The global energy transition, projected to cost USD 200 trillion by 2050, could see nearly 25% cost reductions through de-risking instruments, according to Deloitte’s report, “Financing the Green Energy Transition: Innovative Financing for a Just Transition.” The report stresses the importance of innovative financing methods for renewable energy investments such as solar and wind farms, green hydrogen production, electrification, and carbon capture. These sectors face higher perceived risks than fossil fuel projects, driving up capital costs and slowing the pace of green energy adoption.
The study identifies four categories of risks contributing to elevated capital costs. Macro risks, stemming from political instability and regulatory uncertainties, are the most significant, accounting for 40-90% of project costs in some regions. Market risks, including challenges with project financing and revenue predictability, add up to 20% of costs, especially in developing countries. Technical risks, such as project delays or underperformance, and financial risks related to access to capital, are smaller contributors but remain notable factors. Misjudging the climate and public health benefits of renewable energy projects further exacerbates perceived risks.
“Facilitating investments in green projects remains a topical concern, pivotal for accelerating the energy transition and the decarbonisation of economies. In large markets, which are more advanced in this journey, the risks are already on a downward slope, leading to lower cost of capital for green projects, thus encouraging investors and lenders,” said Ovidiu Popescu, Partner at Deloitte Romania.
Popescu added, “Moreover, at a global level, the pioneer segments of the transition, solar and wind, have reduced their initial costs by 80% and 40%, respectively, over the last 15 years. It is an effect of experience and gradual integration of lessons learned that creates predictability within projects and markets and mitigates risk perception. The study recommends several strategic measures to de-risk the implementation of emerging technologies, so that they have a chance to demonstrate their commercial viability in the medium and long term, and it emphasises that the mix of measures must take into account both the market context and the maturity of the technologies in question.”
The report recommends comprehensive de-risking strategies to unlock the financial potential of green projects. These include regulatory instruments like streamlined licensing processes and enhanced network planning, which aim to address inefficiencies and delays. Economic incentives, such as tax breaks, support policies, and offtake contracts, are proposed to encourage investor participation. Financial tools, including grants, subsidies, guarantees, and concessional loans, are deemed essential for reducing upfront costs and improving project viability. Additionally, blended finance mechanisms, which combine public and private capital, are highlighted as transformative, with the potential to reduce renewable energy costs by up to 35%.
The study emphasises the need for accountability and collective financial learning among stakeholders to create a robust green finance ecosystem. Investors and lenders are urged to integrate decarbonisation goals into their strategies while developing climate risk assessment frameworks. Regulatory authorities play a crucial role in fostering predictable investment environments and embedding lessons learned into public policies. Development banks can facilitate large-scale refinancing mechanisms through tailored blended finance solutions. Meanwhile, international organisations, including the United Nations, are tasked with coordinating global efforts to establish a ‘new energy world order’ that enables the efficient and equitable exchange of information, strategies, and technologies.
“The green finance ecosystem consists of different types of actors—developers, investors, financiers, etc.—having different objectives and constraints. Public funding sources, operating with more flexible risk criteria, are still the driver of green financing, contributing almost half of renewable energy investments around the globe in 2021 and 2022, according to Climate Policy Initiative data from 2023.” said Radu Dumitrescu, Financial Advisory Partner-in-Charge, Deloitte Romania. “According to the study, the future of this ecosystem should mean, in addition to de-risking measures, improved accountability of the actors and a permanent, collective financial learning exercise, which will facilitate the diversification of financing instruments over time and which in Germany, for example, contributed to a drop of over 4% in the cost of capital of photovoltaic and wind installations between 2005 and 2017 alone.”
