Renewable energy is growing fast around the world and will edge out natural gas as the second biggest source of electricity, after coal, by 2016, according to a five-year outlook published Wednesday by the International Energy Agency.

Developing countries are building more wind, solar and hydro-electric power plants to meet rising power demand and combat local pollution problems. And the costs of renewables are falling below the cost of traditional power sources such as coal, natural gas and oil in some markets with high-priced power.

Renewable power, including hydropower, is the fastest-growing power generation sector, and it is expected to increase by 40 per cent in the next five years. By 2018, it will make up a quarter of the world's energy mix, up from 20 per cent in 2011, the report said.

Eighty per cent of the renewable power generated in the world, however, is hydropower, a technology frowned upon by environmental groups and sustainability experts because it requires the construction of dams that can damage river ecosystems.

Non-hydroelectric sources, such as wind, solar, geothermal and energy derived from plants, are also expected to grow quickly, but they contribute a far smaller amount of energy to the global mix. These technologies will supply eight per cent of the world's energy by 2018, up from four per cent in 2011 and two per cent in 2006.

Subsidies declining

Still, renewable power is facing uncertain times as subsidies in developed countries wane. Investment in renewable projects fell in 2012, according to the IEA, an energy security and research organization based in Paris that serves 28 oil-importing countries, including the U.S.

In a report published in April, the IEA said the world's energy is no cleaner than it was 20 years ago because of rising reliance on coal-fired generation in China, India and parts of Europe that are phasing out nuclear power and facing high natural gas prices.

"The rapid growth of renewables continues to beat expectations and is a bright spot in an otherwise bleak assessment of global progress toward a cleaner and more diversified energy mix," the report concludes.

The use of biofuels is expected to grow, though at a slower rate than renewable electricity, in part because companies haven't succeeded in developing technology that can squeeze fuels from plant waste or dedicated biofuel crops such as grasses at commercial scale. The vast majority of biofuel used today is alcohol — called ethanol — made from sugar cane or corn.

Biofuel use is projected to increase 25 per cent by 2018 to 2.4 million barrels per day. By comparison, the world consumes 90 million barrels per day of petroleum.

Biggest growth will be in developing world

Developing countries, led by China, will account for two-thirds of the global increase in renewable generation. Growth in Europe and the U.S. is expected to slow, though U.S. President Barack Obama outlined a sweeping plan Tuesday that would encourage renewed investment in renewable sources.

Renewable sources were used to generate 12 per cent of the electricity consumed in the U.S. last year, according to the Energy Department. Hydroelectric plants supplied seven per cent of the country's power, and other renewables such as wind and solar supplied five per cent.

IEA Executive Director Maria van der Hoeven said in a statement that the biggest impediment to further renewable growth is changing energy policies that increase risk for investors.

"Many renewables no longer require high economic incentives, but they do still need long-term policies that provide a predictable and reliable market and regulatory framework compatible with societal goals," she said.

The IEA estimates that worldwide subsides for fossil fuels are six times higher than incentives for renewables.