Blended finance as a catalyst for accelerating the European heat transition?

Abstract

Against the background of accelerating climate change, this paper examines to which extent sustainable infrastructure finance can effectively contribute to the European heat transition as a part of a “Great Transformation” towards a climate neutral economy and society. Since the building sector is responsible for approximately 35% of the EU's carbon footprint, district heating and cooling networks can provide an efficient technology for decarbonizing the energy supply of buildings. New district heating and cooling networks technology allows for heat and hot water generation that is combustion free. A large-scale role-out of this infrastructure would require hundreds of billions EUR of investments within the next few years. In view of the high public debt, the public sector will not be able to finance the required investment volumes. Against the background of regulatory changes, such as the EU Action Plan on Financing Sustainable Growth, this paper examines in which way financial markets participants might be able to fill the funding gap. A particular focus lies on blended finance, since related instruments reduce investors' risks, esp. in early stages of the infrastructure lifecycle. Due to an improved risk-return-relationship this makes the investment more attractive to private investors. It is also essential for investors to understand the kind of business model they invest in. Therefore, we discuss the importance of key performance indicators in the four dimensions that are relevant for the investors' decision-making process: return, risk, liquidity and sustainability. With respect to the sustainability dimension, we elaborate on the relevance of EU-Taxonomy-aligned district heating and cooling networks' construction and operation.