XClose

UCL Institute for Sustainable Resources

Home
Menu

2024 Roundup: Climate finance and electricity

29 January 2025

A summary writeup of what happened in the world of climate finance and electricity within the Institute of Sustainable Resources in 2024 by Professor Nadia Ameli and Michael Grubb.

Charts of stocks on a computer. It isn't clear what the stocks are, but it gives an impression of general financial trading

For those in the field, 2024 was slated to be the year of climate finance (as well as elections). Critical challenges in climate finance and energy development have come into sharper focus, with key contributions at UCL from our climate finance team led by Professor Nadia Ameli, as well as important developments in UK electricity.

Global negotiations on public finance at scale were bound to be fraught and inadequate, and it is widely acknowledged that private finance will be crucial for low carbon investments. Building on earlier research on the huge disparities in the cost-of-capital for different countries, two of our publications explored issues for public policy in facilitating far greater private flows, particularly for renewable energy globally.

For much of the developing world, the hurdle is no longer the underlying cost of clean technologies, but about the perceived risks to investors. Our researcher Sumit Kothari broke new ground by employing project-level investment data to investigate how different risk factors influence investment across different country contexts. Drawing on his PhD research, this introduces and maps out investment "frontiers" - risk thresholds that demarcate the boundaries of investibility in diverse environments. This new perspective disrupts the simplistic linear understanding of risks as additive, by showing how they combine and magnify in non-linear patterns. Armed with these insights, we’re advancing towards a systemic, cost-effective approach to risk mitigation - one that leverages these non-linear interactions and customizes solutions to enhance clean energy investment, informing scalable strategies also for regions long perceived as too risky.

A practical proposal consistent with these foundations was developed and presented as a Policy Brief for the T20 network of think-tanks, designed to feed ideas into the G20.  Led by researchers Yaroslav Melekh and Jamie Rickman, this identified the need for a Twin Track approach to catalysing zero carbon investment in lower-income countries – a way to tackle the wide disparities in current international financial flows, and ultimately, to “turn the “billions into trillions’. Concessional finance remains important, but is best targeted to drive the early stages of technology penetration - to achieve a threshold of cumulative capacity in each country, build capabilities and viable businesses, and identify key risks and opportunities. This can tackle one major category of risk. Once a country has such established capacity and track record, many of the remaining risks are macro, and/or perceived more than real. At this stage, risk-sharing mechanisms, using guarantees, have large potential and high leverage factors for attracting private finance.  Our T20 paper offers a menu of possible dedicated guarantee-providing institutions for zero-carbon investments, most powerfully through establishing a multilateral guarantee facility or special guarantee provider, potentially including sovereign wealth funds.

Shifting the trillions

The energy transition required to meet the Paris goal of “well below 2C” is estimated to require over $1trn/year of investment. The world is not short of money, but across energy overall, much of it continues to flow in the wrong directions. Fossil fuel company profits over 2018-2022 averaged over $500bn/yr, and a more detailed analysis of the energy crisis of 2022 found that profits that year surged to well over $1trn, with about $500bn of superprofits – above expectations at the beginning of the year. Of which about 60% accrued to private companies headquarters in developed countries, and 40% to state-owned companies, many in developing countries.   

Ultimately, we need a wholesale shift of finance from fossil fuels to zero carbon energy, and two contributions underlined just how hard this is. A letter in the FT, slightly expanded in a Commentary, noted five ways in which Energy markets are currently stacked against clean energy.

Whilst some hopes have been placed in ‘disinvestment’, an in-depth analysis published in Nature Communications pinpointed a major obstacle to phasing-out fossil fuel finance in the banking sector. Featured prominently in The Banker, Bloomberg News, and Les Echos, this identified a sobering reality: fossil fuel financing can remain remarkably resilient, even in scenarios where phase-out policies are in place, due the syndicated nature of fossil fuel loans, in which fund withdrawals by one bank are readily replaced by another. In a deregulated environment where banks can shift capital freely, withdrawing capital only by some parties becomes inefficient. This inertia persists unless stricter capital requirement rules directly curb banks’ exposure to fossil fuel lending. The study then identifies a tipping point where the phase-out becomes more effective, which depends on both the timing and the stringency of capital regulations. This transition accelerates when larger banks take the lead in scaling back fossil fuel investments, creating a cascading effect across the financial system.

The election of Donald Trump, and the subsequent withdrawal of most US banks from the UN-sponsored Net-Zero Banking Alliance naturally renders this a lot harder for the present...

Sectoral lenses

Ultimately though, the transition will occur at sectoral levels – and ever sector has its own quirks of financing and challenges. Whilst the shipping industry is often overlooked in broader discussions about decarbonization, decarbonization policy has made importance advances, and our paper on shipping finance explored the financial dynamics of climate performance. Banks have started to offer lower-cost loans to support decarbonization – reflecting the growing risks to high-carbon shipping - but our study shows that the financial benefits are tied not to the specific assets companies own, but to their overall climate performance. Banks are increasingly rewarding companies that demonstrate superior environmental governance, reduced emissions, and comprehensive climate strategies, rather than those investing specifically in greener ships: financial institutions are making decisions on a corporate basis rather than evaluating individual ships' carbon performance. As with the Cell Reports Sustainability study, this suggests the need for stronger regulations that link loan terms directly to the carbon performance of both companies and individual ships. Voluntary initiatives alone appear insufficient to drive the necessary change in the industry.

Financing is not the only problem in developing countries; along with the controversies over carbon-offsets, our study on large-scale renewable energy projects in Brazil shows how a race to scale up renewable energy can involve a new form of land appropriation that disproportionately affects local communities. Whilst renewable energy is crucial for mitigating climate change, poorly managed development can generate unintended social harms, and needs to balance the imperatives of environmental sustainability with the rights and well-being of those on the frontlines of change.

Finally, as the electricity transition proceeds, new challenges emerge, as with any transition. Understanding the finance dimension is crucial, in all countries. As demonstrated by research into Policy risk and investment in UK Offshore Wind, the shift from dependence on volatile wholesale prices, to bidding for constant prices through  through the UK’s CfDs, enabled cheaper finance including through greater use of bank loans instead of more expensive equity. This was an important contribution to the dramatic reduction in offshore wind costs that followed. 

Despite headwinds, clean generation is now attracting the lion’s share of electricity investment. The UK’s last coal power station, no longer needed, closed in September. In the “year of elections”, the UK public was deeply unimpressed by the previous government’s vacillations over net-zero, and the general election returned a new government, with huge majority, committed to accelerating the transition. The law also came out unambiguously, that emissions from fossil fuel activities need to be taken into account in planning approvals. A long-running saga over a proposed mine for coking coal finally ended with it being ruled illegal - alongside closure of loss-making steel blast furnaces in favour of electric arcs. New offshore fossil fuel developments have also been effectively halted.

Given the pace of electricity transition, and new urgency imparted to it by the new government, in September we were also able to announce the launch of the UCL Centre for Net Zero Market Design, to help navigate the undoubted complexities. Just before Christmas, our working paper generating surplus put a spotlight on a phenomenon of rapidly rising importance: fast-growing periods potential surplus generation from zero carbon sources. The paper underines the pace at which this will become both a challenge (for policies to maintain investor confidence), and an opportunity (e.g. for storage and electro-intensive industries with potentially flexible demand, able to benefit from very low-cost output).  The next phase of the transition has only just begun.

 


Further information