Post COP26: Developing and Funding Energy Transition Projects White & Case LLPPost COP26: Developing and Funding Energy Transition Projects White & Case LLP
Impact Investing Forum 2023
London. May 04-05, 2023.
With an attendance of more than 190 world leaders, the long-awaited twenty-sixth Conference of the Parties (COP26) concluded with agreement on the Glasglow Climate Pact and the Paris Rulebook. Amid mixed views of whether COP26 was a success, there was a particular focus on the international leadership’s stance on the energy transition and how support for cleaner technologies can help limit the global average temperature rise to less than to 1.5 degrees Celsius by the end of the century.
Energy transition is generally taken to refer to the global energy sector’s shift to cleaner, more sustainable energy sources such as wind, solar and hydrogen, while maintaining a parallel focus on “greening” existing energy sources such as hydrocarbons, including through the use of decarbonisation technology such as carbon capture, use and storage (CCUS).
This article highlights some of the key points discussed at our recent webinar titled ‘COP26 – Energy transition’s pivotal role in delivering climate change targets’ featuring panelists Yasushi Hirai (Japan Bank for International Cooperation (JBIC)), Angela Yuen (JERA Co., Inc.), Lei Zhang (Soci?t? G?n?rale) and Tim Power (White & Case), as moderated by Paul Harrison (White & Case). In particular, we discuss how COP26 goals will affect the development and funding of energy projects and what opportunities and challenges of the decarbonisation journey lie ahead.
Significant developments from COP26
Ever since COP26 concluded, there has been debate from all sides as to whether the goals set were ambitious enough to tackle the climate crisis. However, panelist and White & Case partner Tim Power took the view that the timing of the summit was in itself particularly significant, “COP26 really plugged into the ESG zeitgeist that’s going on at the moment, driven primarily by businesses and their shareholders and investors and by capital providers, to decarbonise businesses and to pursue sustainability objectives.” He added that COP26 has provided a forum for “public attention and government commitment to decarbonising, right at a time where businesses and financiers especially are also very much focused on achievement on the ESG front.”
Key energy transition developments from COP26 included the following:
Breakthrough agenda: Over 40 countries committed to accelerate the development and deployment of clean technologies and sustainable solutions with the Breakthrough Agenda. Signatories including the UK, US, Japan, India and China set goals for 2030 in five key sectors – Power, Road Transport, Steel, Hydrogen, and Agriculture. For Hydrogen, the goal is to make affordable renewable and low carbon hydrogen globally available by 2030 and for Power, it is to make clean power the most affordable and reliable option to meet power needs by 2030.
Pledge to quit coal: More than 40 countries committed to ending all investment in new coal power generation domestically and internationally; and phasing down unabated coal power in the 2030s for major economics and the 2040s for poorer nations.
Pledge to end fossil fuel financing abroad: At least 20 countries agreed to end new direct international public finance for unabated fossil fuels by the end of 2022, including funding for oil and gas projects. While the US, Canada, UK and New Zealand were signatories, Asian powerhouses, China, Japan or South Korea, did not sign up. Importantly, the focus is on international finance (the countries did not rule out domestic financing) and on unabated fossil fuels.
On the pledge to quit coal, Tim noted that the final language agreed was controversial, particularly in Australia. “While the initial commitment to phase out coal was toned down [to “phase down“], it is still, to my mind, a pretty unambiguous message that coal fire power generation has a shelf life if the emissions are unabated. And that is a big qualifier, as that leaves open …carbon capture and storage or other similar technologies.”
Moving toward cleaner energy technologies: A sponsor’s perspective
Many traditional oil & gas entities are transitioning to become “energy companies” – rather than moving away entirely from their traditional core business, they are supplementing their business model with investments in renewables and cleaner technologies such as hydrogen, battery storage and carbon capture.
As the largest power generator in Japan with power generation capacity equivalent to half of Japan’s thermal power generation output, JERA is taking a similar approach. “On the one hand, we really are in a position to lead the transition to the green economy but on the other hand we need to strike a balance with our responsibilities to maintain a stable supply of energy,” Deputy General Counsel, Angela Yuen said.
JERA has announced a 2050 zero emissions roadmap, with a focus on greener power generation and smart technology and has entered into a large number of investments, collaborations and initiatives, both in Japan and internationally, including in hydrogen development and co-firing of ammonia.
