Lennart Blecher on why the public and private sectors need to work together to reduce the funding gap for the energy transition
The energy transition is a mammoth undertaking that will require trillions of dollars worth of investment every year for decades to come.
For the private investment sector and the private sector, this also represents a compelling investment opportunity. However, the public and private sectors combined aren’t investing anywhere near enough money if global climate targets are to be hit. Indeed, by one estimate, an investment gap of $18trn will open up by 2030.
One reason for this is the magnitude of change needed. As I’ve said previously, the energy transition will require the largest commercial investment since the dawn of industrialisation. We need to upgrade our power generation and transmission systems, decarbonise our industries, and adapt each element to connect to a digital world. This is clearly no small task.
But there’s another reason, and one that’s wholly avoidable: an insufficient level of dialogue between the public and private sectors about how to finance the transition. This isn’t to say that the public sector in many countries hasn’t taken some positive action on net zero financing.
The US and the European Union have, for example, earmarked tens of billions of dollars in grants to help catalyse climate action projects in the private sector. But grants aren’t enough. If net zero is to become a reality, the public and private sectors need to work hand in hand across energy, transportation, the environment, and digitalisation.
There must be an open dialogue on topics such as investing – and generating returns – together, speeding up permit processes for new urgently needed infrastructure projects, and the role that big private markets investors can play in funding the transition.
The public sector can’t finance the energy transition alone. If it were to do so, taxes and government borrowing would have to rise sharply, likely sending inflation soaring. No state would want to take such a risk.
Meanwhile, the private investment sector has, and continues to accumulate, an enormous amount of capital to be deployed. By mid-July this year, data shows that private equity and venture capital firms held a record $2.6tn in uncommitted capital, up from little more than $1trn nine years ago.
Private markets firms have deep experience in infrastructure investing. Over the last decade or so, a boom in infrastructure investing has seen private investors take on about $1.3trn worth of infrastructure assets globally. As they deployed their capital, the best investment firms built strong relationships with leading industrialists, creating powerful networks of sector experts.
The public sector must create frameworks through which the private sector can help finance the energy transition and open dialogue with the private sector is crucial in achieving this.
One important element of this is creating concessions through which private investors can own and operate transition infrastructure — utilities, for example — and also generate returns. Owners should, of course, be held to the highest standards through systematic auditing and sanctioning of significant failures.
Private investors are very good at attracting further funding from institutional investors, including long term investors such as pension funds. Of course, sound investments by pension funds benefit the many people whose pensions they manage.
In the long term, it’s possible to see pension funds becoming the leading owners of transition infrastructure. The public sector also needs to take on some of the risk of developing new technologies for the energy transition because too much of this risk is borne by the private sector.
I have a suggestion here. There is no shortage of multilateral and bilateral financial institutions and export credit agencies that help developed nations export to developing nations. If global warming continues at its current pace, these organisations could be instructed to fund research and promising start-ups in the energy transition space, which will be essential to developing and developed nations alike.
Institutions like the World Bank are experts at taking calculated risks, so they should have no trouble working alongside risk-takers from the world of private investment to help fund transition innovation.
Given the magnitude of the expected funding gap for the energy transition, cooperation between the public and private sectors is essential.
I hope I’m wrong on this, but if the public sector doesn’t significantly open its communication channels soon, I can’t see how society will reach net zero by 2050.
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