Financial Innovation for Energy Innovation

Abstract

The move to catalyze a global energy transition is underpinned by the collective need to limit the most severe impacts from climate change as well as fostering more sustainable economic growth. Floating photovoltaic power stations on Chinese lakes, integrated carbon capture technology on large-scale power plants in Canada, and decentralized urban wind turbines on Singaporean rooftops, are just a few examples of how the global energy transition is being fueled by radical innovation in the clean energy technology landscape (WEF 2017, Natural Resources Canada 2013, Karthikeya et. al. 2016). Bringing cutting-edge technology from the lab to the global energy market requires a supportive ecosystem: innovation must be matched by enabling technological development, market readiness to adopt disruptive technologies, local capacities to scale up new energy projects, energy policies with climate objectives, as well as sufficient and “aligned” investment capital.

This article focuses specifically on the latter requirement; the characteristics of investment capital needed to support clean energy innovation. Investors are key players in the future of energy, as they must drive innovation in the financial system in order to meet the scale of capital needed to transform the energy industry. Important technological leaps in sustainable energy have been hindered by a lack of or a misalignment of investment capital (WEF 2018, Bloomberg Finance New Energy Finance 2010, Monk et al. 2015). One evident example is the severe financing shortage in commercializing novel sustainable energy technologies. This so-called “valley of death” between early-stage cleantech and full-sized deployment is the result of many causes, but a common thread among them is increasing financial risks in the energy industry, as well as opacity within the energy ecosystem (In and Monk 2018). 

We approach this funding shortage and widening valley of death in the energy sector from a newer perspective. We investigate underlying structural and organizational barriers in today’s capital markets, and discuss how to innovate the financial industry. Our discussion attempts to move the focus of current energy finance and investment research from a deal-by-deal perspective to a continuous process that involves asset owners, asset managers and entrepreneurs. This shift in perspective is important because “investors are often presented with a ‘deal’ rather than a historical understanding of a company, while entrepreneurs themselves are often faced with countless types of investors, from pensions and sovereigns to tax-equity providers” (In and Monk 2018, page 26). In our view, long-termism has been continuously undervalued as a key success factor, despite its strong potential to align various players in the ecosystem. Instead, asset owners and managers are often forced to rely on short-term and costly financial products and services to fund the long-term global project of energy transformation. The financial innovations described in this article thus focus on how to foster long-termism and catalyze patient and smart long-term investment capital to support energy innovation, by innovating governance, management and operations of investors via new collaboration and cooperation among asset owners and managers.