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Is the golden age of green investment really ending?

Written by Evan Byrne, Senior Account Executive, Energy Practice

Green financing is a hot topic right now. Last month the House of Commons Environmental Audit Committee (EAC) published its report Green finance: mobilising investment in clean energy and sustainable development, which argues that green investment has plummeted, driven largely by poor policy decisions and a lack of consistent direction from Government.

Figures from Bloomberg New Energy Finance show that in cash terms new investments into low carbon energy fell by 56 per cent in 2017, compared with 2016, which itself saw a drop of ten per cent from the year before.

This has led many commentators to sound the klaxon. Some claim that the fall in green investment will in turn prevent us from successfully tackling climate change down the road. It has led to calls for a complete overhaul of how we manage green financing with suggestions ranging from calls for the UK to introduce a Sovereign Green Bond, to the Bank of England building climate-related risks into its macroeconomic models. The Bank of England also recently told investors to back green companies or face the risk of huge losses from climate change.

These measures may be useful. There is a strong case to be made for reviewing how low carbon technologies are funded going forward, as policies and mechanisms introduced over the past decade may now no longer be fit for purpose. Several of the recommendations from the EAC report do in fact provide innovative solutions that could lead to more efficient and effective green financing.

Are green bonds actually ‘green’?

There are indeed some issues around ensuring that ‘green bonds’ are in fact green (rather than potentially the result of greenwash strategies), and a UK sovereign bond could help set a standard by which private bonds could be benchmarked.

Another recommendation from the EAC report is for the introduction of a carbon tax that increases over the long term, as generators and suppliers would have to adopt low carbon technologies in order to avoid future costs.

Renewables becoming ever more affordable

However, one might question whether a fall in green investment in cash terms is a regressive step. There is ample evidence showing that the capital costs associated with renewables in particular have fallen to record low levels. Of particular note is the fact that renewables and other low carbon generation’s share of the energy mix continues to rise.

All of this in fact suggests in terms of outputs – generation, capacity, total number of projects under development – that renewable and low carbon technologies continue to perform well and that the “fall in investment” is reflective of the vastly reduced costs associated with these technologies. There is consistent global data which shows that generation costs continue to fall, driven by global competition. In the UK, renewable projects are now being developed which are completely subsidy free, which shows how the scale of change these technologies have undergone financially.

The EAC Report proposes several valuable solutions, which the Government should look at implementing to improve the green financing space, and to continue the trend of enabling cheaper and cheaper renewable and low carbon energy.

However, the Government must be careful and not misunderstand the data it has been presented with: the “fall in investment” has been presented in cash terms. It is easy to argue that any fall in cash influx is a backwards step, but this argument fails to account for new efficiencies creating savings or fall in initial capital costs.

The Government must ensure that any future policies around green finance tackle the problems we will face in the future, and not revert to old policy positions which are not fit for purpose in today’s energy landscape.