Sat. Aug 8th, 2020

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The European Investment Bank Has Quit Fossil Fuels. What Now?

9 min read

COPENHAGEN — With an annual outlay in the energy sector of €15 billion ($16.6 billion), the European Investment Bank (EIB) is one of the sector’s biggest lenders.

And for every euro the EIB puts into a project or business, around seven more are invested by the private sector. That’s around €120 billion ($133 billion) of public and private investment in the energy sector that stems from the EIB’s choices. According to the IEA, global renewables investment in 2018 was $300 billion.

So the EIB’s confirmation last month that it would effectively end support for fossil fuels garnered widespread attention — as much for the signal it sends as for the additional impact the bank can make with the freed-up funds.

Since 2013 the EIB has invested €13.4 billion ($14.9 billion) in fossil fuel energy projects, though nearly two decades have passed since the bank last funded any fossil fuel extraction.

GTM spoke with Alessandro Boschi, the EIB’s head of renewable energy, about the bank’s new lending policy.

The EIB’s role, in effect, is to bankroll the EU’s policy goals. Two broad targets will inform its more detailed lending plans.

By 2025 it will invest half of its entire annual outlay — not just the energy budget — on climate action and sustainability. And by the end of 2020, all investments, be they in schools or transport or telecoms, will be aligned with the Paris Agreement.

“The ambition is to become the EU’s climate bank,” Boschi said. “Not only will we need to increase our financing, but we also need also to leverage our presence by bringing in all the other private investors. The scale of the challenge cannot be met with public money.”

With renewables increasingly able to compete without subsidies, the EIB will put a heavier focus on the infrastructure and technology that enable more wind and solar to join the grid, Boschi said.

“There is a global market failure in internalizing the costs of climate change. The markets are not responding at the pace needed. So, by definition, there is a role for us to play.”

The EIB’s shareholders are the EU member states and it’s run on a not-for-profit basis. As such, its focus mirrors the priorities of the EU and its executive, the European Commission.

The EIB provides funds to parties across the value chain, from small businesses to regional governments, often stepping in early with finace to reduce risk for private investors. In a fairly typical deal, it recently agreed a €690 million loan with Spanish utility Iberdrola to build renewable capacity in Brazil and modernize the grid back home.

Going forward, the EIB’s energy lending will break down into four streams.

First, the bank is taking a lead from the Commission with an efficiency-first policy. A ‘Green Deal’ is to be formally announced next week at the UN climate summit taking place in Madrid.

After efficiency comes decarbonization of the power sector, which in practice means phasing out its support for gas-fired generation. While the EIB has said it may back highly efficient natural gas generation and gas boilers as part of energy efficiency programs, its days of supporting utility-scale gas generation or natural gas infrastructure are done.

“We will be looking with great interest at green, low-carbon gases that should be replacing … methane,” Boschi said. “That could be through hydrogen or biomethane.”

The third investment stream will focus on innovation and new technologies, and could prove particularly interesting to the offshore wind sector. The bank is already supporting the WindFloat trial off the coast of Portugal, and wave and tidal projects could benefit too.

The fourth group of investments will be aimed at enabling infrastructure to decarbonize the economy. That includes modernizing the electricity grid as well as the infrastructure needed to decarbonize other sectors, like industry and heavy transport. Hydrogen could be a beneficiary.

A focus on offshore wind

Offshore wind is set to play a central role in Europe’s energy transition, and recent auctions have seen prices fall far faster than anticipated. But cost reductions should not be conflated with maturity, Boschi said.

“There’s 20 gigawatts of installed offshore wind compared to 600 gigawatts of onshore wind. Every offshore project uses a different foundation, a bigger turbine,” he said. “The technology is still evolving. We don’t have 15 years of operational data to look at.”

For now, then, the EIB will continue to play the role of market accelerant for what it still sees as an early-stage technology.

The EU’s offshore wind targets of 100 gigawatts by 2030 and 450 gigawatts by 2050 will require a number of new markets joining the race, Boschi said.

“At the moment it’s the North Sea and it’s five or six countries. The bulk of the investments will still be in these countries, but other countries will be coming in like Ireland, Poland and some of the Baltic states.”

The EIB can play an important role helping to “kickstart” those new markets, Boschi said.

Among possible targets for investment are cross-border projects, such as creating grid connection spanning the Baltic Sea, and floating wind.

New era for energy sector

In recognition of the urgent need for its climate-related investments, Boschi says the EIB is working to develop new mechanisms that would allow it take more risks.

It’s also hoping to get approval to increase how much it can lend to demonstration projects such as WindFloat. (Projects that aren’t yet ready for financing can work with the bank on technical and financial planning to help them reach that stage sooner.)

The bank is actively working to figure out how it can best seed the corporate power purchase agreement market, Boschi said. At the moment the EIB is assessing the PPA market and looking for way to reduce the risks on both sides of the contract. Standardization and a mechanism that could pool smaller users are two of the ideas under consideration, but these are very much a work in progress.

A new era is dawning for the overall structure of Europe’s energy sector, one that emphasizes private and public sector collaboration, Boschi said.

“If you look at the energy sector 20 years back, it was fully centralized and managed by the state. Then it was liberalized and you have private companies doing the generation.”

“Now we’re moving into a system which is between the two. It’s fully liberalized, that’s the right approach, but you need central planning,” he said.

“The member states and the EU set the targets that need to be reached. Take offshore wind as an example: the governments hold the auctions, but the private sector fulfils them.”

