A workable way of financing renewable energy must be found before it is too late - and there are no more excuses, regardless of the state of the world's economy.

The recession has been a particularly frustrating time for the business of reducing atmospheric carbon dioxide levels. It has blunted efforts to bring heavyweight capital and investment initiatives into the sustainables, renewables and carbon-reduction infrastructures. And by inhibiting industrial production and power generation, the recession also reduced the effectiveness of the EU cap-and-trade scheme. By operating under the caps, various industries had more credits to offer the markets, keeping prices well below levels needed to attract investment in mitigation technology.

As the world climbs out of recession, the challenge is to adjust the way financial markets can bring their weight to bear on this pressing global problem.

For the developed world, energy security, energy sustainability and reducing the impact of climate change remain key issues, but the developing world is focusing on the acquisition of energy at almost any cost. For both sets of constituents, renewable energy buildout is of the utmost importance; for future generations, it is critical. The key question is how do we pay for it?

Energy generation has traditionally been funded by governments (wholly or partially) and utilities. Today, there are significant shortages of capital in these traditional pools to fund legally mandated (for example, the EU's) targets for renewable generation, let alone other plans. Other complementary sources of funding are needed. This means tapping into the expertise and asset pools within financial institutions for both debt and equity financing in new and imaginative ways.

Infrastructure buildout is generally funded with a mixture of debt and equity. Traditional debt markets were hit severely in the credit crisis and almost closed down, but these pools are opening up again in some localities. So the challenge for new infrastructure building is to attract investment capital from fresh pools of equity. This equity can earn very attractive government-backed returns from the utilities sector, often containing an element of inflation-linking.

This suits large pools of capital seeking non-correlated, physical investment assets. Pension schemes, insurance companies and some family offices are attracted to this proposition and sector exposure. There is a lot of talk right now - particularly from pension funds - on the attractiveness of this sector from a sustainability perspective and from the simple expedient of portfolio construction, but it is still taking most pension funds (and life companies) a surprisingly long time to embrace this asset class. Again, this is something that has been held up by the recession. It is the simplest of axioms that investors only enter markets when they see a perceived return exceeding the perceived risk. This means the fundamental challenge is the establishment of appropriate incentives for projects that can deliver commercially attractive returns for the perceived risks taken.

Robust regime

While the recession undoubtedly reduced the feasibility of debt funding for infrastructure projects, the behaviour of some governments has raised concerns as to whether policy supports will remain in place, highlighting the importance of clearly defined clean-energy policies.

Infrastructure assets are generally financed at relatively low but steady yields over long periods of time. They are therefore highly sensitive to small changes in terms. Enhancing returns or reducing perceived risks are the simplest ways in which to draw new investors into a market, and renewable energy generation is no different. National policy and resultant incentive mechanisms then become absolutely central components of making a country attractive for financiers. Once investors invest, the stability of the regime becomes critical. A well-structured, attractive and robust regime needs to offer more than incentives and embrace a wider energy policy, including the structure of the utility sector and the creditworthiness of utilities as off-takers. Policies need to be simple and clear but, above all, consistent over a long period of time.

The perception is, however, that governments are not serious about regulating to allocate money to this agenda at scale. Addressing this would be one of the swiftest ways of reassuring investors they can achieve the returns their fiduciary constraints demand.
From a policy perspective, pragmatic solutions underpinned by aggressive and binding commitments for carbon reductions are needed. Engaging with the threats of climate change and energy price volatility will require political bravery and visionary thinking and there is no room for interim shortcuts. Any stimulus package to encourage large-scale infrastructure rollout needs long-term stable regimes and, ideally, a price that more accurately reflects the true cost of emitting carbon dioxide. Governments comprehensively ducked these issues at the UN climate conference in Copenhagen (COP15) in 2009 and showed every sign of repeating this at the conference in Cancun (COP16) last month.

Compare this with the energetic approach to resolving the banking crisis, despite the argument that in the longer term, the climate change threat is considerably more dangerous than the current financial crisis. After all, one of the features of modern financial markets is their ability to reinvent themselves and move on.

Missed opportunity? A protestor demonstrates outside COP 16 2010, the United Nations climate change conference, after last year's forum ended in political deadlock Missed opportunity? A protestor demonstrates outside COP 16 2010, the United Nations climate change conference, after last year's forum ended in political deadlock

Political traction
Much can be achieved by harnessing political support for doing the obvious and capturing low-hanging fruit, particularly with regard to renewable energy and energy efficiencies. A small number of concrete policy initiatives and commitments would easily encourage the growth of infrastructure investment into renewable energy, first by developing a global cap-and-trade framework or for fungibility between regional frameworks if the global objective is too hard to achieve in one step.

Second, recognising the importance of energy efficiencies in the built environment in fighting climate change. Buildings are responsible for approximately 40% of the world's current energy use and constitute about one-third of our carbon dioxide emissions. The opportunity for cost-effective reduction of carbon emissions related to the built environment would reduce overall demand for energy and allow better management of grids.

Third, it is important to support investments into renewable energy and increase the flow of capital to clean and energy-efficient technologies and infrastructure. There is a tremendous opportunity for businesses to respond positively to the challenges of climate change and in so doing create jobs for the future, economic growth and fiscal revenue. However, this will require a higher degree of certainty around policy and legislation.

Ultimately, renewable energy technologies will need to be cost-competitive with fossil fuel-intensive technologies. Until scale has been achieved, however, there is a need for stable, long-term, feed-in tariffs and enforceable renewables targets for utilities. Similarly, there is a role for governments to promote large-scale investments into grid parity and smart grids to enable renewable schemes to compete effectively.

The delays and uncertainty in the wake of COP15 were a setback, but they must not be allowed to deflect us from our responsibilities as individuals, businesses and citizens. Perhaps expectations of COP15 were, in retrospect, too optimistic, but the fact remains that governments of the world chose not to provide clear leadership. Bilateral action between countries may be a way to break the political deadlock, but anything that resembles protectionist measures would be disastrous.

Carbon trading has shown there is a place for financial markets in funding renewable energy. Investment groups, banks and industry will happily play an important part in combating climate change, but the recession, low carbon prices, poor mitigation-investment incentives and especially low levels of consistent political support are making it hard for these players to develop the necessary long-term strategies.

The challenges of financing renewable energy should create long-term investment, job creation and growth, while providing a better future for our dependents. Not investing in this sector would be a mistake. Climate change may pose an enormous threat, but it also presents a golden opportunity to build energy security for future generations, offering attractive growth opportunities to visionary governments and asset managers.

Stanley Fink is Chairman of Earth Capital Partners LLP and CEO of International Standard Asset Management. He is a former CEO of UK hedge fund Man Group

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