Deloitte report: How to deploy innovative financing to unlock US$50 trillion in savings on the road to net-zero

VIENTIANE, 9 May 2024 —Deloitte has released the second edition of the Financing the Green Energy Transition report, which details how society can reduce the cost of capital by mobilising de-risking instruments and innovative financing mechanisms, making the energy transition possible, affordable, and equitable—especially for developing economies. The new edition builds on last year’s report that found improved financing could save the world US$50 trillion as it decarbonises its energy system, identified key barriers to investments in green projects, and highlighted potential instruments to bypass those barriers.

“The energy transition presents an unparalleled challenge that could cost up to US$200 trillion unless we improve the financial conditions for clean energy investments. Investors, lenders, development finance institutions, and policymakers each have significant roles to play in a coordinated effort to establish a truly dynamic project financing environment,” said Jennifer Steinmann, Deloitte Global Sustainability leader. “We speak with organisations every day on the numerous de-risking strategies available to forge a path forward. This report outlines a novel set of public-private initiatives that can release capital, stimulate economic growth and development, and ultimately accelerate an equitable energy transition.”

Tailored de-risking strategies for cost-effective clean energy investments

A cost-efficient combination of different de-risking instruments can drive a US$40 trillion reduction in energy transition costs through 2050, but the impact, effectiveness, and efficiency of the tools are highly context-dependent.

Tailoring a mix of de-risking strategies to specific market conditions, geographies, and technology maturity can help minimise the risks by:

• Enabling systemic de-risking via effective policymaking: Regulatory and information instruments are crucial for building an ecosystem with low systemic risks for positive climate impact projects. Effective policymaking in energy and climate can help provide transparency and visibility for investors and lenders, creating the right regulatory framework to facilitate project development and financing.
• Matching de-risking instruments to project-specific risks: Investors and lenders assess project risks to determine return on equity and loan rates. This is especially important for capital-intensive clean energy projects, where risk perception can make financing too costly.

Successful deployment of de-risking instruments across the first wave of clean energy projects can improve the risk perception of similar projects overall, further lowering financing costs for future projects. While these instruments can be effective, they entail their own costs, such as expenses for project developers, potential expenses by states and insurers, and the use of public capital for economic and financial support. Evaluating the cost efficiency of these instruments is crucial, especially in developing economies where there tend to be limited public budgets.

Unlocking cost savings through green project refinancing

Through financial learning effects, as investors and lenders improve their risk perception of green projects over time, and markets and regulatory environments mature, the cost of capital can decrease even further.

As interest rates for sustainable projects are expected to decline over time, projects can benefit from the financial learning, and continued cost reduction can occur even after construction is complete. The cost of debt and equity of completed projects can be designed to be reviewed each year and modified based on the market rates for new projects. Enabling the refinancing of long-term green projects can help make the transition more affordable by allowing projects to lower their financing costs as capital markets mature. Refinancing debt and equity can unlock as much as US$10 trillion of savings cumulatively through 2050.

Brian Ho, Sustainability & Climate Leader, Deloitte Southeast Asia, added, “The Southeast Asian region presents a unique confluence of challenges and opportunities. Businesses must be acutely aware of these dynamics to develop effective de-risking strategies and foster strong collaboration across stakeholders. This collaborative approach will mitigate investment uncertainties but also empower Southeast Asian economies to achieve a sustainable, resilient, and equitable future.”

Calling on stakeholders to help reshape the current project finance environment

Stakeholders should work together to help reshape the current project finance environment into a more functional, sustainable project finance ecosystem that incorporates the climate impact of investments and enables refinancing:

• Investors and lenders should prioritise green finance in their investment strategies and adapt their financial assessment methods to help meet new demands. According to the Climate Policy Initiative, institutional investors only accounted for less than 1% of global climate investments on average in 2021 and 2022.
• Policymakers are pivotal to helping establish the required regulatory environment and the sustained momentum needed for an affordable transition to net-zero. Political leadership is needed to develop strategies and taxonomies, set up adequate de-risking instruments, create a differentiated and flexible sustainable project finance ecosystem, and help establish an initial commercial track record to activate learning effects.
• Development finance institutions (DFI) should calibrate their finance instrument mixes to make the most out of their limited concessional capital and enable large-scale refinancing. DFIs should deepen their analysis of sustainable project de-risking tools and entrench their role as early-stage risk-absorbers to facilitate the participation of large-capacity investors.
• International organisations can help lay the foundations for a global trade environment where everyone prospers, helping reduce the cost of the energy transition and fostering economic development around the globe. These organisations can also encourage common regulatory frameworks to enable the global trade of future clean energy technologies, needed raw materials and molecules.

“This report offers a compelling roadmap for unleashing the immense financial potential of the green energy transition—and time is of the essence as mobilising green finance is expected to continue to be a central theme at COP29 in Baku in November 2024, as it was in COP28 last year,” said Prof. Dr. Bernhard Lorentz, Founding Chair of the Deloitte Center for Sustainable Progress and Deloitte Global Consulting Sustainability and Climate Strategy leader, who co-authored the Deloitte study. “By strategically combining de-risking instruments, promoting project refinancing, and fostering collaboration among stakeholders, non-bankable clean energy projects can be transformed into attractive investments, slashing the cost of achieving net-zero and accelerating the creation of a sustainable future. This promising scenario can deliver a healthier planet but also trillions of dollars saved—especially in emerging economies—a powerful incentive to ramp up action.”

To learn more about Deloitte’s 2024 Financing the Green Energy Transition report, please visit: https://www.deloitte.com/global/en/issues/climate/financing-the-green-energy-transition.html.

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