Renewables are making large gains globally, but if they are to continue grabbing market share from fossil fuels, they will require reliable policy backing, according to International Energy Agency Executive Director Maria Van Der Hoeven.

The IEA’s 2013 Medium-Term Renewable Energy Market Report maintains a positive outlook for growth in renewables worldwide. “Despite a difficult economic context, renewable power is expected to increase by 40% in the next five years,” it says. This comes on top of 8% growth last year, to 4,860 terawatt hours – more than China’s total estimated electricity consumption.

“The rapid growth of renewables continues to beat expectations, and is a bright spot in an otherwise bleak assessment of global progress towards a cleaner and more diversified energy  mix,” Van Der Hoeven said at the Renewable Energy Finance Forum – Wall Street in New York on Wednesday.

“Despite a difficult economic context, policy uncertainty in some countries, and turbulence in industry, at a global level, our medium-term outlook for renewables remains positive. And we expect investment opportunities to grow,” Van Der Hoeven said.

But “the competitiveness of renewables depends on market design”, said Van Der Hoeven. “Many renewables no longer require high economic incentives…but they do need long-term policies that continue to provide predictable and reliable markets.”

Government subsidies and other incentives for renewables have come under pressure of late, particularly in Europe, as economic conditions have soured.

“Policy makers need to understand better that any decision increasing uncertainty and volatility results in higher investment risks, higher costs of capital, more difficult access to finance, and ultimately worsens the business case for renewables,” she said. “The main challenge – public enemy number one from the investment side – the most important barrier to renewable energy deployment is policy uncertainty.”

Retroactive renewables policy changes in places like Spain have “totally destroyed investor confidence”, Van Der Hoeven said. Renewables investments can an also suffer from “stop-and-go” policies, “such as around the extension of the Production Tax Credit in the United States”, she said. “They affect business appetite for long-term investments.”

“The perennial stop-and-go problem of the United States…creates boom and bust cycles that should be avoided,” said Paolo Frankl, the head of IEA’s Renewable Energy Division.

Other challenges to renewables deployment include a “heated debate about costs, either real or perceived, of economic incentives to renewables”, Van Der Hoeven said. “And in some markets, the share of wind and solar is now such that grid integration challenges need to be duly addressed.” To that list, she added non-economic barriers, including burdensome authorization procedures, a lack of social acceptance, and competition from cheap coal and shale gas.

Frankl noted that renewables are not yet competitive with oil, gas and coal. But he said that costs are coming down. “If you look at leveled costs of energy, on average, they remain much higher than fossil fuels,”  but “it is certainly fair to say that renewables are really improving their competitiveness in a wide set of circumstances all over the world”, he said.

And Van Der Hoeven added that maintaining subsidies until such time as renewables can compete is critical to their success.

“Cuts in incentives are absolutely legitimate and desirable if and when they reflect cost reductions of technologies, and to maximize benefits to final customers and taxpayers,” said Van Der Hoeven. But removing incentives too early, or without warning, could undermine efforts to expand renewables. “Such decisions must be taken in a transparent and predictable way that gives proper time to the renewable industry to react and adapt.”

China Leads the Charge

China is at the forefront of renewables growth, according to IEA research. “In terms of incremental [renewables] additions in the next five years, China is by far the largest and most important country,” said Frankl. “China is going to be the first market for hydro, wind onshore, PV, solar thermal, most of the technologies.” He attributed this to a number of factors, including government backing, incentives, and ample available low-cost financing.

“The second one is the United States. Don’t forget that the United States has one of the best renewable resources in the world,” Frankl said. There are “some dysfunctions in policy, maybe, but the potential of the United States remains very interesting”.