Sara Silva de Oliveira 15/06/2014 GCM Seminar ...

Sara Silva de Oliveira

15/06/2014

Bridging the investment gap in green energy: opportunities and barriers. The global socio-economic dynamics has faced, in the last years, pressures from environmental discussions to internalize negative externalities of energy production with investments on green energy alternatives by countries, institutions and organizations (Wüstenhagen & Menichetti, 2012). However, to reach proposed targets, global financial actors need to increase current investment levels in renewable energy, energy efficiency and supportive infrastructure in order to diminish the funding gap, and overcome identified backlog. In order to overcome financial barriers and bridge the funding gap in green energy, it is important to identify and tackle the different sources of obstacles blocking investors, developers, supportive corporations and policy-makers. In the financial perspective1, one of the biggest challenge is to attract financial resource chains from short-term liquid assets, speculative and trading portfolios2 towards long-term infrastructure assets, which includes green energy (2° Investing Initiative, 2012; Jacobsson & Jacobsson, 2012). The Financial system also witnesses investors mainly allocating monetary resources in fossil fuel options and chain values instead of clean technology. In addition, climate policies and bottom-up regulations, as carbon prices, are still not well introduced, and assume that investors will relocate their financial resources to lower climate risk investments, which may not even consider the +20C scenario. However, most investments are too short-term compared to major climate risk impacts expected in the future (2° Investing Initiative, 2012; Kaminker & Stewart, 2013; Pretorius, et al., 2013). In the technological perspective, investors believe clean technologies are still immature with little or no track history, requiring high level of research, investment and social-economic shift in order to absorb necessary investments and reach targets. In addition, clean technologies, as solar and wind, depend on the availability of external resources to function, increasing the uncertainty of energy supply. Consequently, investors create more barriers to invest their resources (Cook & Hall, 2012). The institutional perspective also contributes to the investment backlog. Some of the cited barriers are the common lack of political commitment and regulatory instability with longterm energy policy and green energy investments (Kaminker & Stewart, 2013). Different actors as financial and governmental intuitions as well organization and connected stakeholders are studying and applying opportunities towards the facilitation of investments in green energy. One of the greatest financial issues is to include climate change risks in the financial dynamics. Stronger government policies are needed to enforce institutional and economic stability for investor, developers and project partners (OECD, 2011).

Pension funds, investment funds, and insurance investors are included as institutional investors in the global finance system OECD (Kaminker & Stewart, 2013). 2 Attracting even Non-Financial Corporations to these types of investments (Jacobsson & Jacobsson, 2012). 1

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GCM Seminar Germanwatch "Applied Climate Policy"


15/06/2014

In addition, finance actors could intensify3 the adoption and improvement of the already used Environmental, Social and Corporate Governance (ESG) performance ratings to attract more companies to include the methodology in their business development (Pretorius, et al., 2013). Consequently, the rating would accelerate public awareness and energy sector competition for green energy strategies. Regulators could also include mandatory impact assessments in the portfolio investments of financial actors (2° Investing Initiative, 2012). Financial stakeholders can also work in developing and including efficient investment traceability requirements, reporting company activities in more detail and disclosure of key indicator documents for companies in order to compare and regulate high-carbon and low-carbon intensive companies and projects. Even though climate policies and institutional regulations are essential for accelerating low-carbon energy, financial incentives are also important to green energy options. Connecting ‘bottom-up’ incentives as carbon prices to ‘top-down’ options as “taxation on savings, capital requirements, transparency rules and accounting standards” (2° Investing Initiative, 2012, p. 6), will diminish the financial gap. Another opportunity for investments in green energy is the government financial support, which can generate comparison of attractiveness among countries. Some of the available options are loans, loans guarantees, subsides, tax credits and grants (Cook & Hall, 2012). For this reason, a significant number of corporations trust on government supports to develop their projects (Taylor Wessing, 2010). Governments can also strength the utilization of Public Private Partnership to secure investors and developers with more investment options (Kaminker & Stewart, 2013). The most important regions in clean energy investments, especially renewable energy are Europe, China and the United States (Figure 2). China has grown significantly the investment share of Renewable energy globally due to the massive installation of solar panels. The United States government is still important for renewable energy investments, even though policy uncertainty has grown over the years. In addition, a major shift in the global market is the attraction of renewable energy channels for developing countries, instead of developed countries due to institutional environment improvement and availability of investors to apply their financial resources. Consequently, countries as Morocco, South Africa, Mexico, Kenya and Chile have witnessed intensive increase of investment (UNEP, 2013). However, clean energy may still face future challenges, which have to be analyzed and addressed.

Theses 

The financial investment competition between two greatest sources of energy supply, the carbon and non-carbon intensive, has not been defined yet and will not reach a result in the next years. New carbon intensive sources of energy as shale gas, and tar sands are currently being explored and gaining competitiveness.

However, the rating is used in the minority percentage of assets as equities and corporate bonds, but not for derivatives and bank bonds, which represent a higher level of importance in the financial system (2° Investing Initiative, 2012). 3

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The financial system seems to be developed to address large-scale finance and centralized energy system, not focusing on decentralized energy consumers in housing and small-medium business. Consequently, high risks with land enforcement and socio-environmental conflicts be noticed, frightening investors.

Figure 1 – Energy Shares in 2011 Source: Worldbioenergy (Worldbioenergy, 2014), 2014

Figure 2 – Renewable Energy Stimulus by Country in 2012, US$ Billions Source: UNEP 2013 3



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References 2° Investing Initiative, 2012. Connecting the dots between climate goals, portfolio allocation and financial regulation, s.l.: 2ii. Cook, D. & Hall, R., 2012. Financing Renewable energy Projects in Difficult Economic Times. Energy Engineering, 109(3), pp. 41-52. Jacobsson, R. & Jacobsson, S., 2012. The emerging funding gap for the European energy sector - will the financial sector deliver?. Environmental Innovations and Societal Transitions, Volume 5, pp. 49-59. Kaminker, C. & Stewart, F., 2013. The Role of Institutional Investors in Financing Clean Energy, s.l.: OECD Publising. OECD, 2011. Harnessing freedom of investment for green growth, s.l.: OECD. Pretorius, L., Howarth, C. & Rouse, L., 2013. The Green Light Report, s.l.: Share Action . Taylor Wessing, 2010. Bridging the Funding Gap: The Financing challenge for financing European cleantech and renewable energy, s.l.: Taylor Wessing. UNEP, 2013. Global Trends in Renewable Energies 2013, s.l.: Frankfurt school of Finance & Management. Worldbioenergy, 2014. The role of bioenergy in the global energy mix, s.l.: s.n. Wüstenhagen, R. & Menichetti, E., 2012. Strategic choices for renewable energy investment: Conceptual framework. Energy Policy, Volume 40, pp. 1-10.

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