implementing policies to accelerate deployment of those technologies. This is not true today.
Sean McMahon 16:08
Now, is it more markets, market driven decisions?
Luiza Demôro 16:12
Now it’s economics, right? So as those technologies get cheaper and cheaper, it just makes more sense. Policy is fundamental to scale up, especially. So we won’t see the trend and absolute will number for lower income emerging markets change when the policy is not there. But it’s very important that we now have economics leading the way. Because then as soon as the policy is implemented, the barriers are address, it’s so easy to just shift the direction of those markets, because it just makes sense economically.
Sean McMahon 16:44
Well, I’m glad you mentioned the importance of policy, right kind of policy leading the way for economics, because, as you know, we have COP27 Coming right around the corner here. And I understand you’re going to be in attendance in Egypt. So what are some of the trends you see? And what are some of the other hopes you have for that event? You know, any any policy decisions you’re hoping that are advanced or finalized? Seemed like you’ve got a good bead on what to expect at a gathering like this. So So what are you hoping for?
Luiza Demôro 17:08
I think my first concern is I mentioned the coal news or bad news. And because one of the key drivers of the spiking coal generation in 2021 only got worse, which is the gas prices and the energy crisis, we’re very likely to see another spike in call duration in 2022. And this is pretty much against the direction that we need to go. So we need to find solutions. to just get back to the direction that we were discussing at COP 26 do provide something that’s very concerning is at COP 26. About 40 countries committed to rhetorical capacity. Half of those countries, over 20 of those countries have recorded an increase in cogeneration in 2021. So like even those that are like just making the bold commitments this year, last year, we started to just go into the opposite direction.
Sean McMahon 18:11
What are your reasons for that? I don’t have the list of those 20 countries in front of you. But is it countries that were hit by the war in Ukraine and kind of needed to find another source? Or what are we talking about?
Luiza Demôro 18:20
I think it’s a mix of the three factors, really fast economic growth, droughts, which didn’t get any better this year. And the gas prices, which only got started going up last year. So there’s a it’s much worse, much more concerning. Many European countries have already announced that they’re restarting some of their coal plants to deal with this situation, at least in the short term. My hope is that the energy crisis becomes a good thing in a way that countries start really understanding as many already are, that transitioning to clean energy is not just a matter of climate change, but also a matter of energy security, which has become fundamental. But I think we still need to see more concrete action in this direction.
Sean McMahon 19:09
You mentioned droughts is one of the drivers of some of these countries, you know, reverting back to coal. So as someone who kind of covers this industry, I feel like the importance of Hydros underreported, if you will. And so I don’t know if a lot of consumers when they hear news about a drought, understand the direct connection it can have in some countries in some regions for power generation, right through hydro, what can be done to kind of just raise that awareness or help more people make that connection?
Luiza Demôro 19:36
That’s a good point. And a good question. I’m not sure if I actually have an answer to that. But this is something that’s extremely clear in my mind, I’m Brazilian, and hydro supplies, most of the electricity in Brazil. Other clean technologies have been growing, but hydro fuel supplies most of it, and over the past years, we have faced a lot of droughts. We She impacted a lot. And our database is not only at costs. But for example, when it was a kid, there was a massive initiative to just reduce public lighting, otherwise, we would not have power because after all, it’s over months. So people were just like going to every street and painting the streetlights that had should be turned off, to just help us deal with this issue. And this is a big thing, and I think many emerging markets, but I has never been top of the mind of people because it’s in emerging markets. Now that it’s affecting, I think more and more developed countries, the concerns in that tent that the focus is start the turning a bit more to do hydropower. And from my experience, like, the reason why we don’t talk so much about hydraulic, when we are talking about numbers is because hydro is very important. But the role of hydro and the participation of hydro has been pretty much stable over the years. So if you look at like, the share of generation that hydro is responsible for, it’s pretty much the same over the past decade. But it plays a huge role in many markets that rely a lot on hydro, in allowing more and more wind and solar penetration to come in, without such a big need to deploy a lot of energy storage, which makes those technologies more expensive at the moment.
Sean McMahon 21:27
Okay, and then getting back to COP27. Real quick. Are there any specific things you’re hoping are announced or agreed upon? I remember, you know, in Glasgow was specific articles that, you know, everyone was happy to kind of see advanced. So, you know, as an insider, please like that. If I would have talked to you in a few weeks time now. And that conference is wrapped up, you know, what are you hoping are some of the key things that are actually accomplished and not just talked about?
Luiza Demôro 21:50
My personally, my my hope, and my main expectation for COP is that the buzz around the mortgage markets and around Africa that we’re seeing right now remains true when copper is over. I’ve never seen so much attention paid in emerging markets, this is a good thing, because we really need to make sure that we transition away from fossil fuels and into renewables in those countries. And doing so is more complex in emerging markets than in developed countries. And we also need to ensure just transition in which the community deployment and the transition away from coal and other sources also enable social development. There are many cases in which COP related discussions don’t last long, which, sadly, is illustrated by the fact that, like there’s so much more coal being generated in the countries that have committed to phasing out coal capacity. But I think this is an area that we can benefit a lot from.
Sean McMahon 22:52
Are there any countries in Africa that you kind of hold up as an example of where there’s promise, because I mean, part of the reason the cops being held in Africa, as does bring that spotlight, even to that continent, so any individual countries there, you see that really kind of seem like they’re providing a roadmap for the rest of the continent.
Luiza Demôro 23:09
We’re looking very close at Africa right now. And we have always through many, many initiatives that we have here at, you know, in their many countries that see booms and spikes in finance for renewables and technology. But if I had to name one of the key barriers limiting investment flows, is that in most of the countries, the procurement of renewables is very inconsistent, which means that investors have no clarity on where to look at or how and when to finance. We had countries that have had good moments of success. Of course, South Africa is the biggest one, one country that has had examples of what good looks like as well as what bad looks like and now was trying to start to just move again, to direction of phasing out coal and accelerating the renewables through many policies. But we also saw some good cases in countries like Kenya, Nigeria over the years, especially with rural electrification. Wonder is a very impressive market in terms of stability in terms of policies and engagement from the government that I think can also provide good examples for the region. But consistency is the issue. And I think for many of the markets aligned with other policies, if there is clear direction of the market and consistent recruitment, we can see those countries booming really, really quick.
Sean McMahon 24:35
All right now, one of the things I like to do with guests on the show, Luiza is to ask them for their bold predictions, and you seem like someone who is very well positioned to kind of see trends and see what people are gonna be talking about, not only now but in the future. So do you have any bold predictions on where will be with this transition? What would this report will look like and say, five years, starting from
Luiza Demôro 24:53
In 2022. I think we will still be in a bittersweet moment. Not very different from where we are now. I think the coal numbers are likely to get a lot worse because of the energy crisis because of what many European nations are needing to do, as well, some countries in Asia as well. But I also believe that we will only go up with renewables. So while we could be in a worse position with coal, we’ll also be installing more renewables than ever. And every year generating more and more from wind or solar is specifically a bit more longer term. I’m optimistic, I don’t think he would be doing what I do if I was consistently pessimistic about the topic. And I do think that, despite the fact that many countries are not implementing the fundamental policies that they should be, many are actually evolving. And at the same time, I see really good movement from the private sector, to understand what role they should be playing, and how they can actually accelerate investment into emerging markets, for example. So I think we’re going to be in a good point, if five years from now, not sure if this is exactly where we need to be at. But I think the trend is positive overall, what I would like to see is the middle stakeholder that is extremely fundamental, playing a more the size of role to just connect public and private sector in a way that’s functional and accelerate the transition. Specifically, I’m talking about development agencies, for example, and philanthropic organizations that can act and connect both sides and ensure that we get there as soon as possible.
Sean McMahon 26:45
Okay, well, I echo your hopes, and I hope that all those come together like you, I’m not pessimistic on this. I’m optimistic. So Lisa, thank you very much for your time. I really appreciate it and enjoy your trip to Egypt, and I hope everything goes well at COP27.
Luiza Demôro 26:58
Thank you, Sean was a pleasure.
Sean McMahon 27:02
That’s our show for today. But before we get out of here, Colin and I want to say one final thank you to the exclusive sponsor of today’s episode. MFS Investment Management.
If you like this podcast, please share it with your friends and colleagues. And be sure to follow us on Apple, Google, Spotify, or wherever you get your podcasts. You can also follow us on Twitter, where our handle is @ModernMoneyPod. And if you’d like a daily dose of Modern Money news delivered to your inbox, head on over to SmartBrief.com and sign up for the Modern Money SmartBrief. The Modern Money SmartPod is the production of SmartBrief – a Future company.