CITIES OF THE FUTURE | TWO | OCTOBER 2023
Building & Fuelling the Future
The role of clean technologies in decarbonising cities and increasing energy security
INTRODUCTION
The second report in the Cities of the Future series showcases how cities are adopting clean, innovative technologies in the energy transition. This report will provide a global view with examples of cities from Nottingham in Europe to Delhi in Asia to Santiago de Chile in South America. The wide range of cities also provide examples from the groups that are laid out in the first report, namely mature cities, upwardly mobile cities, and innovation frontrunners, each of which face different types of challenges. All, however, face the global threat of climate change, which is the overarching driver of clean technology for cities discussed in this report.
Macroeconomic drivers of the energy transition
As well as climate change, Russia’s invasion of Ukraine and the subsequent tightening of oil and gas markets, which drove a huge spike in energy prices, has recently put energy security at the forefront of global issues and driven domestic deployment of clean technology. Arguably, this has been more pertinent to accelerating the energy transition in recent years than climate policy and regulation. Key legislation that has followed includes the US’s Inflation Reduction Act and the EU’s RePowerEU policy. China’s strict lockdown policy during the COVID-19 pandemic that led to severe global supply chain disruptions demonstrated the vulnerability of global markets. In a bid to reduce reliance on China and supply chain risks, major markets are looking to diversify their supply chains and increase domestic manufacturing and generation of power. This is driving country and city-wide uptake of domestic low-carbon technologies. Although this drive will reduce global supply chain risks, there is still the need for international collaboration to reach energy transition targets. Climate change, energy security and supply chain risks are some of the key drivers that are propelling cities to adopt clean technology.
Cities leading the energy transition
Cities have a central role to play in climate change. Urbanisation trends mean that by 2050, over 70% of the world’s population will live in cities, and they will be the centre for both energy demand and supply. A report by CDP found that four out of five cities are already experiencing climate impacts,1 with the most common being extreme heat that also increases risks of drought and wildfires. These increasing risks will demand local action to mitigate risks, whilst also bolstering energy systems to cope with the growing impacts. The uptake of low-carbon energy at a country-level is mixed with targets expected to be missed. For example, the likelihood of exceeding 1.5 degrees warming between now and 2027 is around 66%.
Many cities are taking the initiative to reduce this likelihood and the impacts. In 2006, the C40 Cities Climate Leadership Group was formed to connect cities globally in reducing emissions. This report will show how cities are leading in deploying clean technology.
The likelihood of exceeding 1.5 degrees warming between now and 2027 is around 66%.
SECTION ONE
Global renewables power sector outlook
Renewables growth trajectories
The power sector energy transition is being driven largely by renewables, including solar, wind, biomass and geothermal technologies. These will comprise a 16.4% share of electricity in 2023, while coal will still make up over a third of electricity generated and gas 22.6%. Over 80% of capacity added between 2022 and 2030 will come from renewable sources, which is why by 2030, renewables will increase to a 26% share of electricity generated. Coal and gas will still generate 48% of electricity, which is why the map below shows that fossil fuels still dominate most markets.
Source: EIA, IRENA, National Sources, Fitch Solutions
Only a few markets will reach over a 50% share of renewable generation by 2030
Renewable growth varies geographically. Western Europe and North America lead the way with the highest percentage of non-hydropower renewables, with Western Europe expected to be powered on average by over 50% renewables by 2030, and North America by 28%. Leading countries and regions foster renewable growth through policy commitments, such as the EU’s Renewable Energy Directive. The MENA region lags behind, where on average the renewables share forecast for 2030 is just 7.9%; stronger policy commitments may be required to replace fossil fuels with low-carbon technologies.
Solar PV is the leading renewable technology, which is expected to account for 42% of total non-hydropower renewable power generated globally by 2030, and also a quarter of the total power capacity by 2030. Most of solar PV’s growth will come from a few markets: China (54%), the US (11%), Germany (6%), India (6%) and Spain (2%) are taking advantage of their solar resources to deploy the world’s most cost-competitive technology.
Wind, led by onshore wind, is another leading renewable technology, and is expected to generate 48% of global non-hydropower renewable electricity in 2030. Onshore wind additions are led by Asia, and offshore by North America and Western Europe (NAWE). China, India and Australia are leading Asian wind markets, with the US, Germany, the UK, France and Spain leading wind growth for NAWE.
Biomass and geothermal sources provide a much smaller contribution to the energy transition. Biomass refers to the electricity produced from burning organic matter such as forestry resources, and geothermal is electricity generated from underground heat sources. By 2030, they will contribute less than 10.4% of total renewable power. Biomass-fired power will contribute to over 86% of that share. China will lead biomass growth with the country pushing waste-to-energy biomass plants that burn organic waste.
