Financing Decarbonization of the power sector

24 February 2010

ZÜRICH – Leading financial institutions who have adopted the Climate Principles, met in Zürich to discuss the financing needs for decarbonizing the power sector.

The meeting, hosted by Swiss Re, brought together a unique combination of power sector experts, financing specialists and climate change practitioners to discuss current policy, technology and financing barriers and solutions. There were two key topics of conversation: accelerating solar power in Europe and providing finance for carbon capture and storage (CCS).

Some of the key points raised from the dialogue include:

Solar power in Europe

Disjointed and short-term regulation and financial incentives are hampering the growth of renewable energy projects in Europe. Differences in renewable energy regulations across Europe make it complex and time consuming for project developers to navigate permitting processes, negotiate energy contracts and secure grid connections. All of these issues translate into risks for providers of finance, most of which cannot be covered by insurance products as they are a result of policy and political issues rather than technological or weather related risks. Even feed-in tariffs, typically created to incentivize the market, can have the opposite effect. High feed in tariffs certainly drive increased interest and project opportunities, but by creating a false economic opportunity the market can become saturated by those wanting to make quick returns. Incoherent and misguided project proposals clog up investor in-boxes, bubbles form in markets, such as Spain, which then burst and create skepticism of the financial stability of similar markets - all of which makes it more difficult for the genuine developers to gain access to traditional sources of finance.

As with other newly developing markets, solar technology manufacturers and project developers alike are finding finance from angel investors and venture capital funds better suited to the risky and complex nature of the sector. The overarching message from the conversation in Zürich was that without more coherent policy, the market will continue to grow but much more slowly that it could with longer term certainty and incentives that do not distort the market. Without change, it is also likely to slow the acceleration of next generation technologies such as concentrated solar power, which although has enormous potential in terms of supply, comes with additional questions regarding the need for a super grid across Europe and storage capacity to manage loads across existing infrastructure. All of these issues need a well-thought-through policy framework to enable scale up – an area that Munich Re is working on for concentrated solar power.

Carbon Capture and Storage

Whilst the solar power sector is dominated by new and entrepreneurial businesses, carbon capture and storage projects are, not surprisingly, often being led by well established utility and energy companies with a wealth of engineering and geological knowledge and experience of developing large, complex projects. This is essential for not only solving the problem from a technical perspective, but understanding how to assemble the value chains to deliver end-to-end projects that are commercially viable. Projects discussed during the meeting are moving forward with a combination of public sector finance and funding from project sponsors. The question is how private sector finance and insurance will develop to support planned and future projects.

The first step is getting financial institutions comfortable with the actual and perceived risks of the process and the second is providing a clear outline of the business model. One model likely to provide a commercial opportunity in the short term, if using pre-combustion technology, is to create two saleable products from a hydrocarbon source (ie. oil, gas or coal) upfront, rather than using CCS as an end-of-pipe abatement technology. In this instance, carbon dioxide can be sold for enhanced oil recovery (EOR) and the remaining hydrogen is used as a clean energy source for generating electricity.  There are examples where this arrangement provides a win-win situation, such as the HECA project in California, and the HPAD project in Abu Dhabi, which can also be seen here. As money is hard to come by in the current economic climate, the importance of a credible and financially secure project sponsor is a crucial factor for those making financing decisions. This raises the question about the viability of projects with lesser known partners.

Another important question is whether suitable business models can be found for existing and new coal fired power stations where post combustion capture technology may be the only option, and an obvious customer or storage site for the carbon dioxide that is captured is not available.  These are questions that will be the subject of ongoing debate as part of The Climate Group’s work funded by the Global Carbon and Capture and Storage Institute (GCCSI).

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