The new release of the World Energy Council’s annual Energy Trilemma Index, a ranking of countries based on their energy security of supply, affordability and sustainability, shows that Germany and Spain have gone down in their ratings. The UK and Japan have been placed on “negative watch”, showing a downward trend in energy security. In an interview with Energy Post, Joan MacNaughton, Executive Chair of the World Energy Trilemma work, notes that there is enough capital available for low-carbon investment, but there are not enough “bankable projects” for investors to put their money into.
The World Energy Council (WEC), the UN-accredited global energy body with more than 3000 member organisations located in over 90 countries, publishes an annual Energy Trilemma Index, in which it benchmarks 129 countries according to how secure, affordable and sustainable their energy systems are. The ratings, developed in partnership with global management consulting firm Oliver Wyman, are based on a range of country-level data and databases.
The latest edition of the Index, published on 24 November, has only three countries with a triple-A rating: Switzerland, Sweden and the UK. The UK, however, is placed on a “negative watch”, as it faces a number of problems that were not included in the 2014 Index yet. WEC notes that “domestic production of fossil fuels in the UK has steadily declined. Aspirations to produce unconventional oil and gas have to surmount technical barriers and secure public acceptance. In the power sector, the nuclear fleet is being run down, and many coal plants will be forced to close by European legislation.”
“I thought projects were mostly in search of money, but it’s vice versa as well”
Both Denmark and Spain lost their triple-A rating this year, Denmark because of lower “equity” (affordability) of energy, Spain because it saw a deterioration of both affordability and security of supply. Germany went from an ABB rating to a triple-B rating, because of lower security of supply. Japan’s overall Index ranking slipped seven places, as the country “continues to struggle with unfavourable total energy production to consumption and therefore import-to-export ratios”.
The United Arab Emirates and Mexico were put on positive watch, while other countries such as Colombia and the Philippines are making strides “on all dimensions of the trilemma”, notes the WEC.
Financial community survey
In addition to the country rankings, the WEC’s annual World Energy Trilemma report contains the findings of an in-depth survey WEC conducted among the financial sector to find out how the investment community looks at the energy sector. In particular, the survey – carried out by the Global Risk Center of Marsh & McLennan Companies, the parent company of Oliver Wyman – sought to discover what is needed for investors to commit the huge sums of money necessary to finance the global energy transition. The report concludes that “there is enough money available from the private sector if the right conditions are provided”.
These “right conditions” are: a stable regulatory and policy framework, an adequate “financial infrastructure” and a sufficient number of “bankable projects”.
The report notes that “under regulatory pressure of Basel III, banks are expected to reduce their infrastructure loans. At the same time, the regulation opens the space for insurance companies to increase their infrastructure loans. Other investors, for example, pension funds and other long-term investors around the world are also looking to increase their allocations to infrastructure. Over time, more experienced funds may increasingly invest directly and others may invest through dedicated infrastructure funds to bring substantial increases in investments.”
“The technologies are to a large extent already there. What is holding us back is the lack of market drivers”
The report adds that “the sector must overcome bias toward conventional energy projects. Currently, approximately 70% of energy investments (not including investments for energy efficiency) are directed to fossil-fuel related projects.” Through to 2035 it is expected that fossil fuels will still require up to 65% of total investments.
A major bottleneck, according to the report, is the lack of bankable low-carbon projects. To remedy this, the energy sector should “establish standard procedures and best practices on the type of information – for example, technical assessments for wind power projects – as well as financial information required to allow investors to effectively and efficiently assess projects.”
WEC’s report on the financial community is the third in a series of surveys. The 2012 World Energy Trilemma report included the findings of a survey among energy industry executives. Last year, a survey was held among policymakers.
The financial sector is not comfortable investing in “new technologies that are highly dependent on political regulatory frameworks”
In an interview with Energy Post, Joan MacNaughton, Executive Chair of the World Energy Trilemma work, notes that currently the “conversation” between these three groups is “not widespread enough or deep enough to get all parties working together effectively”.
MacNaughton, who is also President of the London-based Energy Institute and has worked for the UK government, the International Energy Agency and Alstom in the past, says that according to the financial community, “policymakers and regulators do not have a sophisticated enough understanding of different financing mechanisms, what’s appropriate at different stages of a project and how investors allocate risks”.
She says she was surprised to find that “when we asked if there is enough capital available for low-carbon investment, the answer was a resounding yes”. But, she adds, we also got a resounding statement that “we needed to increase the pipeline of bankable projects. I thought projects were mostly in search of money, but it’s vice versa as well.”
According to MacNaughton, the financial sector is currently not comfortable investing in “new technologies that are highly dependent on political regulatory frameworks. They have a lot of data on conventional upstream energy projects. Risks in the clean energy sector are much more difficult for them to quantify, both because there is no track record for many technologies and because political interference is too unpredictable.”
MacNaughton notes that the financial sector is still not confident of “how intent politicians are in moving toward a low-carbon economy. The longer it takes without a substantive climate deal the more that will persist. The US-China announcement and the aspirations we all now have for a much more meaningful agreement in Paris, are extremely important signs for the potential of future investment.” Although innovation is important, MacNaughton adds, “the technologies are to a large extent already there. What is holding us back is the lack of market drivers for those technologies.”
MacNaughton does not believe that the “divestment movement” and the concern about “stranded assets” (or “the carbon bubble”) will have a large impact on the willingness of investors to invest in fossil fuels – at least not in the near to medium term. “I am not sure that investors are concerned about this on the timescales needed for them to get a return on their investment. Up tot 2040 there will still be a large demand for fossil fuels under any scenario. Most investment made now will be paid back well before that time.”
“We need to think carefully about gas, because we are going to need a lot of gas to support renewable energy”
Where stranded assets do come in is where companies “have booked reserves on their balance sheets. Some of these companies may look stronger than they are”, notes MacNaughton. “That may be an issue that they need to think carefully about. Plus the fact that if the divestment movement gains ground they might find it slightly more difficult to raise capital. But I don’t think we’re there yet.”
MacNaughton believes the divestment movement can play a useful role “to drive change in particular with regard to oil and coal.” But she adds that “we need to think carefully about gas, because we are going to need a lot of gas to support renewable energy and also as far as we can to reduce emissions by switching from coal to gas.”
“What I really would like to see”, she notes, “is the divestment movement making their decisions conditional on companies committing to use CCS (carbon capture and storage). Even coal with CCS could be good part of the solution over the next few decades.”