The current energy sector is certainly a hazardous one, contributing to much of the CO2 emissions that are affecting the planet. That is why the global energy sector – including industry and mobility using energy – must transition to clean energy in order to keep the planet a liveable place.
However, there is substantial investment needed to do so. Particularly, investment needs to be focused where carbon intense infrastructure is to be substituted by low- or zero-carbon alternatives.
One of the sectors without which an energy transition is impossible is power, representing 40% of global carbon emissions in 2018 – but the transition process is connected with huge challenges.
We have researched what these challenges are and how these sectors can become zero-carbon, in order to understand the drivers that are holding this transition back.
As we are – with this transition – entering uncharted territory neither policymakers nor market actors such as investors have estimates or probabilities to work with along this path.
Under these circumstances, decision-makers find it difficult to make the investments at the scale and speed needed, because traditional tool kits, of how to assess and handle risks, do not work.
From our research, this appears to be one underlying and less known issue with an energy transition – a deep uncertainty of unknown unknowns.
Investment is being delayed in vital energy transition technologies, such as offshore wind farms or electric vehicles, because we simply do not have data, information or predictions on how to implement the most effective energy transition approach. This is drastically slowing down the speed of a transition.
Energy infrastructure is capital intensive. We know that we need substantial investment in clean energy, and we know that we need it fast.
So, how can we ensure that policymakers and investors are in a position to effectively transition to a clean energy sector? How to act in an environment where some unknown unknowns will naturally remain?
Investors and policymakers can best work together on this, if the policy signal is such that investors can rely on it. And to be clear: that is not easy. A simple law that can easily be changed will not do the job. Shifting the coal or the nuclear exit back and forth are just some examples.
© Supplied by Frankfurt SchoolBut there are possibilities. Financial contracts, such as contracts for difference simulating a high carbon price for investors, may be more helpful. The reason is simple: Once a financial contract is signed, it is much more difficult for the government to change its content – at least in constitutional states with rule of law.
So, there must be a credible commitment from policymakers signalling that, for example, the path towards zero emissions by the year 2050 will be implemented.
This will allow for a better forward-looking plan for investors who are then more likely to invest in clean energy. Policymakers must make the decisions to push for this, but ultimately it needs private investment to be successful, and policymakers have to make that investment attractive.
The government needs to send a credible long-term signal that the transformational change will happen. There may be concerns about this inducing costs and risks to the competitiveness, but that could at least partly be compensated by strong and broad government support of research and innovation.
This will particularly help those who are willing to innovate – and innovation is key in times of structural change like now.
Transitioning a whole economy towards net zero carbon emissions is vitally needed and a tremendous challenge at the same time.
Governments need to provide a strong compass where the journey will go. Below this general direction, more flexibility may be helpful: a high-innovation environment to enable firms to find their own way.
Ulf Moslener is professor for sustainable energy finance at the faculty of Frankfurt School and Head of Research of the UNEP Collaborating Centre for Climate and Sustainable Energy Finance.
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