Today’s energy landscape continues to evolve as countries around the world increase their focus on decarbonisation and shift from fossil fuels to renewable energy sources. The energy transition is driving significant investment and a variety of actions across the industry, from wind and solar energy startups to legacy oil and gas companies and the manufacturing and technology companies supporting the ecosystem.

Energy transition investment is on the rise, with $303 billion invested in the U.S. in 2023, according to BloombergNEF, up 22% from the prior year. Still, that is a fraction of the $1.77 trillion that was invested globally. The business case for adopting renewable energy is making more sense for companies, even with today’s higher cost of capital. Renewable energy companies find themselves with increased interest in funding, new tax credits, other incentives and decreasing equipment costs. As a result, projects that previously may not have had a justifiable return on investment could now be viable and even attractive opportunities.

Energy companies, manufacturers enabling the energy transition, and other businesses indirectly tied to the sector should be aware of how this landscape is changing. Here are five of the top trends shaping the ecosystem around renewable energy:
 

Investment in renewable energy

The Inflation Reduction Act (IRA) and other government incentives have catalysed public and private investment in the renewable energy sector, with public investment serving as a force multiplier for private investment. Canada has also proposed both clean energy investment tax credits and regulations. Broader environmental, social and governance (ESG) initiatives are also contributing to this surge in investment, compelling companies across industries to decarbonise. Combined, this signals a significant shift toward more sustainable practices and a departure from traditional fossil fuel reliance.

Renewable energy projects, especially, are receiving increased attention due to the potential for tax credits and investment returns in this new regime. For example, in some cases, power generated from renewable sources can have a value that is over 50% higher than the price paid under the power purchase agreement after accounting for tax credits and other incentives.

TAX TREND: Clean energy tax credits and incentives
To understand how energy tax credits and incentives might improve your return on investments in renewable-energy projects, start by assessing how project objectives and operations might meet various criteria. That assessment focuses on variables and outcomes such as: 

- Production or recycling of components used in renewable energy industries
- Capture of carbon emissions
- Storage of electric or thermal energy
- Energy efficiency of new equipment put into service
- Energy-efficiency of improvements to facilities
- Electricity generated by renewable sources, such as wind and solar, and thermal energy produced by geothermal property
- Prevailing wage and apprenticeship status of project laborers or mechanics

Holistic approach to the energy transition

Governments are adopting a holistic approach to the energy transition, focusing on diverse renewable energy technologies rather than favoring a single source. This approach emphasises the importance of a balanced mix that incorporates renewable power sources such as solar, wind, hydroelectric, hydrogen, carbon capture/sequestration and biofuels.

Companies must adapt their strategies to align with this broader spectrum of renewable energy sources, ensuring resilience and sustainability in their operations.

Scaling up renewable energy technologies

Capacity in solar, wind and biofuels has grown significantly over the past several years, and experience with scaling up these technologies has demonstrated the effectiveness of public-private partnerships in driving down costs and expanding renewable energy capacity. The IRA also targets clean energy technologies like carbon capture and hydrogen, offering incentives to expedite their scaling.

Incentives under the IRA were largely designed to be solution-agnostic, and government support will continue to drive innovation and adoption across the sector. Although the upcoming 2024 U.S. elections bring uncertainty around the future of some federal incentives, the significant investments made by private industry in recent years have created enough momentum that large-scale reversals are unlikely.

Electrification and integration of renewables into the power grid

There has been a push in recent years toward electrification of technologies traditionally dominated by fossil fuels (e.g., internal combustion engines to electric vehicles, gas furnaces to heat pumps, etc.). At the same time, utilities delivering the power face increased demand to use renewable sources to supply data centers with the power needed to support the cloud and artificial intelligence boom.

Integration of renewable energy sources into existing power grids is a critical aspect of the energy transition. Investments in battery storage and smart grid technologies, as well as expansion and modernisation of the electric transmission infrastructure, will play a pivotal role in improving the adoption of renewable energy and addressing the intermittency challenges of wind and solar power.

Delays in approvals for adding new renewable capacity to the grid are slowing the adoption of renewable energy and leading generators and commercial customers to connect directly, bypassing the need for grid connection approvals. Until this constraint is resolved, all parties—utilities, companies and consumers—will face challenges, higher prices and the possibility of decreased grid reliability.

ESG driving clean energy growth

 ESG is now a focal point for companies globally, and the environmental component is squarely aligned with the growth in clean energy. Companies are assessing how they can use more renewable power sources and identifying new business opportunities to capitalise on the energy transition.

For example, traditional oil producers are considering capturing gas and selling it for power generation rather than flaring it, and power generators and refineries are weighing carbon capture technologies to reduce their emissions. Industries whose activities cannot easily be electrified or decarbonised (e.g., airlines, trucking, etc.) are looking at adopting renewable fuels such as sustainable aviation fuel and renewable diesel.

Oil and gas companies have historically supported renewable energy as part of their energy transition strategies, with renewables representing approximately 60% of all money spent on their transition efforts between 2015 to 2021, according to BloombergNEF. But oil and gas companies are now shifting their investment focus from renewable energy toward other clean energy technologies, including biofuels and carbon capture and storage. In 2023, investment in renewable energy was down 23% from 2022, and off a high of over $20 billion in 2021, while clean energy technologies represented approximately 53% of their 2023 investments in low-carbon assets, according to BloombergNEF.

CONSULTING INSIGHT: ESG
Environmental, social and governance is a key success measure for many companies. But ESG initiatives can present businesses with risks and opportunities, and understanding ESG’s intersection with critical business functions often proves challenging. Learn how RSM can align your ESG efforts to your business strategy and position you for future success.

The Takeaway

As the renewable energy sector continues to gain momentum, energy producers and consumers alike will need to consider how the shifting landscape of energy mix and availability will affect them and carefully evaluate their strategies to capitalise on emerging trends.

Companies requiring large amounts of consistent power (e.g., data centers, large factories) must consider the implications of geographical power availability limitations, even more so if they want to use renewable power. Electric utilities may need to change and upgrade how they generate, transmit or distribute power as customer needs and demand grow.

By aligning with government incentives and embracing a diverse mix of renewable technologies, companies can not only enhance their competitiveness but also unlock new opportunities for growth. Middle market companies can leverage government incentives and strategic partnerships to drive innovation and position themselves as leaders in the evolving energy landscape.

*This article was contributed by RSM US and was originally published in the report on ‘The top 5 renewable energy trends shaping the sector’.