Circular Economy and Me – Issue 16
How Quickly Can Circular Economy Projects Scale? Lessons from Renewable Energy by Qianqian Ma.
The circular economy (CE) is rapidly gaining attention, with businesses increasingly adopting CE principles and rolling out related innovations. This momentum is driven by government incentives, such as CE’s inclusion in the EU Green Taxonomy, and by economic opportunities. Policies, patents, and funds are aligning with CE, suggesting a promising future. However, a critical challenge remains: scaling up CE-related technologies. These technologies are still in their infancy, and products generated through circular methods often come at a higher cost compared to those from a linear economy. This raises an urgent question: how quickly can CE projects achieve the necessary scale?
To answer this question, a good start is learning from previous experience. During the past few decades, we have seen how renewable energy (RE) projects can be scaled-up and expanded. Although a total energy transition is still a big challenge, significant progress has been seen in the maturity of renewable energy technologies. In general, costs of RE from different technologies have been reduced to an acceptable level. RE is now well-understood in terms of cost savings and environmental benefits. It has become an accepted and integrated part of the production process, taking priority over traditional high-pollution fossil fuels. Meanwhile, RE and CE projects are driven by a common vision of creating a more sustainable world through efficient resource use, technological innovation, and systemic change. Therefore, a comparative analysis between CE and RE projects is valuable and can deliver some lessons for quick deployment of CE-related technologies.
It is important to emphasize that CE projects encompass a wide variety of types, each with significant differences. This article focuses primarily on CE projects within the manufacturing industry, which are particularly characterized by being capital-intensive, utilizing recycled materials, and heavily reliant on technological innovations.
Cost reduction of RE projects
In 2010, the global weighted average levelized cost of electricity (LCOE) for solar photovoltaic (PV) was 710% higher than the lowest cost of fossil fuel-fired energy. RE was a small niche. By 2022, the cost of solar PV had drastically reduced, becoming 29% cheaper than the cheapest fossil fuel-fired energy[i]. Other statistics show that solar PV costs have been reduced 81% and both onshore and offshore wind energy costs have been cut around 45% from 2010 to 2019[ii]. This exemplar showcases a significant advancement in making renewables more cost-effective than fossil fuels.
Factors that contributed to the cost effectiveness are complex. This article highlights three crucial factors: strong government incentives [iii], improving technology that has added incrementally to efficiency, and a strong downward trend in finance costs.
(1) Strong government incentives
In the early 2010s, renewable power developers depended mainly on government incentives to ensure predictable cash flows and secure financing at the early phase of RE projects. Main government incentives included: feed-in-tariffs that locked in the price of electricity for long-term projects; green certificates that provided additional revenue on top of revenue from selling electricity at the standard market rates; and tax incentives that lowered the cost of building new facilities to expand capacity. Lessons from RE projects shows that as wind and solar power costs have dropped significantly, the reliance on government incentives has diminished. A growth of private capital has been seen in financing RE projects in the late 2010s. In the period 2013-2020, around 75% of total $2432 billion investment was provided by the private capital[iv].
(2) Improving technology deployment
Another favourable factor is cumulated experience in deploying RE technologies. With increasing number of RE projects being conducted, manufacturers and developer accumulated operation experience and more performance data. Availability of performance data enabled them to prove track record of technologies to investors. More accurate assessment of project risks increased confidence of investors. Fierce competition among manufacturers and developers could be observed as well along the maturity of RE technologies, which helped to cut overheads.
(3) A strong downward trend in finance costs
Similar to CE projects, RE projects face high upfront capital expenditure. Caused by expansive monetary policies, interest rates were at record lows across major economies during 2010-2019. The cost of capital declined in this period generally. Similarly, the significant upfront capital expenditure of RE projects has been driven down in the cost of both equity and debt. For instance, a study measured that lower financing costs led by the general low interest rate has contributed to 41% of solar PV levelized costs of electricity (LCOE) reduction and 40% of onshore wind LCOE reductions during the period 2000-2017 in Germany[v].
Lower interest rates resulted in low return expectation of investors. Meanwhile, investors raised experience from RE investment, such as better risk assessment and due diligence processes, standardized investment structures, frame contracts etc. These together stimulated fierce competition among investors and banks to participate in RE deals. Cost of capital for some renewables declined due to a more related financing environment and a more mature RE finance industry.
