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How to help energy utilities finance the energy transition?

The current energy crisis is forcing governments to address the issue of high prices while many companies struggle with rising operational costs and market volatility. Accelerated investments in green technologies and the energy transition are seen as the long-term solution — this is reflected in more ambitious energy savings and renewable share targets as set by the REPowerEU. To achieve them, we need additional investments of €210 billion until 2027. This will be challenging, as we are currently witnessing the shrinking of financial resources that could be used to achieve that aim. Therefore, the forthcoming energy market design reform should find the right balance between the necessity to protect vulnerable customers and the need to ensure that energy companies will have enough resources to finance their transition toward climate neutrality.

Limited public and private funds

The possibility to access financial markets will be significantly limited in a world of rising interest rates, significant volatility and uncertainty. In short, private financing will be much more costly than it used to be.

The current energy crisis is hitting both households and energy companies around the European Union. Temporary measures to address the issue of high prices further limits the financial resources of utilities companies. In such circumstances, obtaining financial means from the market or public funding may seem an obvious choice, but this is currently more complex than it seems. The possibility to access financial markets will be significantly limited in a world of rising interest rates, significant volatility and uncertainty. In short, private financing will be much more costly than it used to be.


Public funding is currently stretched to its limits since governments must focus on measures to protect citizens and industry from rising prices. Furthermore, public funding is not targeted at a specific sector, so not all of these resources are available for the energy sector — they have to be divided between various sectors, power generation and distribution being one of them. Even if there are some tools aimed specifically at the energy sector and selected member states, like the Modernisation Fund, they are not sufficient. The Modernisation Fund aims to support lower-income EU member states’ investments in carbon neutrality, but its total size may be (depending on European Union Allowance price) around €40-60 billion for all beneficiaries. However, the investment needs related to energy transition are counted in hundreds of billions of euros. An additional burden is implied by rising investments costs, which are the result of broken supply chains, increased labor, raw material and other supply costs.

The costs and challenges

Even with private and public funding, the scope of needed investments is tremendous. According to the World Energy Outlook 2022 report by the International Energy Agency, under the “net zero emissions” scenario (which means that the global average temperature is stabilized at 1.5°C above pre‐industrial levels), around €2 trillion of investments until 2030 are needed in advanced economies: OECD countries along with Bulgaria, Croatia, Cyprus, Malta and Romania. Additionally, more than €3 trillion will be needed between 2030 and 2050.  This is more than double the amount invested in 2017-21. These costs could be further augmented due to the uncertainties related to workforce shortage, costs of materials and other geopolitical factors. Just for Poland, the costs of transforming the power and heating sectors, together with necessary protective measures, might cost as much as €135 billion until 2030. This sum includes investment needs of €66 billion in electricity generation, €18 billion in distribution networks, and €16 billion in heat production and distribution.


Investments should include both support for clean energy, as well as the technologies necessary for hard-to-decarbonize sectors like district heating.

With all the public funding shortcomings, member states and the EU should use them to send a clear signal to indicate which kind of investments should be supported by the financial markets. Those investments should include both support for clean energy, as well as the technologies necessary for hard-to-decarbonize sectors like district heating. For instance, the support for increasing the pool of free ETS allowances for the district heating sector in exchange for decarbonisation investments as proposed by the Council is  a step in the right direction.

Wojciech Dąbrowski, CEO of PGE Polska Grupa Energetyczna S.A. / VIA PGE

Furthermore, it is also necessary to focus on energy market design, which the European Commission is currently working toward. The EU’s ambitious climate targets were based on the current market design. Its centralization and changes toward “manual control” would make decarbonization really difficult. Apart from ensuring energy security and achieving climate goals, the new electricity market design should provide a clear path for restoring basic market fundamentals. Otherwise, the capital to invest in the energy sector in Europe will be channeled to other markets. This would mean that the fundamental aim of the EU’s sustainable finance agenda, including the EU Taxonomy framework (namely to mobilize private capital to play a significant role in financing the energy transition), would be jeopardized.

Therefore, the energy market design should investigate the need to sustain a reliable backup for intermittent renewables. The current situation clearly shows that an energy-only market is not an option for Europe. Since the current marginal pricing model makes electricity prices dependent on the price set by the last unit necessary to cover demand, electricity prices are responding to market fundamentals and resulted in effective reduction in natural gas consumption. The example of the so-called Iberian Mechanism shows that even temporary interventions on price setting in the wholesale market might result in undeserved effects in natural gas consumption, which prevents the effective allocation of this fuel in the whole economy. Therefore, the widely discussed decoupling of electricity and gas prices may lead to another problem, with increasing dependency on scarce fuel, instead of providing a reliable and long-term solution. The imperative is to protect renewables investments, which means ensuring firm, bankable income from those investments — i.e. in the form of contracts for difference.

Reconciling these issues will be challenging but necessary if we want to achieve our sustainability goals and climate neutrality by 2050.

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