Over the weekend, in the final stage of COP21 in Paris, 195 countries adopted a legally binding agreement to fight climate change.  While the accord will have far reaching implications across many sectors, its impact on global power generation is particularly significant. For power producers, the window for ‘business as usual’ is closing a bit faster.

 

While the provisions in the agreement have a varying degree of legal enforceability, one signal to the market should be extremely clear. Advanced energy is going to be at the center of global power generation. With the Paris agreement, all parties have committed to implementing domestic plans that track toward limiting climate change to 1.5 degrees Celsius; specifically recognizing the importance of de-carbonizing electrification. This ambitious goal simply cannot be achieved without the prolific expansion of technologies like renewable energy, energy efficiency, and storage.

 

Since the agreement is structured such that each country can create its own framework to decarbonize, the exact mechanisms that will be used to expand advanced energy technologies vary significantly from country to country. However, many countries like Brazil, India, Japan, Mexico, US, and the EU have put forth aggressive renewable energy targets already.

 

The commitments made at COP21 will require a massive scaling of capital deployment. According to the International Renewable Energy Agency (IRENA) a 2-degree target requires $650 billion of annual investment by 2030. Total global investment in renewable energy was $310 billion in 2014, meaning that investment will need to increase by more than double.

 

However, another key outcome of Paris is the long-term commitment of public investment from developed countries going to developing countries in order to mitigate the effects of climate change. This financial commitment has a floor of $100 billion per year by 2020 and, based on the historical flow of ‘climate finance,’ this investment is largely directed toward low-carbon energy infrastructure like renewable energy projects.

 

While a $100 billion floor will not close the capital gap alone, one of the key goals of this investment is to facilitate the participation of the private sector in markets that require additional support. On an ongoing basis, emerging markets – which project some of the most prolific energy demand growth – will be ripe with opportunity to develop renewable energy projects for companies that can effectively access this public financing.

 

For power producers, COP21 means that ‘business as usual’ just got a little more risky. While the energy market may not transform overnight, the agreement represents a massive push in an already rapidly changing energy system. Over the medium and long term, every energy company will need to be strategizing accordingly. Governments just committed to building roads, those that fail to adopt risk being the horse and buggy salesman while everyone is driving cars.

 

For all stakeholders that now have to execute on a strategy with aggressive advanced energy targets, it requires a recognition that GW processes don’t work for MW scale projects. New processes, tactics and tools are required to finance, develop and manage these technologies at scale.

 

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