Financing renewable energy and role of multilateral institutions

Renewables combined with battery storage is not only the cheapest way to expand energy production in most parts of the world but also the fastest to deploy, according to BNEF.

Yet financial and non-financial risks still exist when rolling out renewable projects at scale, especially in parts of Asia, where transition away from fossil fuels has the longest way to go. Support from governments and multilateral development banks (MDB) such as the World Bank is needed to further break down barriers.

This was the topic of a panel discussion at the HSBC Global Investment Summit, which explored the path to financing the energy transition – especially the installation of renewable sources.

“Wind and solar can be deployed fast and at scale, generating cheaper electricity than fossil fuels in most cases, which makes those technologies very attractive today” said Torsten Lodberg Smed, Senior Partner at Copenhagen Infrastructure Partners (CIP).

“The current environment is very attractive for renewables. Our projects are backed by real assets which can provide downside protection and are often linked to inflation”.

Because sunlight and wind are free and available in abundance, the running costs of installed solar and wind farms are significantly lower than in generation plants fuelled by coal and natural gas. At the same time, a buildout of large capacity for solar panels and wind turbines in China and other places is helping to bring down their costs, making renewables disinflationary.

While the US administration’s recent policy actions favouring fossil fuel production and exports, and its curbs on wind power, have led to uncertainty surrounding existing projects there, America’s loss could be a gain for other regions.

Investment capital for renewables is likely to look for opportunities outside the US, and the supply-chain that will not be utilised in the world’s largest economy will be available to other global regions, Mr. Smed said.

“The US remains an interesting market for renewables, but in the short term, some of the capital and supply chain earmarked for US offshore wind projects is likely to be deployed in other regions”, Mr. Smed said.

Sir Danny Alexander, Chief Executive, HSBC Infrastructure Finance & Sustainability, who moderated the panel discussion, highlighted that trillions worth of annual investments were needed to be invested to achieve companies’ and countries’ net zero goals.

"While bank capital alone cannot bridge this gap, the good news is infrastructure as an asset class is gaining appeal among new classes of investors including asset managers, insurers, pension funds as well as private clients,” he said.

Asia opportunities

Joanna Munro, Chief Executive for Alternatives at HSBC Asset Management, said that while China has built a huge capacity of renewable power, the take-up of renewables is not as high across Asia. Japan and South Korea, for example, derive most of their electricity from non-renewable sources.

The two nations, both large importers of liquefied natural gas, have a “real imperative” to quickly deploy renewables for their energy security. At the same time, few global infrastructure funds that are raising capital have an Asia focus, making many investment opportunities available.

“Of the 176 global infrastructure funds actively raising capital, only 15 of those are focused on Asia,” said Ms. Munro, adding, “infrastructure debt in Asia is proving harder to attract European investors due to the expectation for a risk premium", said Ms. Munro.

The role of public institutions

MDBs and public institutions, which have social objectives such as poverty eradication and agendas to bring clean energy to the emerging and developing world, can play a key role in helping channel investments by lowering financial and non-financial barriers.

The panel discussed how MDBs can partner with the private sector to create a positive cycle that will unleash significantly more resources for emerging and developing markets.

For example, the World Bank is helping by facilitating a policy dialogue to encourage countries to work with developing institutions and building a pipeline of renewable projects that need financing. Having the right policies in place can ensure consistency and enhance predictability for investors, given the long-term duration of energy projects.

Guarantees and securitisation

The World Bank provides step-up loans to countries – charging lower interest rates during the construction phase of a project, when there is no return on investment, and a higher rate on completion. Such a mechanism can serve to ease the financial burden on borrowers.

The World Bank has created a group in partnership with global financial institutions, and asset managers and owners to discuss and get feedback on what it will take to securitise its loans. Securitisation, where assets are pooled and tranches of that pool are sold to financial institutions, can be an effective way to expand a financial institution’s lending capacity while turning illiquid assets into tradeable securities.

Infrastructure is the fastest-growing alternative asset class, yet it accounts for less than 1% of total global Assets under Management (AuM). Institutional investors allocate only 5% of their portfolios to infrastructure, despite its benefits—stable returns, inflation protection, and portfolio diversification¹.

“The challenge is not a shortage of global capital,” said Sir Danny Alexander. “The challenge is meeting a range of investment risk appetites. Especially in Asia and MENAT where global investors expect a risk premium and the spectrum of bankability means many projects struggle to attract commercial financing terms,” he said.

To appeal to institutional investors at scale, any financing opportunities need to be structured as investment grade assets. Safe guards include having MDBs guarantee loans at a project finance level and ways to address foreign exchange and construction risk.