Johannes Olschner-Wood l Palladium - Aug 26 2022
Will the War in Ukraine Push Us Towards Green Energy? For Some Parts of the World, Maybe

Russia provides about 10% of the global supply of oil and as the conflict in Ukraine continues, so does the global fuel crisis. Since the start of the war, the United States and the European Union have imposed economic sanctions on Russia and made plans to reduce their reliance on Russian oil, while forcing international leaders to rethink their energy supplies.

These disruptions to the global energy market are causing energy prices to rise substantially and the ramifications are being felt around the world as cost-of-living increases in tandem. Will this be the inflection moment to push us as a global community towards green energy? It’s a question that’s top of mind for many people, and as countries like Germany fire up old coal power stations to meet growing demands for energy, it’s a pressing question to answer.

Over the past decade, we’ve seen a steady increase in clean energy investments across more advanced and developed economies. Given recent developments, could this investment take a hit? In the short-term, quite possibly, but as the United States and Germany pass some of the most sweeping and progressive legislation to date on clean energy, I’m confident that we’re stepping in the right direction.

The question then becomes less of ‘will we lose momentum towards cleaner greener energy?’ and more of ‘how can we ensure that the whole world and all economies make that shift?’ Because simply put, right now, the outlook is a bit grim for some emerging markets and developing countries. In countries with low rates of electrification, for example, a reliance on diesel-powered generators means greater exposure to fluctuating oil prices. As oil prices go up, so does the price of diesel and, consequently, basic living expenses for much of the world.

For those countries faced with such a conundrum, two options are available to them: either to stabilise fuel prices through government subsidies, thereby increasing budget deficits; or allow prices to rise with market trends, thereby exacerbating a cost-of-living crisis. Neither option presages a positive outcome. In order to tackle this short-term crisis, therefore, support from bilateral and multilateral donors will be necessary.

While this should increase the imperative for renewable energy in the long-term, it does little to alleviate the problem in the short-term.

Furthermore, while clean energy is more sustainable and cost efficient over a longer time horizon, the upfront capital expenditure associated with such projects is significant. Put simply, it’s not a viable policy option for dealing with the immediate fallout of the energy crisis.

Beyond the current crisis, however, who will support the transition to clean energy for the developing world?

It’s a predicament for development finance and the broader impact investing community as they make decisions around where to prioritise their resources over the coming months and years. It will be critical, no matter what, for external finance to support developing countries in a transition to net zero. In an environment with rising interest rates, the availability of concessional finance – finance that is offered at below-market rates – will be even more critical.

One feature of renewable energy projects is the significant upfront capital expenditure required and, if rates go up, the expected returns will be expected to increase as well. Expanding the availability of concessional finance will help to keep more projects commercially viable. In the past, concessional finance has helped catalyse renewable energy projects. In Mexico, for example, around US$100 million in below-market-rate finance led to the establishment of 1,000 MW of new wind power capacity.

My concern though, is that as the whole world experiences this stark increase in cost of living, attention in our developed economies and the western world will turn inward, shifting focus and investment to problems at home, rather than abroad.

And while solving those issues at home is important, it’s critical that we don’t lose sight of the bigger picture.

Because without proper support and investment, those same issues we’re facing across the Western world are amplified ten-fold elsewhere, and a lack of empathy for those further afield risks allowing them to not only slip further away from clean energy, but also closer towards food insecurity and famine.

Nonetheless, there’s hope. Globally, we have been on a steady trajectory towards renewable energy and the amount of money that Germany and the U.S. are about to invest is going to be a big boost, setting the bar and the example of how global economies need to be thinking about and investing in a shift towards net zero.

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