How can finance support the energy transition?

Finance is driving the energy transition – but it needs to flow to the organisations with the solutions.

Finance is driving the energy transition – but it needs to flow to the organisations with the solutions.

We are witnessing a transformation in the world of finance. In 2020, the EV sector raised $28 billion in equity – ten times more than in previous years. Five years ago, just one battery Gigafactory was under construction worldwide; now, there are one hundred and fifty.[i] And this momentum looks set to continue, with forty-five per cent of banks taking action to align their lending portfolios with net-zero objectives.[ii]

As President for COP26 Alok Sharma MP recently stated, finance is ‘the critical piece of the climate action toolkit on which everything else rests’.[iii] Much remains to be done to ensure that investors grasp opportunities to build more sustainable societies. However, there are some signs that climate finance is nearing a tipping point. Growing in confidence because of their strong financial backing, green technology companies are deploying at escalating scale. This results in higher projected growth – which, in turn, attracts ever more investment. This positive feedback loop draws in increased amounts and types of capital, driving rapid technological improvements and absorbing risk. This lowers costs, and results in sustained low-carbon growth. As the clean energy juggernaut gains in power, investors are presented with more and more incentives to divest from polluting fossil fuels and to back the energy transition.

For years, investors were wary of wind and solar generation, which were seen as flawed technologies because of their intermittency: they could only generate when it was windy or sunny, and so they couldn’t support entire energy systems. But this story has changed. Advances in the battery sector, as well as in other emerging forms of storage, mean we can now store renewable energy for use at times of low wind and sun. Large, grid-scale batteries can store over 100MW of renewable electricity – enough to power a city for two days. They also provide further key services to renewable energy systems, preventing electricity waste, improving system stability by managing frequency and voltage, and resolving grid constraints. Storage solutions boost investors’ confidence in clean energy, unlocking climate finance and supercharging the transition.

A secure renewable energy system is the foundation of a decarbonised transport system. But even as the proportion of renewables on the energy system increases, organisations who want to electrify their vehicle fleets – from logistics companies, to bus operators, to local authorities – continue to face financial and technical barriers. Procuring electric vehicles and installing charging infrastructure in depots is expensive, and many organisations lack the funding to pay for this – not to mention the technical experience to operate the equipment. If local energy networks lack the capacity to charge electric fleets, the need for grid upgrades further drives up costs. So how can organisations with access to green finance reduce the risks of electrification for fleet operators? We need new business models, financial products, and regulatory mechanisms that allow green finance to flow down to small organisations with big decarbonisation ambitions. This would empower them and their specialist suppliers to implement solutions to the climate crisis.

COP26 offers an opportunity for policymakers and financiers to send a powerful signal about their commitment to climate action. For all the recent progress in green investment, rich countries are still failing to meet their COP21 pledge to provide developing nations with $100 billion a year in climate finance.[iv] More needs to be done to ensure that climate risks are integrated into all decisions taken by governments and banks, so that we avoid funnelling money into carbon-intensive projects. A wave of innovative organisations are developing the technological, financial and business solutions that we need to tackle the climate crisis. Now those in power need to implement policies that provide these organisations with sufficient support.

 

+ Read more market insights

[i] Carbon Tracker, ‘Spiralling disruption: The feedback loops of the energy transition’, August 2021, <https://carbontracker.org/reports/spiralling-disruption/>.

[ii] ‘The Time to Green Finance: CDP Financial Services Disclosure Report 2020’, CDP, 2020 <https://www.cdp.net/en/research/global-reports/financial-services-disclosure-report-2020>.

[iii] Alok Sharma, ‘The Golden Opportunity’, International Monetary Fund, Autumn 2021 <https://www.imf.org/external/pubs/ft/fandd/2021/09/alok-sharma-COP26-green-inclusive-resilient-recovery.htm>.

[iv] Fiona Harvey, ‘Rich countries not providing poor with pledged climate finance, analysis says’, The Guardian, 20 September 2021 <https://www.theguardian.com/environment/2021/sep/20/rich-countries-not-providing-poor-with-pledged-climate-finance-analysis-says>.