Breaking the investment barrier: how to make green energy projects bankable

The path to net-zero has become more complex amid growing energy security concerns and political uncertainty. The election of Donald Trump in the US signals a potential shift in direction for one of the world’s largest economies, while the financial aftermath of the COVID-19 pandemic continues to cast a long shadow over green energy initiatives.

This uncertainty poses challenges for renewable and emerging energy projects, from established technologies such as onshore wind, offshore wind and hydropower to newer markets including hydrogen, carbon capture and storage and floating offshore wind.

And these challenges are further compounded by a significant financing gap that threatens to derail progress toward climate goals.

The scale is staggering. According to the International Energy Agency, global investment in renewables must more than triple by 2030 if we are to achieve net zero by 2050, reaching approximately US$4.5tn a year. Currently, clean energy investment stands at just US$1.8tn, with only one-third of this directed toward solar PV and wind projects.

EIC data also reveals a stark disconnect between global net-zero targets and actual project advancement. The global final investment decision (FID) rate for renewable and transition technologies languishes at around 5% or less, in sharp contrast to upstream oil and gas at 33% and large-scale nuclear energy at 44%. Perhaps most concerning is that only 5% of the US$2tn earmarked for global fixed offshore wind projects have reached FID, signalling a potential stall in progress toward net-zero targets.

Navigating financial uncertainties

The complex structure of clean energy projects often deters investors. These initiatives typically demand high upfront costs offset by lower operating expenses over time, creating a lengthy path to return on investment.

“The reality is that many climate tech startups are hardware-heavy and require a lot of time and capital to scale,” says Arjun Jairaj, an Investor at venture capital (VC) firm noa.

“To manage this as a VC fund in this space, while we do invest in hardware, we look for companies that are as asset-light as possible,” he continues. “We’re also conscious of capital intensity. We support businesses that are investing venture equity into research and development and working on products that have a clear path to commercialisation. Investors looking to make a quick buck should probably look elsewhere.” 

Recent economic and inflationary challenges have exacerbated concerns around upfront expenditure, with utility-scale solar PV and onshore wind investment costs now 25% higher than in 2019. However, solutions and mechanisms out there are having an effect.

Lewis Gardner is Managing Director at Gamcap, which has been steering investments into green energy projects for the past decade. “Public-private partnerships combine public resources and regulatory support with private-sector innovation and capital,” Gardner says. “Power purchase agreements, meanwhile, offer additional stability through guaranteed long-term contracts with energy buyers.

“Some governments are taking proactive steps, such as managing pre-bid work and tender auction processes. This has kind of approach has been demonstrated successfully in India’s solar auctions and offshore wind tenders in Germany and the Netherlands.”

Bridging the government-industry divide

EIC has identified a concerning trend in government attitudes toward the energy sector. Some administrations have adopted an adversarial stance toward oil and gas, assuming separate ‘bad’ supply chains for fossil fuels and ‘good’ ones for renewables. However, EIC data shows that 80% of companies in the UK energy supply chain still rely on oil and gas revenues while driving cleantech innovation.

EIC’s recently published manifesto advocates for treating the energy sector as an integrated whole rather than following a siloed approach. This will ensure that companies can operate across the spectrum of energy activities, supporting their survival and growth through the energy transition.

Building community support

Local opposition can significantly affect project timelines and investor confidence. If the green energy financing gap is to be reduced, it will be critical to bring the public along on the net-zero journey.

Some innovative approaches to community engagement are showing promise. “Crowdfunding and community investment schemes not only secure necessary funding but also foster local ownership and support,” Gardner says.

The reality is that many climate tech startups are hardware-heavy and require a lot of time and capital to scale - Arjun Jairaj, Investor, noa

“I can think of a couple of success stories here in the UK. They include Low Carbon’s Maldon Wycke Solar Farm in Essex, which engaged nearly 2,000 visitors through public consultations. In Scotland, Rethink Glasgow’s interactive community engagement platform gathered over 1,300 contributions towards sustainability initiatives.”

Strengthening grid infrastructure

Grid connection remains a critical bottleneck, with an estimated 3,000GW of renewable power projects awaiting connection around the world.

“The grid capacity is of extreme importance,” comments Javier Dominguez, Managing Director of TWEFDA, an Aberdeen-based innovator of a solution that can switch between generating and storing power generated by waves.

Crowdfunding and community investment schemes not only secure necessary funding but also foster local ownership and suport - Lewis Gardner, Managing Director, Gamcap

“The grid is used to take the power from where it is produced to where it is consumed,” Dominguez explains. “In large distances, the interconnectivity of every user of electricity guarantees the power is reached when required. Connectivity in large distances also reduce the renewable energy intermittency that, up to now, the grid has had.

“As Matt Hinde, the Head of European Affairs for the National Grid, has said, there is no energy transition without transmission.”

Addressing the global ‘grid gap’ is likely to be extremely costly – around US$607bn needs to be invested in grid infrastructure every year until at least 2030 if net-zero goals are to be met.

Countries such as India and Brazil are increasingly turning to private capital to expand their infrastructure, while in the UK, providers face connection delays of up to 15 years, with projects worth US$253bn currently stuck in connection queues.

The UK is addressing this challenge through the creation of the National Energy System Operator and the Long Duration Electricity Storage investment support scheme, designed to boost investor confidence and unlock billions in funding for renewable energy storage. This ‘cap and floor’ structure offers developers a guaranteed minimum income while limiting excessive profits, creating a balanced approach to risk management.

As Matt Hinde, the Head of European Affairs for the National Grid, has said, there is no energy transition without transmission - Javier Dominguez, Managing Director, TWEFDA

Streamlining regulations

The regulatory landscape also presents significant challenges. Around the world, there are 68 different carbon initiatives currently affecting the renewable energy sector across various countries.

“We operate in markets that have historically been highly regulated and complex to navigate, with entrenched incumbents that have traditionally operated without much market competition,” says Jairaj. “Meanwhile, the liberalisation of energy markets has not been uniform across countries. In those that were made competitive, we are seeing tremendous innovation and new entrants and challenger models, but it will take a fund cycle for these to scale and demonstrate the type of impact and return we expect.”

Mixed messages in subsidy policies further complicate matters. For example, France’s fossil fuel subsidies and Spain’s efforts to reclaim profits from renewable operators are sending conflicting signals to potential investors.

However, progress is being made through clear and stable regulatory frameworks. Denmark has established a one-stop shop for offshore wind permitting, while Germany has streamlined its wind farm approval process, resulting in an 80% increase in project approvals in 2023 compared to 2022.

The introduction of targeted subsidies, tax credits and feed-in-tariffs for clean energy projects has helped to reduce financial barriers. However, it is important to note that investors remain cautious about market dependence on these mechanisms – currently, 75% of global solar is linked to feed-in tariffs, making it vulnerable to regulatory changes.

“Politically, there needs to be a recognition that this is the right thing to do for our climate, and that it’s not a zero-sum game – there are good gains to be made by investors, companies and governments,” says Jairaj. “But there is clearly a reactionary element to ‘the cost’ of the transition, and it will take tremendous political will to push the right types of measures.”

Looking ahead

To address these challenges head on, EIC will be hosting its Bankable Energies event in London in February 2025. This gathering of stakeholders will bring the global investment community, key project developers and policymakers together to discuss solutions for driving projects forward and meeting net-zero targets.

For more information about this event and to join the discussion on unlocking investment for future projects, visit the-eic.com/Events/BankableEnergies.

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