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Innovation investment vital in dealing with future energy demands, says expert

FOCUS: At the COP21 climate change talks in Paris in December last year there was a clear message that innovation is what is needed to reach climate change goals in a faster, cheaper, smarter way. 15 Feb 2016

At the talks 200 countries agreed plans to keep global temperatures from increasing by more than 2°C. While current technologies will take us some of the way towards that, a lot of work is still needed. Many current 'green' technologies are still too expensive, intermittent and unreliable to replace more traditional carbon-emitting fossil fuels.

Climate change goals are not the only reason for needing what is being termed an 'energy revolution'. The world's population is expected to double in the next 30 years, with more than two thirds living in urban areas and energy consumption rising by 50%. The real challenge is how we are going to ensure that the energy demands of the future will be met in a way that provides clean and sufficient energy at affordable prices to all.

This challenge was recognised in Paris with the launch of two energy innovation plans: 'Mission Innovation', backed by the governments of 20 leading economies including the UK, and 'Breakthrough Energy Coalition', backed by a group of billionaires, including Bill Gates. In a statement on Mission Innovation's website, the UK said that "more innovation across a range of technologies is needed if we are to meet the challenges of population growth, increased consumption and increased urbanisation in a sustainable manner".

Innovation, however, takes time and costs money. There is an expectation that $1 trillion per annum (known as the "clean trillion") will be needed globally to meet the targets set in Paris. 

As part of the Innovation Mission the UK government has promised to double its central government spending over the next five years on clean energy technology research, development and demonstration projects, investing in excess of £400m in 2020/21, with a quarter of this focused on developing countries. But is this enough?

Just looking at it in terms of spend per head, with approximately 0.85% of the world's population, the UK should be contributing closer to $8.5 billion per annum. And that's not even taking into account the UK's income as against the rest of the world, which George Osborne confirmed last year in his summer budget speech as being 4%. This would put our share of the clean trillion at $40bn or £27.6bn.

However, the Office of National Statistics, in its 2015 National Balance Sheet, valued the UK spend at just over £8 trillion. In the same report, the estimated net worth of the UK's general government sector was valued at minus £450bn. It is not surprising then that the UK government can only commit to 1.5% of the UK's £27.6bn share of the clean trillion. The expectation is that other global governments will be facing the same challenges. So where will investment come from? The private sector?

Ban Ki-moon, in his speech to the Investor Summit on Climate Change at the end of January, urged international investors to double their investments in clean energy by 2020, calling the private sector "the engine" that will drive the climate solutions we need to reduce climate risks, end energy poverty and create a safer, more prosperous future for this and future generations.

However, private investment in energy innovation is still far from attractive. The founders of the Breakthrough Energy Coalition know that the current investment risk is too high to meet the market tests normally applied by traditional angel or venture capitalist investors. Which is why they are looking to plug this gap themselves - they will invest in early stage companies, based in the 'Innovation Mission' countries, developing technologies that have the potential to be zero carbon, affordable and reliable. The expectation is that once the investments are de-risked, traditional capital investors will take over. It's a risky strategy, but one that is needed to kick-start the energy revolution.

But investment alone will not solve the problem. Bill Gates, in his paper 'Energy Innovation: why we need it and how to get it' made the point that it will be essential to transition new technologies quicker into the energy market.

"Today, renewables account for less than 5% of the world’s energy. It took four decades for oil to go from 5% of the world’s energy supply to 25%," he said. We don’t have four decades to introduce new solutions – the problems we are facing are here now and need to be fixed. Governments and the private sector will need to work together to ensure that the challenges can be overcome. Regulation will need to allow successful technologies to be rolled out smoothly and quickly, even where disruptive to the current market. 

The importance of businesses and investors engaging with policy-makers and regulators to agree on appropriate governance, regulatory and contractual mechanisms for public private partnerships is highlighted by The World Economic Forum in its recent paper 'The Future of Electricity in Fast-Growing Economies - Attracting Investment to provide Affordable, Accessible and Sustainable Power'. Its view is that clear regulation and innovative financing structures will be necessary to give the private sector confidence in committing long-term capital. 

Formed in 2010, the UN's Green Climate Fund aims to mobilise funding at scale to invest in low-emission and climate-resilient development. It will use its $2.5 billion annual public pot "in a creative way" to open new markets to investment and overcome barriers to private investment. This may involve de-risking default by local institutions or the creation of large-scale investment opportunities through the aggregation of groups of projects into single investment vehicles.

These are all good positive steps forward, but we will need more than this to achieve the 2 degrees target set in Paris. The climate change and future energy dilemmas need to be dealt with at a grass roots level as well as at global and national scale. Individuals and businesses will need to play their part too. After all, £27.6 billion is only £430 per person, which is less than a flat white per day.

If the UK wants to be part of the energy revolution, it will need to convince investors that the UK is committed to its share of the clean trillion, not just through its own investment, but also through encouraging the right conditions for private investment and technology adoption. This may not be easy given the government's recent cut backs on renewable and energy efficiency programmes, but it can be done, particularly with our strong track record in public private partnerships.

Becca Aspinwall is an energy expert with Pinsent Masons, the law firm behind Out-Law.com.