On Tuesday 29 March, the Climate Parliament organised a parliamentary roundtable to discuss climate finance for green grid investments with African and South Asian MPs, in collaboration with Oxford Policy Management (OPM), in the context of the Energy for Economic Growth (EEG) research programme. Our session featured guest speakers Abhishek Shivakumar, an independent consultant specialising in energy system modelling, and Steve Pye, Associate Professor of Energy Systems at the University College London Energy Institute - two world-leading experts in this field.
In a world entirely powered by renewable energy, there is no question that large regional and continental grids will be critical to ensure that electricity supply is reliable and sufficient to meet demand in any place, at any point in time. But the real challenge is to get the necessary investment needed to build this green grid infrastructure to get our power system ready for the future, and for a rapid expansion of renewable energy. For Emerging and Developing economies (excluding China), the overall investment in the energy sector today stands at USD 250 billion per year, and if we want to meet our climate goals and keep the temperature increase below 1.5°C, this number is projected to increase to a trillion. If we look more specifically at the grids component, overall investment is at 70 billion today, and is projected to increase to 300 billion (see Financing clean energy transitions in emerging and developing economies – Analysis - IEA). These investments will have to be concentrated on the main regions driving growth, primarily India, Southeast Asia and Sub-Saharan Africa. This fourfold increase highlights the fact that huge additional investment in green infrastructure will be needed if we are to stay within a safe global carbon budget. This is critical not only to create new transmission and distribution lines, but also to reinforce and upgrade the existing ones, and make our current infrastructure fit for purpose for the larger amounts of electricity which will need to be passing through it in the future.
One of the main challenges of financing grids is that most of them are state-owned, which makes it harder for private investors to get involved. But given the immense amount of money required to build this infrastructure, public funds would not be enough to cover the financing the world needs, and it is critical to attract private money as well. 100 trillion dollars are available in the bond market, and infrastructure projects are usually considered stable, safe investments that tend to provide predictable returns on investment. It is therefore critical to create incentives to orient more private money towards green finance. The Green Climate Fund - the world's largest fund mandated to support developing countries raise and realise their goals toward low-emissions pathways - has been focusing on making climate investments more economically attractive, by reinforcing their bankability and introducing de-risking mechanisms to reduce interest rates.
However, the international organisations and stakeholders involved in green finance have had difficulty agreeing on how to define what qualifies as a climate investment. Indeed, looking at the amount of carbon dioxide is not helpful in the case of grids as they do not emit or absorb CO2 on their own, but rather they unlock potential for low carbon generation. Over the past years, two main frameworks of criteria have emerged; on the one hand, the EU Taxonomy is a classification system establishing a list of environmentally sustainable economic activities which qualify as climate investments at or below a threshold of 100 g CO2e/kWh of electricity generated. Although this system works well for European countries, it is not fitted for emerging economies, as it only looks at current existing data. Emerging economies sometimes find themselves confronted with a chicken and egg situation; they need investment to get on a pathway to low carbon emissions, but they cannot qualify for the investment unless they are already on that path. On the other hand, the MDB (Multilateral Development Banks) Common Principles for Climate Mitigation Finance Tracking take into account where a country claims it will be in ten years. But the downside of this approach is that it offers less certainty, as the assessments are based on a projected trajectory instead of precise data. Both of these frameworks remain hugely restrictive: using the EU Taxonomy criteria would only allow 10% of the necessary investment required on grids, and the Common Principles 40%.
Very keen to understand how they can help catalyse climate finance in their own countries, the MPs asked questions about the type of legislation and framework they should promote for this purpose. According to the two experts, it is essential to make sure their countries show serious political commitment to follow the path of clean energy, with a robust system of forward-looking plans, to give investors the reassurance that there will be a pipeline of renewable energy investment in the future. Raising climate ambition to increase the target of renewables in the energy mix and maintaining strong oversight on the achievement of these targets, are also powerful incentives. Government investment is another strong signal to investors of a serious commitment and that the rules will not suddenly change. Answering a question from MPs on the difficulty to ensure continuity of climate action with the alternation of parties in power, Executive Director Sergio Missana emphasised the key role that a cross-party network of legislators can play to work together beyond political differences, and to put pressure to promote long-term environmental policies of state, as opposed to short-term policies of government.