Energy security replaces policy as primary clean energy investment driver

As the climate debate moves towards voluntary emissions reduction, post the United Nations Copenhagen and Cancun conferences, the impact policy will have on clean energy investment is diminishing, according to a leading consultancy.
Marcel Brinkman, partner at strategy consultancy McKinsey & Co says the world has moved on since the legally-binding Kyoto Protocol was first introduced in 1997, when developing countries were prepared to reduce emissions without a burden on developed countries, according to Brinkman.
‘Climate change in itself is not the primary driver for cleantech investment anymore,’ he says.
With alternative voluntary commitments being unlikely to impact on clean energy investment levels, other factors will inevitably determine how much money is invested.
Energy security, energy demand growth and the need to manage environmental impacts on both a local and global scale are the three primary concerns that will sustain low carbon investment, says Brinkman.
With subsidy cutbacks visible in Europe and the US, environmental policy is expected to be outshined by the role private sector investment will play in the transition to a low carbon economy.
‘Most of the investment money needed to facilitate a low carbon transition has to come from the private sector,’ says Brinkman.
‘It is striking to see how big the role of the private sector is, while it is at the same time not being stimulated. There are wide lines of private capital flowing into climate mitigation, compared to spaghetti lines of money being made available by the public sector.’
The private sector will need to play a central role in mobilising the $100bn investment developed countries have pledged to help emerging nations mitigate climate change by 2020.
‘If we add up all the commitments countries have made to reduce emissions, we still only get half way,’ says Brinkman.
‘Despite these high pledges, it is not clear-cut how countries will make this level of capital available. It is clear that the private sector will have a key role to play in financing the sector.’
China, India, South Africa and Mexico have the strongest need to become more energy efficient and diversify their energy resources, which provides strong investment incentives, according to Brinkman.
With 1.5 billion people lacking access to energy, the power access debate also offers opportunities for investment in the sector.
‘Distributed solar is cheaper at this stage than distributed diesel generators, at this point in time, but it does require more investment capital, so that may be a major investment hurdle in emerging countries,’ says Brinkman.
However, cheap gas prices, low carbon prices and fossil fuel subsidies still threaten investment in renewable energy, he warns.
Role of emerging countries
Emerging countries are expected to be the largest source of energy demand growth in the coming years with India, Brazil and China anticipated to drive the majority of this growth.
BP’s World Energy Outlook, published earlier this year, predicted 2.7 per cent growth between now and 2030, with zero net growth in OECD countries, compared to 3.5 per cent growth in non-OECD regions.
These projections, coupled with a recent UNEP study showing that a green economy would increase global gross domestic product, substantiate the claim that developing countries will be a driver for the low carbon economy in the future.
Brinkman says, ‘Countries that are on a path towards industrialisation require an increasing amount of energy and India became less efficient in 1990, compared to 2000.
‘But post-industrialisation, countries become more efficient – as the share of services sector increases and second they focus more on energy efficiency, which dampens energy growth.’
China’s part
China’s interest in clean energy, being a country that relies on coal as its primary fuel resource, is hinged mainly on its concerns over energy security, in Brinkman’s view. He anticipates that although the role of coal will continue to dominate in China and India, where it is locally produced, import quotas will lure these countries into adopting alternative sources of energy.
While China only imports 11 per cent of its energy, India imports 40 per cent, making its economy significantly more reliant on other countries.
Now China is the biggest global greenhouse gas emitter, tackling climate change will be difficult without the country’s cooperation, Brinkman says.
Western duo
While security and economic growth are the main drivers behind US investment in clean energy, which imports 27 per cent of its fossil fuels, the UK is a larger producer of energy than its neighbours in Europe.
Europe remains most vulnerable to energy security and import issues, relying on imports for 70 per cent of fossil fuels used on the continent.
‘In the EU the public debate is to a limited extent about competitiveness – cheap energy is not a primary concern industrially, but the fuel poverty debate is strong. In US, however, it is all about cheap energy and security, and to a lesser and lesser extent about climate.’
Increasing investment in Africa
Africa has strong potential for increased investment in renewable energy, because the cost of developing a new renewable energy infrastructure is less than building a fossil fuel supply chain, according to Brinkman.
This contrasts with the high cost of replacing gas infrastructure in the developed world with wind and solar technology, which presents a possible hurdle to further investment in renewable energy in Western countries.
The main barrier to investment in renewable energy in Africa will be access to capital, Brinkman forecasts.
‘The drawback is that renewable energy is more capital intensive than fossil fuels. Ethiopia is already in a position where it cannot finance its hydro developments through the local banking system.’
‘South Africa has a lot of coal resources that are capable of filling a power generation gap – but it will still want to harness renewable energy resources because new solar energy infrastructure is not that bad from cost perspective. In sub-Saharan Africa, solar is easier than diesel because you don’t have to build a diesel supply chain.’