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Analysis

Financing future energy

How to make money from green investments

by Herbert Poenisch in Astana

Wed 13 Sep 2017

Green energy was the theme of Expo 2017, the international exposition hosted by Kazakhstan between 10 June-10 September, though the more marketable and less contentious phrase 'future energy' adorned the official logo.

The fundamental message was for ordinary people to save resources and utilise renewable energy as much as possible, complementing the 2015 Paris climate accord addressed to governments and corporations. The exposition succeeded, partly, in propounding this idea, but at great expense; hosting Expo 2017 cost Astana an estimated $4bn. For that price, each person in Kazakhstan could have instead been given $250.

Onlookers were perplexed as to why Kazakhstan, which subsists on oil and gas exports, attached such importance to the event. Although the country said in 2013 it wanted to install a 'green economy' by 2024, its present share of renewable energy production is just 0.2%. Plans to exploit solar and wind energy more effectively exist only on paper.

Making tangible progress on green energy is a challenge for all nations, especially those with ample natural resources and powerful interest groups resistant to change. It is essential for policy-makers and major multinational institutions to become more active in the field of green energy.

The educational message was conveyed in various national pavilions, foremost in Kazakhstan's Nur Alem structure, the largest spherical building in the world. The exhibition of solar, water, wind and kinetic energy over its eight floors, however, lacked any link to the real world; there was little or no information on what is installed, how much energy is saved, how much it costs, and who pays for it. Other countries, including Germany, Switzerland, Israel and South Korea, did a better job of explaining the practical details.

Some countries missed the message of the exposition altogether. Russia boasted of its rich oil and gas reserves, and the US proclaimed limply, 'The source of infinite energy is within all of us.' The mainly Kazakh visitors spurned this, citing the belligerent messages coming out of the White House since January.

There is a plethora of major energy projects – solar and wind farms, hydroelectric dams, and tidal power stations to name just a few – which can and should be supported by long-term finance. Nascent initiatives, including green bonds issued by governments and supranational bodies, should help to fill this gap. In 2016, the total issuance of green bonds was around $95bn, up from $43bn the year before, though they still represent less than 1% of the global bond market.

Linking the technical, climate-friendly solutions with financing renewable energy was not addressed in Astana. Instead it focused on small-scale projects, such as fitting solar panels on individual buildings and installing heat exchanges in domestic buildings. The scale can be compared to small and medium-sized enterprises, which require a different kind of financing than expansive projects. For the time being, financing of green energy projects is done by households or housing associations, supported by public subsidies.

It should be feasible to provide loans for these small and medium-sized projects as part of commercial banks' contributions to green financing. These, in turn, could be bundled into green asset-backed bonds, similar to mortgage-backed securities. The payment streams will be financed by energy savings or income from selling renewable energy to central grids. Such bonds will not only revive the asset-backed security market, but provide good investment opportunities for private and much-needed public investors.

Herbert Poenisch is a Member of the International Committee of the International Monetary Institute at Renmin University of China, and former Senior Economist at the Bank for International Settlements.

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