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The cost advantage of renewables is simply not sufficient for market solutions to deliver the climate change goals warns Nordic corporate bank SEB

Elizabeth Mathiesen, senior strategist at SEB Markets Research makes the warning in the bank’s latest green bond newsletter.

She says that to meet the timetable for zero net emissions by 2050, it will require political interventions.

Her analysis suggests that the transition to an emission-free energy system remains on a trajectory resembling that of earlier technological revolutions with falling prices and rapid volume increases reinforcing each other.

This suggests that by the first half of the 2040s, renewable energy will supply 50% of all the energy we use. 

However, she adds: “From a climate crisis perspective we need to be at zero net emissions by 2050, so even this optimistic scenario will ultimately be too slow.”

Mathiesen is also concerned about short-term warning signals as investment in new renewable energy production has been falling in the 2018 and 2019.

“That is an indication that the cost advantage of renewables still isn’t large enough for market forces to attract the necessary investment on their own, which means we will need political support to mobilise capital for investment that could also drive prices down faster.”

According to Bloomberg New Energy Research (BNEF), China’s investment in renewable energy fell 39% to $28.8 billion in H1, taking global investment down by 14% to $117.6 billion.

China installed only 11.4GW of new solar capacity, implying a sharp slowdown form full-year 2018 installation of 44.1 GW. According to BNEF, this is due to a change in policy from fixed subsidies to an auction-based system, and investment is likely to pick up again as the new system is phased in. However, it was not just China’s investment that declined. In the U.S. and Europe, investment volumes fell 6% and 4%, respectively, in the first half of 2019.

However, SEB believes the EU’s new taxonomy framework is a step in the right direction.

“The aim is to expand the supply of sustainable financing by expanding the range of investments that are identified as transition drivers and also directing the capital towards the parts of the economy where emissions currently are high. This is the starting point for a significant expansion in both supply of and demand for sustainable financing.”

Over the coming years, the analysis says this is likely to increase the pace of the transition process, but the move to include more shades of green also raises some challenges for investors.      

“From a structural perspective, the energy transition story continues to look strong. The diffusion of renewable energy and the complementary technologies around it follow the same S-curve pattern and show the same learning curve characteristics as earlier technology revolutions.”

“After rapid gains over the past decade, the renewable share of total primary energy consumption is now close to 5%, a level similar to nuclear power’s share in the early 1980s. In electricity generation alone, renewables have reached close to 30%.  In Europe, USA and China renewable share of total energy consumption is now 4-9%, roughly comparable to where nuclear peaked. Meanwhile, prices continue to decline for both wind and solar power, suggesting the structural drivers are intact.”

There is short term positive news in the Green bond market.

Issuance in July significantly outperformed last year with total issuance of $21.7bn. The positive development has not been as strong in August, but issuance in the year to date on 28th of August 2019 was up 29% year on year. The bank says that with total issuance passing the $140bn, it is “comfortably on track” to match the bank’s more bullish full-year scenario of $210-240bn.

Green bond market stats

  • Europe continues to be a driving force in the green bond market, accounting for 36%, 32% and 58% (ex Nordic) of total issuances in June, July and August, respectively
  • The US market continues to be dominated by the mortgage-backed security sector and is consistent at around 25% of the total market.
  • The Canadian dollar is emerging as a large issuance currency with International Bank for Reconstruction and Development issuing C$1.5bn, Export Development Canada C$500m and the City of Ottawa C$302m. The pound sterling is also emerging as a new currency for large issuance with the European Investment Bank issuing £800m and Germany’s KFW £650m.
  • The financial sector has raised $42.16bn through green bonds so far in 2019, a Year on year increase of 35%.
  • The largest issuance within the financial sector came from China with the Industrial Bank Co Ltd issuing $2.90bn green bond in July, followed by BBVA from Spain with a €1bn ($1.13bn) green bond in June, and Societe Generale with a €1bn ($1.12bn) green bond in July.
  • The corporate sector has raised USD 35.81bn in green bonds format so far in 2019, accounting for 25% of total green bond issuance year to date to 28 August 2019, a year on year increase of 78%
  • The two largest issuances of 2019 in the corporate sector came with Engie SA from France ($1.68bn) in June and E.ON SE from Germany ($1.66bn) in August
  • Within the corporate space, the energy sector has been very active with ENBW selling €500m two times and Greenko Solar raising $950mm.
  • The government agency sector has raised $21.49bn through green bonds so far in 2019, a year on year increase of 293%

Green bond issuance is growing as a proportion of overall bond issuance

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