De-risking energy transition investments, how can this be achieved?

This week I watched the "Mastering New Energy Economics" session at the World Economic Forum in Davos and the panelists discussed the path ahead for our global energy transition. The panelists had different perspectives on the way forward to address energy policy, energy security, the energy transition and energy risk. Martin Wolf, from the Financial Times, was a panelist on the "Mastering New Energy Economics" and he stated that "massively expanding the renewable energy is a climate and security priority." But he warned that in order to keep close to 1.5C and meet climate targets by 2030, would require "dramatic serious de-risking of investment across the world."

De-risking energy transition investments, how can this be achieved?

The United States government announced the?Inflation Reduction Act (IRA)?in August 2022 and this historic act is the United States' commitment to accelerate the speed of the energy transition towards a new energy future.?The vast amount of government stimulus does provide a unique opportunity to de-risk the energy transition investments and the various member countries of the European Union (EU), have commented about the IRA and how this has the potential to cause financial issues for the member countries. The French President Emmanuel Macron,?also expressed concerns in December 2022 during a visit to Washington and these comments were similar to the themes expressed by other EU countries.

The IRA has provided a significant opportunity to de-risk the energy transition and since the IRA was announced in August 2022, this has stimulated a vast amount of investment in the US and this is across all areas of the historic act. For example; since the US passed the Act, the country’s planned domestic battery manufacturing capacity for 2031 has been growing twice as fast as Europe’s, although the latter’s head start means it still currently has a higher figure.

Could the EU proceed with a similar de-risking strategy to the IRA?

The EU has recognized the benefits of the IRA and the president of the European Commission, Ursula von der Leyen announced on Tuesday at the World Economic Forum in Davos; "We will put forward a new "Net-Zero Industry Act". The aim will be to focus investment on strategic projects along the entire supply chain. We will especially look at how to simplify and fast-track permitting for new clean tech production sites. We will prepare a European Sovereignty Fund as part of the mid-term review of our budget later this year. This will provide a structural solution to boost the resources available for upstream research, innovation and strategic industrial projects key to reaching net zero. But as this will take some time, we will look at a bridging solution to provide fast and targeted support where it is most needed."

This announcement from the European Commission highlights they are seriously considering a de-risking energy investment strategy and the announcement stated that the Green Deal Industrial Plan will be covering four key pillars: the regulatory environment, financing, skills and trade.

Pillar 1: Regulatory Environment - It does appear the new Act will be aligned with the previously announced NextGenerationEU and REPowerEU plans. This could provide support to the wind and solar sectors, the decarbonization of heat systems, hydrogen, electric vehicles and energy storage.

Pillar 2: Financing - in an attempt to keep the European industry attractive to investors, there is a need to be competitive with the offers and incentives that are currently available outside the EU. This could be applying simpler procedures, tax breaks, or incentives.

Pillar 3: Skills - develop a skilled workforce to ensure the energy transition will be successful. This would be across all levels of technology and innovation.

Pillar 4: Trade - develop strong and resilient supply chains to allow for a successful energy transition. Develop trade agreements with countries around the world (Mexico, Chile, New Zealand, Australia and India).

The Net-Zero Industry Act and the Green Deal Industrial Plan?are in their infancy and it will be some time in the future before these Acts are actually implemented. When they do, the benefits should start flowing into the EU region and this should provide similar opportunities to what occurred in the US, when they announced the IRA. The announcement of this Act does provide a strong positive intent from the EU to de-risk some of the investments in the energy transition and will definitely provide some strong support for the EU industries. This Act will only further assist the energy transition to be successful and will provide some healthy competition to attract the global industrial organizations directly involved with the energy transition.

In the meantime, brace yourselves for a bumpy and economically challenging transition in the energy sector and it definitely won’t be boring for us.