Our Thoughts
Tue, 18/06/2024 - 12:00
· 6 min read

Powering the Future: Global Perspectives

Experts from across BNP Paribas' global network discuss how political and financial factors are influencing renewable energy growth.

Electricity is Key to Decarbonisation

Decarbonising power generation is a priority if we want to achieve net zero. The power sector has a direct impact (33% of greenhouse gas emissions), so decarbonising power generation is crucial to make electrification efficient, produce green hydrogen and low-carbon fuels, and to capture carbon.

Renewable energies are key to producing zero carbon electricity. However, nuclear has regained new momentum in Europe, with promising developments most notably in the field of small modular reactors. The rollout of solar energy is considered to be on track with the IEA’s net-zero pathway.

Nevertheless, the development of wind energy, particularly offshore wind, is lagging behind. This is mainly due to supply chain tensions, sharp inflation and poor auction design in many countries. These factors have undermined revenues for wind farm developers and turbine manufacturers. Accelerating the development of renewable energies will require financial and political support, much like the Inflation Reduction Act in the United States. The EU has set the ambitious goal of doubling its wind capacity to 420 GW by 2030. It is keen to support the wind industry with measures such as revising auction design, indexation of tariffs, boosting permits, and financing with the support of the EIB.1.

Séverine Mateo, Global Head of the Low-Carbon Transition Group at BNP Paribas

Offshore Wind: A Promising Context Despite Headwinds

Although there is pressure on the wind power sector due to rising construction costs and interest rates, governments’ initial support measures are on track. But they are still not enough to achieve the goal of mass roll-out by 2030.

Offshore wind is a vital pillar of the energy transition, thanks to its high load factor (ratio between effective production and rated capacity), the larger size of production units and the easing of site restrictions. This explains why public policy is focused on a yearly rollout schedule of 80 GW by 2030, as compared to around 10 GW today. Nevertheless, the sector has recently faced considerable additional costs, increased financing costs and the slowness of regulators. Projects have therefore been delayed or cancelled, while the share prices of developers and equipment manufacturers have come under pressure.

A number of measures have been taken by public authorities. For instance, the United Kingdom has raised remuneration levels for 2024 tenders significantly. However, there are fears this will not be suffice to reach the intended goals.

Wood Mackenzie forecasts annual installation rates of only 30 GW in 2030. The main emphasis should be on developing interconnections with the electricity network, as well as strengthening the supply chains that will not be capable of handling the volumes targeted in large-scale investments (ships, cables and turbines). That said, the financial context remains promising. This is underscored by a recent partnership between Iberdrola and Masdar, to co-invest up to €15 billion in green projects, mainly in offshore wind, in Europe and the United States.

Romain Talagrand, Global Head of Renewables Financing, Low Carbon Transition Group at BNP Paribas CIB

ESG Energy Legal lift for the low-carbon industry

 

The US energy transition is growing swiftly thanks to the Inflation Reduction Act. The passage of the Inflation Reduction Act (IRA) in the US in 2022 signalled immense government support for the energy transition. The industry has been boosted by the IRA’s robust tax credits and favourable monetisation schemes, making low-carbon technologies such as carbon sequestration and hydrogen more economically viable.

Since this act came into force, growth in the renewables sector has soared – more than 270 clean energy projects totalling more than $130 billion in investments have been announced. Backed by green financing, the private sector is expected to spend trillions more to benefit from the IRA’s incentives over the next decade.

Several factors have somewhat challenged the region’s path to transition in the last few years: inflation, rising interest rates, volatility in commodity prices, supply chain disruptions, growing interconnection queues, geopolitical conflicts and humanitarian crises. Yet our clients’ activities clearly indicate a momentum and desire to transition. Looking ahead, the outlook appears even stronger given strong macroeconomic tailwinds: robust renewable offtake pricing, retrenchment of raw material prices, pullback in rates, and improved permitting momentum.

US renewable developers are forging record levels of partnerships and acquisitions. Many of the largest sponsors and infra funds are creating dedicated teams and products for low carbon. In 2023, global infrastructure fundraising approached is headed for its lowest level in almost a decade, but the energy transition accounted for 66% of all sector-focused capital in 2023.

Ravina Advani, Managing Director, Head of the Low-Carbon Transition Group Americas at BNP Paribas CIB

Seeking a Balance Between Renewable Energy and Biodiversity

Renewable energies are developing in response to the fight against climate change. However, their impact on biodiversity should not be forgotten.

Solar panel farms often lead to artificialisation of land, wind turbine blades can kill birds and, last but not least, any type of project can disturb wildlife during their breeding season. To limit these impacts, the IUCN and many public authorities promote the ‘ARC’ approach: avoid, reduce, compensate.

Avoid by preventing any possible impacts, for example by studying the flight paths of migrating birds or by selecting areas that have already been artificialized. Reduce by taking into account the biodiversity present during construction. Lastly, compensate for the unavoidable impacts by adding vegetation to a new area.

BNP Paribas draws inspiration from the ARC framework for any project of significant size. In addition to this framework, renewable projects must comply with the Equator Principles. These aim to achieve the healthy management of environmental and social risks when financing projects.

Yves Floch, Energy Transition and Ocean Expert, CSR Group at BNP Paribas

ESG Energy Plant

 

The UK Perspective

The UK government expects demand for electricity to double by 2050, with renewables set to provide the majority of this capacity. In preparation for this, the focus is on upgrading and extending the grid network, increasing battery storage and making the process of connecting to the grid significantly easier.

Renewable energy should form part of any asset strategy, both for landlords and occupiers. Not only can it reduce risk to supply interruption or pricing swings, but it can also enable businesses to considerably reduce overall energy costs. A common theme throughout this document, that is perhaps more pertinent here than anywhere else, is that collaboration is key. Technical solutions exist, planning and connections will become easier and there are plenty of options available for funding. The complexity arises around leases, particularly full repairing and insuring leases, and this can put off even the most sustainability focused of businesses.

Examples of the innovative partnerships we are seeing include:

- Landlords installing renewable energy sources and recharging the energy produced to occupiers.

- Occupiers installing solar panels with the permission of the landlord

- Third parties developing solar capability entering into a private wire agreement with nearby high energy users.

- Landlords and occupiers working together to ensure REGO backed renewable energy is supplied to an asset as part of an its lease.

Jeremy Dawson, Head of Renewable Energy, BNP Paribas Real Estate UK

 

Read the next article, Managing Energy in a Volatile World or discover more from our ESG in Perspective magazine. 

 

Powering the Future: Global Perspectives