Decarbonising the power system - It's electrifying!

Technology and finance will all play a part in the transition to a net zero economy where renewable energy is the dominant source of power.

Decarbonising the world’s energy supply is the single largest contribution to realising net zero. Bloomberg’s New Energy Foundation says that that the transition from fossil fuels to clean sources will account for 50% of the necessary emissions abatement by 2050.¹

In developed economies, the energy transition will require replacing pre-existing power networks with cleaner alternatives. In emerging markets however, there are opportunities to build renewable-centric power systems that grow alongside their economies.

Implementing such a fundamental economic shift needs input from a wide range of sectors – such as technology and finance – to ensure that the new power supply meets the needs of businesses and the broader population. While wind and solar are mature technologies it would be a mistake to think the development of these renewable solutions is complete.

“There is so much that has to happen to enable a fully decarbonised power grid,” said Randolph Brazier, Global Head Clean Power Systems, Global Sustainability, HSBC. “Renewables are already being rolled out en-masse, but there still needs to be progress in new storage technologies, as well as new types of renewables (such as floating wind) and other supporting technologies like AI and high-speed telecoms.”

The technological needs in emerging markets will focus on providing affordable electricity – especially to people living in remote areas that are typically unserved by traditional power networks. There also needs to be sufficient infrastructure in place – hard infrastructure in the form of charging points for electric vehicles, and software that can improve the efficiency of the power grid.
Beyond technology, there are broader governance issues that need to be addressed during the transition to net zero. A country’s power generation is not a silo distinct from the rest of the economy, but an integral part of how a society functions.

“There are huge opportunities from renewables to not only replace fossil fuels, but to actually improve the lives of people in many different areas,” said Mr. Randolph. “Take jobs for example, with certain types of renewables providing more employment than their fossil-fuel equivalent, as well as addressing local air pollution.”

A country’s deployment of renewable energy will depend on a comprehensive strategy that brings together the public and private sectors, while incorporating the needs of the grassroots population. These governance challenges are exacerbated by the relatively short timeframe that the transition has to take place.

Decarbonising the global energy supply requires financial innovation, and there is a growing recognition that blending financing will play an important role in ensuring that there is sufficient capital to fund the installation of renewables.

At its core, blended finance is the effective use of public finance to derisk private investments to a point where they become commercially viable. It is an established technique for funding infrastructure projects, but one that will need to increase in scale to meet the needs of the energy transition.

“There are many funding gaps, and the challenge that we face is we are not going to bridge these gaps through traditional funding sources,” said Luke Bettesworth, Director, Sustainable Infrastructure and Innovation, HSBC.

Blended finance shows how renewable technologies have access to capital, while highlighting the importance of governance issues – especially in emerging markets. Pentagreen Capital, a joint venture between HSBC and Temasek, recently committed US$30 million to provide subordinated financing for six solar projects in the Philippines. This structure bridged the funding gap for a 490 megawatt initial portfolio of renewable energy assets, with potential to finance expansion of the portfolio to over 1 gigawatt.²

“Building the institutional capacity onshore in emerging markets is absolutely critical to scale up the roll out of decarbonisation technologies,” said Mr. Bettesworth. “We need to ensure that there are enough people in the emerging markets who are able to structure projects and solutions that will be attractive to the private sector.”