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The role of private capital in building a low carbon Energy Union

February 2015 – With Commission cabinets, the University of Cambridge Institute for Sustainability Leadership identified the need for additional thinking on the role of private capital in building an Energy Union. This brief discussion paper addresses the necessary systemic and regulatory reforms that would stimulate private capital flows into the proposed European-wide Energy Union. It has been divided into two parts: a high-level strategic assessment of the challenge, and a formula for unlocking private capital.


The role of private capital in building a low carbon Energy Union

Paper for European Commission Vice-President Maroš Šefčovič

Dr Jake Reynolds and Sandrine Dixson-Declève

University of Cambridge Institute for Sustainability Leadership

1. Investment Strategy for an Energy Union

The Energy Union concept represents an opportunity for Europe to establish a common energy agenda that better stimulates smart investment, and improves the resilience and coherence of EU energy and climate policy.

As the EU decarbonises and fossil fuel use decreases, energy security and affordability will be increasingly driven by the cost and availability of infrastructure finance. The EU needs to invest over €2.5 trillion in energy over the next decade by some estimates1, the vast majority in capital-intensive low carbon infrastructure (including power generation, storage, networks and energy efficiency).

Despite the resurgence in global clean energy investments in 2014, there are no guarantees that this momentum will continue on its own2. Hence, delivering this investment at an acceptable cost and at the pace required will be challenging. Banks have scaled back their investment to meet regulatory capital requirements imposed after the financial crisis. Utility balance sheets are shrinking, which reduces their ability to carry large-scale investment. Bringing new sources of finance into the sector is a clear imperative.

The focus should therefore be on how to ensure access to adequate and timely cost-effective finance for energy supply, infrastructure and efficiency investment across the whole of the EU. This will require drawing on under-used pools of European institutional assets. There is particular scope to maximise the synergies between President Juncker’s Jobs, Growth and Investment Package, the Capital Markets Union process and the Energy Union concept, which should include a specific focus on sustainability and long-term planning.

For these initiatives to succeed, however, they need to be carefully designed to leverage public and private finance around the highest value investment for Europe’s Energy Union objectives – particularly around energy efficiency, electricity networks and renewable heat and power. Over-investment in fossil fuel infrastructure and in coal-fired generation (as has been proposed in many of the national submissions for the Investment Plan) would displace higher value investment and work counter to Europe’s investment agenda as a whole. As part of the Energy Union idea, a European Energy Investment Strategy is needed to set out both how the investment needs for the Energy Union will be delivered and a minimum set of criteria to prevent publicly backed investment from being mis-spent on projects that run counter to Europe’s energy and climate security goals.

2. Unlocking Private Capital for the Energy Union

The importance of private capital in financing the transition to a low carbon economy is widely acknowledged. The reality is somewhat different however: most private capital is invested in the existing economy, and shows little sign of moving. The following 10 point action plan explains how policymakers can change this in the short term in order to unlock capital flows towards medium and longer term energy investments and create a resilient Energy Union.

It is important that policymakers recognise the need to focus on both the demand-side for capital as well as the supply-side. Action on one side without the other is unlikely to result in the scale of investment that is required.

"Making progress towards sustainable development will require action to improve both the demand-side for capital (such as effective regulation and pricing of natural capital in the real economy), as well as action on the supply side in terms of improvements in the financial system."

UNEP Inquiry into the design of a sustainable financial system: Pathways to scale, January 2015

Supply of finance:

1. Huge pools of reserves/savings are managed by European institutional investors, many of them in public or near-public schemes, or private companies benefiting from tax subsidies. These pools are invested across a wide range of asset classes, and could be mobilised much more effectively behind Europe’s low carbon energy and economic goals. Leaving aside private and central bank assets, the bulk of the finance is derived from the 'investing public' through savings, pension plans and insurance premia, as well as private wealth and sovereign funds. It amounts to tens of trillions of euros.

2. 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 the life-cycle 'carbon impacts'. Governments should make it compulsory (on a comply or explain basis) for relevant companies to disclose their carbon risks and carbon impacts using standard methodologies for investors to use.

3. Similarly, financial regulators should recognise that the risks posed by the economy’s structural bias towards high carbon infrastructure may pose threats to financial stability. Established stress-testing regimes used by regulators (e.g. within Basel III and Solvency II) should be harnessed to develop better understanding of such exposures (whether derived directly from the impacts of unmanaged environmental or social risks or arising from social, economic, political or legal responses to them) and new techniques developed where necessary. This would ultimately enhance regulators’ ability to define regulatory capital requirements.

