Access to cheaper capital expected to boost G20's energy transition financing

The private and public sectors have a critical role to play, Irena says

A solar plant in the northern Indian state of Rajasthan. India aims to reach net zero emissions by 2070. AFP

Access to cheaper capital will play a significant role in boosting financing for energy transition projects in G20 countries while collaboration between public and private sectors will help to catalyse institutional capital flows, the International Renewable Energy Agency has said.

Capital needs to be “urgently mobilised” from the domestic and international resources of the private sector, Irena said in a report prepared together with India’s Ministry of New and Renewable Energy.

“In the long run, renewables and energy efficiency will play the dominant role in accelerating the global energy transition process, which is pivotal to achieving the 1.5°C climate target under the Paris Agreement,” Irena said.

“However, this will require an annual investment, on average to 2050, of at least $4.4 trillion, a significant portion of which will need to come from the private sector. Both commercial domestic and international sources of private sector capital need to therefore be urgently mobilised at scale.”

Investment in renewable energy technology hit a record of $1.3 trillion last year.

However, that figure must rise to about $5 trillion annually to meet the key Paris accord target of limiting temperature increases to 1.5°C above pre-industrial levels, the Abu Dhabi-based agency said in its World Energy Transitions Outlook 2023 preview in March.

Renewable capacity must grow to more than 10,000 gigawatts in 2030, from about 3,000 gigawatts currently, an average of 1,000 gigawatts annually, it said.

“Domestic financial markets are critical sources of capital for financing the energy transition since they provide diversified funding sources, access to local equity capital and corporate bond markets, and much-needed local-currency financing to avoid currency risk and help mitigate macroeconomic shocks,” Irena said.

“This is especially true in developing markets, where international institutional investors may be reluctant to invest, when local investors or lenders — local banks, pension funds and insurance companies — are not involved themselves in the project financing.”

The report also emphasised the role of governments in supporting the private sector in financing energy transition projects.

“Governments can set the conditions for private sector actors to build and finance a viable pipeline of transition–oriented projects,” it said.

“For example, in a blended finance structure, the public sector strategically provides small amounts of concessional public capital to mitigate certain risks that private sector capital cannot [yet] absorb, or for which they would demand a very high price [rate of return].”

“This approach sees public and, sometimes, philanthropic actors providing concessional capital [capital at below-market rates or terms] to alter the risk-return profile of an investment so that private capital is attracted at lower cost, and/or better terms.”

Argentina’s RenovAr programme, Brazil’s Economic Development Bank and Indonesia’s accelerated phase out of coal-fired power plants each use one or more concessional blended finance approaches to mobilise private sector capital.

The RenovAr programme, launched in 2016, aims to increase the share of renewable energy-based production to 16 per cent in 2025, from 2 per cent of Argentina's energy mix in 2015.

The programme aims to attract $17 billion to $20 billion in investment as the South American country focuses on reducing emissions.

The report also cited India’s successful renewable energy programme as Asia’s third-largest economy seeks to achieve net zero emissions by 2070.

The Indian Renewable Energy Development Agency, a finance corporation set up by the government in 1987, has been supporting the country's renewable energy sector.

The corporation continues to pioneer new and emerging technology — such as battery energy storage systems, green hydrogen electrolysers, e-mobility, waste to energy — by introducing financing policies to promote their use, the report said.

“It has also become the preferred agency through which DFIs [development finance institutions] across the world contribute to green project financing in India.”

India is also tapping into sovereign green bonds as part of its energy transition strategy.

Green bond issuance in India has grown significantly to $18.3 billion cumulatively, with 2021 being the banner year with a record issuance of $7 billion to support the energy transition.

The public sector should play an active role in creating a healthy financing environment for private sector investors and project developers, Irena said.

“If that is achieved, the private sector will invest and build the energy transition projects needed.”