Financial instruments to support decarbonisation

Reducing investment risks is important for fostering investment in the development of solutions for enhancing energy efficiency and reducing the carbon intensity of fuels or other energy carriers used in transport. Risk mitigation is particularly relevant for technologies that face “chicken-and-egg” issues related to the need to deploy new vehicle and refuelling infrastructure jointly.

A number of financial measures involve the public sector in taking risks that would otherwise need to be borne by private investors. Key examples include:

• The availability of financing from public entities at low interest rates. Loan guarantees, i.e. the public sector pays some or all the debt in the event the investor fails to pay.
• Debt service reserves, i.e. deposits of cash to pay interest and principal payments in case a borrower fails to make scheduled payments.
• Subordinated debt, where a public agency agrees to accept a lower priority position than senior debt holders (in case of default, senior debt holders are paid in full before other debt holders are repaid).
• The provision of grants by public agencies to investors to preserve or reduce the market interest rate of a loan.
• Credit insurance products for bond financing, i.e. insurances agreeing to pay a bond in the event that a payment default occurs by the issuer.
• Advance market commitments, where one or more public (or private) bodies buy a certain number of vehicles and/or volume of energy carriers that meets specified emissions characteristics or guarantee a certain use of specific facilities (e.g. recharging or refuelling infrastructure), thus reducing early mover risks. In the case of fuels, these include offtake agreements – i.e. arrangements between a producer and a buyer to purchase or sell the (low-carbon) energy that will be produced.
• Contracts for difference, which commit governments (or companies) to paying part or all of the cost difference between conventional fuels or vehicles and lower-emission versions to suppliers.
• Public-private partnerships (PPPs), where the commercial risk is shared among private partners and the public sector. These partnerships evolve from the idea of “pure” project financing schemes, where private partners are entrusted with the infrastructure financing, construction, operation and maintenance in exchange for traffic-related revenues for a number of years (bearing most of the risk). They include mechanisms that modulate the fraction of the risk component falling on the private investor and the public sector, giving more importance to the infrastructure availability and the provision of a public service than to the traffic capacity. They may include the participation of the public sector at the financing stage and the renegotiation of contract terms to address traffic risks, and can contemplate (or can even be exclusively restricted to) the payment of fees by public authorities to private investors/operators in exchange for contractual guarantees on service quality and efficiency. Risk-sharing solutions may also include projects where the public sector confers existing assets to the private sector in exchange for the development of new infrastructures.