With time ticking away for Europe to meet its targets for slashing greenhouse gas emissions, banks could end up securing massive amounts of debt to finance the transition to clean energy. Issuing "green bonds" is one mechanism they could use.
European governments are staggering under the weight of public debt. That has injected some uncertainty into the European Union's plan to cut emissions 20 percent below 1990 levels by 2020. Private-sector financing and public financial markets will bear €2.9 trillion ($3.93 trillion) in debt financing needed to develop and roll out cleaner energy sources in a decade, according to a study by Barclays Capital and the consulting firm Accenture.
If that financial burden comes raining down, Barclays and Accenture contend, Europe's big banks will need to be creative. One of the emerging schemes is asset-backed securities that would turn roughly €1.4 trillion ($1.90 trillion) in debt incurred to buy low-carbon technology into green bonds.
"Banks could provide primary debt, securitize it into 'green bonds' and place the securities on the mainstream public markets with minimal impact on their balance sheets," say the consultants. By pooling the debt, banks could "avoid harming" their capital ratios and risk-weighted assets.
The concept of green bonds as a financial vehicle has floated around for years. The idea comes in different forms. The World Bank has encouraged the use of green bonds as an innovative way to finance low-emissions energy technology. The U.S. Treasury Department has green bonds as a pithy name for low-interest loans to clean energy companies. Investment banks have proposed creating green bonds that can be traded for profit, just as credit default swaps and other mortgage-backed securities had been before the housing bubble popped.
Barclays and Accenture urge banks to create tailored financial products to turn debt into security contracts backed by the clean energy infrastructure it's financing. They encourage banks to tap into primary and secondary capital markets and push for global and national standards to define "green bonds" as a security class.
Trading scheme has large hiccup
The financing proposal comes as the E.U. Emissions Trading System convulses after weeks of scandal tied to stolen emissions credits. It shut down carbon trading houses and threw into question the program underlying the continent's goal of achieving significant carbon reductions. The report analyzed 15 commercially available low-carbon energy technologies. Deploying them widely would cost €2.3 trillion ($3.12 trillion) in procurement capital and €600 billion ($815 billion) in development costs, saving 2.2 gigatons of carbon dioxide-equivalent emissions and resulting in energy cost savings of €261 billion ($354 billion).
Of this, integrating more renewable power into the electricity grid would require companies and homeowners to spend €508 billion ($690 billion). More solar, wind, geothermal and biomass would generate almost half of the carbon savings.
Under this scenario, the analysts say, solar power is the costliest single technology. Large-scale infrastructure and "micro-generation installations" would cost €365 billion ($496 billion).
"The largest share of capital will be given over to buildings for retrofitting low-carbon technology equipment, constructing smart buildings and decentralizing energy production," says the report.
In addition, mounting rooftop photovoltaic can be costly, and the analysis says that until development picks up, the cost of producing electricity from solar could remain high.
Wind and solar take most capital
In general, alternative energy from wind and solar will eat up 66 percent of the development capital. Initial public offerings of renewable energy companies at U.S. and European stock exchanges "will drive capital into this subsector."
The report cites last year's IPO of the renewable energy division of Italy's largest power company, Enel Green Power, which raised €2.4 billion ($3.3 billion). More than 40 clean energy technology companies floated equity on the stock markets between 2008 and 2010. Still, most of those companies were small.
"In other less mature sub-sectors, development capital will remain essential to help emerging technology to reach a more mature stage," says the report. "Investment in these sectors is likely to be dominated by venture capital, private equity and initial public offerings."
The analysis says electricity production from low-carbon resources will drive down emissions in the first half of this decade. "By contrast," it says, "the second half of the decade is likely to see an acceleration in savings from technological advances in alternative fuel and electric vehicles as adoption becomes more widespread."
Barclays and Accenture acknowledge that many of the energy alternatives are not yet cost-competitive with coal, oil and natural gas, the dominant fuels used for generating electricity.
"As a result government policies will need to continue to provide incentive frameworks until technology costs drop and become cost competitive," they say.
Another hurdle is restrictions on capital lending. "Governments have been encouraging aggressive lending targets for banks to support economic growth," says the report. "However, at the same time, banks are also under intense pressure to reduce risk and build their deposit base to ensure there is enough capital to satisfy new or anticipated regulations."