With the ability to make a significant contribution to decarbonization of transport, aviation, shipping, and electricity, bioenergy is fast becoming the chosen source of renewable fuels.
Yet, the development of advanced bioenergy technologies carries a number of risks for potential investors, including those associated with underdeveloped supply chains, heavy dependence on long-term regulatory frameworks, and fossil fuel subsidies.
An effective way to address those risks is by risk sharing through public-private partnerships between industry, countries, and investors.
By Namita Vikas, Founder and Managing Director, auctusESG
With the current emissions trajectory and the increasing frequency and intensity of climate change impacts, the net-zero pledges made by companies and countries alike are becoming instrumental in achieving international climate goals. One possible way of facilitating this is by scaling up solutions such as bioenergy that can minimize the environmental impact of energy production.
Bioenergy is renewable energy derived from biological sources or biomass, with immense utility in terms of energy generation. With the ability to make a significant contribution to decarbonization of transport, aviation, shipping, and electricity, bioenergy is fast becoming the chosen source of renewable fuels. The International Energy Agency’s (IEA) 2022 estimates suggest that modern bioenergy – including biofuels – is responsible for approximately one-tenth of global energy supply, making up around half of total renewable energy.
Forecasts for bioenergy uses are positive. According to the IEA’s Net-Zero Emissions Scenario, bioenergy will make up 20% of the total energy supply by 2050. The IEA reports that following a drop in demand in 2020, the total annual demand for biofuels is expected to grow by 28% during 2021-2026. The future of bioenergy reflects well on the agenda of carbon negativity as well. Solutions like bioenergy with carbon capture and storage (BECCS) combine the renewability of biomass with carbon sequestration in geological formations, resulting in a negative-emissions technology. To help fulfil the role of bioenergy in achieving climate commitments, including SDG 13 (climate action) and the goals of the Paris Agreement on climate change, strong impetus needs to be placed on financing the bioenergy sector.
Yet, the development of advanced bioenergy technologies carries a number of risks for potential investors. For instance, underdeveloped supply chains result in unviable long-term sourcing of biomass (waste streams, residues, and energy crops). Even the price of alternate sources for biofuel production, such as agricultural waste, is too high for it to be viable for private sector investors. Moreover, innovative conversion technologies, resulting from the advancement in bioenergy, have not yet proven to be bankable.
Additionally, there is heavy dependence on a stable and supportive long-term regulatory framework, including consistent policy and financial incentives, at the national level. Changes in long-term policies may render investments in bioenergy technologies to be perceived as “high risk.”
These challenges are exacerbated by fossil fuel subsidies, which hamper the growth of renewable energy. In 2020, support to fossil fuels totaled almost USD 6 trillion – 6.8% of global GDP. With fossil fuel subsidies estimated to account for 7.4% of global GDP by 2025 in spite of global efforts to phase out such subsidies, it is bound to widen the funding gap for bioenergy systems.
Bioenergy stands to become increasingly profitable with green industrial policies backed by government support and incentives. Inflated profits play an equal role in encouraging investment and innovation. As a result, despite the multiple gaps in funding bioenergy production, financial innovation offers replicable solutions that can accelerate both bioenergy production and investor returns.
An effective way to address the aforementioned risks is by risk sharing through public-private partnerships (PPPs) between industry, countries, and investors. The different approaches undertaken by PPP models would: help strengthen the corporate governance of private and public utilities; establish legal, regulatory, contractual, and fiscal frameworks; and improve market governance to attract private investment.
A PPP-led project launched Ethiopia’s first commercial-scale biodiesel refinery in the Adama Industrial Zone. The project is expected to result in reforestation of 1.4 million hectares to provide renewable resources for biofuel. Contingent on the success of this project, the annual target for biodiesel production is 70 million liters. The project is set to have long-term economic, social, and environmental impacts for East Africa. These include USD 1 billion annually in biofuel revenue, the sale of carbon credits, creation of 500,000 jobs in the region, and an improved environment with land rehabilitation, lower fossil fuel use, and a reduction of greenhouse gas (GHG) emissions.
In another instance, an ongoing government project promotes risk mitigation instruments and finance for renewable energy and energy efficiency investments in Argentina. It aims to mobilize concessional finance from the Green Climate Fund (GCF) to promote energy efficiency in the country. Pooling resources from an Argentine public bank, this blended finance structure involves investments in biomass, biogas, and energy efficiency sub-projects, amounting to a total of USD 430 million. The concessional nature of the capital structure is expected to play a critical role in catalyzing funding from the private sector, by equilibrating risk-reward profiles of bioenergy investments. This is particularly important due to the impact of COVID-19 on the Argentine economy, which has brought attention to the hedging of risks in such projects. Therefore, a favorable financing environment for investing in future sustainable energy projects would require legal and operational changes that factor in “black swan” risks such as COVID-19.
As the time for achieving carbon neutrality closes quickly, concerted efforts need to go into implementing tools like bioenergy for climate action. Developing economies and emerging markets, particularly in Asia, are expected to lead the projected 50% increase in global energy use by 2050. This projected increase lends ample opportunities to scale up bioenergy production in developing economies. Bioenergy projects can be replicated in emerging markets with the support of development partners, national and state governments, and local investors to address some of the obstacles to using bioenergy to combat climate change and support energy transition.
auctusESG LLP is a global advisory and enabling firm, which provides specialized advice at the intersection of finance, investments, and sustainability. With a goal to accelerate global sustainable finance and climate transition, the firm works with asset owners, asset managers, companies, banking associations, governments, multilateral and bilateral agencies, and academia, to design and develop sustainable finance products, climate strategy, ESG and climate risk integration, and knowledge and innovation products on thematic areas. Find out more about auctusESG here.