In the world today, there is constant pressure on governments and large corporates around the world to take the issue of energy transition more seriously, pushing many of these countries and organisations to set respective decarbonisation targets and develop the road map to achieve these goals. At the core of this push is the need to ‘green-up’ power generation through the deployment of renewables and other sustainable energy solutions. Both Government and Financial Institutions are critical players necessary for the development of the renewables sector, and are catalysts for the adoption of clean energy technologies and energy transition as a whole.
Government is the primary change driver, and should dutifully set the tone for this development through solid policy support, which is a critical factor in sizing the addressable market, subsidies and other financing incentives, and a nuanced regulatory framework tailored to fit the unique needs of the nation and encourage investors. In Europe, the drive for renewables is championed by European Union (EU), through its Renewable Energy Directive (RED), and all countries within the EU are required to align their respective national clean energy goals to the EU’s targets.
Respective governments in the EU develop their strategy on the back of the RED, which includes identifying and pulling the different levers within their respective nations to ensure that the EU goals are met.
To achieve this, each country typically focuses on specific technological expertise or/and renewable resources that it has most in abundance, and seek to develop those technologies and resources through subsidies, government loans, credit guarantees, etc.
For instance, Energy companies in the Nordics typically prefer to focus on offshore wind due to their world class expertise in developing offshore oil and gas assets, e.g. Equinor, which is Norway’s National Oil Company (NOC) currently invests heavily in offshore wind, and is the only large oil and gas company that has offshore wind as its core energy transition strategy.
Another example is Ørsted. The Danish government has been pivotal to the success of Ørsted, which is a remarkable global leader in renewable energy innovation, focused on offshore wind.
The Danish government is the majority shareholder in Ørsted. The country has made significant investments in wind energy, both onshore and offshore, and has developed one of the most advanced and efficient wind power industries in the world.
Ørsted, formerly known as DONG Energy, has been at the forefront of this transformation. Ørsted successfully transitioned from a fossil fuel-based energy company to a green energy leader, with a significant portion of its energy production now coming from renewable source, primarily offshore wind.
Ørsted is the largest developer of offshore wind in the world, with an operating capacity of ~9GW. This shift not only highlights the importance of strong government support but also an understanding of comparative expertise advantage.
Governments in Africa need to identify their cheapest and most accessible renewables technologies and resource that can be developed at the desired level of scale, and provide some form of subsidies or financing structure to encourage investments for the development of these sources of renewable power.
It is also important to consider if these resources can be developed close to an existing or proposed network infrastructure. As governments provide the necessary enabling environment for the development of the sector, financial institutions also play a pivotal role either as financing conduits or direct investors.
Financial institutions, including banks, plain vanilla and alternative investment firms, insurance companies, etc., are not passive players in the global economy, and have been at the centre of core infrastructural development in the world by providing the necessary capital, financial expertise, and strategic guidance, as well as acting as capital conduits.
These institutions have the capacity to enable the development and deployment of sustainable energy in Africa. They are powerful catalysts capable of driving significant change. Hence, government must carry stakeholders of key financial institutions along in thinking through support and financing schemes for the development of renewables.
For instance, a significant portion of renewables financing in the U.S. comes from ‘Tax Equity’, which is a complex structure of acquiring some quasi-equity interest in a renewables asset in return for tax attributes. Financial institutions are the primary investors in this structure, as a result, they provide a significant portion of the capital deployed in the sector.
Agreeably, the transition to sustainable energy is a complex, multifaceted challenge that requires the concerted efforts of various stakeholders. Government is the most important player, while financial institutions, with their vast resources and expertise, are uniquely positioned to co-lead this charge.
Through policy support, appropriate financing structure, strategic advisory, risk management, and support for innovation, government and financial institutions can collaboratively drive the development and adoption of renewable energy solutions.
In conclusion, as someone who has dedicated a significant portion of my career to the financial and energy sectors, I have seen the critical role that financial institutions play in advancing sustainable energy. As the world continues to navigate the challenges of climate change and energy security, the insights and expertise of professionals in this field are invaluable in shaping a sustainable future.
. Ugbegua is an expert in providing financial and capital advisory to companies in the power & renewables sector, with experience across the major markets of the world, particularly Europe and North America. He is a Chartered Accountant and a CFA Charterholder
