How low-cost funding can help the energy transition

Published the report “Low-cost financing for the energy transition”

(sustainabilityenvironment.com) – The global energy transition has reached a critical moment, in which the spread of technologies such as green hydrogen, storage systems and floating wind must be rapidly enhanced; However, rising interest rates are increasing the cost of financing capital, making the process more difficult. Underlining this is the new report Low-Cost Energy Transition Finance launched today by the International Agency for Renewable Energy (IRENA), in collaboration with the Indian presidency of the G20. The document prepared in close cooperation with the Indian Ministry of New and Renewable Energy (MNRE) provides some suggestions for increasing the availability of low-cost funding in G20 countries and beyond.

IRENA Director-General Mr. Francesco La Camera said: “The global energy transition requires a rapid scale-up of renewable energy deployment globally, making access to low-cost finance urgently vital. We are proud to contribute to the work of the G20 and provide valuable insights that support India’s Presidency in facilitating access to affordable finance in developing and advanced economies.”

According to IRENA’s Preview of the World Energy Transitions Outlook, in order not to exceed the climate target of 1.5 ºC of Earth’s temperature rise, the share of renewables in the primary energy mix should rise to about three quarters. An effort that will require annual investment averaging over $5 trillion until 2030. The biggest problem? Access to finance in many emerging and low-income economies is limited and often too expensive to accelerate the energy transition at the necessary pace.

What makes the difference on funding costs is mostly the risk profile of projects. In general, less risky ones can draw on larger capital basins, with lower debt costs and more favourable conditions (for example a longer duration). Lenders will also be willing to lend more and projects will also require lower equity rates of return.

Although specific circumstances vary from country to country, national risk or political risk is often identified as the main obstacle to international institutional capital flows, according to the report. In this context the report provides some useful lessons from historical cost reduction trends for solar photovoltaic and onshore wind technologies, defining enabling frameworks that can reduce technology transfer costs and facilitate foreign direct investment to accelerate the expansion of hydrogen, offshore wind and battery storage.

It also highlights the need to mobilise the resources of the private sector, whose commitment is fundamental in offering low-cost funding to finance energy transition projects. But at the same time it stresses the need for deeper public-private collaboration.

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