This year’s Earth Day was cause for optimism in our fight against the climate emergency. With climate change now well and truly upon us, Earth Day 2021 saw the most significant renewal of pledges to tackle the crisis by national governments since the Paris Agreement of 2015.
Recently inaugurated US President Joe Biden promised to cut his country’s carbon emissions in half by 2030 and Canada upgraded plans to reduce emissions by 40-45 per cent by the same date (based on 2005 levels) while Japan pledged to cut emissions by 46 per cent, also by 2030 (based on 2013 levels). Meanwhile in Europe, the EU promised a 55 per cent reduction by 2030 and the UK a 78 per cent reduction by 2035 (from 1990 levels).
Such announcements are encouraging but to make real progress on these goals we need to understand the concrete plans that will translate targets into policies, affecting everyday business decisions. For this to become the case, the financial system that powers businesses needs to go green. With appetite in ESG issues and sustainability increasing by the day, the financial services sector has a terrific opportunity to create a whole host of green-accredited financial products that could redefine finance and drive sustainable investment throughout the global economy.
This is why the formation of the Glasgow Financial Alliance for Net Zero, ahead of this year’s COP 26, is yet another positive development from Earth Day. The new alliance, led by former Bank of England Governor Mark Carney, will see global financial institutions with a combined $70 trillion of assets under management sign-up to science-based carbon-reduction accreditations, with targets and reporting requirements. This is crucial as the world cannot succeed in tackling climate change without investors and funders.
With fossil fuel energy systems across the world contributing the most carbon emissions, the transition to decarbonised, clean energy must become an investment priority. The good news is that intense competition, increasing availability of capital and continued technological developments are propelling this market forward.
Private equity investors have long been the driving force behind the rise of renewable power and the involvement of such investors is only gaining speed. Whilst much of the investment market remains focused on bankable, subsidised operational projects, such schemes are in extremely high demand and investors are increasingly diversifying into non-subsidised projects and technologies such as hydroelectricity, energy storage, heat networks and green hydrogen. There is also growing appetite from equity investors to invest much earlier in the project lifecycle, be that at consented or even greenfield stage, in order to secure a pipeline and boost returns.
As energy storage will be key to underpinning a clean energy system, investor interest in this technology is also on the rise. Multi-technology co-location projects where renewable energy generation is paired with battery storage and other energy infrastructure, such as electric vehicle charging infrastructure (EVCI), are becoming attractive propositions. To facilitate the realisation of such projects, it is important that each co-located asset is viable in its own right. Such viability, as well as the cost-efficiencies created by co-location, will boost long-term revenues and prove attractive for investors.
Given the trend towards co-location and the increasing need for storage capacity, developers and investors should make sure their energy schemes allow for further technologies to be added down the line, from a legal and planning perspective but also in terms of permitted import and export capacity to the national grid. Such provisions significantly enhance the flexibility of projects and keep them open to future, additional revenue streams for expanded operations. There are a lot of elements to think about, but if the project is future proofed from the outset and scoped with the requirements of a future investor in mind, then that not only creates more flexibility but the developer will be able to secure a better price once the project goes to market.
Whilst private equity investors are still the pioneers of the energy market, it is worth noting that debt funders are catching-up and looking to diversify lending portfolios to established technologies such as solar PV and wind as well as energy storage, EVCI and multi-technology projects. Indeed, in the coming months we’re likely to see the first subsidy-free solar plus storage debt solutions. In the more risk-averse lending market, propositions that can clearly mitigate risk and meet project finance requirements will stand the best chance, so the integrity of the project rights and authorisations and the quality of the contracts will be decisive.
With the fight against the climate crisis now a well-established political objective, it must also become a fundamental goal for the private sector and the financial services industry in particular. With investors more focused than ever on ESG and sustainability, the conditions are ripe to mobilise green finance. Such a drastic change cannot happen overnight however and developers must work hard to make their schemes legally solid, flexible and demonstrate return on investment on each asset deployed. Investors and funders are looking to get on board, let’s give them the reasons to do so.
Simon Courie, partner at UK law firm TLT, is a leading infrastructure and renewable energy lawyer with more than 20 years in private practice having worked at leading international law firms. Alongside his partner role at TLT, he is general counsel at The EV Network, a developer and investor of high-powered EV charging infrastructure.