Green finance on the rise
The need for expertise in renewable energy, energy efficiency and climate finance is growing. Alexander Boensch of RENAC in an interview on the challenge of energy transition for financial management.
About the interviewee
Alexander Boensch (M.A.) is Project Director in the field of Bio Energy / Renewable Energy and Energy Finance at the Renewables Academy AG (RENAC), an international education provider specialized in renewable energy technologies and energy efficiency. In cooperation with the Berlin Professional School of the Berlin School of Economics and Law (HWR Berlin), RENAC will offer a part-time online master's degree programme with a specific focus on "Green Energy and Climate Finance" starting in October 2021.
What can banks do to tackle climate change?
Green energy finance provides a framework for the systematic, standardised arrangement and secure implementation of green energy investments.
Not only can banks, but also other financial institutions and global capital market players consciously decide to finance these energy projects, instead of power generation projects using fossil fuels; and thereby directly influence advancements in climate change. Of course, the requirement is always that new green energy projects do in fact replace existing, conventional energy-generating units to the same extent. Politicians must, therefore, issue clear guidelines to reduce fossil fuel energy production.
What is green energy finance?
Green energy finance comprises methods and models to structure and finance renewable energies, energy efficiency and climate finance projects worldwide. The interdisciplinary knowledge required covers standard areas of business management such as financing, evaluation, transaction structuring, marketing and strategy formulation on the one hand, along with technical and scientific engineering expertise and legal knowledge of industry-specific contract structures and drawing up suitable business constellations on the other.
What are the factors playing a key role?
The main objective of this particular financial area is to procure and provide sufficient financial means to quickly, comprehensively and professionally implement green energy projects. This primarily involves adequate pre-structuring to ensure that projects have the qualitative status to bring stockholders and lenders on board, based on their respective investment criteria. This process is known as obtaining “bankability”. In addition to project-specific factors, existing or non-existent political and institutional framework conditions also often play a major role.
Is it right to assume that green energy finance is based on minimising and managing climate risk for credit institutions?
In the past, the majority of credit institutions awarded a significant amount of credit to companies involved in fossil fuel production. As a result of increasing advancements in energy policy, most of these leveraged investments have already become uneconomical. For others, there is an acute risk of becoming economically inefficient within the next few years or assets no longer being used that can only be shut down, caused by rising carbon costs among other things. These so-called stranded assets can result in credit losses for lending institutions if they are not recognised and managed early on. Nowadays, an increasing number of credit institutions no longer finance conventional energy investments and only focus on green energy projects.
How does green energy finance differ from other finance areas?
A key feature of this special financial area is the focus on strong stakeholder value with the goal of acting in the best interest of all project participants. More than usual, multiple perspectives have to be taken into account and reconciled in a compromise-oriented way. This requires a high degree of willingness to cooperate. In addition, sustainable financing instruments are applied that have an explicit reference to one or more of the three ESG criteria: environmental, social and governance. Knowledge is needed about the comprehensive integration of ESG-compatible organisational processes. An additional distinguishing feature is the focus on project financing as a central (and also democratic) financial tool that supports stakeholder diversity.
How green is green energy finance (really)? Thinking of the buzzword “greenwashing” here.
The main priority here is in fact money - namely, the money that can be made through projects focussing on renewable energy, energy efficiency and the climate so that these can replace the use of fossil fuels in future where possible and reduce the global CO2 and pollutant emissions of existing technologies. Actors in this finance area are therefore actively involved in global energy change. However, the colour of money is ultimately determined by the individual themselves. It’s important to us that projects are put in place which fulfil the definition of green energy.
What can and must be done to accelerate the use of cleaner energy technologies?
The standardisation of project and financing approaches is important for increasing the speed at which these are implemented along with pooling smaller projects into larger, financeable ones to reduce transaction costs. New de-risking tools must be developed and the use of existing tools expanded for investments in emerging and developing countries. Well-trained specialists can better implement the complex challenges of the project environments and can take alternative courses of action to resolve specific issues within this field.
What developments do you see?
While global investments in many markets are increasing dramatically, at USD 4.4 billions in 2019, Germany currently falls approximately 30% below the previous year’s level. However, over the past 20 years Germany has invested more than USD 330 billion in total and now obtains 50% of its electricity from renewable energy sources. Investments within the EU for 2019 amounted to USD 54.6 billions in total (7% less compared to 2018). Absolute figures are only meaningful to a limited extent as the specific investment costs for both of the main technologies, wind and solar, are constantly falling due to economies of scale, whereby the same capacity can be established annually with lower production costs. Overall, at least the next two decades will see a high demand for green energy finance and require well-trained specialists in this area.
What specific knowledge do green energy finance specialists have?
Financing green energy investments requires various specialist knowledge on the part of the investors that general financiers do not typically possess. This particularly affects the areas of international project financing, management and carrying out industry-specific due diligence processes and asset-based financial modelling in Excel. Furthermore, comprehensive knowledge of remuneration schemes and output marketing (e.g. of green electricity) is also required. The targeted incorporation of international, multilateral and development finance institutions and the capital market (key word: green bonds) also plays a significant role, along with in-depth knowledge of the latest technologies used in such projects and their associated contractual structures.
Where can one acquire these competences?
RENAC carried out an internal market analysis beforehand to assess the demand for academic finance courses in the area of renewable energy, energy efficiency and climate finance. In addition, the strong global demand for the Green Energy Finance Specialist certificate programme we currently offer indicates that there is also a market for additional courses. In order to provide students with an opportunity to undertake academic studies on the topic of Green Energy & Climate Finance, this master programme was developed in conjunction with the Berlin Professional School at the HWR Berlin. The programme starts in October 2021 and is offered as an online degree programme. By the way, applications can still be submitted until 31 August.
Mr Boensch, thank you for the interview.
The interview was conducted by Sylke Schumann, press officer at the Berlin School of Economics and Law.
Information on the Master's programme: Master Business Management – Green Energy and Climate Finance