Energy produced from hydro, wind, solar, and other renewables sources is expected to exceed that from natural gas and double that from nuclear sources by 2016 – becoming the second most important energy source behind coal.

Speaking at the 10th Annual Renewable Energy Finance Forum in New York City last month, International Energy Agency (IEA) Executive Director Maria van der Hoeven said the global outlook for renewables is “robust”, with total renewable generation capacity expected to grow to nearly one-quarter of the global electricity generation capacity by 2018.

Ms. van der Hoeven points to two main trends driving the renewables outlook: renewable deployment is expanding across the globe and renewables are becoming cost competitive versus fossil fuels in many circumstances.

Led by investment and deployment in China, non-OECD countries are expected to account for two-thirds of the global increase in renewable power generation between now and 2018. This rapid deployment is “mainly driven by fast‐rising electricity demand, energy diversification needs, and local pollution concerns, while contributing to climate change mitigation”, according to Ms. van der Hoeven.

China is expected to account for 40 percent of the global growth in renewable power capacity between 2012 and 2018. Although a large portion of China’s renewable portfolio is hydro and onshore wind, the country could have the largest deployment of solar PV systems if financial incentives and a stronger policy push are made.

In addition to China, there is significant renewable deployment in Brazil, India, South Africa, and the Middle East. The IEA expects this growth to more than compensate for slower growth in Europe and the United States.

Renewables are also becoming cost competitive with fossil fuels. The levelised cost of electricity (LCOE) for onshore wind is competitive or close to competitive versus new coal or gas-fired plants in Australia, where wind is competitive versus the generation costs of new coal- and gas-fired plants with carbon pricing, and the best wind sites can compete without carbon pricing. In Turkey and New Zealand, onshore wind has been competing well in the wholesale electricity market for several years.

Despite the healthy growth prospects, renewable energy deployment is becoming more complex and needs policy certainty to be successful.

“To get investment at favourable rates, risks must be reduced and shared. Even for less deployed technologies such as concentrated solar power and offshore wind, technology risk is no longer seen as the main barrier to investment”, Ms. van der Hoeven explained. “The main challenge, the public enemy #1 for investors and the most important barrier to renewable energy deployment is policy uncertainty.”

Countries such as Spain, Czech Republic, and Bulgaria have adopted retroactive policy changes that shake investor confidence. In the United States, uncertainty over Production Tax Credits at the end of 2012 provided little confidence for the renewable industry and investors.

Reducing incentives for renewable projects is a legitimate policy action as long as the reductions “reflect cost reductions of technologies to maximize benefits to customers and tax-payers.”

The IEA Medium-term Renewable Energy Market Report Executive Summary can be found here.

Related reading: U.S. energy transitions in one graph

Graph: IEA