Analysis and News

Financing the Energy Transition

BY ARMCORE VPI's Analyst: Govindra Raghubansi

Energy transitions materialise over decades. The desire to hasten the next energy transition is one of necessity and has fuelled the development of a decarbonised energy economy in recent years. Significant investments in low-carbon technology and infrastructure will be required to complete the energy transition. Attracting investors to fund low-carbon energy projects is a critical problem that will need the active development of policies that eliminate obstacles and minimise risks while providing competitive returns.

Global investment in low-carbon energy transitions amounted to 501.3 billion USD in 2020, up from 458.6 billion in 2019 and just 235.4 billion in 2010. This number comprises investments in renewable energy, energy storage, electric vehicle charging infrastructure, hydrogen production, and carbon capture and storage projects, as well as end-user low-carbon energy devices including solar systems, heat pumps and zero-emission vehicles. (Bloomerg,2021).

This figure is only a minuscule quantity of what can be harnessed. The World Economic Forum highlights a 23 Trillion USD market now exists as countries try to align with the Paris Agreement for the year 2030. This will open up significant opportunities in two markets; renewables and energy efficiency.  Because of a "commercialisation gap" that exists initiatives that are too capital-intensive and hazardous for venture capital, private equity corporate loan financing, investments in new technology ventures are limited. To close this gap, governments globally will need to play an instrumental role in using funds, policies and laws in a catalytic manner in stimulating green financing and opportunities.

Despite the essential role of the public sector in championing net-zero, the role of the private sector must not be overlooked. “Financing is the lifeblood of industries”, JP Morgan has committed 200 Billion USD in coming years through facilitating, underwriting and advising clients to invest in green bonds both in the US and globally, said the company’s  Head of Capital Strategies Erin Robert in an interview in 2018. Similar initiatives are taken by other US banks which represents a shift towards sustainability.

The European Union categorises green financing into three segments:

Green bonds: Any type of bond instrument where the proceeds will be exclusively applied to finance or refinance new or existing eligible green projects”.

Green lending: A type of financing that allows borrowers to fund initiatives that have a positive influence on the environment.

Green equity investment: The majority of green equity investments are conducted through index investing or equity funds. Many indices have been established in recent years to identify and measure the performance of green sectors, businesses, and investments.

A transition of the energy mix requires innovations that can compete with conventional energy over the long term. Green finance is an indispensable tool in making this possible.

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