Financing the clean energy transformation

Bader Al Lamki, Executive Director, Clean Energy, Masdar

The renewable energy sector has passed the point at which its future growth no longer remains dependent on public subsidy and ideological factors. The evidence for this is clear; renewables have achieved the critical mass needed to complement conventional energy sources in the energy mix. 

Global investment is at record levels, reaching nearly US$300 billion in 2015, a five-fold increase compared with 2004, according to the International Renewable Energy Agency. And while the International Energy Agency predicts consumption of all modern fuels to rise as global energy demand jumps 30% by 2040, renewables are expected to experience the fastest consumption growth by far. 

Technological innovation, operational experience and economies of scale are making solar and wind power increasingly cost-competitive, and more and more compelling as investment opportunities. But now is not the time for complacency.

At least US$100 billion of extra investment is needed each year to double the share of renewables in the global energy mix by 2030. That’s assuming countries honour their spending pledges under the Paris Agreement, and that the current rate of industry investment is maintained. 

And with the developing world accounting for the majority of the anticipated global energy demand growth, much of the missing capital will be needed in regions like the Middle East & North Africa. 

We must therefore take full advantage of the record investment in renewables, not to mention the recent record-low prices for solar-generated electricity, to chart a course towards financing the future growth of the sector in the most efficient and effective way possible. 

Strategies to achieve this will be keenly debated at Abu Dhabi Sustainability Week in January; the event will be one of the first global industry platforms to be held after the international climate change conference, COP22, in Marrakech. 

In truth, the principles of investments are relatively simple. Investors normally start by asking a number of basic questions: Is the technology proven and therefore bankable; in other words, will a bank provide a loan to develop the project? What are the operational risks? What regulatory safeguards are in place, and will they stay there throughout the life of the project? 

In the UAE and other parts of the Middle East, public-private partnerships – where both the independent developer and the government entity are shareholders in the project – have paved the way for large-scale clean energy plants. 

The Mohammed Bin Rashid Al Maktoum Solar Park in Dubai is a case in point. Having a reliable electricity customer in place – in this case, state-backed off-taker and co-investor Dubai Electricity & Water Authority (DEWA) – allowed the project’s bidders to propose extremely competitive tariffs. A transparent tendering process also gave investors greater confidence to accept risk.  

Investment conditions in other countries are not necessarily as stable, due to a range of factors including regulatory changes, currency fluctuations, lack of transparency, limitations to the scope of the off-take agreements, or the added complexity of the asset under development, such as the need to fund publicly owned infrastructure besides the power plant itself.

To finance renewable energy in such environments, investors must either demand higher returns or employ ‘de-risking’ strategies to make the proposition more attractive. These may include hedging structures, mezzanine financing, financial derivatives, or strategies around tax efficiency. 

The track record of companies including Masdar in renewable energy investment over the last ten years has demonstrated the importance of scale and operational experience. 
As markets mature, the players in those markets also evolve. Here in the UAE, the National Bank of Abu Dhabi recently committed US$10 billion to renewable energy investments over the next ten years, while DEWA is planning its own US$27 billion renewables fund. 

Shams 1 in Abu Dhabi was the first renewable energy development in the Middle East to secure project financing from private banks. But banks aren’t the only source of finance. The Organisation for Economic Cooperation and Development (OECD) estimates that as much as US$2.8 trillion per annum could be available from pension funds and insurance companies for renewable energy investment, for example. 

More widespread adoption of corporate social responsibility standards is also promoting greater sustainability awareness in the investment community, which arguably has knock-on benefits for the renewable energy sector. 

An estimated US$4.5 trillion has been invested across emerging markets over the last decade in development projects that comply with the International Finance Corporation’s Performance Standards, an initiative aimed at integrating sustainability into business and banking practice. Global stock exchanges increasingly rely on these standards to construct their sustainability indices – a trend that could influence how institutional investors allocate about US$120 trillion in assets, encouraging the wider integration of clean technologies in the private sector. 
Ultimately, there is no silver bullet to the challenge of securing more investment for renewable energy. It hinges on fundamental principles of due diligence, and the ability of developers, investors and various other stakeholders to both define and balance risk and reward.   

It also demands leadership and collaboration.  

One hundred and ninety four countries party to the UN Framework Convention on Climate Change came together to create the Green Climate Fund (GCF) in 2010 to promote low-emission and climate-resistant projects in developing countries. 

At COP22, the GCF announced that it had received board approval earlier this year to take its first loss, allowing it to work in higher-risk environments, directing funds to least-developed countries vulnerable to the effects of climate change, and to attract more private finance. The Fund’s current private sector portfolio is expected to unlock nearly US$10 billion in on-ground investment. 
Here in the Arab world, the dramatic shift in attitudes towards the opportunities of renewable energy wouldn’t have been possible without the bold ambition of the UAE to diversify its economy, and the pace-setting innovation and willingness to invest of companies like Masdar. 

Abu Dhabi Sustainability Week in January will be the first opportunity after COP22 in Marrakech to put all the available funding tools on the table, to examine how they can be more effectively combined to raise the additional capital needed to deliver on our climate change mitigation targets, and to ensure more clean energy investment reaches the places where it is most needed.