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27 April 2023

Financing the energy transition: who will pay for a greener future?

The green energy transition is moving forwards – but what will it cost, and who will foot the bill?


At a glance:

  • The cost of developing and scaling energy transition technologies and infrastructure will be substantial.
  • Green energy technologies are at vastly different stages of their technical life span, capability and scale.
  • Financing a greener future needs a cohesive effort from the private sector, government and consumers.

Now and into the foreseeable future, considerable global investment is focused on electricity networks, and the cumulative investment in grid infrastructure technologies is likely to exceed $5 trillion by 2030. Investment and innovation also continues around clean power generation, battery storage, electrified road transport, green steelmaking, clean hydrogen, and carbon capture, utilisation and storage (CCUS).

These trends confirm that the green energy transition is moving forwards, but financing this shift and developing and scaling the technology and infrastructure needed to support it, will be substantial. We invited Gerard Daniels Principal, Kester Guy-Briscoe, to explore the cost of the energy transition, and consider how the private sector, government and individuals need to combine in order to successfully finance a greener future.

What will the energy transition cost?

It’s difficult to quantify the cost of achieving a low carbon future, given most of the world’s infrastructure currently supports traditional fuel. But many have tried, often with vastly different calculations, on what this cost will be.

  • A recent Stanford University study predicts switching to 100% renewable energy will cost $62 trillion.
  • An earlier McKinsey report estimates that $275 trillion in cumulative spending on physical assets is needed between 2021 and 2050, to reach net zero.
  • Other studies focus on the economic benefit offsetting the expense of this transition. A study from Oxford University suggests switching to renewable energy by 2050 will save over $12 trillion, compared to continuing with current levels of fossil fuel use.

“One of the reasons why it’s so hard to predict this cost, is because there are so many technologies involved in decarbonising the energy sector, and they all at very different stages of their technical life span, capability and scale,” says Kester. “Each technology also has very different costs and processes for scaling up production, storage and distribution.”

“For example, although solar, offshore wind and hydro power still require development, technically they are relatively mature,” Kester explains. “The cost of developing supporting infrastructure for these renewables – partly through government subsidies, and partly through scale – has also come down considerably over time.”

“Hydrogen technology is also far from new, but because oil and gas have always been reliable and scalable power sources, there hasn’t been a reason to push hydrogen, so its development has lagged behind other energy sources,” he continues. “But there’s now a very compelling reason for developing this and other green technologies, in the case of hydrogen as a form of energy storage, integrated with intermittent renewables.”

Who should foot the bill for a greener future?

With the capacity and expertise to develop energy projects, the energy sector will continue to play a leading role in the energy transition. But it’s also important to consider how other parts of society will assist in driving and financing this shift. “There are things that government, the broader private sector, and consumers each do really well, that other groups typically don’t,” says Kester. “It’s these individual strengths that will help to move the energy transition forward as a cohesive effort.”

Fuelling innovation

Fundamentally, governments exist to keep society functioning in a way that lets people live happy, healthy and prosperous lives, but this role doesn’t always lend itself to great technical innovation – this is typically where the private sector comes in.

“In the private sector, businesses innovate to grow, to make money, and to be first to market, and the drive to invest in green and clean energy innovation stems from this need to stay competitive, to be profitable, and attract investment,” says Kester. “Although many organisations have strong values around sustainability and being seen as environmentally and socially conscious is another factor, ultimately the private sector won’t innovate if there isn’t money to be made.”

Institutional investors, like pension and sovereign funds are also helping to move the dial. “Where hedge funds once took the lead as activist investors, we are increasingly seeing pension funds choosing where they invest based on ESG performance,” says Kester. “This shift is fuelling healthy competition and innovation in the private sector, and attracting green investment.”

Banks are also responsible for financing green energy innovation. “As lenders, banks with a genuine commitment to sustainability can prioritise green finance, and we are increasingly seeing banks around the world take this stance, though the laggards are well known” says Kester.

Creating confidence

To finance the green energy transition, consumers need choice, and the market needs the confidence to invest – but for this to happen, the playing field needs levelling, and governments have a unique role to play in achieving this.

“There are many ways for governments to create confidence around green energy” says Kester. “For example, tax breaks and other financial incentives can be issued for developing certain types of projects. Green budgets can also create interest in green energy sources and technologies, and be applied in other ways that allow green energy to thrive. For example, through creating technology hubs, like the Net Zero Teesside project – the UK’s first decarbonised industrial cluster.”

How money talks

With the power to vote with our money and our feet we have an equally important role as consumers, and there are many different ways to exercise this choice to help finance a green energy preference.

“Within our households we can choose to purchase power through an energy provider with proven performance and clear credentials on green power, or choose a provider who doesn’t. And we can choose whether we buy an electric or hydrocarbon-powered car,” says Kester. “Those of us who live in a democracy also have the right vote in favour of political parties and individuals that prioritise and finance the green energy transition.”

Leading the energy transition

Change will always require strong leadership, so if you’re serious about green energy you will need the right people in your Boardroom and on your leadership team, to drive this transition. Gerard Daniels has an exceptional global track record in appointing sustainability and decarbonisation leaders in areas like hydrogen, CCUS, offshore wind and other energy transition disciplines.

To discuss your leadership needs or find your next leadership challenge, connect with Kester, or reach out to your local Gerard Daniels team.

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