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Defining the energy transition

Rod Morrison
Rod Morrison
Editor, Project Finance International, Refinitiv

As the energy transition evolves, banks are under pressure to invest in innovative new technologies – but is a full-scale shift towards green assets by 2030 a realistic goal?

  1. The president of the European Investment Bank Werner Hoyer says to “put it mildly, gas is over”, just as the German authorities have given some more onshore approvals for the Nord Stream 2 gas pipeline from Russia.
  2. The International Energy Agency (IEA) says no new gas fields – but many commercial energy companies define it as a transition fuel.
  3. Defining the energy transition has yet to start. Right now, it’s all blue skies ahead.

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This article was originally published in PFI, 19 May 2021.

Former governor of the Bank of England Mark Carney was on UK TV recently in the run up to the COP26 United Nations climate change conference in Glasgow in November later this year.

He is the financial adviser to the UK presidency of the event. Asked if we should stop flying to help the environment, he said we should certainly take the impact of flying into account and ramp up the cost of it with carbon pricing before sustainable fuels can come into play.

Read the new report: Cashing in on the sustainable infrastructure green rush

New technologies and the energy transition

That aside, Carney was stressing the need for banks to invest in new technologies.

Trillions of pounds of investment will be needed every year for the foreseeable future, and the money will have to come from the banks, as that is where the money is, Carney said.

Banks will be forced to provide the funds for the green deal as their non-green assets will become stranded if they continue to fund those assets. They need to switch.

Gas, apparently, is the new coal and it could have a US$100bn stranded asset price tag according to San Francisco clean energy supporter Global Energy Monitor.

Emissions reduction targets

Carney pointed out that banks are now subjected to Bank of England stress tests on their assets to see how their loans will perform in 2030 when the UK reaches its target of reducing emissions by 68 percent from 2005 levels.

Down in Australia, by contrast, the Federal Government has just had to bail out the country’s two remaining oil refineries with a US$1.8bn package up to 2030.

The package includes moving to ultra-low sulphur petrol. Shame the banks could not finance that, but refineries are not bankers’ flavour of the month.

Investing in technologies to boost renewables

Carney says the new technologies to invest in include offshore wind – if only enough deals could come through some bankers might say – and other innovations such as hydrogen and electric vehicles. But 2030? That might be pushing it.

Hydrogen to ammonia perhaps, but widespread use of hydrogen, probably not by then. And indeed, the same can be said for many new technologies that are unproven and therefore by definition ‘unbankable’.

Asked if banks should support companies whose activities damage the planet, Carney said we should transition to tomorrow, to the new industries of tomorrow. But today? And how to transition realistically?

Roadmap to net zero by 2050

The IEA, which used to be criticised for not taking green energy seriously enough, is now saying there is little time left to get to net zero in 2050; it is a narrow but still achievable window.

And given the urgency, it has laid out a roadmap that says no new gas fields, no new gas boilers, etc. New technologies will the rule the roost.

“Most of the global reductions in CO2 emissions between now and 2030 in the net zero pathway come from technologies readily available today,” it says. “But in 2050, almost half the reductions come from technologies that are currently only at the demonstration or prototype phase.”

The shift away from gas is problematic

All very well, but as the European Union (EU) has found ruling out gas is problematic.

The European Commission (EC) had planned to omit gas-fuelled power plants from a new list of sustainable investments but delayed the decision last month following complaints from some member countries and companies.

Various oil and gas majors lobbied against the rule, as one would expect. But notwithstanding commercial imperatives, what makes sense for society as a whole?

Do we rush headlong into a new era of banking, or not banking, but subsidising new technologies in the hope they will work? Is this akin to when the railways were switched from steam to electricity overnight in the UK? Or do we plan ahead, set out what transition really means? It is all very well to set out future demands, goals and ambitions, but why not back them up step-by-step?

Gas plays an important role in the energy matrix right now and will do so for the next decade or two.

If it creates additional problems regarding methane leakage as well as carbon emissions, encourage the work on solving that right now. Do that in parallel with the work on developing and accelerating the new technologies. Who knows where that work will lead?

I suspect technological developments will move faster than we expect. But banking on that now does not make sense. Bank on what you know. We knew electric trains worked.

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