Transitioning to a Clean Energy Future Will Require Lots of Private Capital, but How Do We Get There?

Source: 401(K) Flickr

Source: 401(K) FlicThe past two decades have seen a tremendous growth in our understanding of the climate change imperative and in the enormity of the challenge that confronts us. It has become clear that meeting climate change mitigation objectives will require the aggressive deployment of clean energy technologies, substantial amounts of capital, and creative methods of engaging that capital around these activities.

Transitioning to a low-carbon economy costs money (and lots of it). In fact, the International Energy Agency has estimated that $10.5 trillion will be required between 2010 and 2030 to fund this transition worldwide. Given the continuing challenges confronting global economies, the bulk of the capital needed to transition to this clean energy future will, by necessity, be private capital. As a result, creative financing solutions are essential to engaging and unleashing private, institutional capital, and accelerating the flow of those funds toward clean energy projects.

But the question of how to most effectively unlock the enormous amounts of capital necessary to pay for our transition to a low-carbon economy still remains.

Structure and rules are needed to engage private capital

In principle, there is no shortage of capital looking for suitable investment opportunities. The nearly $120 trillion in institutional funds currently under management is more than enough private capital to fund the transition to a low-carbon economy for the entire world. The challenge is how to construct these investment opportunities so that they quickly attract the volume of capital needed on a replicable basis. New asset classes (themed, climate-related financial instruments, such as climate and green bonds) and creative financing mechanisms, such as property-assessed clean energy (PACE) financing, energy service agreements, and power purchase agreements, will allow issuers to borrow against future economic and environmental benefits. It will also allow for the critical investment necessary now to deliver those environmental benefits into the future.

Institutional capital and other private sources of finance have yet to show an understanding of the opportunities emerging in the clean energy sector. As a result, investors need a new tool and market infrastructure into which these funds can be comfortably deployed. There is also a critical lack of “standards.”  An agreed upon set of rules and criteria are essential to assure investors they are getting a fair return on their investment in clean energy. These rules should be designed to fully engage institutional capital, which will create a wider and more liquid market for these types of investments.

Creative financing solutions will fund the low carbon future

In my next few posts, I’ll talk about green bonds, climate bonds, and other finance mechanisms designed to engage and accelerate private, institutional capital flows into climate change initiatives. I will also talk about On-Bill Repayment and Property Assessed Clean Energy programs, EDF’s Investor Confidence Project, aggregation (the process whereby a number of a firm’s smaller projects are combined and treated as an individual project), securitization (the process of pooling similar financial instruments, such as loans or bonds, into one security), and other efforts that are designed to engage private capital, create wider and more liquid secondary markets for climate debt, and help to finance critical clean energy initiatives. Stay tuned.

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