November 8, 2024 (IEEFA South Asia): At the 29th Conference of Parties (COP29) in Baku, dubbed the “climate finance COP”, representatives of different countries should deliver key decisions to design policies and regulations and offer institutional support that encourages banks to lend more to the renewable energy sector, a new briefing note by the Institute for Energy Economics and Financial Analysis (IEEFA) states.
The note analyses global renewable energy investment trends and projected gaps to meet the goal of tripling renewable energy capacity by 2030 from 2023. It finds by reorienting capital from the fossil fuel sector to renewable energy, banks can bridge the International Energy Agency’s projected annual investment gap of US$400 billion from 2024 to 2030.
1. Meeting the goal of tripling renewable energy capacity by 2030 faces an investment gap of up to US$400 billion annually between 2024-30. Banks, which channelled a whopping US$967 billion to the fossil fuel sector, can bridge the gap by reorienting capital to the renewable energy sector.
2. While banks need to integrate climate change risks in their lending decision to reduce their exposure to fossil fuels, they also require credit enhancement support to accelerate fund flows to renewable energy projects that are not commercially viable. Governments, Multilateral Development Banks (MDBs), and bilateral financial institutions can provide risky and concessional capital for credit enhancement support.
“With only six years remaining, the 2030 goal for renewable energy seems a stretch too far, but enhanced cooperation between developed and developing countries and conducive local policies may bridge the gap,” says the note’s co-author Vibhuti Garg, Director – South Asia, IEEFA.
“Negotiators at COP29 in Baku should back their ambition to triple renewable energy up with a consensus on additional climate finance, supported by the developed countries, to fill the gap of catalytic funds in the developing and least-developed countries,” she adds.
The note finds that under different estimates, global investment in renewable energy has been growing, highlighting the attractiveness of renewable energy among investors. It rose from the range of US$329 billion - US$424 billion in 2019 to US$570 billion - US$735 billion in 2023, implying a jump of 73% - 78% during this period. However, the average annual investment to attain the goal of tripling renewable energy will require between US$1 trillion and US$1.5 trillion from 2024 through 2030. As such, the average funding gap between 2024 and 2030 will reach US$400 billion per annum.
“While bank credit flows to the fossil fuel sector is declining, it was still a whopping US$967 billion in 2022. On the flip side, low-carbon development projects, including renewable energy, received US$708 billion in the same year. By reorienting more capital to the renewable energy sector, banks can bridge the projected investment gap,” says the note’s co-author, Shafiqul Alam, Lead Analyst – Bangladesh Energy, IEEFA.
The note highlights several ways to encourage banks to change, like prioritizing lending for renewable energy, offering banks credit enhancement support, integrating climate change into banks’ policies, interoperability of green taxonomies, making financed emissions disclosures mandatory and monetary policy tools.
“Governments can create partial credit risk guarantee instruments to reduce credit risk, encouraging banks to accelerate credit flows to the sector. Multilateral Development Banks (MDBs) and bilateral financial institutions, with support from local governments, can provide risky and concessional capital to local banks and help create partial risk guarantee instruments,” says the note’s co-author Labanya Prakash Jena, Consultant – Sustainable Finance, IEEFA.
Besides, the central bank can use moral suasion to nudge commercial banks to increase capital flows toward the clean energy sector while moving away from thermal power plants.
