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Clean technology and sustainable projects – financing the transition to net zero

Insight 10 January 2022

Clean technology and sustainable projects – financing the transition to net zero

In this article we look at the levers available to create infrastructure, and how to finance these projects with the aim of delivering the net-zero ambition.

As world leaders continue their climate-related pledges, most recently at COP26 which built upon the Paris Agreement - those words, commitments and targets need to rapidly become actions.

Igniting the sustainable revolution as well as the net-zero carbon transition requires political will, public and private investment. It also requires little short of the majority of the world to shift their behaviours and choices to also strive for net zero and sustainable living on a personal level.

Here we look at the levers available to create infrastructure, and how to finance these projects with the aim of delivering the net-zero ambition.

In the period 2013 to 2020* more renewable power was added to the grid annually than fossil fuels and nuclear combined. Renewable energy comprises solar, wind, hydropower, geothermal and biomass. The costs of renewable energy have declined significantly in the last decade and today solar and wind can be the cheapest sources of electricity in many markets. Of course, many countries remain heavily reliant on fossil fuels and significant increases in clean energy capacity and infrastructure are still needed.

*Source: IRENA (International Renewable Energy Agency)

Alongside the transition away from fossil fuels, large infrastructure investment is also required. Examples include:

  • The transition to hybrid and electric vehicles (EV) and associated EV charging infrastructure;
  • Improving battery storage capacity and cost effectiveness;
  • Noteworthy residential improvements to increase use of efficient air source heating units and replacement of oil-based central heating systems;
  • The widespread rollout of smart building technology;
  • End-use electrification;
  • Power grid improvements; and
  • Assisting niche solutions to become viable and scalable.

Significant capital is required to fund the direct and indirect transition to a sustainable low-carbon future. The clock is ticking with the next decade already deemed ‘decisive’., There is a real challenge to scale solutions and projects rapidly such that there is not a premium to be paid for low-carbon options and they are practically viable to the masses.

One direct means of supporting low-carbon electricity generation is the Contracts for Difference (CfD) scheme. The CfDs provide developers of projects with protection from wholesale price volatility. Renewable energy generators submit bids for the CfDs when energy auctions are held. Those energy generators whom are successful with their bids receive a 15 year supply contract.

The UK has held three auctions to date and the fourth was launched on 13 December 2021, with bids due by 14 January 2022. £285 million of CfDs will be auctioned with the expected profile earmarked as:

  • £200 million to offshore wind
  • £75 million to emerging renewable technologies (including floating wind, tidal and geothermal)
  • £10 million to established technologies (solar and onshore wind)

The UK government has committed to meet a target of 40 GW of offshore wind capacity by 2030, potentially sufficient to produce enough electricity to power every home.

By 2030, renewable power globally is predicted to quadruple compared to the current capacity. Outside of the direct environmental benefits, this tremendous growth will create significant employment opportunities, often in locations outside of traditional workforce hubs. By 2050 renewable energy jobs are set to account for a third of the predicted 122 million energy sector jobs globally. The potential social benefits of the transition to a low-carbon economy present opportunities to regenerate locations. One such example is the North East of England, which has been earmarked for £160 million of offshore wind investment in the most recent UK budget.

Keeping to the example of the CfDs, when a contract is won, often the next step for the energy developer is to raise debt and equity funding sufficient to enable them to deliver upon the contract. This is where the capital markets can come into play. Institutional equity capital and the private market debt funds are increasingly looking to allocate against sustainable projects including the ‘dark green’ environmental projects. These allocations are driven by investors seeking sustainable investments and sustainable returns, often part of the investors net-zero ambitions.

The recent announcement by the Glasgow Financial Alliance for Net Zero (GFANZ), committed to over $130 trillion of private capital to transforming the economy for net zero. These commitments, from over 450 firms across 45 countries, can deliver the estimated $100 trillion of finance needed for net zero over the next three decades. This clearly demonstrates that capital is available and ready to be deployed.

There are many options available for underlying projects to access the private markets. Alongside seeking out equity and debt investment in a traditional manner, more recent options such as the SPAC offer an exciting option to access capital and deliver rapid scale for those operators with innovative solutions. The special purpose acquisition company (SPAC) offers a neat route for experienced management teams and sponsors to take companies public, delivering access to capital and liquidity.

Traditional IPOs remain an option too – the recent Rivian IPO (the largest of 2021 to date) demonstrates the value in the new technologies and changing trends. Rivian is an electric vehicle maker and was valued at over $100billion following share price gains immediately after IPO. Investor sentiment is clearly strong for the potential of a company in the EV sector.

Subsequent to deployment of debt or equity capital, the focus will turn to ensuring that environmental, social and governance targets remain on track. Alongside the wave of new reporting frameworks such as SFDR and TCFD, investors and lenders will also have the ability to influence positive progress on ESG targets.

Green clauses are being written into contracts and leases with some including penalties should projects fall behind on their ESG metrics. Increasing scrutiny and independent validation of ESG performance alongside standardisation of reporting are expected next. It seems reasonable that non-financial reporting will evolve to a similar place as financial reporting – that of consistent reporting standards and independent audit.

Net-zero transition will see renewables and infrastructure investment attract new debt and equity investors.  Structuring will evolve to meet the scale and liquidity needs of projects, alongside enabling the capture of government grants and tax breaks as might be available.

Sitting alongside the structuring picture will be the increasing requirements to capture, analyse and report non-financial data. Just as with financial reporting, the role of the administrator is set to be central to meet these needs. New tools and solutions are now being offered by the administrator community, such services complimenting the range of fund and corporate solutions already provided. The leading administrators can offer genuine asset-class-expertise across the renewables and infrastructure sector too.

Sanne services: Renewable energy projects

Services to developers of renewable energy (Contracts For Difference (CFD) model shown)

How can Sanne help?

As a PRI Signatory, Sanne is committed to integrating ESG considerations into investment practices. We are a leading fund administrator offering ESG advisory and reporting services through our Sanne.Live platform. Sanne’s expert Real Assets, Private Equity, Private Debt and Corporate Services teams have a proven record in administering infrastructure and renewable energy funds and asset holding vehicles.  Sanne offers a full range of fund and corporate services across our global network of offices, with leading alternative assets expertise.

To discuss how Sanne can assist you or your business, reach out to Simon or Karlien.

Let's talk...

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Simon Vardon Global Head of Real Assets - Jersey
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Karlien De Bruin Global Head of ESG - South Africa
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