4. State-owned finance institutions can demonstrate leadership by ensuring that their investment strategies are consistent with the goals of both the 2030 Climate and Energy target and the Energy Union. Equally, government-enabled mechanisms to attract alternative flows of private finance into infrastructure investment, such as the European Long Term Investment Funds (LTIF), should be required to invest in low carbon assets.

5. Retail savings do not provide choice or incentives to invest in a low carbon future. Current incentives, such as tax breaks, are not linked to policy objectives such as low carbon. For example, the growth of French life assurance companies' assets closely correlates with the tax exemption attached to life insurance contracts – effectively a state subsidy of the finance industry. By addressing this, Europe’s citizens' savings would help to finance its low carbon transition. Specifically, governments could require financial intermediaries to:

  • Provide green alternatives to mainstream retail finance products.
  • Incentivise their uptake through improved return characteristics or other incentives that recognise the public utility of these products.
  • Facilitate the smooth implementation of regulations that affect investment products and ensure that clean energy investment funds are able to expand and grow.

Demand for finance:

6. Capital flows when it is economically justified, i.e. when it meets certain conditions relating to risk and return. As a consequence, much of this capital is invested in damaging, high carbon industries rather than serving the public good. Policy should therefore concentrate on making low carbon industries and projects relatively more attractive to investors than business as usual. Low carbon infrastructure has a multi-decade lifetime and is therefore subject to political and policy risk. To unlock capital, governments need to agree long term, stable, policy conditions that do not compromise the economics of the projects during their lifetime. This entails a series of structural reforms to provide the necessary conditions for investors to feel comfortable allocating capital:

  • A carbon price in the EU sufficient to tilt investment towards low carbon industries and projects, which will require a Market Stability Reserve (MSR) in place as soon as possible and a real reform of the EU Emissions Trading System. On this basis, the carbon price should be in the region of €30-50.
  • Phasing out fossil fuel subsidies and all subsidies for price-competitive mature technologies to provide a level playing field and ensure a well-functioning energy market with robust supply- and demand-side management.
  • If a level playing field does not exist between conventional and non-conventional energy sources, consider what steps can be taken to ensure properly designed Feed In Tariff schemes/subsidy schemes and prevent or dissuade Member States from any further retroactive changes to such incentives.

7. It should not be assumed that the customers served by the finance sector deeply understand climate change or any other policy objective. Clearer standards, support mechanisms and examples are therefore required for the industry to play an effective role. For example:

  • A label indicating the carbon risk (AAA scale) and carbon impact of an infrastructure project (A-G rating, or +ve/ neutral/–ve).
  • Transparent and rigorous standardisation of the rapidly growing green bond market, to allow investors to understand in a simple and consistent manner the contribution that large-scale debt investment can make to related social and environmental policy objectives.
  • EU rules to ensure no barriers to investment in energy related infrastructure are imposed and that the existing debate around unbundling rules in the Third Energy Package is resolved.3

8. As a transition measure, while project pipelines build up, risk sharing mechanisms such as public guarantees and ‘first loss’ finance would speed up capital flows. Clarity on the variety of relevant risk-sharing mechanisms available from EU institutions is required, with new (or rationalisation of existing) mechanisms introduced if they are found to be inefficient or subscale, in close co-operation with the finance sector and institutional investors.

Governments can facilitate low carbon infrastructure, energy services and technology innovation through their procurement and planning policies. Within their own estates they can directly choreograph project pipelines (e.g. schools, hospitals, state-owned energy/grid, transport). Beyond their estates, 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. Such interventions would have a strong supporting effect on employment and SME growth.

9. Private finance owners need to be convinced by governments that there is a 'plan', that the EU collectively understands what it wants out of the Energy Union, and will work systematically to achieve it. Part of this plan concerns dealing with the perverse incentives currently in place; part in introducing new standards and simple-to-access risk sharing mechanisms; and part in encouraging a shift in the operation of the finance system through targeted regulation.

Get this right and private capital will flow into a low carbon and resilient Energy Union, producing not only a low carbon, secure and future-proofed energy system for Europe, but large numbers of jobs in businesses of all sizes, including SMEs. Ensuring a robust system will however entail an integrated policy making process from the start spanning all national and EU governing departments dealing with energy, climate, markets, industry and finance.


  1. DIW. European Energy Sector: Large Investments Required for Sustainability and Supply Security
  3. European Commission Unbundling note:

About the authors

Dr Jake ReynoldsDr Jake Reynolds is the Director of Business Platforms at CISL. In this role he is responsible for enabling business leaders to identify system-level solutions to sustainability problems. Jake is a Co-Investigator in the Nexus Network and oversees business involvement in the network.
Sandrine D Decleve

Sandrine Dixson-Declève was Director of The Prince of Wales’s Corporate Leaders Group until April 2016.