A lack of understanding of risk holds back renewable energy projects from investment

Better quantifying the range of potential returns from new energy projects will bring greater investment to the industry.


Max van Someren

8/21/20232 min read

There is insufficient investment in the energy transition to achieve the emissions reductions required to keep global warming to manageable levels. According to the International Renewable Energy Agency (IRENA) the annual investment in the deployment of the technologies of the energy transition needs to more than quadruple to keep global warming below 1.5 °C. Investment specifically in renewable energy technologies needs to triple from the USD 0.5 trillion achieved in 2022 to keep the energy transition on track.

So why aren't projects attracting the investment they need to get the energy transition done?

It's certainly not from a lack of opportunity. To give one local example in Western Australia, the state government recently released its assessment of the forecast demand for electricity for the South West Interconnected System (SWIS) over the next two decades. The results are astounding. The assessment predicts the need for five times more electricity, and estimates that electricity generation capacity will need to increase by ten times to meet this demand (since renewable technologies are available for a smaller proportion of time compared to the higher emitting technologies they will replace).

Instead, it's a question of risk. New energy projects are much harder to predict the returns from than a conventional energy project such as Liquified Natural Gas (LNG).

The input energy for renewables projects is inherently variable in nature. The aggregate amount of sun and wind is predictable but the overlap in availability between these energy sources can be highly variable. Added to this is uncertainty on when the energy will be required, and at what price it will be bought.

A conventional energy project certainly has risks of it's own - for example, producing LNG is a complex process with technical risks and there are uncertainties in the overall oil and gas resources available, as well as the costs of construction and operation. However the overall system of a conventional energy project does not see the minute by minute, hour by hour and day by day changes in production and consumption that characterise new energy projects.

This is why we have founded Causal Dynamics. We believe the tools of the previous era and no longer appropriate for the dynamic nature of the new energy future. New tools and new ways of thinking are required if project risks (and opportunities) are to be adequately quantified and understood.