Financing the energy transition
The financing of the energy transition requires sustainable investment mechanisms and plans that foster public and private participation.
How can the actions required for the energy transition be implemented?
Reaching a climate-neutral carbon economy by 2050 will not be possible without a continued effort in terms of investment and financing, both from the public sector and the private sector. In fact, the European Commission presented the Sustainable Europe Investment Plan in January 2020, which calculates an additional investment of around 260 billion euros annually if we want to achieve climate and energy goals by 2030 and climate neutrality by 2050. Therefore, the Plan will mobilise a minimum of 1 trillion euros in sustainable investments in the next 10 years, the highest percentage of public spending on sustainability.
What volume of economic resources is involved in the energy transition in Spain?
In Spain, the National Integrated Energy and Climate Plan (PNIEC) considers the need to mobilise 241 billion euros between 2021 and 2030 to achieve the proposed energy and climate goals.
These investments are distributed in the following way: renewable energy (38%), savings and efficiency (35%), networks and electrification (24%), and other measures (3%).
What are the main mechanisms for sustainable financing?
The mobilisation of resources for the energy transition will need public and private funds, as the magnitude of the investment exceeds the Administration’s capacity. The plan foresees that 80% of the investments would be carried out by the private sector, while the remaining 20% would be public funding coming from the different Administrations of Spain and the European Union.
The European instruments include, for example, the Recovery and Resilience Facility, the European Regional Development Fund, the European Investment Bank funds, and the European Fund for Strategic Investments. The funding from the private sector comes from the own resources of the different agents involved, as well as from private funds channelled through banks or "green" instruments in the financial markets (instruments for sustainable carbon neutral investments).
What instruments are there to facilitate the energy transition?
In order to achieve sufficient involvement of citizens and companies, the public sector has to incentivise the private sector to invest and develop green projects (sustainable projects that support the decarbonisation of the economy). This set of incentives includes environmental regulations, co-financing of key projects with public funds, a system of green energy taxation, and a regulatory framework for financial instruments aimed at sustainable projects.
And what role does energy taxation have?
Energy taxation, as well as being an important source of financial resources for administrations, can be conceived as an instrument to help achieve climate and environmental goals, as it fosters the change to a low-emissions energy source and more sustainable industry. However, the EU tax framework hasn't been updated since 2003, so it isn’t in symphony with the strategy developed in the European Green Deal. In Brussels, a revision of the regulation is being debated to bring the taxation of energy products and electricity into line with EU policies, preserve and improve the European single market, and maintain the revenue-generating capacity of Member States' budgets.
What can the financial sector do to contribute to the energy transition?
In the last few years, many financial products aimed specifically at the transition towards a decarbonised economy have been appearing. Green bonds, which are a type of debt issued by public or private institutions to finance projects related to climate change and the energy transition, represent the sustainable products par excellence, although over time the offer is expanding and diversifying.
In addition, other sustainable financial products are emerging, such as green loans and credits or green investment funds, so that small and large investors can allocate their savings to activities aimed at the energy transition, decarbonisation of the economy, and environmental sustainability.
Where is the financing market heading? What are the requirements that condition or tighten financing?
The appearance of new green investment instruments will generate better financing conditions for those companies and projects related to the energy transition, decarbonisation, and environmental sustainability. Similarly, financing conditions will become more restrictive for companies that don't promote projects aligned with these goals and those most exposed to the risks associated with climate change will be penalised. This will imply higher risk premiums and higher financing costs for any activity that may be exposed to extreme weather events or rising average temperatures.
What does the financial sector need to fulfil its role as a channel for green investment funds?
The mobilisation of a large amount of economic resources for the energy transition requires creating a regulatory framework that guarantees the stability of the financial system, fosters its transparency, and reorientates finances towards more sustainable activities. That's why the European Union is committed to Taxonomy, an instrument that allows the classification of economic activities that contribute to environmental goals. This tools increases the confidence of investors as they can identify, in an objective manner, if an activity contributes significantly to said sustainable objectives.