Utility Week

18 | 16TH - 22ND FEBRUARY 2018 | UTILITY WEEK Policy & Regulation Market view T he European Commission recently announced that it was considering measures to ease capital charges on banks' green investments to stimulate activ- ity. An estimated €180 billion annual invest- ment in clean energy is required to keep the rise in global temperature below 2C. Bank capital requirements force banks to finance a percentage of lending by share- holder equity, with the percentage increas- ing in-line with the loan risk. They provide a cushion, meaning that the bank should be able to take a financial hit without becoming endangered. The move to introduce a green supporting factor to capital rules has been welcomed by the European banking community because it would reduce the perceived risk attached to green investments. It would mean that banks had a financial inducement to finance loans with a higher proportion of debt rather than expensive equity. Yet regulators are more apprehensive and will want to ensure that the proposals do not allow financial institu- tions to become over indebted and unable to cope with an economic downturn. If approached with a degree of caution, and by setting certain limits and introduc- ing rigorous criteria for what constitutes a green investment, the European Commission proposals could help steer finance in cer- tain directions. It intends to include the idea in its sustainable finance action plan, which is due to be published in March, and will also set out pro- posals for furthering the development of a pan-European market for green bonds. If these measures go ahead, it is likely that the focus will be on investments that promote emissions reductions and it is worth considering what clean technologies might attract interest from lenders. At the end of 2017, electric vehicles became the new watch word as the budget, the Clean Growth Strat- egy and the Industrial Strategy all held pro- visions to ensure that electric vehicles and their associated infrastructure play a role in ensuring the UK's carbon neutral future. This is an area where we would expect to see an upli in funding activity and there are three areas where we are likely to see signifi- cant growth. The first area will be electric vehicles and their associated infrastructure. Indeed, there has already been an increase in activity securing rights for suitable sites. However, like with so many technologies, it may be that ini- tial investment in electric vehicles is an equity play because equity investors are able to get comfortable with the high-risk profiles associated in invest- ing in relatively untested technologies. Yet, the more traditional funders are looking at electric vehicles as a potential future invest- ment and the roll-out of electric black cabs in London this January has already sparked some interest. Second, there is the potential requirement for additional energy storage projects as a result of the European Commission propos- als. This could play a key part in mitigating the impact that millions of new battery-pow- ered vehicles (all of which will need charg- ing) could have on the grid. At the moment, many local grids are not equipped to handle a significant increase in the number of fast charging points being installed. Infrastruc- ture energy storage could provide essential grid balancing services at peak charging times, rather than costly updates to the grid. While we can see a role for energy stor- age here, the extent of the requirement for standalone battery storage facilities is less clear. If smart vehicle charging arrangements see widespread adoption and people exploit the battery storage functionality of electric vehicles themselves, there may be less need for additional battery storage facilities to manage the grid issues that electric vehicle charging would otherwise create. The extent to which smart vehicle charging is adopted will depend, among other things, on how effective control system technologies are and how attractive the commercial incentives are for customers. These incentives could include reduced charging rates, or a share of additional revenues for allowing their elec- tric vehicle to be used by an aggregator to obtain revenue from grid balancing services. The final growth area will be projects that combine multiple technologies. In the same way that residential and commercial energy users can reduce their exposure to the cost of grid-supplied electricity through solar photo- voltaic and other sources of on-site or private wire generation, we anticipate that some operators of charge point infrastructure will be keen to incorporate on-site sources of gen- eration into their projects. In particular, solar car port systems, possibly combined with battery storage, would seem to be a natural fit for an electric vehicle charging station. In summary, whether investors are look- ing to fund electric vehicles, energy stor- age projects, associated infrastructure or research into technology advancements, any measures that can help to step up the level of green investment can only be seen as another step in the right direction. Maria Connolly, partner and head of the energy and renewables team, TLT Green investment boost The European Commission is considering easing capital restrictions on green investment. Maria Connolly says incentivising banks would be a step in the right direction. Key points Capital requirements force banks to finance a percentage of lending by shareholder equity. The Commission is considering relaxing the equity rule for green investments. Also under consideration is a European market for green bonds. Emissions reduction technologies are likely to be the chief beneficiaries. EVs and their charging infrastructure top the list of likely projects. Storage is also a promising area, although standalone storage could be problematic. "It may be that initial investment in electric vehicles is an equity play because of the high-risk profiles"

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