Role of Capital Market to Accelerate the Transition to Low-Carbon Energy System

Abstract

Properly functioned capital markets ensure the efficient operation of our businesses and economy in a globally competitive marketplace, and may in specific circumstances provide the appropriate reputational and financial incentives in low-carbon society. Renewable energy projects are especially in need of enhanced access to the public stock markets. Extension of Master Limited Partnerships (MLP) status to renewable energy technologies would allow the sector to access the public capital markets under favourable tax treatment. Through the sale of stock, Yieldcos offer the renewable energy industry a financing mechanism. Renewable energy securitization structures would offer investors an opportunity to participate. In addition to these equity investment vehicles, green bonds, debt raised through crowdsourcing and the lease of renewable energy equipment are emerging sources of capital for renewable energy and energy efficient building projects. Venture capital and private equity investments are becoming an important source of “clean tech” financing for innovative entrepreneurial firms. However, compared with self-financing and debt financing, the total volume of financing from capital market is still quite small. Core technical risk, regulatory Barriers, the lack of suitable investment vehicles in developing countries, the lack of right pricing signal and the lack of investor capability are the main barriers to increasing the financing through capital market. To encourage capital market to accelerate the transition to low-carbon energy system, the government need to play a positive and appropriate role, by providing technology developers and financiers with a stable platform for innovation, addressing early stage financing gaps, financing pre-commercial demonstrators for some technologies, leveraging public procurement, and improving reporting, enable better analysis and promote investor commitment to the cleantech space. For developing countries, it is necessary to enhance capital market infrastructure and capacity building to encourage green domestically listing IPOs by providing an incentive capital market environment. Furthermore, financial products and services innovations should be encouraged, i.e. local green or clean energy stock index, Debt-based instruments, structure finance, etc. It is also necessary to promote market transparency and strengthening formal requirements to provide information on investments with effective regulation authority cooperation and standardized and unified information disclosure environment, and set up “guarantee mechanism” to reduce risk by establishing standardised project documentation, tendering, contracting and due diligence processes, expanding the project pipeline and aggregate projects. International financial support and cooperation can play a critical role in financing renewable energy deployment in developing countries.