Innovation funding: What the energy industry really needs from COP28

• 11 months ago (2023-12-11)
• Junior Isles

Emissions 65 Renewables 776

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Andrew Keen, Head of Content, Energy & Resources, Industrials at Edison Group

In what is shaping up to be one of the most polarising climate conferences in years, cutting through the noise to consider what the energy industry truly needs from COP28 is of the utmost importance.

Certainly, having one of the world’s largest oil and gas producers overseeing global climate negotiations makes for a challenging programmatic backdrop – particularly as the world contends with the hottest year on record, and the goal of keeping global warming below 1.5C seems out of reach for many countries. This does not change the fact that the energy sector is in desperate need of clarity, as industry players continue to battle over competing priorities – namely juggling the need for energy security with demands to phase down fossil fuel usage.

Clean energy investment: where we are now

The current landscape of clean energy investment has many layers. After years of attention and capital increasing towards ESG investments, we have seen a more recent change in investor thinking following Russia’s invasion of Ukraine, global inflation and an increase in populism, all of which have shifted economic and geopolitical contexts. The positive momentum behind clean energy investment has waned in some cases, given the appeal of high short-term returns for fossil fuel assets and the deterrent of high upfront spending for clean energy investments. Investors and businesses also continue to reckon with a confused, non-standardised sustainability compliance industry.

Despite this, globally, new investment in renewable energy skyrocketed to $358 billion in the first six months of 2023, a 22% rise compared to the start of last year and an all-time high for any six-month period. Renewable energy companies have had success in 2023 raising equity to support their growth, with venture capital and private equity expansion commitments to renewable energy reaching $10.4 billion in 1H 2023, up 25% from 1H 2022. New equity raised on the public markets totaled $12.7 billion during the first half of the year, again up 25% from 1H 2022. Unequivocally, China was the principal leader behind this investment, with $177 billion of new investments making it the largest market for 1H 2023. The US and Germany secured $36 billion and $11.9 billion respectively. Encouragingly, solar investment remains dynamic in India; investor activity is picking up in parts of the Middle East; and multiple countries across the EMEA region also saw record-breaking investments in clean energy.

With more than 90% of the increase in clean energy investment since 2021 taking place in advanced economies and China, it’s clear that the drive behind clean energy investment is not distributed evenly across countries or sectors. For many nations in the developing world, a shortfall in cash severely restricts an ability to shift energy systems and economies from fossil fuels to renewables. So-called ‘petrostates’, or fossil fuel dependent countries like Africa and Venezuela, are amongst more than two dozen economies at risk of losing more than half of their expected revenue from fossil fuels by 2040.

Key COP28 debates

Global imbalances such as these will inform COP28 discussions on whether to phase out, or phase down, fossil fuels. COP26 made reference to phasing down coal for the first time, and unsuccessful efforts were made at COP27 to expand that to fossil fuels as a whole. The COP president acknowledges that phase-down is inevitable, so the question at COP28 will be whether parties can fully commit to this. Similarly, a major debate will be what to do about unabated fossil fuels, an energy class that produces emissions unable to be reduced or captured.

Given the rising cost of capital, the question of whether the world can even afford the price tag of the energy transition remains. Cost estimates range from $110 trillion ( per the Energy Transitions Commission ) to $275 trillion ( McKinsey & Co. ), the latter of which represents roughly 2.6 times global GDP for 2023.

Carbon capture and its associated controversies – namely the fear that it will be used as an excuse for the continued use of polluting fuels – will be the subject of increasingly heated debate at COP28. Undoubtedly, certain countries will again attempt to convince us of the fallacy that unlimited use of carbon capture can make high fossil-fuel production compatible with limiting global warming to a safe level.

The role of innovation funding

Many of the issues within the energy track due to be addressed at COP28 are hinged on a lack of capital. What the clean energy industry desperately needs is innovation funding – government and private sector investments in research and development, driving innovation in clean energy technologies forward at a faster, more equitable rate.

Government incentives are a key component of a successful innovation funding strategy. Grants, subsidies, loan guarantees for clean energy projects and tax incentives for R&D in clean energy technologies all help to reduce the financial burden, and risk, of clean energy for investors.

Structured resource pooling is critical in the pursuit of innovation. Public and private partnerships are essential, especially those between academic institutions, private companies, government research bodies and non-profits. Matched funding schemes, where government funding encourages private sector investment, could be hugely beneficial for clean energy startups.

Encouraging clean energy entrepreneurship is vital, and can be done through incubators and accelerator programmes to help young companies navigate challenges, funding, and dealings with other industry players. Similarly, if private and government entities can support pilot projects of clean energy technologies, successful demonstrations can help to attract private investment.

Perhaps slightly less exciting, but equally as important and innovative as the suggestions above, is the need for a set of transparent, standardised clean energy assessment guidelines – creating a trustworthy compliance industry to inform decision making by investors, and legitimising investment in the industry overall.

This year’s COP is set against a tense backdrop. What emerges from the clean energy industry over the last 12 months is a distinct readiness for investment in the sector, but a non-equitable distribution of this interest, conflicting ideas on the speed at which we should move away from fossil fuels, and a lack of capital available to jump into action. Meaningful progress at COP28 would mean that progress was made on each of these issues, but to start driving clean energy technologies forward at the pace required, innovation funding is the crucial missing puzzle piece.