Inventivise banks to invest in low-carbon technologies

The European Commission is considering easing capital restrictions on green investment. Maria Connolly says incentivising banks would be a step in the right direction.

The European Commission recently announced that it was considering measures to ease capital charges on banks’ green investments to stimulate activity. An estimated €180 billion annual investment in clean energy is required to keep the rise in global temperature below 2C.

Bank capital requirements force banks to finance a percentage of lending by shareholder equity, with the percentage increasing in-line with the loan risk. They provide a cushion, meaning that the bank should be able to take a financial hit without becoming endangered.

The move to introduce a green supporting factor to capital rules has been welcomed by the European banking community because it would reduce the perceived risk attached to green investments. It would mean that banks had a financial inducement to finance loans with a higher proportion of debt rather than expensive equity. Yet regulators are more apprehensive and will want to ensure that the proposals do not allow financial institutions to become over indebted and unable to cope with an economic downturn.

If approached with a degree of caution, and by setting certain limits and introducing rigorous criteria for what constitutes a green investment, the European Commission proposals could help steer finance in certain directions. It intends to include the idea in its sustainable finance action plan, which is due to be published in March, and will also set out proposals for furthering the development of a pan-European market for green bonds.

If these measures go ahead, it is likely that the focus will be on investments that promote emissions reductions and it is worth considering what clean technologies might attract interest from lenders. At the end of 2017, electric vehicles became the new watch word as the budget, the Clean Growth Strategy and the Industrial Strategy all held provisions to ensure that electric vehicles and their associated infrastructure play a role in ensuring the UK’s carbon neutral future. This is an area where we would expect to see an uplift in funding activity and there are three areas where we are likely to see significant growth.

The first area will be electric vehicles and their associated infrastructure. Indeed, there has already been an increase in activity securing rights for suitable sites. However, like with so many technologies, it may be that initial investment in electric vehicles is an equity play because equity investors are able to get comfortable with the high-risk profiles associated in investing in relatively untested technologies. Yet, the more traditional funders are looking at electric vehicles as a potential future investment and the roll-out of electric black cabs in London this January has already sparked some interest.

Second, there is the potential requirement for additional energy storage projects as a result of the European Commission proposals. This could play a key part in mitigating the impact that millions of new battery-powered vehicles (all of which will need charging) could have on the grid. At the moment, many local grids are not equipped to handle a significant increase in the number of fast charging points being installed. Infrastructure energy storage could provide essential grid balancing services at peak charging times, rather than costly updates to the grid.

While we can see a role for energy storage here, the extent of the requirement for standalone battery storage facilities is less clear. If smart vehicle charging arrangements see widespread adoption and people exploit the battery storage functionality of electric vehicles themselves, there may be less need for additional battery storage facilities to manage the grid issues that electric vehicle charging would otherwise create. The extent to which smart vehicle charging is adopted will depend, among other things, on how effective control system technologies are and how attractive the commercial incentives are for customers. These incentives could include reduced charging rates, or a share of additional revenues for allowing their electric vehicle to be used by an aggregator to obtain revenue from grid balancing services.

The final growth area will be projects that combine multiple technologies. In the same way that residential and commercial energy users can reduce their exposure to the cost of grid-supplied electricity through solar photovoltaic and other sources of on-site or private wire generation, we anticipate that some operators of charge point infrastructure will be keen to incorporate on-site sources of generation into their projects. In particular, solar car port systems, possibly combined with battery storage, would seem to be a natural fit for an electric vehicle charging station.

In summary, whether investors are looking to fund electric vehicles, energy storage projects, associated infrastructure or research into technology advancements, any measures that can help to step up the level of green investment can only be seen as another step in the right direction.