Financing the energy transition: A path to a more sustainable future for Ireland
In With Up To And Are Sides Segment Frontier The Renewable Sectors Curve Private In The All Public Move The Technologies Aligned Interests Mature The Energy, Segment Want To Of From The That Investment
, Partner, PwC Ireland, outlines the importance of private sector finance in facilitating an accelerated energy transition
Ireland is at a pivotal moment in its energy journey. As the world grapples with the urgent need to combat climate change, the transition to a sustainable energy system has become a top priority.
For Ireland, this transition involves shifting from fossil fuels to renewable energy sources, enhancing energy efficiency and ensuring energy security. Financing this transition is a complex but crucial task that requires a multifaceted approach involving government policies and supports, private sector investment and community engagement.
The cost of transitioning to a more sustainable energy system in Ireland is substantial and varies depending on the scope and speed of the transition. Estimates suggest that the total cost could range from €60 billion to €200 billion over the next 25 years.
This wide range reflects different assumptions about the pace of change, the technologies employed and the extent of infrastructure upgrades required. While the Government will be in a position to part-fund this transition there is a growing recognition of the importance of finance in facilitating an accelerated energy transition.
The terms funding and financing are often used interchangeably; however, they are quite different. Funding refers to who pays a specific amount of money for a specific purpose. It’s usually provided interest-free with no expectation of repayment and includes customer charges, grants, subsidies, property taxes, business rates and asset disposals.
Financing involves providing money for a specific purpose which ultimately has to be repaid. It includes commercial bank debt, project debt, bond finance, equity investment and leasing finance. Financing is important as it can take the up-front burden of funding from customers and governments and spread it across a longer period of time.
It can also enable increased innovation and risk-taking to help accelerate technologies and know-how.
The Irish government has committed significant funding to support the energy transition. For example, the National Development Plan 2021-2030 includes substantial investments in climate action and sustainable infrastructure.
Additionally, the Renewable Electricity Support Scheme (RESS) and Offshore Renewable Energy Support Schemes (ORESS) provide financial support mechanisms for renewable energy projects, encouraging private sector participation.
However, if we are serious about achieving our decarbonisation targets, further support mechanisms, particularly in earlier stage segments of the energy transition, will be required.
The energy transition market is divided into four segments:
This is the earliest stage of an investment, e.g. sustainable aviation fuels and green fertilisers. It contains technologies that are still in development. This is in the realm of venture capital and corporate venturing — high-risk, high-reward investing in which the game is to back the next ‘breakthrough technology’.
The Developing segment contains technologies or solutions that are proven to work, but that have not yet been adopted at scale, owing to high costs or other barriers to penetration such as consumer scepticism. In Ireland, they include floating offshore wind and electric (EV) charging networks. The natural financiers of such opportunities are shorter term debt providers, private equity firms and core-plus infrastructure funds that are willing to finance the rollout and scaling of good propositions.
The Maturing segment includes technologies and solutions with proven business models and reliable cash flows and returns that have already achieved significant penetration, such as grid-scale renewables. This segment is the natural domain of long-term debt finance, core infrastructure funds and patient private equity and can include very large projects.
The Sustaining segment reflects the importance of responsible stewardship of high-carbon assets, and the ‘brown-to-green’ investment mandate that decarbonises critical industries such as metals, cement and refining.
The objective for finance providers — and for society as a whole — is to move technologies up the curve from the frontier segment to the mature segment. This unlocks larger pools of capital that can invest at lower cost which can then scale the technology further. The interests of the public and private sectors are therefore aligned. De-risking investments and removing obstacles to investment provides returns for all stakeholders.
Over 50% of the technologies or solutions to deliver our energy transition needs are not yet commercially mature (i.e. in the Frontier segment) and yet the majority of financing is available in the developing and maturing segments. In addition, current early-stage investments are heavily focused on energy and mobility, while sectors like buildings, food, agriculture and heavy industry need more attention.
Government policy and collaboration has a vital role to play in setting targets and providing support. This can involve the following:
- Tailoring policies to reduce risk in specific technologies. European investors are comparatively risk-averse and require a level of certainty that many Frontier technologies do not yet offer. It is here that governments must step in strategically. This could be through the provision of capital supports to help crowd in finance or the development or regulatory models to support longer-term investment.
- Long Term Commitments. Clarity is an essential part of risk reduction and investors need clarity for the life of an asset. By providing long-term commitments, governments can offer much-needed reassurance that will unlock early-stage financing.
- Blended Finance. The Government may also bridge viability gaps on projects through blended finance. This can involve providing finance where it would not have been provided by commercial banks. It may also involve blending government supports or subsidies with private finance.
- Recycling capital is also an important strategy. If the governments get this right, not only can they accelerate the development of decarbonisation solutions, but they can make money in the process. Government funds can fill the gap in early-stage investments or markets. And as the assets and technologies mature, those investments can roll over into lower-risk funds — freeing up new capital to be invested in the next generation of riskier projects.
Achieving the energy transition in Ireland requires Government, investors and corporates to work together. Success will require that these players challenge their existing thinking and be prepared to step up and work in different ways.