The impact of uncertainty surrounding energy transition paths: tools for Ministries of Finance and investors to manage the financial risk of infrastructure investments

Abstract:

Continuing to tie electricity prices to fossil fuel generation prices will increasingly impose risks on renewable generators that they cannot manage, increasing the risk and financing cost of renewable generation without incentivizing investment or operating behavior that benefits system costs or reliability. Ministries of Finance need to be aware of these risks, as well as the potential long-term benefits of an energy system that is less exposed to the volatility of global commodity markets. Ministries of Finance can undertake five key actions to reduce risk and benefit from potentially lower costs and volatility of future energy systems: (1) understand the range of technology systems and energy system designs that could become available or evolve in the coming years; (2) work with other policymakers to evaluate and triage infrastructure projects rapidly; (3) where the economics of projects are dependent on the transition path, explore and develop options to manage technology and path risk; (4) support Energy Ministries in the reform and innovation of energy markets so they are suited to support low-carbon energy systems; (5) focus on the financing costs of new, low-carbon energy supplies, especially where interest rates are high and capital is scarce.