Abstract
We need to INVEST a lot more money in our Energy Transition in an increasingly uncertain world. The fiscal and political constraints mean that countries will confront difficult tradeoffs and challenging technical decisions in our imperfect and fragmented worlds. Leaders, companies, and financial players must balance the demands of short-term economic health / growth with the longer-term needs of sustainable economies. Currently, many countries do not have policies, market structure, or institutional framework to address our energy financing needs. We must come up with feasible plans that recognize our regional differences, economic constraints, climate scenarios, and variable energy resources.
" We should devote our efforts to charting Realistic Futures that consider our Technical Capabilities, our material supplies, our economic possibilities, our social necessities, and devise practical ways to achieve them. " Vaclac Smil, Halfway Between Kyoto and 2050
An energy development bank structure-like Turkey's Development and Investment Bank or the World Bank's EBRD-with an expanded mission could invest in a portfolio of public and private projects that is crucial to the MECA transition. Much like the Marshall plan, a regional energy bank would have access to the funds to leverage long-term investments through participation with key public and private players across MECA countries. A regional merchant bank would have the expertise, money, connections, and scenario modeling knowledge to spur many more energy investments over the next twenty years. I The Investment & Financing Challenge (see IAEE MECA program, Energy Finance abstract)
There are huge investment needs for the transition in terms of electricity, infrastructure, buildings, transportation, industry, and emerging technologies. The financing requirements are significantly beyond regional capacity-institutions will need to attract private capital, FDI, and outside funding where the risks are greater than the returns. The energy transition is largely a public good with utility level returns that support the long-term economic and social development of a region. Hard choices are ahead.
The financial markets, private firms, and institutional frameworks are not meeting energy investment needs because of uncertain scenarios, price volatility, risk / return tradeoffs and critical budget / financing constraints (deficits, BOP, FX). Large energy-related investments by private / public players must be made in the next five years with outside funds if the MECA region is to grow over the coming decades.
II Why & How of Energy Merchant Bank Energy merchant banks in partnership with private players are struggling with market failures and public good nature of the energy transition. Examples of public purpose banking frameworks include housing finance banks, World Bank, micro finance, community banks, and larger investment banks focused on energy. The creation of the Marshal plan after two world wars recognized the urgency to rebuild war devastated countries. The World Bank, of course, addresses the development challenges in countries with fewer resources. Housing finance and building societies focused on the market failure to provide adequate funding for middle class housing. And micro finance provides funding for very small family enterprises.
The MECA energy bank helps fund initiatives that move the transition forward quickly. An energy bank has the information, personnel, and access to experts to make long-term investments with key partners like utilities, wind farms, and storage facilities. Operating as a merchant bank with a sustainable mission it allocates its limited structured finance resources to leverage outside investors. In other words, one hundred billion energy bank funding results in a trillion-dollar portfolio invested in fifteen projects.