Interview with David Nelson, Executive Director, Climate Policy Initiative Energy Finance
Feb 21, 2018
Climate Action had the pleasure of speaking with David Nelson, Executive Director, Climate Policy Initiative Energy Finance about decarbonising the energy sector and CPI's initiatives in the sector.
Do you want to say a few words on CPI’s energy finance programme and what it is trying to achieve?
CPI’s energy finance programme aims to accelerate the low-carbon energy transition by improving the efficiency of capital flows and capital allocation. We find that government policy, industry structure and existing investment paths often create arbitrary risks for investors that lead either to higher capital costs as compensation, or allocation of investment to higher-carbon assets than would otherwise be optimal. We work across all three areas, helping governments and regulators incorporate finance and investor perspectives in policy design; helping companies develop low-risk and financeable paths to more sustainable business models; and working with investors to develop sustainable investment products that are tailored to the specific needs of different types of investors, including, in particular, institutional investors. More specifically, we have designed new financial instruments that match the infrastructure characteristics of many clean energy assets with the needs of investors, and thus help lower the cost of the low-carbon transition. We provide the heavy analytics that support the decarbonisation pathway and the new market designs required to get us to high shares of variable renewable energy. We also develop financial mechanisms that enable utility companies to manage their shift away from fossil fuels more smoothly, and we are also working on some very urgent issues related to sovereign credit risk in in emerging markets that are highly exposed to stranded assets.
How are asset managers contributing to the energy transition? What are the opportunities?
Asset managers play a significant role in mobilising the substantial amounts of capital required in the energy transition and have proven to be first movers, as well market movers. We see interesting trends emerging, such as renewable energy being viewed an asset class like infrastructure. However, not all asset managers, let alone the institutional investors whose capital they manage, have the same freedom. Last year, we published findings from our research into the barriers faced by institutional investors such as pension funds and insurance companies. We found that our design for a Clean Energy Investment Trust, similar to the YieldCo concept, would increase the potential pool for direct investment in renewable energy assets from $305bn to $4trn.
What are the most prominent challenges in the current clean energy investment landscape?
Risk to clean energy that is often a legacy of the energy industry’s fossil fuel based roots, and its impact on access to capital and the cost of that capital, is the most pressing issue in the energy transition. While there’s no shortage of capital to invest, we see inefficiencies in the allocation of risk that unnecessarily raises the cost of capital or causes investors to stick with traditional investment options. Clean energy has a stronger infrastructure element than traditional upstream oil, gas, power and coal. Thus, with the right regulation and financing structures in place, clean energy should be a lower risk, lower finance cost investment. However, the traditional pool of energy investors, and the related investment structures and companies, are geared to higher risk, higher return investments, and thus see the fixed income qualities of clean energy as being less attractive. We need to expand the pool of investors, and think creatively about new financial instruments that help price climate risk accurately in public markets.
You have extensive experience in the energy regulatory environment. How can regulators boost or burden the deployment of renewable energies? Do you have a success story in mind?
Over the past 30 years, regulators and companies have developed impressive and sophisticated tools and models to provide market incentives to energy companies and investors. These models have led to major shifts in generation sources, the optimization of transmission and distribution, and the integration of consumers into the energy system. As a result, costs are lower than they would have been, and the system has innovated in terms of equipment, business models and finance. While this experience and capability is tremendously valuable, we must also recognize that the world is very different today than it was when we first started developing these models. The need to address climate change has become a primary consideration, while the cost of clean alternatives, including wind, solar and energy storage, has fallen precipitously. These new alternatives have very different operating characteristics, as well as cost, risk and financing needs. The differences are so large that some of the developments in regulation and policy have become useless, or even counterproductive, while the importance of others have become greater. The key moving forward is to use those parts of the models developed over the last few decades that address the clean energy needs, especially including market models to improve flexibility and increase consumer participation, transition policy to accelerate the development of new technologies such as wind, solar and storage, and pricing models to de-risk infrastructure investments. Meanwhile, we must carefully remove those elements of the business models that create unneeded, and costly, risks and incentives that no longer serve their intended purpose.
During the Sustainable Investment Forum Europe, you will be speaking about the decarbonisation of the energy sector. Can you share a small preview of your agenda?
Dramatic cost declines in renewable technologies mean that decarbonisation of the electricity system is within our grasp. This is not the story we were telling 5 years ago but we can and should accelerate this shift, and expand electrification to sectors beyond power. Even the oil majors have recently started to acknowledge that the expansion of electrification will change our energy economy profoundly. Pricing climate risk into global financial markets could be transformational.
David Nelson will be taking part in the “Decarbonising the energy sector” panel during the Sustainable Investment Forum Europe.