COPENHAGEN — With an annual outlay in the energy sector of €15 billion ($16.6 billion), the European Investment Bank (EIB) is one of the sector’s biggest lenders.

And for every euro the EIB puts into a project or business, around seven more are invested by the private sector. That’s around €120 billion ($133 billion) of public and private investment in the energy sector that stems from the EIB’s choices. According to the IEA, global renewables investment in 2018 was $300 billion.

So the EIB’s confirmation last month that it would effectively end support for fossil fuels garnered widespread attention — as much for the signal it sends as for the additional impact the bank can make with the freed-up funds.

Since 2013 the EIB has invested €13.4 billion ($14.9 billion) in fossil fuel energy projects, though nearly two decades have passed since the bank last funded any fossil fuel extraction.

GTM spoke with Alessandro Boschi, the EIB’s head of renewable energy, about the bank’s new lending policy.

The EIB’s role, in effect, is to bankroll the EU’s policy goals. Two broad targets will inform its more detailed lending plans.

By 2025 it will invest half of its entire annual outlay — not just the energy budget — on climate action and sustainability. And by the end of 2020, all investments, be they in schools or transport or telecoms, will be aligned with the Paris Agreement.

“The ambition is to become the EU’s climate bank,” Boschi said. “Not only will we need to increase our financing, but we also need also to leverage our presence by bringing in all the other private investors. The scale of the challenge cannot be met with public money.”

With renewables increasingly able to compete without subsidies, the EIB will put a heavier focus on the infrastructure and technology that enable more wind and solar to join the grid, Boschi said.

“There is a global market failure in internalizing the costs of climate change. The markets are not responding at the pace needed. So, by definition, there is a role for us to play.”

The EIB’s shareholders are the EU member states and it’s run on a not-for-profit basis. As such, its focus mirrors the priorities of the EU and its executive, the European Commission.

The EIB provides funds to parties across the value chain, from small businesses to regional governments, often stepping in early with finace to reduce risk for private investors. In a fairly typical deal, it recently agreed a €690 million loan with Spanish utility Iberdrola to build renewable capacity in Brazil and modernize the grid back home.

Going forward, the EIB’s energy lending will break down into four streams.

First, the bank is taking a lead from the Commission with an efficiency-first policy. A ‘Green Deal’ is to be formally announced next week at the UN climate summit taking place in Madrid.

After efficiency comes decarbonization of the power sector, which in practice means phasing out its support for gas-fired generation. While the EIB has said it may back highly efficient natural gas generation and gas boilers as part of energy efficiency programs, its days of supporting utility-scale gas generation or natural gas infrastructure are done.

“We will be looking with great interest at green, low-carbon gases that should be replacing … methane,” Boschi said. “That could be through hydrogen or biomethane.”

The third investment stream will focus on innovation and new technologies, and could prove particularly interesting to the offshore wind sector. The bank is already supporting the WindFloat trial off the coast of Portugal, and wave and tidal projects could benefit too.

The fourth group of investments will be aimed at enabling infrastructure to decarbonize the economy. That includes modernizing the electricity grid as well as the infrastructure needed to decarbonize other sectors, like industry and heavy transport. Hydrogen could be a beneficiary.

A focus on offshore wind

Offshore wind is set to play a central role in Europe’s energy transition, and recent auctions have seen prices fall far faster than anticipated. But cost reductions should not be conflated with maturity, Boschi said.

“There’s 20 gigawatts of installed offshore wind compared to 600 gigawatts of onshore wind. Every offshore project uses a different foundation, a bigger turbine,” he said. “The technology is still evolving. We don’t have 15 years of operational data to look at.”

For now, then, the EIB will continue to play the role of market accelerant for what it still sees as an early-stage technology.

The EU’s offshore wind targets of 100 gigawatts by 2030 and 450 gigawatts by 2050 will require a number of new markets joining the race, Boschi said.

“At the moment it’s the North Sea and it’s five or six countries. The bulk of the investments will still be in these countries, but other countries will be coming in like Ireland, Poland and some of the Baltic states.”

The EIB can play an important role helping to “kickstart” those new markets, Boschi said.

Among possible targets for investment are cross-border projects, such as creating grid connection spanning the Baltic Sea, and floating wind.

New era for energy sector

In recognition of the urgent need for its climate-related investments, Boschi says the EIB is working to develop new mechanisms that would allow it take more risks.

It’s also hoping to get approval to increase how much it can lend to demonstration projects such as WindFloat. (Projects that aren’t yet ready for financing can work with the bank on technical and financial planning to help them reach that stage sooner.)

The bank is actively working to figure out how it can best seed the corporate power purchase agreement market, Boschi said. At the moment the EIB is assessing the PPA market and looking for way to reduce the risks on both sides of the contract. Standardization and a mechanism that could pool smaller users are two of the ideas under consideration, but these are very much a work in progress.

A new era is dawning for the overall structure of Europe’s energy sector, one that emphasizes private and public sector collaboration, Boschi said.

“If you look at the energy sector 20 years back, it was fully centralized and managed by the state. Then it was liberalized and you have private companies doing the generation.”

“Now we’re moving into a system which is between the two. It’s fully liberalized, that’s the right approach, but you need central planning,” he said.

“The member states and the EU set the targets that need to be reached. Take offshore wind as an example: the governments hold the auctions, but the private sector fulfils them.”

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