Highlights

Abstract

Keywords

۱٫ Introduction

۲٫ Conceptual background

۳٫ Methodology for estimating financing needs by source

۴٫ From investment by technology to investment by source

۵٫ Learning and dynamics in finance

۶٫ Conclusions and implications

Acknowledgements

Appendix A. Supplementary data

References

Abstract

Numerous studies have presented scenarios regarding energy transition, including the computation of investment costs in various models. Although these studies project detailed investment pathways for different technologies, they do not distinguish between different sources of and types of funding. They tell us what the transition will cost, but not how it will have to be financed. In this paper, we develop a methodology according to which an appropriate financing mix can be calculated from these investment projections based on technology-related assumptions in scenarios. We differentiate between debt and equity as well as between the following sources: public/private Research, Development and Demonstration (RD&D), small-distributed financing, venture capital (equity), public markets (equity), and asset finance (debt and equity provided by institutional investors). We show that major commitments to wind and solar energy need to come from institutional investors in the form of asset finance. In addition, to achieve the transition to a decarbonized power system, government and private investors need to continue investing and extend their engagement in funding research, demonstration, and early deployment. Finally, we present a number of policy options targeting the different sources of finance.

۱٫ Introduction

To reach the targets set by the 2015 Paris Agreement, a significant reduction in CO2 emissions is necessary (IPCC, 2019; OECD/IEA and IRENA, 2017; Rockström et al., 2017), and many studies have projected the required amount of investment in renewable energy (RE) production and/or reduced energy demands to make this happen (see Fig. 1). These investments are, without exception, large and cover both investment in the deployment of mature technologies and the development of new and innovative technologies (Eyraud et al., 2013; Mathews et al., 2010; Polzin, 2017). It is well known from the finance literature, however, that different investments attract very different types of investors, with correspondingly different mandates, risk appetites, and lossabsorbing capacities (Mazzucato and Semieniuk, 2018; Polzin et al., 2017). It is therefore important to consider not only the total amount, but also the mix in which finance should be available to make the energy transition feasible.

Fig. 1 shows the projected average annual investments per technology for a selection of models. These projections show that there is significant variation across models and scenarios; however, what the underlying studies do not explicitly address is what sources of finance actually need to be tapped to finance the total investments in these different technologies. Preliminary work (Mazzucato and Semieniuk, 2018; Polzin and Sanders, 2020) indicates that a qualitative mismatch rather than an actual financing gap may slow down the energy transition. This is, in a sense, good news, as it is easier to redirect available resources than to overcome absolute shortages. Specifically, we need to design policies to better engage private sector financiers. To design such policies, however, we first need to assess and quantify their role in the scenarios covering 2020–۲۰۵۰ (McCollum et al., 2018). McCollum et al. (2013, p. 3) already asserted that “what this mix of investments [sources of finance] should look like is very much an open question, however, especially at the national and regional level.” To address this gap in the literature, we propose a simple method for mapping the readily available and routinely projected vector of investments per technology into a vector of investments according to preferred financing types