Energy transition: how to finance the race to net-zero | White & Case LLP


SECURITIES

  • Green bond issuance soared 13% in 2020 to US $ 305.3 billion
  • Global energy investments will need to be tripled to reach $ 5,000 billion by 2030 if net zero carbon emissions are to be achieved by 2050
  • At the start of 2021, renewables accounted for more than 20% of total power generation capacity in the United States, surpassing the use of coal.

The global momentum behind the fight against climate change has never been stronger, as governments and energy companies around the world pledge to reduce carbon emissions to zero by 2050.

The United States, under the administration of President Joe Biden, has played a leading role in the race for net-zero by putting in place an ambitious program to facilitate the country’s energy transition from hydrocarbons to renewable energies.

On the first day of his term in office, President Biden signed in the United States the Paris Agreement, the international treaty on climate change signed in 2016. The Biden administration then set targets to reduce emissions from 50% to 52%. net greenhouse gas emissions from 2005. levels by 2030 and to have a carbon-free electricity sector by 2035, on track to achieve net zero carbon emissions by 2050.

20%
Renewable energy sources now account for over 20% of total energy production capacity in the United States

Find funding

The technology needed to facilitate the energy transition is developing at an accelerated pace, with considerable progress in renewable energies, battery storage, electric vehicles, carbon capture, green hydrogen and energy efficiency technologies. But these technologies require a significant financial investment to evolve at the pace required to meet the 2050 net zero calendar and modernize existing hydrocarbon infrastructure to meet demand from renewable sources.

The State’s balance sheet will be an essential source of financing, but given the importance of the investments required, private investors will have to intervene to cover the financing needs.

According to the International Energy Agency (IEA), which has presented a roadmap for achieving net zero, annual global energy investments will have to reach US $ 5,000 billion by 2030, more than three times more than the $ 1.52 trillion in global energy investment. registered by the IEA in 2020.

For private investors and energy companies, many of whom have significant capital stranded in hydrocarbon infrastructure, sustaining market returns while simultaneously reorienting themselves towards green energy provision is a major challenge.

Private markets, driven by investor demand, have already started to pivot in this direction. The issuance of green bonds raised specifically for climate and sustainability-related projects rose 13% to $ 305.3 billion in 2020, according to Bloomberg. In April 2021, the Standard & Poor’s rating agency expects issues of debt instruments linked to sustainability (credit facilities not linked to specific projects, but which encourage compliance with key performance indicators linked to sustainability) will increase by more than a third in 2021, reaching more than $ 200 billion in total.

However, these already booming markets will need to grow at much faster rates to meet net zero fund requirements. What makes this particularly difficult is that a large part of the investment will have to be devoted to the still emerging renewable and carbon-free energy technologies. According to the IEA, by 2050, nearly half of reductions in hydrocarbon use will have to come from technologies that are still in the early stages of prototype development.

Risk and reward

Investors see significant potential for high returns from investments in renewables and green energy, and commitments to net zero goals offer opportunities to take advantage of these rapidly growing industries.

The expansion of now established renewable energy sources such as solar and wind power, both of which are now as competitive and commercially viable as hydrocarbon power, serves as a model for these growth opportunities.

According to a Forbes analysis from BP’s latest Global Energy Statistical Review, the renewables sector has quadrupled in size over the past decade and is the only energy sector to have posted double-digit growth during that decade. period.

Investing in solar or wind is now no more risky than investing in any other source of energy, giving investors the comfort and confidence to deploy.

Investing huge sums of money up front in newer technologies and infrastructure, such as hydrogen, however, represents a very different risk-return dynamic. There is no established customer base for these energy sources, and they have long delays before an investment can begin to pay off.

This is where governments have a role to play by investing in initial R&D to develop proofs of concept for new technologies, sharing the risks of investing in green energy infrastructure and supporting the formation of new ones. renewable energy markets through clear policy and regulation.

If their private capital is to be released into the market, developers and investors need a clear long-term political vision on how the energy transition will progress, as well as assurance that governments will not change direction.

The US government and regulators have put in place various measures to support the development of renewable energy and mitigate the risks posed by these projects. These include a federal renewable energy portfolio standard, which requires that a percentage of electricity sales in states come from renewable energy sources; feed-in tariffs, where the government covers any price differential between new renewable energy sources and established energy supplies; and R&D grants on renewable energies.

Renewable energy use in the United States topped coal for the first time in 2019, according to the US Energy Information Administration. In early 2021, the Federal Energy Regulatory Commission reported that renewables now represent more than 20% of total power generation capacity in the United States. This demonstrates that governments can play a role in creating new commercially sustainable industries and in private sector investment.

Government measures will be essential to encourage private sector investment in new technologies and renewable energy projects, and to achieve the ambitious goals for a net zero future.

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