The McCombs Sustainability Summit 2010 this week raised a very relevant issue for practitioners in sustainable businesses about the global recession and its impact on sustainability. Although the discussion was mostly focused on consumer products, a basic question to ask to sponsors of clean energy projects is simply: How do you plan to finance your project?
The economic feasibility of energy generating costs most commonly represented as the levelized cost of energy, which is the cost of generating energy (usually electricity) for a particular energy generating system including all the costs over its lifetime: initial investment, operation and maintenance, cost of fuel and cost of capital. Technological advances in clean energy often do not make sense economically since they are competing with existing conventional energy and the threat of new technologies that could make their technology obsolete or less efficient. Furthermore, energy infrastructures have lifetime asset period of more than 20 years. Currently, a lot of renewable energy sources such as solar and wind are only competitive because of government incentives, among the most popular in the US are the 30% Investment Tax Credit (ITC) from the overall capital cost and an accelerated 5-years of depreciation.
The above mentioned risks and uncertainties are exactly what lenders and investors most likely to avoid. These issues are accentuated due to the recessionary environment and credit crunch. A report from PwC and the Climate Group (www.theclimategroup.org), an international non-profit organization promoting low-carbon economy, launched in Davos last week found that investment in clean energy fell 6.5% in 2009 compared to the previous year. On the bright side, during the same forum, five of the world’s leading global financial institutions with total assets of over US$ 5.5 trillion stressed their commitment to incorporate low-carbon economy in both project finance and retail banking.
Going back to May last year, financing the transition to a low-carbon economy was one of the key issues in the World Business Summit on Climate Change in Copenhagen. In order to tap sources of funding from private investors such as pension funds and venture capitalists, it is essential to understand the key drivers and barriers in private investment as well as recommending policies to scale up investments in a fast manner to keep up with technological advancements. A regulatory framework should be designed not only to provide incentives to project sponsors but also investors which are contemplating the risks and returns from investing in clean energy compared to other types of project.
The focus group recommended that policy makers work together with businesses to provide the following:
- A robust and long term carbon pricing signals
- New financial products and strategies
- Private investments in early stages of technology
- Greater transparency and mandatory carbon disclosure
- Measures to increase rewards and decrease risks.
This off course is easier said than done, in particular because of the global scope of the industry. Any entrepreneurs interested in clean industry must understand the anxiety of investors in investing in such uncertain, highly capitalized and long term projects. This is the time when collaboration between technology, business and policy is crucial to provide a roadmap to low-carbon economy.