Reducing investment risks of green projects necessary for energy transition

Rotterdam, 28 November 2023

The world currently invests less than US$2 trillion each year into the energy transition. This is far short of the financing needed to help put the world on course to meet our collective climate goals. Achieving net zero greenhouse gas emissions by 2050 will require an annual global investment in the energy sector ranging from US$5 trillion to US$7 trillion.

According to the report, successfully guiding investments toward sustainable projects requires prioritising the following:

• De-risking green projects: Mitigating risk in the investment landscape can unlock the low-cost financing that can make the costly and capital-intensive energy transition more affordable. Blended finance mechanisms, for instance, can both reduce project risks and facilitate commercial capital flow to green projects.
  
• Bridging the green-fossil cost gap: Establishing upfront investment support mechanisms for research and development and adding investment support and/or operating premiums to green assets while penalising the use of emissions-heavy assets, are some of the key tools to bridge the cost gap between green and greenhouse gas-intensive assets, both at the project level and larger scale.
  

Private investors reluctant to invest in green

The report, published ahead of the United Nations Climate Change Conference (COP28), found that green projects currently suffer from underinvestment and high required return rates because private investors tend to see green technologies as riskier than alternative investments. The report highlights the need for governments, financial institutions, and investors to jointly develop mechanisms to help mitigate risk from green projects by developing blended, low-cost finance solutions to mobilise private investment and help achieve economic growth and climate neutrality, especially in emerging economies.

"Removing financial barriers is essential to accelerate a just energy transition, especially in emerging economies. Decisive and coordinated policy support and hand-in-hand action across the global finance ecosystem are critical to guiding investments toward green projects and supporting the growth of sustainable economies," says Jennifer Steinmann, Deloitte Global Sustainability and Climate practice leader.

More investment in emerging economies needed

Less than half of green investments are currently made in developing economies mostly due to greater risks and stricter public budget constraints for energy transition projects. However, to reach net-zero, nearly three-quarters of green investments (70 per cent) would need to be made in developing economies by 2030 as these countries look to new, sustainable infrastructures and technologies.

Recommendations

The report identifies four actions governments can take to remove political barriers, mitigate risk and make a just energy transition more affordable.

1. Embrace a clearer, more strategic direction for climate action by actively updating energy transition policies.
2. Create transparent and efficient regulatory frameworks for climate investments to help mitigate legal ambiguities and potential corruptions that can derail critical green initiatives. In addition, governments should also understand how green technologies, and their applicability to high-emitting sectors, are essential for setting appropriate targets and clear regulations.
3. Address market barriers, specifically the absence of sustainable and green markets for investors to gauge projects against. For example, despite green hydrogen being a viable energy carrier, it does not yet have a global or local market, nor technological and delivery specificities and standards. This uncertainty entails risks associated with offtake, revenues, and construction/operation launch delays and can make it difficult for investors to spend the money needed to allow this technology to truly scale.
4.  Understand that transformation barriers that impede green investments lie within infrastructure and human capital. Countries with limited or poor electricity infrastructure that rely on fossil fuels, for instance, are less attractive to investors. The feasibility of successfully introducing more variable energy sources, such as solar or wind energy, plays a role in this. The global need for more skilled workers within the green energy sector should also be recognised.

To learn more about Deloitte's Financing the Green Energy Transition 2023 report, please visit: https://www.deloitte.com/global/en/issues/climate/financing-the-green-energy-transition.html