Where does the money come from? Sources of finance for the European energy transition

We analyse supply of and demand for finance in major scenarios for the European energy transition until 2050, and contrast this to the available sources of such finance. The good news is that sufficient private money is – in principle – available. However, the bad news is that it is not (yet) available in the forms that the European energy sector would need. Changing the situation requires action from both the private and the public sector in the coming years (Polzin and Sanders, 2019).

We know how much we need

Many studies highlight the large amounts of investment in the energy system that is required, ranging between 2310 and 2625 USDbn for Europe until 2050. An innovation-led sustainability transition requires investments in both invention and innovation, as well as diffusion, in a diversified financial system (Polzin et al., 2017). Many of the scenario-based analyses explicitly or implicitly neglect the sources of finance rather focusing on aggregate investment needs. For example McCollum et al. (2018, p. 591) state that ‘[…] given the nature of these models, we expressly address the question of ‘Where are the investment needs?’, not ‘Who pays for them?’’.

The money is available, but…

Our analysis further shows, on the one hand, that the volumes are available in the order of magnitude needed for a successful energy transition, especially when it comes to institutional investors. On the other hand, the numbers also reveal a qualitative mismatch what type is available and what is required. There is ample capacity to invest in scaling mature technologies such as onshore and offshore wind. But there are shortages in (upstream) innovation finance, especially research, development and demonstration (RD&D) as well as venture capital and private equity to finance for example power-to-X technologies. There the amounts are smaller, but the downstream impacts are not. However these types of finance which are suitable for funding experimentation are not scalable and require specialized knowledge. Hence they are not so easy to mobilize in Europe’s highly institutionalized, bank-based and regulated financial sector (Elert et al., 2019).

Who can do what?

In the later stages of technology lifecycle (see Figure 1) for example when the risks involved are comparably low, even within the current composition of equities, bond and alternative investments, institutional investors could finance large-scale (low-risk) renewable energy projects (Röttgers et al., 2018). An effective reform of regulation and governance to allow these investors to engage more in unlisted long-term equity and debt will make ample funding available to scale the necessary technologies. These could be realised through intermediate channels such as green bonds or YieldCos but institutional investors also heavily engage in public equity markets another underutilized source (La Monaca et al., 2018).

In the earlier stages of the technology lifecycle (with considerable risks) the problem is more urgent. Here only hardly scalable solutions such as small and distributed finance and venture capital are available (see Figure 1). Larger ticket sizes and higher risks can only be handled by (state) investment banks and some private equity funds. State investment banks have the potential to scale-up their investments significantly. However, their main role would be in mobilising private finance through co-investments, signalling and education (Geddes et al., 2018).

Figure 1: Sources of finance for the energy transition (framework adapted from (Criscuolo and Menon, 2015)).

Unlocking the potential

Our review yields three major ways of unlocking the potential of different sources of finance. First, initiatives promoting socially responsible investments from within the sector (such as pension funds and sovereign wealth funds) that base their investments also on ESG criteria could be scaled up (G20 Green Finance Study Group, 2016) An innovation-led energy transition needs risk-carrying capital in smaller tickets (Owen et al., 2018; Polzin et al., 2018). That needs freeing equity from individual retail investors or institutional funding from pension funds, insurance companies or sovereign wealth funds (Polzin et al., 2017). Finally, a recurring recommendation is the urgent development of expertise with technologies, investment vehicles and transition paths.


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Friedemann Polzin is Assistant Professor of Sustainable Entrepreneurship and Innovation at Utrecht University School of Economics (U.S.E.) and associated researcher at the Sustainable Finance Lab (SFL) | https://www.uu.nl/staff/FHJPolzin | https://twitter.com/friedemann_p Mark Sanders is Associate Professor Economics of Transition and Sustainability at Utrecht University School of Economics (U.S.E.) and member of the Sustainable Finance Lab (SFL) | https://www.uu.nl/staff/MWJLSanders | https://twitter.com/mwjlsanders