Wholesale transformation at a national level — decarbonizing factories, changing out vehicle fleets, making buildings efficient — requires trillions of dollars.
So, encouraging investment in energy transition comes down to ensuring everyone involved makes money and lowering risks for investors.
Well-defined carbon levies, tax treatments, stimulus commitments, regulatory parameters and emission targets are among a long list of government and regulatory directives that must survive through elections.
Is a nickel mine for battery materials sustainable? How green is a blue hydrogen project? What qualifies as a nature-based solution? We’re trying to reduce emissions ASAP, so clarity on the terminology that qualifies billion-dollar projects for preferential financing is paramount.
Traditional energy enjoys such knowledge, but many areas of new energy still lack market foundations.
Consider the legacy infrastructure that’s been built around our oil, natural gas and electricity systems. Sophisticated financial instruments are well established to inform the risk-return calculus.
A century-plus of investing knowledge has contributed to a deep understanding of the risks and potential returns for every oil and gas jurisdiction in the world.
Now, with the rise of renewables and momentum behind the energy transition, the energy landscape has expanded to include renewables, biofuels, nuclear reactors, batteries, hydrogen fuel cells, ammonia — the list goes on.
How does a financial analyst construct a portfolio of new energy companies? Such a spreadsheet must compare the risk and return profile of a renewable diesel project with a solar farm, a hydrogen fuelling station with a grid-scale battery facility.
Overcoming this risk-return knowledge barrier will require the experience of time, which in the world of finance is a soft way of saying that investors will have to lose money before learning how to make money.
Once investors have these proper inputs to help them reduce perceived risk, they’ll be more inclined to follow governments in financing new energy projects.
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