Energy 2030: Financing a Greener Future

Financing Green Energy in a Low Fossil Fuel Price World and Managing Stranded Asset Risk

In our August 2015 Citi GPS report Energy Darwinism II, we took an objective look at the economics of the global warming debate, to assess the incremental costs and impacts of mitigating the effects of emissions, to see if there is a ‘solution’ that offers global opportunities without penalizing global growth, whether we can afford to do it (or indeed whether we can afford not to), and how we could make it happen.

After looking at the macroeconomic effect, we decided to switch gears and investigate the microeconomics of a changing energy environment. In this new report, we take a look at the competitive dynamics between fossil fuels and renewables and question whether renewables will remain competitive in a lower-for-longer fossil fuel environment, and subsequently, can renewables still be competitive in a zero subsidy environment. Financial innovation will be key to making this a reality.

Technological breakthroughs in oil and gas production (shale technology) as well as renewable technology have led to precipitous cost declines in both energy mediums. With incremental efficiency gains and cost declines tailing off as renewables technologies mature and given financial costs are a large part of the overall costs for renewable power plants, the authors believe financial innovation could provide the next leg of cost declines for renewables to maintain their competitive position with fossil fuels. Given that cost of capital differs greatly between regions, financing costs of capital intensive renewables projects can indeed constitute the close to half of overall costs.

To investigate how innovations in renewable energy finance and policy support for green finance could alter competitive dynamics of renewables vs. fossil fuels, the report considers total costs of new power plants forecasted to 2030 under a ‘high’ and ‘low’ financing scenario and finds that financing costs matter.

Equally important as renewables to global climate change mitigation are the dynamics of inter-fuel competition and namely the battle between coal and gas. While new plant economics seem to favor the rise of natural gas, regional variation in costs and power demand growth could dampen its ascent, to the benefit of coal. There is therefore a need for governments to assess appropriate policies to assure not only support for renewables but also for natural gas. In a changing energy environment, the issue of stranded assets is relevant as there is fear that policies aimed at climate change could lead to large amounts of stranded assets and potentially creating the inadvertent effect of companies holding back on needed investments to fuel the planet.

Most importantly, the report investigates the future of new energy financing by exploring the core alternative energy project finance strategies that are critically important in many regions. It also drills down on the key components of broader financing strategies that address the role of currency risk in emerging markets, hedging strategies for project finance, public sector de-risking measure, participation of development finance institutions and the securitization of distributed energy production.