3. Investing in energy transition
Do banks have an appetite to invest in green energy projects?
Transitioning to clean energy is not cheap. To achieve net zero by 2050, business analysts McKinsey estimate global spending of USD 275 trillion on physical assets. This could represent an enormous opportunity for the clean energy sector, but are banks willing to support investments and, if so, what types of projects are more likely to attract financing?
“Banks are very much willing to finance clean energy projects. And as a matter of fact, we're already doing this, already for years and years by supporting this huge influx of renewable energies. And so wind and solar are currently obviously more the bread and butter of what we're what we're doing actually on a daily basis in the team where I'm working.”
Gido van Graas, ING
Global clean energy transition is a massive undertaking. It will require significant expansion in both public and private sector renewable energy sources, as well as upgrades to national grids and transmission networks. It will also need greater use of carbon capture, utilisation and storage, improved and expanded energy storage (such as batteries) and growth in new technologies for electricity generation including hydrogen and clean manufacturing, such as in green steel.
Gido van Graas is responsible for New Energy Technologies (Hydrogen, CCUS and energy storage) and Energy Project Finance Advisory business globally for ING bank. During the Atradius live event panel discussion, he provided valuable insight into the role and appetite of financing for clean energy transition.
Investing in energy transition
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Appetite for energy transition
Revolutionising the way the entire world generates and uses energy is a massive undertaking. And it is one that is not cheap. Investment in new technologies and infrastructure will cost trillions over the next few decades. While governments will need to take a lead on many of the strategic decisions, the clean energy transition is too big to fund through public finances alone, especially when many public finance reserves have already been dented by the cost of the pandemic. As we move forward, banks and private sources of finance are likely to have an important role.
According to the International Energy Agency’s World Energy Outlook 2022, the world has not been investing enough in energy in recent years. This has left the energy system more vulnerable to shocks, such as that seen in the energy crisis this year. The Agency’s suggestion for a smooth and secure clean energy transition centres around significant increases in clean energy investment flows.
As the Head of ING’s Energy Project Advisory Team Gido van Graas is well placed to provide insight into the appetite of banks to fund clean energy transition projects. His outlook is upbeat. During the panel discussion he said, “there is sufficient liquidity out there to really support the energy transition”, and he pointed to carbon capture and electric vehicle projects that are already coming to life.
However, he also stressed the importance of collaboration. Recognising global clean energy transition is too big for any one party to tackle alone he said: “I think close cooperation between financing parties, not only banks, but also ECAs, insurers, multilaterals obviously energy clients, but also governments. I think that collaboration is absolutely key to further bolster and expedite the energy community.”
“We see that there are huge investments required to support the energy transition. I believe that the liquidity is there to support that.”
Gido van Graas, ING
“Besides renewable energy, which will be a large driver of the energy transition, we should focus … on supporting our clients on the hydrogen side, the energy storage side.”
Gido van Graas, ING
Beyond the power of the sun and the wind
Clean energy transition is much bigger than just looking at renewable energy (power generated by wind and solar sources). It is unlikely that renewables alone would be enough to provide all of the clean energy that the world will need. What’s more, energy sources that are weather dependent can be unreliable and tricky to export. Solar power cannot be generated at night and will have less productivity on cloudy days. Wind turbines will not turn if the wind does not blow.
So, in order to expedite the transition to clean energy, the world will need alternative clean sources in addition to wind and solar. For some, the answer lies with nuclear power. However, for others, the radioactive waste generated by nuclear power is far from a proper definition of clean energy.
Moving forward it is likely we will need technologies such as hydrogen, as well as improvements in carbon capture and in energy storage. The importance of developing carbon capture, for example, can be seen in the approach that Iceland is taking towards achieving carbon neutrality. Almost all of the country’s heating and electricity generation is provided by renewables, specifically hydro and geothermal energy. Despite this world leading position in terms of clean energy production, Iceland’s 2020 updated Climate Action Plan includes carbon capture among the 48 actions the government says are required to achieve net zero.
Launched in September 2021, the world’s largest carbon capture plant, the Climeworks “Orca”, uses geothermal energy to pull thousands of metric tons of carbon dioxide out of the atmosphere and pump it underground to the east of Reykjavik. It has been hailed by Iceland’s prime minister Katrin Jakobsdottir as a “milestone in the fight against climate change”.
Clean energy investments provide opportunities for growth. The IEA predicts that by 2030, thanks in large part to the US Inflation Reduction Act, annual solar and wind capacity additions in the United States will grow two-and-a-half-times over today’s levels, while electric car sales will be seven times larger. Supply chains for some key technologies, such as batteries, solar PV and electrolysers, are currently expanding quickly, and are benefitting from a strong market appetite, particularly within the automotive market.
Is hydrogen the clean energy of the future?
For many commentators, net zero cannot be achieved without harnessing the potential that hydrogen offers as a clean energy solution. According to the Hydrogen Council, hydrogen could account for 22% of global energy demand by 2050. Today it accounts for less than 1%. Although hydrogen produces no greenhouse gas emissions at the point of use, not all methods of creating hydrogen are ‘clean’. The majority of hydrogen in use today is produced by splitting hydrogen molecules from natural gas or methane (known as ‘grey hydrogen’). Hydrogen can also be produced from water molecules in a process that uses electricity generated from renewable resources. This is known as ‘green hydrogen’ and offers massive potential as a clean energy source.
The IEA’s Breakthrough Agenda Report 2022 calls for discounted finance to be made available for hydrogen uses that could attract large-scale private investment, especially for hydrogen production and distribution in developing countries. Investment streams are likely to be critical for the development of the hydrogen energy industry as the costs involved in the production – particularly of green hydrogen – are currently relatively high compared to other sources of low carbon energy.
However, Gido van Graas made a comparison between the current fledgling hydrogen power sector and the wind and solar sector 15 years ago. During the live panel discussion, he noted that power generated by hydrogen is still comparably expensive, but that this is similar to what we saw in the wind and solar sector in the past. He expressed confidence that like the renewables, the cost of generating hydrogen would come down. Citing the Inflation Reduction Act in the US and the Green Deal in Europe, he also noted that energy programmes and legislation in several countries were already helping to generate growth and investment interest. He said: “We often make a comparison with the renewable industry 15 years ago … we are convinced that basically the price will go down over the years to come with the right programmes in place.”
“Collaboration is absolutely key to further bolster and expedite the energy community.”
Gido van Graas, ING