Recalibrating the energy market

Powering the future through renewables and new partnerships

Good looking engineers discussing turbines for wind farm

As the global energy crisis drives the transformation of trade corridors, emerging markets are poised to play central roles in shaping the future of renewable energy. Here, Dr Fabian Schlueter, Head of Client Coverage, at Commerzbank’s Centre of Competence Energy, and Christian Toben, Head of Financial Institutions, Emerging Markets, delve into green energy developments and examine the importance of robust infrastructure and a willingness to invest in making these regions reliable sources of renewable energy.

The energy market is undergoing unprecedented disruption. The pandemic exposed the weaknesses of its complex supply chains, resulting in well-documented project delays, and before it had a chance to recover, the sector was hit by the conflict in Ukraine. The ensuing barriers to many conventional energy supply chains and trade routes has created uncertainty regarding energy security for many countries the world over – fuelling the need to introduce greater diversity into energy supply chains.

And, with sustainability a key international priority, it is not just the geographical source of energy that is being considered, but the type of energy. Given its pivotal role in decarbonising energy production, the renewable energy sector has become a magnet for investment, attracting significant interest from across the globe. Ambitious political targets are underlining this trend. The European Union, for instance, raised its renewable energy target to 42.5% by 2030, with all member states aiming to achieve 45%.

While being a fundamental part of the long-term solution, the build-out of renewable energies such as wind and solar will not in itself suffice. Technical solutions providing the flexibility required by renewables’ fluctuating production profiles will be essential to implementing a robust and sustainable energy system. Such solutions include smart grids, battery storage and green hydrogen applications – to name just a few. Providing financing solutions to such ancillary technologies is an undisputable requirement for a successful energy transition.

Shifting trade flows: emerging markets’ energy hub potential

It is somewhat early to determine how and where trade corridors will shift in relation to the energy crisis and the move to renewables. But it is clear that North Africa, the Middle East and Asia-Pacific will have important roles to play. These regions boast significant potential for harnessing renewable energy sources and present solutions to Europe’s shifting energy needs. Commerzbank recognises these geographies as valuable, up-and-coming energy hubs, particularly when it comes to producing green hydrogen – a green fuel produced from water. That is why we have decided to open a representative office in Morocco as well as a project finance desk in Singapore.

Many Asian countries like Taiwan, Japan, Korea and Vietnam have ambitious goals in developing significant offshore wind capabilities, for instance, while Australia is set to be an up-and-coming producer of green hydrogen.

On the African continent, next to the more advanced regions in the North, West Africa is also a geography being explored as an energy resource. Nigeria, for example, is already one of the largest oil producers in the world and is one of Africa’s top exporters of natural gas. But its government is making efforts to diversify by investing revenues from its fossil fuel exports into renewables and associated infrastructure. In Namibia, a consortium including German developer Enertrag is planning a 3GW green hydrogen project that will be powered by 5GW of wind and PV assets. Additionally, Angola and Senegal – just to mention recent examples – have witnessed the successful installation of large solar parks. Such projects showcase the readiness to contribute to global sustainable energy solutions, even if, as shown below, many of these projects will require support from the industrialised countries.

Infrastructure and investing: barriers to tapping renewable resources

While the prospect of energy prosperity is certainly there in many markets, a key challenge lies in the logistics of transporting these resources to international markets. Infrastructure limitations and a lack of willingness to invest in development by international financiers and investors have created bottlenecks in these nascent energy trade hubs.

Project finance requires significant infrastructure investment and long-term political stability. The absence of established project finance markets in North Africa complicates matters for commercial lenders. Indeed, projects in North Africa differ from those in Europe or North America, where the energy market is heavily regulated and there are clear rules on funding structures. With the support of our representative office in Morrocco we aim to clarify the question whether western commercial banks have the capacity to cover the current opportunities existing in these markets.

The involvement of export credit agencies (ECAs) and trade credit insurers in taking on some of that risk is therefore essential. In partnership with banks, ECAs take the burden of some of the risks to investors, meaning investment in infrastructure becomes more attractive and foreign capital can go further. In fact, projects in emerging markets can often be 95% guaranteed by an ECA; for some strategic projects, coverage might even be higher. Applying this collaborative approach to renewable energy projects will be key to mitigating commercial risks and helping to facilitate the expansion of the green energy sector.

