Policies for Financing the Energy Transition
Historically, energy transitions have occurred gradually over the span of several decades, marked by incremental improvements in technologies. In recent years, public interest in accelerating the next energy transition has fueled a clean-energy policy agenda intended to underpin the development of a decarbonized energy economy. However, policies to date have encouraged investors to fund renewable energy projects utilizing proven technologies that are not competitive without the help of government subsidies. A true transition of the energy mix requires innovations that can compete with conventional energy over the long term. Investments in innovative technology projects are scarce because of the “commercialization gap,” which affects projects that are too capital-intensive for venture capital yet too risky for private equity, project, or corporate debt financing. Accelerating innovation through the commercialization gap will require governments to allocate public dollars to, and encourage private investment in, these riskier projects. Policy-makers will face a trade-off between prioritizing policies for accelerating the energy transition and accounting for the risks associated with innovation funding in a tight budgetary environment.
In recent years, concerns over energy security, climate change, and maintaining U.S. competitiveness have made the next energy transition a prominent topic in public debate. These concerns have led to calls to reduce dependence on foreign oil, decarbonize our energy supply, and create new “green” industries. Many believe that these goals can be addressed through a single solution: the creation of a robust clean energy industry. If successful at scale, this new market would accelerate the next energy transition to a low- or zero-carbon economy.1 On the surface, it appears that the transition may be under way. In 2010, investment in clean energy technologies and projects reached a record $268 billion globally and $30 billion in the United States.2 Annual growth rates have exceeded 25 percent over the past five years. Despite this boom in investment, clean energy still has far to go to make a dent in the energy mix: in the United States, renewable energy (excluding hydropower) made up 5 percent of the energy supply in 2009.3 Furthermore, most renewable energy assets operating today can attract private investment only with significant public subsidies. In the short term, maintaining strong growth rates will depend on whether governments continue to provide sizable supports for the industry. In today’s tight fiscal environment, robust government aid and the health of the current industry are questionable.
To make this next energy transition in an accelerated time frame, the United States and other economies must scale clean-energy technologies beyond the limitations of government funding and the boom/bust cycles that have characterized the industry to date. A true energy transition to a low-carbon economy will require innovations and new technologies that can compete with conventional energy on both cost and scale, without the crutch of government.4 This essay addresses financing–the key challenge to accelerating the commercial adoption of new energy innovations–and what can be done about it.
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Endnotes
- 1I define a low- or zero-carbon economy as an economy with a minimal output of greenhouse gas emissions, achieved through low-carbon energy use and improved energy efficiency.
- 2The total includes mergers and acquisitions and equity reinvestment. New investments in 2010 represent $211 billion. See Bloomberg New Energy Finance and United Nations Environment Programme, Global Trends in Renewable Energy Investment 2011: Analysis of Trends and Issues in the Financing of Renewable Energy, July 2011.
- 3U.S. Energy Information Administration, Annual Energy Review 2009 (Washington, D.C.: Department of Energy, August 2010).
- 4For a discussion of how innovation is necessary to meet goals to limit climate change, see David Victor, “Promoting Technological Change,” in Global Warming Gridlock: Creating More Effective Strategies for Protecting the Planet (Cambridge: Cambridge University Press, 2011), chap. 5.