Report Review: A Consistent Rise in Investments in Low-Carbon Infrastructure, Despite COVID-19
By Nancy Nguyen and Peter du Pont[1]
In May 2021, we published a short blog reflecting on what appears to be a trend of major investors committing to stop or scale back funding for new coal-fired power plants or new greenfield thermal coal mines. In this blog, we highlight a new report by the Institute for Energy Economics and Financial Analysis (IEEFA), which allowed us to better understand whether shifts away from coal investment are translating into a stronger momentum of capital flow into low-carbon assets.
The IEEFA report, entitled “Global Investors Move into Renewable Infrastructure”, highlights an increasing appetite among investors for investments into low-emission energy technologies and projects. According to the report, global investment in climate-friendly infrastructure projects has been steadily increasing over the past 15 years and topped USD 500 billion for the first time in 2020, despite the ongoing COVID-19 pandemic, which has severely impacted many investments. These projects involve renewable energy, energy storage, electric vehicle infrastructure, hydrogen production, carbon capture and storage, small-scale solar power systems, and heat pumps.
Date collected by BloombergNEF, presented in the chart below, shows renewable energy has driven this record-setting investment with nearly two-thirds (60% or USD 303 billion) of total investments in 2020. The majority of this investment is locked into solar and wind projects. For the past seven years (2014-2020), as the BloombergNEF’s data indicates, global new investment in renewable energy assets has consistently increased, reaching more than a quarter of a trillion USD invested each year. The largest renewable energy transaction of 2020 was the 3.6GW offshore wind farm at Dogger Bank, an isolated sandbank in the central to southern North Sea spanning British, German, Danish, and Dutch waters. A total of 29 banks and 3 export credit agencies are providing USD 6.6 billion in loans, plus USD 934 million worth of ancillary facilities for this project. In fact, the Dogger Bank wind farm is one of the largest clean energy transactions to date.
Figure 1. Investment in Energy Transition between 2004-2020
Source: BloombergNEF, cited in the IEEFA’s Report “Global Investors Move into Renewable Infrastructure, 2020
Figure 1 shows a significant uptick over the past several years of investment into other low-carbon sectors beyond solar and wind—notably energy storage, electric heat and transport, hydrogen, and carbon capture utilization and storage (CCUS).
Interestingly, the IEEFA report point outs that, global investment in the clean energy sector is currently being dominated by three Japanese banks (Sumitomo Mitsui Banking Corporation Group, Mitsubishi UFJ Financial Group Inc, Mizuho Financial Group Inc) and seven European banks (Caixa Bank SA, BNP Paribas SA, Societe Generale SA, Cooperative Rabobank UA, Credit Agricole Group, ING Groep NV). In 2020, these ten banks lent a cumulative amount of USD 30 billion to renewables projects. This only includes the projects in the primary debt market, not counting assets in the secondary debt market, investment in publicly listed equities of renewable energy companies, and private equity investment. Among these top lenders, Sumitomo has invested USD 4.2 billion in 78 projects by the end of 2020. Although no U.S. commercial banks are on the list of top 10 debt providers, US banks have adjusted their policies to be more favorable to climate-friendly projects. The four biggest lenders in the U.S—JP Morgan, Bank of America, Citigroup, and Morgan Stanley, have committed to a cumulative target of USD 6 trillion of investment into sustainable and low-carbon assets over the next 10 years.
As the IEEFA report points out, equity investors have also significantly increased their investment in renewable energy infrastructure. Asset management giants such as Amundi, BlackRock, and Brookfield are investing aggressively in the climate-friendly sector. Brookfield has one of the biggest clean energy portfolios, with more than 19GW of hydro, wind, solar, and storage in North and South America, Europe, India, China, and other Asian countries. Brookfield is currently managing USD 57 billion of renewable energy assets, with the annual return in 2020 reaching 91%.
The IEEFA report also remarks on the significant role of major European oil and gas companies—such as Shell, Total, Galp, and Repsol—in scaling up renewable energy investments and aligning their strategies toward net-zero commitments. According to the report, although investment from these giant fossil fuel producers in low-emission energy assets reduced by 12% year-on-year to USD 12.7 billion in 2020, the CAPEX proportion allocated to those projects increased to 6%, which is higher than in previous years.
The continued expansion of investment in low-emission energy assets implies that serious, professional investors believe that the climate-friendly sector can generate strong, risk-adjusted returns and stable project cashflows. We at Asia Clean Energy Partners, in our role as a regional convener, make sure that this important fact is well communicated, and we will continue working with key stakeholders to support investors entering the Asian clean energy market.
[1] Nancy Nguyen is Consulting Manager for Asia Clean Energy Partners, and Peter du Pont is a Managing Partner at the firm.