When policymakers, investors and incumbent energy companies observed the ongoing cost reductions in solver PV and wind energy, they widely recognized the growing importance of low-cost renewables and were willing to foster the environment to further development, which reversely affected the cost reductions. A positive feedback loop was established, collectively reducing the cost of certain renewable energy sources to a competitive level with fossil fuels.
CE projects vs RE initiatives
Our research in the CircularChem Centre aims to fill a neglected niche area: what makes CE distinct from other green projects. Through our research, we identified three aspects in which CE projects differ from RE projects. These three aspects have delayed the scaling up of CE projects.
(1) Knowledge gap in CE projects
Unlike RE projects, where technology and processes are well-understood at present, CE projects often suffer from a knowledge gap. Many businesses and stakeholders lack comprehensive expertise in implementing circular practices effectively. A similar gap is observed in the finance industry. Investors are generally unfamiliar with the CE concept and are therefore hesitant to take on the risks associated with certain projects, particularly those involving novel technological innovations. For instance, chemical recycling of plastic is excluded from some investors’ CE investment portfolios[vi]. Consequently, the absence of leading investors in the CE context jeopardizes the deployment of relevant technologies.
(2) High upfront investment, but RE has lower OPEX
Both RE and CE projects tend to have high upfront capital expenditure associated with initial setup, whereas RE projects have relatively low operational expenses (OPEX) linked to occasional maintenance. CE projects also require high initial investments to build facilities but continue to face high OPEX. The continuous sorting, processing, and repurposing of waste materials in CE projects can lead to ongoing OPEX. It also requires a reliable supply chain to ensure the supply of stable and quality recycled feedstocks. This type of circular supply chain depends on a deep change in the industry, a new collaboration among participant from different sectors, and huge amount of investment.
(3) Scaling up is harder for CE projects compared to RE projects.
Scaling up CE projects is generally more challenging than RE projects. The variability and complexity of materials in CE processes, along with the need for widespread behavioural change among consumers and businesses and the complexity of products and services offered, make it harder to achieve the same scale as RE projects. For instance, while a solar farm can be expanded by adding more panels, a CE project might require developing new processes for different types of waste materials.
The three aspects cannot exclusively explain why CE projects are harder to be scaled up with the comparison to RE projects. There are other macroeconomic, industrial, systemic, behavioural factors that influence the transition to a CE. More complex economic environment with multiple economic, social and geopolitical challenges post pandemic. Tighter fiscal circumstances and higher costs of capital are dimming the prospects for both RE and CE currently, which is particularly capital intensive. Besides, a lack of regulatory framework plays a significant role in the infancy of the CE. In conclusion, while CE projects hold immense potential for creating sustainable and efficient resource use systems and create economic opportunities, they face unique challenges that need to be addressed to scale up effectively. To answer the question proposed at the beginning, it seems we are not currently supporting the readiness of CE projects to scale up. There are some valuable insights we can still learn from the deployment of RE projects. The cost reduction of CE projects is possible with effective policy incentives and monetary policy, setting a market framework and addressing the knowledge gap. The distinct nature of CE projects requires tailored approaches and innovations to achieve similar scalability and impact.
[i] Data is from the website of the International Renewable Energy Agency. https://www.irena.org/Publications/2023/Aug/Renewable-Power-Generation-Costs-in-2022
[ii] McCrone, A., Ajadi, T., Boyle, R., Strahan, D., Kimmel, M., Collins, B., Cheung, A., & Becker, L. (2019). Global Trends in Renewable Energy Investment 2019. In Bloomberg New Energy Finance. https://wedocs.unep.org/bitstream/handle/20.500.11822/29752/GTR2019.pdf
[iii] McCrone, A., Moslener, U., D’Estais, F., Grüning, C., & Emmerich, M. (2020). Global Trends In Renewable Energy Investment 2020. www.fs-unep-centre.org
[iv] IRENA, & CPI. (2023). Global landscape of renewable energy finance 2023. In International Renewable Energy Agency, Abu Dhabi. https://www.irena.org/Publications/2023/Feb/Global-landscape-of-renewable-energy-finance-2023
[v] Egli, F., Steffen, B., & Schmidt, T. S. (2018). A dynamic analysis of financing conditions for renewable energy technologies. Nature Energy, 3(12), 1084–1092. https://doi.org/10.1038/s41560-018-0277-y
[vi] https://home.barclays/content/dam/home-barclays/documents/citizenship/our-reporting-and-policy-positions/Barclays-Sustainable-Finance-Framework-V4-1.pdf