For instance, with respect to green hydrogen, some open questions persist: the scaling of electrolysers remains a challenge, and the long-term viability and associated costs of green hydrogen projects require further exploration and potentially more regulatory support. After all, green hydrogen at this scale is a relatively new technology, which is not yet fully understood and a standard view on how to evaluate its risk profile has not yet emerged.

Despite the numerous challenges, the renewable energy sector, particularly in the domain of emerging technologies, has demonstrated its ability to mature rapidly and successfully. Battery technology is one such technology that has gained significant traction in recent years. It is already integrated into various renewable energy projects. Commerzbank has financed several co-location assets, combining batteries with wind farms or solar PV plants, including a stand-alone battery storage facility in the US.

Certainly, realising the potential of renewables will require numerous preconditions to improve – from the availability of land and robust supply chains to available offtake arrangements and faster permitting procedures. But in order to secure the development of renewable assets while these factors are improving, banks are increasingly being asked for flexible financing solutions. One example is the growing interest in bridge financing, which has shorter tenors and less rigid requirements, allowing sponsors to proceed with their developments before all requirements for long-term financing are available. Another example is portfolio financing, which bundles several assets into one financing facility. Such financing can also contain committed facilities for development project pipelines, such that projects can be rolled into the financing as soon as they have reached ready-to-build status. Banks are therefore playing an important role in securing financing, even in times of high uncertainty and change.

Navigating shifting regulations: the Inflation Reduction Act

Alongside the infrastructure and funding challenges, the fast-moving regulatory environment and the frequency with which new policies are being passed can pose a strategic challenge to companies operating in the energy space. One recent policy that could present challenges for European corporates is the implementation of the Inflation Reduction Act in the US. In essence, it is a very powerful tax-credit-driven subsidy scheme in favour of US-based businesses. This has led to a lot of manufacturers, including those within the renewables space such as battery technology or component production, to shift their strategies and prioritise investment into the US over Germany or elsewhere in Europe. This is a concern for European regulators, who are striving to secure robust supply chains for renewable energies.

This, coupled with added pressure from markets like China in the manufacturing space, is putting into question Europe’s advantage as an attractive market for green energy technology.

Nonetheless, there are no doubt a lot of opportunities for the renewable energy sector here in Europe. But the sector is rapidly evolving, and staying abreast of developments is vital. Commerzbank’s network of 28 representative offices worldwide provides real-time information on political and economic developments to ensure our knowledge is up to date. This is essential if we are to react to shifts in legislation and policy.

Powering growing global demand

As the energy landscape evolves it is important to consider the fact that it is not just current demand that will need to be met. As the world’s middle-class population expands – supported in itself by ESG initiatives – and with the global population expected to rise by nearly 25% by 2050 (from 8 billion to 9.7 billion) energy requirements are set to skyrocket, particularly in emerging markets. Tomorrow’s energy production infrastructure will therefore have to be on a far larger scale, with the sophistication to ensure global supplies are secure, robust and efficient. It is imperative that we put the right infrastructure in place now to meet that explosion in demand.

Currently, many developing economies are reliant on fuel imports. But green energy opportunities could allow for far greater self-sufficiency and independence, as well as economic growth. Latin America is a case in point and is fast becoming a green energy hub in its own right, as we have explored in a previous article. More than a quarter of the region’s primary energy currently comes from its own renewable sources – twice the global average. There remains a lot of potential for Latin America to exploit its green energy production, particularly by exporting it to neighbouring countries like the US. Alternatively, surplus energy could be used in the production of green hydrogen, which is easier to export and market further afield.

Although energy markets are still searching for a new equilibrium, at Commerzbank we are convinced that there is a clear and definite movement towards an energy transition in which renewable energies and complementary technologies will be essential. This is true not only in Germany, but across Europe and the markets in which we operate worldwide.

As the renewable energy sector gains momentum, it is essential to consider the challenges and opportunities presented by evolving trade corridors and changing energy demands. With strategic collaborations, technological advancements and a forward-thinking approach, emerging markets can usher in a new era of sustainable energy solutions the world over.