The EU’s ‘green recovery’ needs to be a facilitator of private capital

Plans have emerged for a €10bn-a-year EIB green infrastructure fund, but it should not crowd out sectors where private capital has made significant strides.

In recent weeks, we’ve banged the drum for the need to emerge from this crisis investing in a more sustainable way. That’s to mean investing in assets that have genuine long-term credentials, as well as those which will help the fight against climate change.

Unless you’re sitting in London or New York, you can probably see the light at the end of this dark tunnel. As such, the European Union has begun to set out its own plans for a sustainable, green and long-term recovery.

The plans – which include funds for renovation of buildings, clean mobility and the circular economy – have been dubbed the European Green Deal by European Commission president Ursula von der Leyen, who described it as “Europe’s moment”.

There was also a significant move for renewables, with the EU unveiling a tendering scheme to make up for reduced tenders at member-state level. This plan envisages 7.5GW procured over two years, generating what it says will be €25 billion of investment. Its support for renewables will also extend to a €10 billion injection from the European Investment Bank as part of the Just Transition Fund to invest in renewables, electricity transmission, digitalisation of distribution networks and delivering clean hydrogen to the transport network, according to early details of the plan leaked before the EU’s announcement on Wednesday.

However, the EIB needs to think carefully as to how this gigantic Just Transition Fund will be deployed. While the coronavirus crisis will have dented the ambitions of some funds and developers, the managers we have spoken to over the past weeks and months have said they see little effect on their existing portfolios and even a minimal effect on supply chain issues. Renewables, along with digital infrastructure, have established themselves as distinct ‘winners’ from the crisis.

Last year, the record for Europe’s largest renewables fund was broken twice, first by Glennmont Partners (€850 million) and then Mirova (€857 million). These funds, among others, are no longer being ploughed into operational projects in the obvious locations. They are, in a material way, contributing to the energy transition.

Many in the private sector – on both the equity and debt sides – have long been wary that EIB activity has been a competitor to private capital. The injection of further billions, with little detail shared on how this will crowd-in investment, will do little to assuage these concerns. This applies not only to renewable generation, but also grid and transmission investments, where private capital is increasingly pivoting towards ‘energy infrastructure’, rather than simply generation.

Even with regards to the relatively untapped market of clean hydrogen, a timely announcement last week saw A.P. Moller-Maersk, Orsted, Copenhagen Airport, SAS and DSV Panalpina link up to build a hydrogen e-fuel production facility for clean fuel to power Copenhagen’s air, sea and roads, with plans to expand internationally too.

The EIB should also heed the words of Dieter Helm, professor of economics at Oxford university. In his latest blog, he criticised green recovery plans such as the EU’s as “classic cakeism”, arguing that “the extra spending on green projects gets funded by debt, backed by quantitative easing, and hence there are no hard choices to make about paying it”. The green recovery, according to Helm, is too good to be true.

“By opportunistically linking green recovery with macroeconomic Keynesian demand stimuli, the green case may well be weakened, not strengthened,” Helm added. “In a world with major constraints on borrowing, the case for green investments may in fact need to be made in a much more challenging and adverse context. There is no magic money tree.”

All eyes will now be on the EU’s tree to see if bears any fruit.

Write to the author at zak.b@peimedia.com