- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University

The ongoing capacity growth in renewable power around the world has seen a huge increase in recent years to the extent that in 2016 global renewable capacity increased 9 percent year-on-year. The current trajectory suggests that installed capacity growth in renewable power generation is creating a promising future for renewables with newly developed innovative technologies and lower prices. However, the ongoing expansion in capacity is inextricably linked to attaining adequate funding, which, after 2008, increasingly has become difficult to obtain. Therefore, the creation of a broader array of tools to finance renewable projects has become a prerequisite for future growth.   

Many countries support renewable power generation capacity to alleviate energy poverty, create resilience for communities against volatile prices, empower remote areas throughout the world, and reduce security risks.  

International organizations working on climate issues suggest that investment tools for renewable capacity growth need to be extended to achieve the COP21 commitment agreed in Paris. In order to limit global warming below two degrees Celsius to pre-industrial temperatures and meet the targets set, it is estimated that global renewable capacity needs an extra US$500 billion per annum. The study undertaken in 2016 by the Bloomberg New Energy Finance indicates that over the next 25 years, an additional $12 trillion is needed for solar, wind, biomass, and geothermal energy if the world is to keep global warming under control. The current investment volume both for solar and wind power has remained far below the stated capacity, equivalent to $216 billion in 2016. 

International institutions such as the International Energy Agency, International Renewable Energy Agency, both local and many international state institutions have been working towards achieving the generation of greater cash flows to better finance renewable energy. Starting with very humble projections back in 1980’s, renewable capacity worldwide has grown beyond expectations. Investments in solar and wind power generation in 2015 reached peak volumes of $270 billion.

When compared to over $900 billion in oil and gas investments during the same period, the total investment in solar and wind was incomparable and remained far below that of the oil and gas industry despite the fact that it was deemed a historical peak for renewables. Consequently, financial tools used in the oil and gas industry could be adapted and utilized to increase renewable capacity growth. With over a century of experience, financial tools that have benefited the hydrocarbon industry should not take so long to be developed for renewables. However, by learning from this global and extensive sector, a blueprint could be formed for better financing alternatives for renewables and ultimately for the growth of renewable capacity.

To better understand why the oil and gas industry is able to obtain funding for high-risk projects through their extensive array of financing tools, while renewable funding is more controlled and faces challenges, the similarities and differences between the two industries need to be examined. 

When it comes to similarities, both sectors are heavily regulated, are subsidized around the world, and are subject to major price volatility.  Both industries are subject to ever-evolving technology and ongoing innovation, which has reduced overall investment costs in the long term. Investment capital for projects is usually required for the long term.

In terms of the differences between the two industries, the oil and gas industry has over a century-long experience whereas renewables are still in their infancy and investments in long-term projects lack experience. While oil and gas companies have strong balance sheets to permit them finding various funding options around the world, financiers for renewables are reluctant to provide large financing volumes for projects that are considered risky. The oil and gas sector has much wider markets compared to renewables. Once produced, oil can find customers globally while the markets for renewables are geographically restricted as renewables can only be consumed locally since generally electricity from renewables needs to be consumed where it is produced. 

Despite the many similarities between the oil and gas industry and the renewables sector, the differences are key in their ability to find appropriate funding for future investments.   

The capital constraints that the renewables sector faces are most evident in the construction phase. To overcome capital restrictions in the exploration and production phase, major oil companies’ benefit from reserves-based financing for their projects. One of the common financing tools in the hydrocarbon industry is for the submission of preliminary field studies for the estimation of proven reserves to financiers. This tactic could also serve the renewable industry well.   

A capacity payment is another financing tool used by the hydrocarbon industry, particularly in financing midstream projects. In recent years, this method has increasingly benefitted not only oil and gas companies but has also served the needs of the wholesale electricity market. This alternative could offer a better option for projects with relatively low costs. Considering that many renewable projects aim to sell electricity on the wholesale market, this choice could be a better alternative for companies that desire to have a bigger share of the wholesale market in the long term. 

Alternatively, grants and concessional financing could also be utilized to strengthen both transmission and distribution networks. At various stages, many different needs arise during the full implementation of a project, and therefore, the best financing tools available should be used for the project’s realization and profitability.

The hydrocarbon industry has many valuable lessons to give to the renewables sector for its development. Many global institutions forecast that the capital required for renewables over the next few decades would be enormous. Therefore, newer and alternative financing options will be required in the future. Once the renewables industry realizes and embraces alternative financing options, the global warming mitigation effort and the social benefits will correspondingly be much stronger.

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu