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Renewables investment falls short of lofty ambitions

A yawning investment gap in clean energy means it is still just a marginal part of many portfolios

It is not the smoothest of roads, but politicians globally are realising that their electorates are trending towards greater environmental consciousness. And this could encourage more state financing to be channelled into low-carbon investment—providing both competition and potential catalyst for private funds.

The World Bank is running an initiative, Financing Climate Futures, that aims to channel capital into projects. It has been scaling up financial flows into approved ventures throughout 2018. The initiative's partners, which include the OECD, are convinced that financing for low-emission energy to date has been far too hit and miss.

"Many countries are implementing ambitious climate strategies, but the incomplete data we have available indicates that infrastructure investment-and financial flows more broadly-remain both insufficient and poorly aligned with climate goals", the initiative said in a seminar in mid- 2018.

There's a lot of interest in Financing Climate Futures, including from private lenders, long-term investors and development finance institutions. Its core goal is nothing less than to "transform the financial system to mobilise private investment".

The partners are in a hurry. "Private capital is needed at a new scale and speed to finance the infrastructure systems for the low-carbon transition," the OECD points out. "Long-term investment in particular will be required and is essential for the scaling up of low-emission infrastructure."

The whole idea is to address the investment gap in clean energy. In the renewables sector, the OECD points out that total global investment hit $300bn in 2017, roughly a third of what was invested in upstream and downstream "fossil fuel exploitation".

As OECD secretary-general Angel Gurria told a conference in the UN in September, institutional investors will have to do better. "Green infrastructure investment is a mere drop in the bucket of the portfolios of institutional investors," he said. "The green bond market, for example, is approaching half a trillion dollars, but only accounts for less than 1% of the global bond market."

According to OECD figures, the major multilateral development banks pumped $35bn into climate finance in 2017, up 28% on 2016, but that still falls far short. The secretary-general is urging governments to provide concessions, tax breaks and other sweeteners that make it attractive for mainstream lenders. It's known as "green budgeting".

In truth, a lot of capital is already heading in the right direction. As DNV GL chief executive, Remy Eriksen pointed out in September, there's already a financing transition in progress that's seeing a reallocation of funds towards cleaner technologies. He predicts that from 2029 onwards there'll be more capital pouring into grids and renewables than into fossil fuel projects.

Renewables up-tick

As the cost of renewables-produced energy falls faster than predicted, there's plenty of relatively small M&A in the sector. In mid-October, for example, Valero Renewable Fuels agreed the purchase of three ethanol plants from America's Green Plains for $300m.

As consultancy PwC points out, the market is driven by the search for yield everywhere. In a review of power and renewable deals, the firm notes that M&A in the US has been dominated by the acquisition of regulated assets "as corporates move to extend footprints in a market where consolidation has some way to run".

In Europe, however, PwC identifies an impending rise in renewables investment as "a number of companies emerge from a period of restructuring and transformation… and seek to deliver on new strategies."

The European wind sector may prove an exception to the rule. As WindEurope chief executive Giles Dickson notes in the latest Wind Energy Outlook issued in September, governments' delays in agreeing investment regimes for wind power are holding up auctions and the issue of permits. "The outlook for new investment decisions over the next five years is less clear [than previously]," he explains. "Most governments still haven't clarified their plans for new wind farms up to 2030."

 

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