However, the transition to renewables and clean energy is not without its challenges. For renewable projects, Angela explained that common roadblocks in Japan include, for example, “grid infrastructure, port capacity limitations, lengthy environmental processes and land constraints for onshore wind and solar projects, and collaborations with fisheries for offshore wind projects.” She added “So for Japan to really achieve the 2030 target of 36-38% renewables as a generation source, and for there to be a pipeline of projects, the government will really need to be able to provide their policy support and to remove a lot of the regulatory constraints that prevent scaling of renewable projects.”
Financing ‘traditional’ and ‘new’ projects
So what does this all mean for financiers who wish to support their clients? ECAs, banks and funds who are active in the energy sector are also having their business model disrupted and are increasingly seeking to re-balance their lending and investment portfolios.
For example, JBIC, the Japanese export credit agency, committed in its ESG policy announced in October 2021 to pursue efforts to achieve operational net zero by 2030 and net zero in its finance portfolio by 2050. Similarly, Soci?t? G?n?rale has become a member of the UNEP-FI Net-Zero Banking Alliance and committed to carbon neutrality in its portfolio by 2050.
These public commitments are important and establish a clear direction of travel; however, in the shorter term, financial institutions are facing complex and competing demands, while navigating the uncertainties caused by the energy transition.
Panelist and Soci?t? G?n?rale’s Head of Energy Finance and Advisory for North Asia, Lei Zhang commented that, as financial services providers, it is critical for lenders to continue to support their clients during this period of transition. Lei saw a two part approach to the energy transition: firstly, to increase investments in renewables and clean energy to reduce carbon emissions and secondly, to take the correct approach to decarbonisation and transition to cleaner technologies one step at a time. “Ultimately, we do need to service the real economy, we do need electricity and we do need to supply and fuel homes,” he added.
In the world of traditional project financing, lenders rely heavily on projections based on historical data including past performance of project technologies. With new technologies, however, Lei explains how lenders approach the market uncertainty and associated risks: “For us, the key is to understand the technologies and the industry we are working with. You can make the financial structure workable depending on the project – project financing is certainly one of the tools but you can also structure financing with a combination of project financing, corporate financing and mezzanine financing. Mini-perm financing is also an option to shorten the risk period”. Lei added, “We recognize that different decarbonisation and energy transition technologies are required for different stages of projects and once technology is scaled up and proven, more finance options will become available.”
Director of JBIC’s Corporate Planning Group, Yasushi Hirai agreed with this sentiment and highlighted the importance of growing energy demand in emerging markets going forward: “Given the emerging markets, we will be seeing a growing energy demand as these countries’ operations become bigger in the future. Energy transition, especially in Asia, will be the key and I strongly believe divestment in the traditional energy sectors alone would not be the solution in this space. JBIC will continue to engage with host countries and government authorities to support their pathway toward a decarbonised society and their energy transition efforts.”
JBIC’s ESG policy sets out JBIC’s continued efforts to help achieve a sustainable energy economy. Hirai-san explained that the key tools that JBIC will deploy to meet these objectives include “scaling up green finance, transition finance and social finance … and issuing green bonds. By doing these things, we will be aligning our financial flows with the principles set out under the Paris Agreement.” Even with these guidelines in place, Hirai-san notes that a fundamental question remains: “Whether there will be enough energy projects in these emerging markets to absorb the financial flows?”
Cautious but hopeful optimism
When considering energy transition in the context of an event like COP26, the elephant in the room is always the lack of concrete progress following previous summits. However, despite the failure to make headway in the past, the panelists were cautiously optimistic about COP26. They took the view that greater public awareness and the stronger global alignment of interests and governmental policies in respect of the energy transition made the goals set out by world leaders at COP26 seem more realistic than in the past.
However, the energy transition will need to be carefully planned and invested in and all participants in the energy space have a key role to play. In Tim Power’s words, “We can’t wave a magic wand and fix it today but we can start planning for the future now. And that will require investment and testing. We will have some wins and we will make some mistakes. It will not be a linear process.”
While there is still a long way to go, there are certainly steps being taken in the right direction on the energy transition journey.
Download ‘Post COP26: Developing and Funding Energy Transition Projects’ PDF in Japanese
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