The PACE of Finance: Challenges of Energy Transition

By Jonathan Gorvett

1183 words - 4 mins read

The PACE of Finance: Challenges of Energy Transition

On 16 January, UAE and US officials announced an initial $20bn of investments under the Partnership for Accelerating Clean Energy (PACE).

Signed between the two countries at the ADIPEC energy conference in Abu Dhabi last October, PACE is one of the largest clean energy financing deals around. The strategic agreement promises to mobilise some $100bn of investment to develop 100 GW of clean energy by 2035.

The first, $20bn wave targets 15 GW of clean and renewable energy projects in the US before 2035, with a consortium of the UAE’s Masdar and US private investors behind them.

PACE is remarkable for a number of particular reasons, yet it also demonstrates the more general centrality of finance to the clean energy transition.

Indeed, with the UN’s November COP 27 conference ending on the suggestion that as much as $4 trillion per year may need to be invested in renewable energy up to 2030, finding ways to channel investment into green solutions is likely to dominate global and regional finance for some time to come.

PACE also demonstrates the key role Gulf countries such as the UAE have in determining the future success of the global energy transition.

Plans and Partnerships

For Dr Sultan Al Jaber, the UAE’s special envoy for climate change, the PACE deal “Will enable climate action while enhancing energy security and affordability for the people of the UAE, the US and nations around the world”.

Indeed, the agreement’s goals are geographically wide ranging, with its aim to accelerate energy transition by promoting projects and new technologies both within and beyond the signatory countries.

According to official statements from both the UAE and US administrations, this will involve catalysing $100bn in commercial investment and assistance in four areas: clean energy innovation, deployment and supply chains; carbon and methane management; nuclear energy; and industrial and transport decarbonisation.

The deal announced in January follows this pattern, with $7bn in cash equity from the private sector being used to mobilise a further $13bn through US debt financing and other instruments.

A group of experts — likely to be composed of specialists from both countries — will meet on a quarterly basis to propose new projects and assess progress under the initiative.

Announcing the agreement, White House press secretary Karine Jean-Pierre also said on 1 November 2022 that PACE would support “emerging economies whose clean development is both underfunded and essential to the global climate effort”. This prefigured a key debate at COP 27 — climate financing for mitigation and adaptation in emerging markets and developing countries (EMDCs).

The part of this debate that captured most of the headlines was the climate ‘loss and damage’ issue, yet there are plenty of other aspects to this international mega-financing challenge.

‘Mega’ is no exaggeration, either. A report from the Independent High-Level Expert Group on Climate Finance (IHLEGCF) released at COP 27 said that $1 trillion per year of external finance would be necessary by 2030 for the EMDCs, excluding China, to achieve their climate goals.[2] McKinsey, meanwhile, suggests that achieving net zero by 2050 requires $9.2 trillion of investment per year, with only around $5.7 trillion per year currently being invested.

This high required level is partly a consequence of the failure by developed countries to honour a previous pledge, made in 2009, of $100bn a year for EMDCs between 2013 and 2020. That failure does not bode well for future success, a concern that prompted the IHLEGCF to call for a “new roadmap on climate finance” in its report.

So what might such a programme look like?

New requirements

First, the IHLEGCF suggests that this funding cannot come from the public sector alone. The mobilisation of such investment requires a new approach that includes the private sector, multilateral development banks (MDBs) and international financial institutions.

Indeed, the report recommends “revamping” the role of MDBs and development finance institutions to triple the annual flows from them to the EMDCs over the next five years.

This echoes a call from the G20-appointed group of experts responsible for reviewing MDB capital adequacy frameworks last July. This recommended that MDBs treat part of their callable capital as regular capital, which would enable them to increase their portfolio of outstanding loans by as much as $500bn, according to Indonesian finance minister Sri Mulyani Indrawati.

A further pillar is concessional finance. This includes programmes such as special drawing rights (SDRs) from the International Monetary Fund. These have been adjusted for emergencies before — early in the Covid-19 pandemic, member states were allowed to access $650bn of additional SDRs to finance vaccination programmes, with $275bn of this going to EMDCs.

Other concessional finance programmes might include additional financial guarantees, such as those made available by the International Financing Facility for Education, or work through voluntary carbon markets.

For private financing, one way forward may be through blended finance, which seeks to de-risk climate investments in EMDCs.

COP 27 saw the Network for Greening the Financial System — a group of central banks and financial supervisors — announce the launch of a new initiative in this area, issuing a Blended Finance Handbook and a clutch of demonstration projects.

Another book launched at COP 27 was the Sharm El Sheikh Guidebook for Just Financing, which brings together a range of strategies for enhancing financial flows to EMDCs.

In addition — and crucially, given the scale and short timeline of the roadmap — a new approach to the debt and liquidity issues that many EMDCs face would also ease the financing burden.

For many of these countries, existing debt seriously constrains their ability to act. A powerful example of this was provided by the COP 27 host itself — Egypt. The government in Cairo says that some 45% of state revenue currently goes towards loan repayment, leaving precious little for financing green energy. In addition, some 61% of climate finance is currently raised in the form of debt, posing further challenges for EMDC budgets.

In this regard, enter wealthier countries such as the UAE, which signed a memorandum of understanding for a 10GW onshore wind project with Egypt during COP 27. Emirati renewable energy company Masdar and Egypt’s Infinity will be joint developers. At the same time, Germany and the US announced a $500mn financing plan for Egyptian clean energy.

Devil in the Details

A wide range of financing schemes and programmes is thus already on the table. Yet, as with many such initiatives, the degree of implementation that follows will be the test.

International politics — and perceptions — may also be a factor.

“There is a competition going on for influence,” Guy Burton, from the Brussels School of Governance, told Everose. The PACE deal signals continued cooperation between the US and the UAE, despite a bumpier road between the two recently under US President Joe Biden. At the same time, “The UAE wants to be seen as a benevolent player internationally, increasing its soft power,” says Burton.

That competition may not be such a bad thing if it leads to greater mobilisation of finance for the EMDCs. Many will be watching to see just how PACE goes about doing that in the months and years to come.