Finance

The energy transition guides us from a fossil-based to a low-carbon economy that will be significantly more capital-intensive. This requires changing the way we plan and manage energy systems.

Security of energy supply will be replaced by security of material supply. From integrated resource planning across the energy supply chain, focus will shift towards sectoral integration between electricity, heat and transport. From a supply orientation, we will move towards supply and demand as equivalent pillars of a sustainable energy system. Rather than worrying about environmental emissions, circularity in a capital- and hence material-intensive system requires much more consideration.

From a financial perspective, a capital-intensive sustainable energy system relies on the availability of abundant capital at reasonable rates of return. The return demanded by investors is closely linked to the perceived risk into a project. Such risk can be related to
new technologies, policy or markets.

Technology risk occurs when a new technology is being introduced in the energy system. Its performance is still unknown and hence can deviate significantly from expectations. A mitigation strategy could be for a government – through its financial institutions or through a programmatic effort – to co-invest in demonstration to reduce this risk for market actors.

Policy risk happens because investments into energy technologies typically span decades, while the typical mandate for a government is limited to 4-5 years. Therefore,
it is imperative to project a long-term future direction for the energy transition that is as clear as possible, despite relative inexperience with emerging technologies and new policy tools.

Finally, market risks arise because the future prices of new energy sources, such as hydrogen, green gas, CO2 allowances or even renewable electricity are uncertain. Here, the best governments can do is not to distort markets, and to have a support and taxation mechanism in place that is in-line with long-term goals.

Besides the risk framework to facilitate investment by business, industry, municipalities and governments, a very promising trend is citizen participation into community power. In addition to the environmental and economic benefits of the energy transition, this addresses its social dimension by promoting public acceptance while reinforcing local communities. Last but not least, it taps into new streams of capital investment, enabling
scaling-up to the trillions of euros that will be required according to IEA or IRENA.

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Capital expenditure on existing and new projects between 2018-2025 amounts to $3.3 trillion in the Below 2 Degrees Scenario.