Will 2023 be the shift year for the financing of the energy transition?
Thirty years ago, wind farms and carbon capture were items of science fiction. Today this infrastructure for a low-carbon economy is clearly the future and is fast becoming the present.
Working with the multinationals, governments and start-ups leading today’s energy revolution, I am seeing a step change in the pace of activity. Indeed, 2023 looks certain to be a year of greater financing of renewable energy capacity and energy transition infrastructure, as lenders become more comfortable with new business models and their associated risks.
It’s no exaggeration to state this is a watershed moment for the energy industry. That’s also true for Societe Generale Global Banking and Advisory, where we’re changing to harness all the bank’s resources as we work across energy’s new value chains. When doing so, we’re helping to shape government policy and to educate the wider market about renewables and energy transition infrastructure’s bankability.
Looking specifically at renewable energy, the latest International Energy Agency (IEA) forecast confirms my impression of accelerating activity, anticipating that the world will add as much renewable power in the next five years as it has in the past 20. Global renewable power capacity is expected to grow by 2,400 gigawatts from 2022 to 2027, according to the IEA’s Renewables 2022 annual report. For context, that is almost a third more than expected a year ago, and exceeds the global installed coal-fired power capacity.
But this growth depends on finding ways to fund unproven business cases, as start-up and existing businesses develop new technologies. How can you allocate risk across carbon capture’s value chains, for example? How can you assess the risks of large-scale hydrogen projects? Using all our collective intelligence, we are answering these questions.
For instance, financing carbon capture utilization and storage (CCUS) is essential for decarbonization but depends on allocating risk across complex value chains, ranging from CO2 emitters like gas-fired power stations or hydrogen producers, through to carbon capture facilities like depleted underground oil and gas reservoirs. Societe Generale has helped to develop a risk allocation framework in the UK and has worked as a financial advisor on several more CCUS projects worldwide, as well as supporting negotiations with governments on underlying business models.
Clean hydrogen is also key to governments’ decarbonization plans. While equity capital is available – including through the Hy24 fund which Societe Generale advised – bankability is at an early stage. But we’re becoming more able to assess the risks and I believe that the project financing of large-scale hydrogen projects will speed up in 2023, before becoming more standardized in time and enabling faster development of the hydrogen economy.
Turning to electricity interconnectors, while conceptually simple as point-to-point high-voltage cables, the financing of a cable that bridges two countries is anything but easy. As renewables generation grows, interconnectors will give countries more flexibility, allowing them to tap neighbors’ power grids when the wind doesn’t blow, or the sun doesn’t shine. But building these will depend on complex financing structures like that for the Greenlink and NeuConnect Interconnectors, which closed their project financings in March and July 2022 respectively, both with Societe Generale as financial advisor. Greenlink is set to connect Ireland and the UK by 2024, this was Europe’s first privately financed interconnector, whilst NeuConnect is to link Germany and the UK with a capacity enabling to power up to 1.5 million homes
As we pioneer the financing of the energy transition, we are becoming problem solvers, engineering types of financing that subsequently become mainstream. Apart from the transactions already mentioned, we have played leading roles in the United States’ first offshore wind farm; Taiwan’s first commercial scale offshore windfarm; and France’s first floating offshore windfarm.
Yet the developing needs of our clients in 2023 and beyond mean that we must also evolve. The collective intelligence of our teams – including experts in geology, processing and engineering – has never been more valuable. Together as energy bankers, we aim to continue our work developing the models of energy transition financing that can subsequently be adopted at scale across financial markets.
It’s an exceptional time, when our existing and prospective clients have an opportunity to be the leaders of tomorrow’s energy transition, just as we have a chance to take a leading role in advising and financing them. And this is the most exciting opportunity of my career.