The insatiable demand for energy is testament to human progress
and development and with the rise of emerging markets the trend will not abate.
The IPCC (2011) estimates a global energy demand increase of 40 % by 2030 and
we shall not forget that 1.3 billion people still lack access to electricity. Given
the fact that energy causes 26 % of global GHG emissions (IPCC, 2007) there is
an obvious need to decarbonize our energy mix. Renewables and energy efficiency
measures hold great promise but capacity adding investments need to be smarter
and bigger. How big? The World Economic Forum says around 750 billion USD/year through
2050 to deliver energy security for all in a sustainable fashion (Green Growth
Investment Report, 2013).
Renewables and energy
efficiency
Public acceptance for renewables is key to realizing any plan, especially
when consumers start seeing new power lines, biomass facilities and wind farms close
to home. Coupled with higher energy prices the appetite for new investments
might falter as recent developments in Germany indicate. One possible way out
of this dilemma is to turn consumers into prosumers, i.e. letting them produce
energy, for example via solar power, and selling surplus production into the
grid. Smart grids need another round of massive investments however. Catch-22 anyone?
Nonetheless,
renewable energy like solar and wind is the fastest-growing source of energy generation,
estimated to make up 25 % of the global power mix by 2018. Already in 2016,
renewables will surpass natural gas, taking second place after coal as an
energy source (IEA, 2013). Growing energy demand from fast growth nations where
coal is still in heavy use means that the average unit of produced energy today
has the same carbon intensity as 25 years ago (IEA, 2013). To turn the tables a
global price on carbon is a must. It has to cost to pollute and harmful
subsidies for the fossil industry should be phased out or at least be on par
with those for renewables. All together, this will make renewables an even
better business case.
While the case for renewables remain contentious in some circles
due to long financial payback time, effects on the landscape and remaining
technological hurdles, the other side of emissions reductions represents a more
straightforward case. Energy efficiency efforts seemingly provide rather predictable
and often large financial returns while mitigating climate change. According
to the IEA (2013) improving energy efficiency in building, transportation and industrial
processes can reduce global energy needs by one third in 2050, saving money and
reducing emissions. IEA also estimates that a global efficiency investment just
under 12 trillion USD through 2035 would produce 18 trillion USD in higher
economic output.
A word of caution regarding these and other
widely circulated figures, they require much faster reduction of energy
intensity than has ever been achieved in the past. Further obstacles include
split incentives, i.e. not always the same people who pay for efficiency that
receive the benefit and the so called rebound effect where lowered cost leads
to increased demand, eroding expected savings and positive environmental
impact. Hidden costs, for example rebates and use of consultants can also cut
into the cost saving quite dramatically.
Nexus and Impact
Investing
Smart energy investments need to consider effects on water and
food, as they are closely interlinked and together impact the environment in a
myriad ways. Using a Nexus approach, as we have stressed in previous blog posts,
gives a deeper understanding of these linkages and how to best structure an
investment to avoid negative effects in the adjoining sectors. It’s time to move
away from the silo perspective.
To illustrate; the full food production and supply chain is
responsible for around 30% of global energy demand. Energy is required for
pumping, storing, distributing and treating water. Water for energy production
currently amounts to about 8% of global water withdrawals (up to 45 % in
industrialized countries). Biofuel demands could grow 100% by 2030 (IEA 2009); biofuels
being highly water intensive, as is reclaimed wastewater and desalinated
seawater. Renewables can cause other negative nexus externalities, for example
high water demand per unit of energy for hydropower and large quantities of
water for cooling solar installations. However, excluding large-scale hydro power plants,
renewables consume much less water than fossil fuels and nuclear power. More
than 40 % of freshwater used in the US can be attributed to the cooling of power
plants, as a reminder. This complex picture teaches
us to go deeper in our investment analysis – forego easy and superficial
methods.
In particular, water and energy are deeply intertwined; energy and
water producers will need to cooperate on an unprecedented scale, both in terms
of on the ground projects and as co-investors. Consider the effects on the
energy sectors in cases of water shortages; operations can shut down, causing
blackouts and consequent economic damages to society. In water stressed regions
the future financial viability of some energy plants can be questioned, not to
mention its impact on water supplies, often competing with the agricultural
sector for withdrawal rights.
Using a Nexus approach to identify possible negative externalities
from an energy investment can be a crucial tool in the process of balancing and
boosting financial and environmental returns. Healthy returns, either in the
form of profits or cost savings are essential to future investments without
having to resort to ruinous and lopsided subsidies. Structuring energy
investments as impact investments offer the best of both worlds. Financial
returns and positive environmental impact are not mutually exclusive as the old
investment philosophy goes but in fact they are mutually reinforcing in a world
where natural capital will have an increasing relevance on the balance sheet.
Including negative externalities in investment decisions can
make the difference between going ahead with a non-renewable energy investment
or using the same capital for a renewable energy project. Leave the coal in the
ground or not? The intersection of the Nexus and Impact Investing can be just
the right formula for business and governments making multi-billion investments
in the above areas, especially in an ever more complex energy sector.
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