How much investment is needed to reach climate neutrality?
Understanding the true costs and benefits of the transition to climate neutrality is complex. While future energy systems promise lower fuel costs and reduced imports, they also require significant upfront investment in infrastructure and new technologies.
Return Button
Investments today versus long-term climate costs
The costs of the transition to climate neutrality are climate mitigation costs – which are significantly lower than the economic toll of an increasingly unstable climate. Since the landmark Stern Review on The Economics of Climate Change was published in 2006,16 it has been widely accepted by economists and policymakers that mitigating climate change is far cheaper than dealing with its escalating consequences. These include the costs and effects of drought, disease, catastrophic weather events and rising sea levels. A recent Nature article estimates current annual climate damage at USD 38 trillion – six times the cost of decarbonising the economy.17 In Germany alone, climate-related damages amounted to EUR 145 billion between 2000 and 2021. Cumulative costs could increase to EUR 900 billion by mid-century.18 The costs of the transition must be weighed against the significant benefits of a stable climate system (both today and into the future). The severe floods in Germany and neighbouring regions in recent years underscore the real costs and escalating risks of a continued rise in emissions.
Investment needs for the power sector in Germany
Transforming the energy system for a decarbonized economy requires increased infrastructure and investment costs, these are offset by lower fuel costs and reduced energy imports in the long term.
As renewable energy sources, technologies and services grow to represent a larger share of Germany’s economy, annual investments in renewable energy and climate protection measures are estimated to average 11% of Germany’s GDP up to 2045 (an average of EUR 540 billion per year). Notably, the majority of those investments – corresponding to around 8% of GDP (an average of EUR 394 billion per year) – would have to be made regardless of climate mitigation efforts (“business-as-usual” investments) due to the usual economic cycles of modernisation and replacement of key infrastructure. Around 85% of these business-as-usual investments will need to be financed by the private sector, while public investments account for the remaining 15%. The investment needs on top of that (3% of GDP) would need to be channelled into climate action (an average of EUR 147 billion per year), of which about three quarters will need to be financed by the private sector and the rest from the public purse. These are additional investments required for climate-neutral technologies as alternatives to fossil-based ones. Now and in the future, re-channeling the business-as-usual investments from fossil-based technologies to climate-neutral alternatives will be necessary. After an initial period of high investment, the overall investment need is expected to decline significantly from 2030.
- Large investments in new power generation technologies are required. These will include several hundred GW of wind energy and solar PV, along with storage, dispatchable renewable energy technologies and hydrogen-ready gas-fired power plants. Investment needs up to 2045 are estimated at EUR 619 billion, equivalent to 0.6% of GDP. Until 2030, around 0.6% of GDP will be needed, gradually increasing to 0.7% per year until 2040. From 2041 to 2045 they are projected to fall to 0.4% of GDP. However, the steep fall in the costs of key energy transition technologies (solar PV, wind, batteries) make these investments possible without raising electricity costs.
Grid and infrastructure must be renewed and expanded in the coming years. German transmission system operators have estimated a total of EUR 301 billion for transmission system expansion costs up until 2045, including EUR 145 billion for the offshore grid and EUR 156 billion for the onshore transmission grid.19 Upgrading the power grid until 2045 will require about 0.3% of GDP (EUR 324 billion). From 2025 to 2030, 0.6% of GDP will be needed each year, halving to 0.3% of GDP in the period from 2031 to 2040. From 2040 onwards, no further investments for grids will be required. Additional infrastructure needs including for district heating networks, infrastructure for storage, hydrogen, carbon captures and storage will amount to 0.1% of GDP between 2025 and 2030, increasing to 0.2% of GDP between 2031 and 2040, falling to 0.1% of GDP between 2041 and 2045.
(For more details on infrastructure investment costs, see Agora (2024).)
With most of Germany’s energy transition expected to occur by 2045, infrastructure investments are largely “front-loaded”. These upfront costs will put in place core infrastructure that serves generations, securing both lower long-term costs and a stable climate system.
“Legacy costs” of the German Energiewende
Germany undertook widespread investment in renewable energy technologies at an early stage, when their costs were still significantly higher than those of conventional energy. In particular, the introduction of feed-in tariffs for solar PV under the Renewable Energy Sources Act (EEG) 2004 had a significant impcat. At the time, solar PV was not only more expensive than fossil fuels but also costlier than other renewables. These decisions increased electricity prices for end-consumers, but played a critical role in driving economies of scale that significantly reduced renewable energy costs. To put this in context:
EEG 2000-2004: fixed 20-year remuneration for solar PV with a range of EUR 45-57 cents/kWh
EEG 2009-2012: reduced to EUR 18-46 cents/kWh
EEG 2014-17: reduced to EUR 6-13 cents/kWh
EEG 2023: reduced to EUR 6-8 cents/kWh
Recent auctions: prices for free-standing solar PV now average EUR 5 cents/kWh
The EEG’s 20-year PPAs for renewable energy producers mean that agreements signed between 2005 and 2010 at higher tariffs will remain in effect until 2025 to 2030.
While renewables like solar and wind were once expensive, they now help reduce both household power bills and electricity wholesale prices. The legacy costs associated with early renewable energy promotion are no longer a challenge for countries that began their transition later. Moreover, the costs of scaling renewables like solar and wind were borne only once. With leading countries such as China driving vast renewable energy deployment and manufacturing of related components at an unprecedented scale, costs have continued to decline. Renewables and storage are now cost-competitive with other generation sources. Since renewable energy technologies are driven more by Moore’s Law-like efficiencies rather than the scarcity-based factors that drive fossil fuel prices, these cost reductions are both stable and lasting, offering enduring benefits for all countries – now and into the future.
Last revision on .