Financing is the key to unlock the energy transition

The global economy is facing a deep recession with the ongoing impact of COVID-19. People all over the world have seen profound changes in their lives: economic recession, unemployment, climate change. The World Bank stated that COVID-19 has triggered the deepest global recession in decades. The response is stunning and unparalleled: around 20% of the global GDP is being made available in various forms of economic and financial stimulus programs, helping the economies and industries to cope with the crisis.

We; countries, companies, and people, need to design and effectively utilize the worldwide stimulus programs to accelerate the energy transition. We must realize a world where circular economies, decarbonized energy systems, and industries alike, are the norm. This can be daunting, given the scale and cost of the required changes. It can also be challenging, given the difficulty in effective capital allocation, balancing risk and reward, and scaling new technologies. But it certainly will be rewarding in terms of environmental, societal and governance impact, economic stimulus, and profitable private investments at the same time.

Financing is an indispensable element of the energy transition and the main challenge for many projects, especially in new technology fields, and in politically unstable, economically fragile geographies, even more so if they have accumulated disproportional sovereign debt.

Governments of developed countries, and some of the developing countries, are more keenly aware than ever of the urgent need to decarbonize and establish regulatory frameworks and reforms. There are certainly green shoots emerging, with a rising tide of countries signaling serious intent to pursue major renewables programs and adopt significant decarbonization strategies.

More so, institutional investors are increasingly re-evaluating their investment strategies and reallocating funds away from carbon intensive investments to carbon neutral and decarbonizing investments.

September proved to be a landmark moment, not only with the spin-off and listing of Siemens Energy on the Frankfurt stock exchange, as a stand-alone company focused on the energy transition. Germany issued its inaugural sovereign green bond in September, valued at $7.7bn. Egypt also entered the green bond market, with a debut $750 million bond. State-controlled Saudi Electricity Company raised $1.3bn with a green sukuk, the first of its kind in the Kingdom.

These issuances highlight the growing commitment from sovereign nations and their entities to pursue and fund renewable and green projects, they highlight capital market growing appetite to support such projects and highlight the business potential for the corporate sector.

But, having the appropriate regulatory frameworks in place, to make new technologies commercially viable, bankable, and attractive to private capital must stand at the beginning of the energy transition.

To facilitate investment, environmental, social, and corporate governance (ESG) must clearly reflect in the core values of projects and corporates. There is a growing focus by equity investors and lenders on ESG related topics. Consequently, companies and projects with strong sustainability elements potentially have access to a much broader funding basis, given an acceptable risk profile on the commercial side.

However, the energy transition and the achievement of global decarbonization targets can only be successful if sustainable financing is available to developing economies. While developing countries account for approx. 60% of CO2 emissions, only 10% of them could advance as planned on their path to meet the climate targets 2030 of the Paris Climate Agreement. Moreover, more than 800 million people are still without access to any electricity, many more are suffering repeating power outages or unaffordable price levels.

Strong partnerships will be the decisive success factor in creating ecosystems with a significant pipeline of projects in new technology fields and in building basic infrastructure for developing countries.  In this increasingly complex world, no player will be able to cover the intricacies, risks, and capital requirements of the energy transformation alone.

We have found that collaboration with strong partners and governments helps solve the financing challenges for the energy transition. That is one of our top 10 priorities for a successful energy transformation.

By Michael Bueker, Senior Vice President Finance Middle East, Siemens Energy