Supercharging energy finance is the key to innovation and decarbonisation

In this guest article, Thomas Storch, Senior Director for Global Economics, Finance, and Development for the U.S. National Security Council, discusses the importance of supercharging climate finance in order to make decarbonisation a reality.

Thomas Storch, Senior Director for Global Economics, Finance, and Development for the U.S. National Security Council

The world faces daunting and competing energy challenges. We must prioritise cleaner energy systems to protect the environment, but we must also be mindful of energy security requirements to provide affordable and reliable energy, as we were painfully reminded last year when European natural gas prices rose over ten-fold from a year earlier. And we must especially focus on the estimated 775 million people – predominately living across the Global South – who continue to live without access to electricity.

As we face these great challenges, we know that innovation in new energy technologies, such as hydrogen and energy storage, will be critical to meeting our growing energy needs. However, we also know that energy innovation is expensive, and it takes time and resources to develop new technologies and bring them to market.

Because the private sector is often reluctant to invest in technologies that are not yet proven, government funding plays a critical role in bridging the financing gap and accelerating the development of new technologies.

With the UAE making climate finance a central focus of this year’s COP28 and setting ambitious targets to stimulate the flow of capital for decarbonisation and energy innovation, there is a great opportunity for global leaders to demonstrate a truly meaningful commitment to increase our ambition to effectuate a sustainable energy future.

Yet government commitments are not enough to solve our future energy challenges. The private sector is the best engine of innovation, and we should incentivise private capital to support the development of new technologies that can help us reduce our emissions.

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Private capital is key to overcoming reduced government budgets and fiscal contraction to provide the financial capacity to make critical energy investments. We must find ways to eliminate the disconnect between private and government investment, allowing those capital sources to complement, rather than contradict each other.

Public-private partnerships (PPPs) are one critical solution to bridge this gap and help galvanise the necessary investment to drive the energy transition. PPPs are arrangements between the public and private sectors to pool resources and share the risks and rewards of innovation. They can provide the capital and expertise required to develop new technologies, and they can help to speed up the commercialisation process.

But bringing government and the private sector together and turning words into concrete action is neither quick nor easy. That is why forums in which the private and public sectors can align ahead of COP28 are so precious. With its focus on gathering the disparate actors and stakeholders in the energy ecosystem, ADIPEC provides an opportunity for the financial community to meet with energy leaders and explore how finance can support decarbonisation.

If we want to accelerate the energy transition, stimulating conversations and collaboration between the energy industry, the finance industry and global policymakers is essential. These dialogues have never been more important, as we increase our ambition to tackle the twin challenges of energy transition and energy security.

Another key to unlocking the full potential of climate finance will be the reform of Multilateral Development Banks (MDBs) and International Financing Institutions (IFIs). These institutions can, if given the power to do so, play a pivotal role in bridging the public-private divide and ensuring funds get to those who need them most. There are already some encouraging signs in terms of reform, with plans to lower risks to lower-income countries through concessional finance, which can supercharge flows of private capital.

We must incentivise these partnerships and institutions by creating attractive, large and wholesale guarantee facilities. In doing so, countries in need of support can better leverage private finance, access institutional investors and work directly with sovereign wealth funds.

With pragmatism and openness to all results-based emissions reduction pathways, we need to seize the moment and make sustainable energy finance reliable, available, accessible, and economic.

As we look ahead to the COP28 meeting in November, we should focus on the interplay of energy finance and innovation to meet the demands of an increasingly complex energy system. Ultimately, while words and pledges can be impactful in signalling policy goals, finance and investment are the key drivers of a sustainable energy future.

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