In addition to non-hydropower renewables, the low-carbon technologies hydropower and nuclear will complement renewables. Nuclear is expected to make up an 8.8% share of total electricity generated, and hydropower a 15.3% share, by 2030. Although, growth for these baseload low carbon technologies will be much more subdued at around 2-3% average annual growth between 2023 and 2032, compared to the fast-growing wind and solar sectors, which average 9% and 14% annual growth, respectively, for the same time period.
Non-hydropower renewables need to continue accelerating to achieve a decarbonised grid
Source: EIA, IRENA, World Bank, Local sources, Fitch Solutions
Looking forward to 2050
Combining all the low-carbon technologies forecast by Fitch Solutions, the total share will reach roughly 50% by 2030. This is still some distance from the required 90% share needed by 2050 to decarbonise the power grid, which also rests on the adoption of carbon capture and storage, as well as carbon removal technologies. Some have yet to be proven reliable, which implies the low-carbon energy share may need to accelerate faster from a 5-% share to a 90%+ share between 2030 and 2050. Achieving this will depend on increased government regulation and funding and overcoming the challenges discussed below. It will also rely on the adoption of newer and less established technologies such as green hydrogen, small modular reactors and microgrids.
Although their adoption will be less wide-reaching than traditional technologies, low-carbon technologies will still be needed to decarbonise power grids and help resolve city and country-wide challenges. The chart above shows a scenario where increasing targets and policies will expand the clean energy sector to achieve the most ambitious scenario.
Global renewables investment landscape
North America and Western Europe renewable developers enjoy low risks
The Fitch Solutions Risk/Reward Index is a quantitative value and ranking providing the investment attractiveness of countries in the renewables sector. The table below summarises the four overarching components of the ranking, which are measured by a number of indices that make up each part.
Risk/Reward Index components
North America and Western Europe (NAWE) lead in this Risk/Reward Index (RRI). NAWE is a global leader because of their developed business environments, ongoing political stability, and economic resilience in these regions’ markets. These regions have the largest growing renewables sector, which increases its Industry Rewards score.
Note: Scores out of 100; higher score = more attractive market.
Source: EIA, IRENA, National Sources, Fitch Solutions
Asia also scores well with markets such as China and Australasia performing especially well. Asia is a particularly attractive place to invest because of the rewards available from mature renewables markets and fast-growing economies that continue to drive up demand. Sub-Saharan Africa (SSA) is the lowest-ranked region, owing to the region’s economic, political and operational risks where access to financing for projects is limited. The MENA region shows some promise with stronger performance in non-hydropower renewables growth.
Cities in India, Chile, Romania & South Africa are overcoming country-level challenges
There are a number of cities showing leadership in the energy transition, many of which are located in countries where investment in the renewables sector is undermined by risks. This report provides examples of cities deploying clean technology in India, Chile, South Africa and Romania; yet all these countries underperform (compared to markets in North America and Europe) in the Fitch Solutions index because of a variety of issues in their respective renewables sectors.
India’s Risk/Reward Index score is strong with a global rank of 18th. It has a large renewables installed capacity, supported by population and real GDP growth that drives up demand. However, very high transmission and distribution losses, which are some of the highest regionally, weigh on India’s investment attractiveness. These are high because of the under-developed grid and high electricity theft, which increases risks to power plants, and of curtailment. Delhi is overcoming this issue by increasing distributed solar PV that is installed at the point of use, reducing transmission needs.
Chile is a regional leader, ranking 1st in the region, but only 31st globally. Non-hydropower renewables are expected to grow 9.4% on average this decade, to reach a 61% share of total electricity generated by 2032. Weak consumption is undermining growth in Chile, eroded by higher interest and inflation rates. The Chilean economy is also threatened by a fall in export demand as growth relies on raw material exports.
South Africa is also a leader regionally (ranking 2 in SSA and 58 globally), but SSA is still the riskiest region in which to invest. It has a much smaller expected share of 16.9% renewables generated by 2032 when compared to Chile. South Africa also has significant threats to its short-term stability that range from energy security issues (persistent power cuts) to high unemployment and poor economic growth.
Finally, looking at Romania, here is a positive investment environment for renewables and a favourable energy policy. However, the market’s Country Risk and Rewards scores are impacted by the ongoing war in Ukraine.
While India, Romania, Chile & South Africa all present investor risks, innovation is underway
Technologies being adopted by cities globally
Source: Fitch Solutions
