Long-term public policy and increased capital markets financing needed to bridge carbon capital chasm through 2020 across Europe
LONDON; Feb. 2, 2011– The banking sector will be pivotal to Europe’s low carbon transition, and will finance and intermediate the vast majority of the €2.9 trillion capital required to implement low carbon infrastructure, according to a report published by Accenture (NYSE: ACN) and Barclays (LON: BARC). Banks will play an increasing role in the financing of the transition, primarily through intermediating institutional capital, but stable and long-term government incentives and policies will remain critical.
The study, Carbon Capital, finds that development, procurement and implementation of 15 commercially viable low carbon technologies will require €2.9 trillion in funding from 2011 – 2020, helping to enable Europe to bring its emissions to 83 percent of 1990 levels by 2020, representing a carbon abatement of 2.2 Gt CO2e. Where existing studies forecast capital requirements against assumed adoption rates needed for Europe’s 2020 targets, this report’s forecasts are based on calculations of realistic actual adoption rates of low carbon technologies.
“The path to a low carbon Europe has largely depended on government initiatives,” said Peter Lacy, Managing Director, Sustainability Services, Europe, Africa and Latin America, Accenture. “High public sector debt and maturing technology now mean that private sector capital, primarily intermediated by banks, must be provided to accelerate the investment we need to meet our 2020 goals. However, governments must still play a role to stimulate demand and stabilize carbon markets with transparent and long term policy commitments. This report will help banks and policy makers identify the costs of commercially viable low carbon technologies and suggest new ways to finance them.”
Capital markets to unlock €1.4 trillion for low carbon technology
Of the €2.3 trillion of procurement capital identified, seventy-three percent (€1.65 trillion) will need to be funded externally, creating unprecedented demand for private capital and associated bank products and services. The largest share will be debt to finance the development of low carbon technology assets. Asset leasing will be required to support consumer adoption of micro-generation and energy efficient equipment by spreading the upfront cost over its lifespan and using the energy savings to cover lease payments.
The report calculates that securitization of the debt into “green bonds” - low carbon technology asset-backed securities - could provide access to secondary markets for €1.4 trillion of capital required, providing new products for pension funds, individual and other institutional investors.
“Banks in Europe are facing the challenge of capital lending constraints, uncertain carbon markets and myriad local policies," said Rupesh Madlani, Head of Renewables and Clean Technology Equity Research, Barclays Capital. "In order to limit the burden on their balance sheets and to mitigate risks, they must create credit products that meet the risk and return appetite of investors. The low carbon transition presents a major opportunity for innovation in financial products and services to meet this challenge.”
The report highlights several key recommendations for corporate banks, investment banks and asset managers including the need to:
- Work in collaboration with investors, borrowers and rating agencies to develop products that enable capital markets funding for low carbon technology backed assets
- Create dedicated low carbon technology investment funds to provide investors with strategic exposure to the sector
- Develop partnerships with energy efficient and micro generation equipment providers to effectively fund an otherwise capital intensive and fragmented market
- Create specific advisory services to provide technical, regulatory, financial and commercial expertise on the low carbon technology sector to be leveraged across the banks’ product portfolios. This will enable accurate, risk adjusted valuation of low carbon technology investments
The report recommends policy makers ensure stable policies in the following ways:
- Commit to long-term public incentives for emerging low carbon technologies, while avoiding retroactive changes to incentives
- Set fiscal incentives and develop risk sharing instruments to leverage private investments in higher risk technologies
- Define compliance standards for low carbon technology investments benefiting from public incentives
Capital requirement breakdown
The Carbon Capital report assesses investment requirements across 15 commercially viable low carbon technologies. The report uses demand-driven adoption forecasts and technology cost learning curves to measure the capital required between 2011 and 2020 in the EU-25.
Out of the €2.9 trillion required to finance Europe’s low-carbon transition, €2.3 trillion will finance the procurement and implementation of the low carbon equipment and infrastructure, while €0.6 trillion will be required to finance the research, development and production of these technologies. These include:
- Buildings: Energy efficiency retrofits and smart buildings for commercial properties and decentralized energy production for residential properties will require the greatest capital injection, €600bn, and would potentially deliver 18 percent of identified emissions savings.
- Commercial transport vehicles: Electric, hybrid, biofuel, and compressed natural gas commercial road vehicles and fuel efficient freight sea vessels will require €582bn and would potentially deliver 19 percent of identified emissions savings.
- Transport infrastructure: Electric vehicle charging stations and intelligent transport systems will require €35 billion and would potentially deliver 1 percent of identified emissions savings.
- Electricity distribution: Smart grid and smart metering will need €529bn and will actively manage intermittent and decentralized power generation, while potentially delivering 13 percent of identified emissions savings.
- Electricity production: Shifting to renewables, including wind, solar, biomass and geothermal will require €508bn. Solar photovoltaic power is likely to remain the most capital intensive technology, but will become more cost effective due to falling primary materials and manufacturing costs and increased efficiency in solar to electric energy conversion. Electricity production is set to deliver potentially the highest level of carbon savings identified at 49 percent.
- Solar and wind infrastructure: Utility and domestic solar and wind installations will require €617 billion. This recognises improvements in technology to lower the cost of energy and higher adoption rates over time.
Notes for editors
The model developed as part of this study is based on a demand-driven approach, derived from realistic adoption rates of low carbon technology applied to buildings, energy and transport. These adoption rates are supported by a number of existing forecasts and have been tailored through collaboration with low carbon technology experts. This approach differs from existing supply-driven models that estimate capital requirements based on technology adoption required to meet carbon reduction commitments. Key features of the model include:
• Country-specific approach for all countries (e.g. applicable markets, cost factors, emissions factors, etc)
• Detailed segmentation of applicable markets for all low carbon technologies analyzed
• Adoption rate calibration based on an s-curve calibration approach
• Integration of technology cost learning curve to derive capital estimates
• Integration of electricity grids’ emissions intensities forecasts to derive carbon savings
Accenture is a global management consulting, technology services and outsourcing company, with approximately 211,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.
Barclays is a major global financial services provider engaged in retail banking, credit cards, corporate and investment banking and wealth management with an extensive international presence in Europe, the Americas, Africa and Asia. With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs nearly 147,000 people. Barclays moves, lends, invests and protects money for 48 million customers and clients worldwide. For further information about Barclays, please visit our website www.barclays.com.
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