How to clear the finance and policy hurdles on the way to a clean energy future

Global energy demand is rising. In 2018, it grew by 2.3%. Most of the demand was met through a 7% increase in renewable generation, although coal still played a major role in developing economies.

Nevertheless, global electricity produced from coal was on track to fall by 3% in 2019, a trend led by the advanced economies of Europe (mainly the UK, Germany and Spain) and the US. However, emerging markets are still adding to their energy capacity through traditional fuel sources, including coal.

Global population and consumption growth are contributing to increased emissions. In 2018, emissions rose by 1.7% on the previous year to a historic high of 33.4 Gt CO2, an alarming increase of 70% since 2010. The IEA estimates that coal has been the single largest contributor to global temperature rises; CO2 emissions from coal combustion contributed 0.3˚C to the 1˚C rise we have already seen.

The World Economic Forum’s Global Future Council on Energy estimates that the global energy mix is 81% fossil fuel - and that this hasn’t changed for 30 years. At the same time, rising global temperatures are in line with global population growth and energy demand. The IEA claims that by 2050, air conditioning will be the key driver of electricity demand. This creates a circular problem - higher temperatures lead to greater cooling requirements. A strategic shift is required to address these challenges in a timely manner and at appropriate nodes.

Almost 197 countries are signatories to Paris Agreement and many have ratified the same. Dozens have formulated policies to support the implementation of the Paris Agreement targets and the UN's Sustainable Development Goals (SDGs) - see below.

And this is promising - because combating the threat of climate change and moving towards sustainable development will require huge policy support and investment.

Policies play a major role in influencing investors, industry and stakeholders in redefining their future courses of action. For example, the global shift towards clean energy sources, encouraged and supported by policy-makers, is now redefining the business models of the large oil firms, who are typically reliant on carbon-based fuels. A recent study by Carbon Tracker found that large oil companies will have to reduce oil production by 35% to meet the target of a 1.5˚C rise in global temperatures.

Governments and policy-makers need to set targets for energy efficiency and sustainability, create incentives and tools to make it conducive for stakeholders (including incumbents) to increase commitments and investment in renewable energy. Emerging economies are catching up with this, and are moving towards sustainable energy sources.

Sustainable finance is a leading contributor to the transition from carbon-intensive energy to renewables and green energy. In 2017/18, global climate finance was a mixture of 44% public and 56% private funds. Clean energy is becoming competitive, but funding requirements are huge, estimated at an annual spend of $1.6 trillion until 2050 to reach acceptable levels of carbon emissions.

The sustainable energy transformation will have huge health and socio-economic benefits. IRENA estimates that every $1 spent will generate $3-$7 in savings on healthcare and climate change-related costs. Availability of appropriately priced and innovative finance can unleash this potential and facilitate the transition. Funding is required to set up new projects and also to exit from legacy projects, which are often under long-term power purchase agreements (PPAs) - these are inefficient and expensive in some countries, but it can be even costlier to exit such contracts.

It is also fundamentally important to create guarantee mechanisms that support the transition. Typically, governments provide guarantees in most jurisdictions, but as fiscal space is limited, alternate guarantee frameworks led by donors, large banks or foreign investors can really scale and speed the transition in developing countries.

The goal of supporting the transition towards green energy while meeting energy demands and reducing emissions requires long-term integrated and cohesive planning among public and private-sector participants. Governments must continuously upgrade their plans and policies, and the finance industry must respond continuously with innovative tools.