The energy transition requires a strategic regional investment agenda has been saved
The energy transition requires a strategic regional investment agenda
Discussing the Regional Energy Strategies (RES) of the Dutch Climate Agreement
The so-called ‘Regional Energy Strategies’ (RES) are an important element in the Dutch Climate Agreement. The objective of these strategies is to translate the national targets to regional programs and projects, with a focus on the themes Built Environment and Electricity. In this blog we discuss the objectives of these regional programs as part of our blog series about the Dutch Climate Agreement. We notice that the main focus is on a careful regional process, while little attention goes to the required regional investments.
Energy transition as a regional process
In the RES the local governments, social partners, network operators, the private sector, and where possible local residents collaborate to prepare regionally supported choices. These choices are translated to relevant areas, projects, and the implementation and execution of these projects. The RES covers:
- Which energy goals should be achieved and in which time period.
- How to organize the spatial planning of these goals in cooperation with relevant social actors
- How to create a long-lasting collaboration between all regional parties
Remarkable is the strong focus on the process and (rightly so) also on spatial implementation. We strongly support the proactive stimulation of collaboration on a regional level. What is underexposed in the Climate Agreement, however, is the recognition that the energy transition is not only a complicated process but requires significant investments as well. In every RES-process the question will eventually arise as to who will invest in the created solutions and in which strategic framework this will be done.
The support from the National Government is primarily process-based and focuses mainly on the development of ‘comparable and cumulative’ RESs, based on the common use of data and information, with the aim to have the regions ‘challenge each other to make better plans’. The idea seems to be that if the process is good, and the plans are good, the investments will follow automatically. For now, the investment commitment by the National Government regarding RES is limited to a process investment of € 22,5 million per year (€ 0,5 million per year per region and € 7,5 million for the overall program).
The Climate Agreement also discusses the (private) financing of the energy transition. This market-based financing will (understandably) be based on usual risk and return objectives in line with market conditions. Government contributions are also announced in the Climate Agreement, to strengthen business cases for sustainability and to bring market financing within reach. How these government contributions will be shaped regarding (1) strategic focus, (2) type of financial instruments, and (3) financial volume, remains unclear.
Public-private investment in transition programs
By nature, transition programs and projects are challenging. Compared to conventional projects risk and return ratios are often less positive and payback periods are unsure. The investment assessment of transition projects is, therefore, more difficult and less frequently leads to a positive investment decision.
What we see in our practice is that more and more often, because of the challenging nature of the business cases and the significant societal relevance of transition projects, private parties request (financial) support from public parties in order to make a positive investment decision. This involves a search for the added value from the project and possible synergies within the domain in which the project is intended. We see private parties looking to regional public parties and port authorities for support, beyond the regular subsidy processes. This demand for support is manifested in different ways, we see support mechanisms in private equity, soft loans, investments in infrastructure and utilities, subsidies, and lobby support focusing on the National Government and European institutions.
On the other hand, in the public sector, we see regional and local governments making complicated investments in for example heat networks, to make these financially feasible and sellable. Both public and private parties are looking for certainty in their investment decisions. Questions that are often brought forward are: What is my role? Who is involved? Which parties are investing? What is the long-term perspective? How do we turn this into a profitable business case?
Here we identify an essential strategic role for regional governments. The formulation of a RES is an appropriate initial step in mapping the investment requirement. Furthermore, these regional governments have - for example through regional development funds and harbor authorities - an overview of and influence on circularity and sustainability projects in the market. By connecting these insights to the RESs, the outline of the investment agendas might become apparent. It becomes clear how, through subsidies, focused equity stakes, and other instruments, regional governments can accelerate the energy transition.
Towards focused regional investment capital
The energy transition is a public-private transition challenge that inevitably will be accompanied by large-scale investments. These transitory investments are characterized by complex business cases with relatively high risk and uncertainty. Investments will be required in for example (residual) heat networks, geothermal energy, increased network capacity, hydrogen, alternative raw materials for industry, etc.
The paradox is that these investments are necessary - in order to reach government targets such as reducing the use of natural gas by 2050 to zero - while at the same time it is still uncertain which solutions are optimal. Optimal from a perspective of (1) CO2-reduction, (2) continuity of supply, (3) support of stakeholders, (4) scalability, and ‘last but not least’ (5) financial feasibility.
In our opinion focused (regional) public investment capital will be essential for boosting and accelerating the energy transition. We argue a change in focus from reactive financial instruments (e.g. subsidies) towards proactive investments in key projects focused on accelerating the energy transition. An investment framework is key to facilitating focused investments within a regionally supported strategy. These strategies are currently being developed. We are eager to witness the creation and development of the RESs in the different regions and the required investments that will, no doubt, result from this. We plead for working towards a clear and focused regional investment agenda in which we can offer support in preparing and optimizing business cases, prioritizing projects, and making them feasible with public and private parties.
If you have any questions or would like to discuss opportunities, please contact us.