Ten ways to unlock private finance for the new European Energy Union
19 June 2015
Europe’s energy system faces a challenging risk landscape that threatens security of supply, economic prospects, and our ability to address climate change. The Energy Union concept is, at its core, recognition that these risks cannot be contained within national borders or managed in isolation from each other. The scale of the challenge calls for a collective, integrated and coherent response, based on better demand management and the development of low carbon infrastructure. The Energy Union Strategy Framework is a unique political opportunity to ensure adequate and sustainable finance is made accessible to deliver a secure, competitive and decarbonised energy future.
"Government action is needed now to drive solutions on the demand-side of the energy system as well as on the supply-side."
Grand Marshall Plan
To my mind, the Energy Union could work as a 'Grand Marshall Plan', with the clear purpose of driving forward low carbon investment and creating new jobs. It could unite Member States around one single vision, as long as we include transition plans for those countries and industries that have a large carbon footprint and core energy security concerns.
There is particular scope to link up the Energy Union concept with President Juncker’s Jobs, Growth and Investment Package and the Capital Markets Union process. We need a European energy investment strategy and a structural reform package to take all of these different initiatives into account and kick-start a competitive EU-wide market for renewables, energy efficiency and carbon capture and storage.
Finance risk should be shared between governments and investors. For this to work however, we need to develop a privatised energy market that is more inclusive of prosumers and citizens, alongside institutional sources of investment and finance products such as green bonds.
Unlocking private capital
The importance of private capital in financing the transition to a low carbon economy is widely acknowledged, yet most private capital is invested in the existing economy, and shows little sign of moving. Government action is needed now to drive solutions on the demand-side of the energy system as well as on the supply-side.
Here are ten actions policymakers should undertake in the short term to unlock capital flows towards medium and longer term energy investments and help to create a resilient Energy Union:
1. Redirect savings
Huge pools of finance managed by European institutional investors, many of them in public or near-public schemes, or private companies benefiting from tax subsidies, should be mobilised much more effectively behind Europe’s low carbon energy and economic goals.
2. Increase transparency
Investors must be in a position to discriminate between high carbon and low carbon assets and, in particular, to understand their exposure to 'carbon risks' as well as ‘carbon impacts’. Governments should make it compulsory for relevant companies to disclose their carbon risks and impacts using standard methodologies.
To be able to define appropriate regulation, financial regulators should recognise that the economy’s structural bias towards high carbon infrastructure may pose threats to financial stability. Established stress-testing regimes (e.g. within Basel III and Solvency II) should be harnessed to develop better understanding of such exposures, and new techniques developed where necessary.
4. Invest wisely
State-owned finance institutions should ensure that their investment strategies are consistent with the goals of both the EU 2030 Climate and Energy Package and the Energy Union. Equally, government-enabled mechanisms designed to channel alternative flows of private finance, such as the European Long Term Investment Funds (LTIF), should be required to direct funds into low carbon investment.
5. Incentivise public participation
Governments should encourage Europe’s citizens’ to invest their savings in developing low carbon infrastructure. For example, policymakers could require financial intermediaries to provide greener alternatives to mainstream retail finance products and incentivise their uptake through improved rates of return; and facilitate the smooth implementation of regulations to ensure clean energy investment funds are able to grow.
"If we get this right, private capital will flow in the right direction and help to develop a low carbon, secure and future-proofed European energy system – as well as hundreds of thousands of jobs."
6. Make low carbon investments more attractive than business-as-usual
Governments must agree long-term, stable policy conditions that do not compromise the economics of low carbon projects during their lifetime. We need a high carbon price, and the introduction of a Market Stability Reserve (MSR) to the EU Emissions Trading System as soon as possible. Fossil fuel subsidies should be phased out to provide a level playing field with cleaner energy alternatives. Depending on oil markets and pricing, we may also require well-designed feed-in tariff schemes for renewables (including clear phase in and out timelines).
7. Provide greater clarity
It should not be assumed that the customers of the finance sector deeply understand climate change policy. Clearer standards, support mechanisms and examples are therefore required for the industry to play an effective role. Policymakers could introduce a label indicating the carbon risk and impact of an infrastructure project; standardise the rapidly growing green bond market; and take action to prevent barriers to investment.
8. Introduce risk-sharing mechanisms
As a transition measure, risk-sharing mechanisms such as public guarantees and ‘first loss’ finance would speed up capital flows. Clarity on such mechanisms available from EU institutions is required, with new (or rationalisation of existing) mechanisms introduced if they are found to be inefficient or sub-scale.
9. Utilise procurement and planning policy
Within their own estates governments can directly choreograph the low carbon development of schools, hospitals and transport. Beyond this, interventions may be required to drive demand-side innovations such as large-scale retrofit of buildings, where aggregation is key and planning challenges can bring progress to a halt. Clear procurement and planning policies will give long-term investment signals thus enhancing investor interest and capital flows.
10. Take a joined-up approach
Private finance owners need to be convinced by governments that there is an overall plan, that the EU collectively understands what it wants out of the Energy Union, and will work systematically to achieve it. This will entail an integrated policymaking process from the start, spanning all national and EU governing departments dealing with energy, climate, markets, industry and finance.
The list may be long, but if we get this right, private capital will flow in the right direction and help to develop a low carbon, secure and future-proofed European energy system – as well as hundreds of thousands of jobs.
The companies the University of Cambridge Institute for Sustainability Leadership (CISL) works with through: Green Growth Platform and our finance platforms, all believe that a low carbon Energy Union done well could reinvigorate Europe’s stagnant economy and keep business in Europe.(CLG), the
What we need now is the political will, courage and leadership to make sure it happens.
First published in the Journal for a Progressive Economy, May 2015.