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Financing the green energy transition

Discover how finance can fuel innovation and help power a green energy transition while saving the world US$50 trillion on its journey to net zero.

When we talk about the transformation to address climate change, the intent is clear, the targets are set, and the technology is accelerating. The missing piece in the green energy transition is finance.

Better financial solutions to better our world

 

Key decarbonisation solutions - including large-scale renewable development, electrification of end-uses, circular in nature, green hydrogen uses in hard-to-abate sectors and energy efficiency improvements - are generally highly capital intensive and require significant investment. Yet funding levels remain below what’s needed to help meet 2050 net-zero goals.

Finance can fuel and power a just energy transition, but the race to achieve net-zero greenhouse gas emissions by 2050 will likely require an annual global investment in the energy sector ranging from US$5 trillion to more than US$7 trillion - yet less than US$2 trillion is currently being invested on a yearly basis.

Deloitte’s economic analysis goes beyond finance to help provide a holistic overview, employing analysis and modeling to consider the technology landscape, policy environment, and a matrixed vision of financing challenges, identifying and detailing what is needed to allow capital to flow, how finance can fuel innovation and power a just energy transition.

Failure to close the financing gap could be costly - especially for the Global South

 

Financing structures can add extra cost to green investments based on risks from political, market and transformation barriers for a specific geography and project.

  • As capital providers expect more return to compensate for risk, the riskier the project, the higher the cost of capital.
  • Financing costs, stemming from the cost of capital, can account for as much as half of the investments required to fuel the transition.
  • Developing economies that should receive a significant portion of investments (70%), often face greater investment risks and projects in these areas tend to be less bankable, i.e., their risk-return profiles likely do not meet the investors’ criteria to mobilise sufficient capital, driving up the costs.

Focus areas to help mitigate the green financing premium:

 

  • Reducing the risks of green projects through climate policies, guarantee mechanisms, offtake reliability and the development of domestic capital markets.
  • Bridging the cost gap between fossil-based greenhouse gas (GHG)-intensive products and their green counterparts through research and development, upfront investment support schemes, the addition of operating premiums to renewable energy systems and penalisation of GHG-intensive assets.

 

Unlocking financial flows and lower cost of capital should go beyond investors and financiers 

 

An ecosystem is required to help forge the path of a just, cost-efficient and successful transition – local and national governments and regulators can reduce the risks that threaten the bankability of green and sustainable investments, concessional investors can maximise the potential of blended finance to mobilise private capital, and societies and investors can deal with upfront investments today, reaping the benefits later.

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