The global energy transition creates additional export markets: how to unlock its full potential?
We are going through a massive transformation in the way we produce and use energy.
Old centralised industries are being replaced to adopt new environmentally and sustainable business models. For this, innovations are needed, both technical and financial.
USDS 30-46 trillion of cumulative investments will be engaged over 2019-2040, impacting all sectors of the economy. While most investments will occur in developed countries APAC (38%), North America (20%) or Europe (18%), local context will lead to different energy transition framework as countries have existing infrastructure and cheap access to different sources of energy.
This ongoing revolution is triggering a change of priorities in the world of commercial exports: not only in terms of the nature of the goods and equipment exported, but also in the relocation of supply chains closer to the users, and the willingness of developed nations to secure their own energy transition industry at home.
Export Credit Agencies (ECAs) have already largely contributed to the development of the energy transition, starting with the emergence of renewable energy a decade ago. Together with banks, we have developed proven tools adapted to financing schemes that we master, tested for many years.
Still, as traditional industrial models are being disrupted with breakthrough projects, we face new financial risks. Dealing with new developers or sponsors, smaller scale assets, pilot projects, the approach to non-recourse financing is often favoured. New technologies or products mean untested market risks or offtake strategies with limited lookback. This is counterintuitive as project finance has been built on empirical data and proven track record! Export flows are also redirected, from historically OECD towards Emerging Markets, as there is more pressure from host countries to secure their own access to clean and efficient energy.
In front of those new challenges, ECAs position as a key partner to unlock new frontier projects, enabling to bridge financing gaps by mitigating experimental risks. Here are a few concrete examples illustrating the challenges in financing the Energy Transition and the strategic role ECAs can play.
• Renewable Energy is pioneer to the energy transition. From the C-Power offshore wind park in Belgium in 2007 to the mega Dogger Bank project in the UK in 2020, ECAs have consistently supported not only Western Europe, but also new renewable countries such as Eastern Europe, Egypt, Argentina, or Taiwan. ECAs can act as catalyst for a deal to materialise for many reasons: new sector, technology, country risk, liquidity constraint, funding diversification, etc… With the current mega-trend in offshore wind, but also with the nascent floating technology, ECAs will remain an essential piece of the financing equation.
• The elephant in the room is certainly Hydrogen even though its implementation is probably longer term. The challenge remains to develop large scale projects, both on the production and demand side, at acceptable cost since green hydrogen is not yet competitive. Multiple initiatives have been announced by the public sector, while private companies (O&G players, utilities, mobility players, equipment suppliers, …) are launching partnerships aimed at H2 generation, transport and end uses for industrial and mobility applications. Investments will be massive and certainly require strong export finance support.
• The Electrical Vehicle industry is particularly interesting as it involves a whole supply chain from mining extraction, to manufacturing and processing, EV battery supply, and recycling. In 2020, the European Commission has laid out an action plan on Critical Raw Materials to which some ECAs have already responded with “smart” / “tailor made” untied programs: Euler Hermes untied loan, Finnvera Raw Material Guarantee, and to some extent the Korean and Japanese ECAs. Europe is also catching up with numerous and ambitious EV Battery giga-factories. Northvolt USD 1.6bn Project Finance in Sweden was a first-of its kind, at the crossroads of mining, chemical processing and automotive industry, with many new issues to be comfortable with: construction multiple contracting risks, raw material supply, new technology, processing operation, EV demand forecast,… ECAs were instrumental in order to make the deal happen.
• Circular economy is one of the main building blocks of the European Green Deal, though it can bring some controversies in terms of positive/green impact. There will be important recycling needs in the context of the energy transition, starting with 11 million tons of used lithium-ion batteries by 2030. Economic value of recycling and second-hand battery is also an issue, which will have to be addressed and ECAs can play a lead role through various forms of support (R&D, long-term financing, discounted premium, etc.)
While those precedents demonstrate ECAs are actively involved in financing the energy transition, their solutions are adapting to address these new risks and further accelerate the transformation.
• For instance, some ECAs are expanding untied guarantee scheme and its eligibility, enabling to support onshore or offshore projects on a broader interpretation of national interest (shareholding, securing a strategic offtake contract, developing a domestic champion who will then contribute to national exports).
• The ability to cover local currencies risk would address domestic PPAs as smaller scale projects do not necessarily rely on international US Dollar offtake contracts.
• A question remains on the application of the EU taxonomy for certain industries (such as waste to energy) or emerging markets, as the notion of “do not harm” can limit virtuous trajectories, such as the introduction of gas in countries that are still heavily relying on coal.
• ECAs support can also encapsulate the upstream part of a project to ensure its bankability through R&D or equity investment.
Those are some of the trends we currently witness within the ECAs community. The momentum is growing, and we are convinced that ECAs and banks can build tailormade solutions to support exporters and importers, and act as a catalyst to optimise capital engagement. Together, we can be bold and push the boundaries!