Frequently asked questions
About the tracker
The energy supply financing ratio is a key metric to assess banks’ real support to the energy transition. It compares financing allocated to fossil fuels with financing allocated to sustainable power supply and is expressed in the format “X:1”, where X indicates the amount of monetary units allocated to sustainable power supply for each monetary unit allocated to fossil fuels. A credible energy financing ratio should cover the entire value chain of fossil fuels and include direct financing (such as loans) and indirect financing (such as bond emissions).
For instance, if a bank allocated US$ 210 million to fossil fuels and US$ 420 million to sustainable power supply over the same period, its energy supply financing ratio is 2:1.
In September 2023, the IEA updated its projections for the NZE scenario in the Net Zero Roadmap. In particular, it leads to an update of the “clean vs fossil” financing ratios (already presented in the World Energy Outlook of 2022):
“Global investment in clean energy is set to outstrip investment in fossil energy by a factor of 1.8 to 1 in 2023. This ratio rises to 10 to 1 in 2030 in the NZE Scenario, when around USD 2.5 trillion is invested in clean electricity and low-emissions fuels and around USD 1.8 trillion in energy efficiency and end-uses, while investment in fossil fuel supply falls to around USD 0.4 trillion.” (Net Zero Roadmap update, page 162).
Most of the supply part (USD 2.5 trillion) is dedicated to power (see World Energy Outlook 2023, Figure 1.21, page 52). These numbers give us a ratio of 6:1 for the energy supply, mostly for “clean electricity”. That is why we advocate that for each dollar allocated to fossil fuels, six dollars should be allocated to their alternatives in sustainable power supply.
Bloomberg New Energy Finance (BNEF) published a report in October 2022 that synthesized seven climate scenarios from the IPCC, NGFS and IEA, and extracted a trend of financing ratios for energy supply investments. BNEF emphasized the need to reach a “clean vs fossil” supply financing ratio of 4:1 by 2030. However, it is worth noting that the 4:1 ratio is framed by BNEF itself in its reports as a minimum (see figure below).
This conservative approach could lead financial institutions to underestimate the financing needs for sustainable power supply. Financial institutions should not base their ambitions on this 4:1 objective but instead consider the average (7:1) or median (6.2:1) values as the real target.
(Source : BNEF)
Many banks have set targets for “sustainable finance”, often also referred to as “climate finance”, “green finance” or “transition finance”. The scope of these targets varies from bank to bank and can cover sectors such as energy, transport, water management, biodiversity, and even social categories, such as access to education or healthcare. As a result, it is extremely difficult to assess the extent to which banks are specifically supporting sustainable power supply (and each of the different sectors).
Many banks have already set sectoral decarbonization targets for the power sector, indicating that they recognize the importance of addressing this key sector specifically. They now urgently need to set clear medium-term financial targets for sustainable power supply, i.e. power generation, storage, transmission and distribution. Setting such sectoral financial targets is essential to demonstrate the implementation of their strategy to decarbonize the power sector, which is critical to limiting global warming to 1.5°C. According to the IEA’s NZE scenario, tripling global renewable energy capacity (mainly wind and solar) to 11,000 gigawatts by 2030 will deliver the largest emissions reductions compared to other decarbonization levers.
The International Energy Agency’s (IEA) ‘Net Zero Emissions by 2050’ (NZE) scenario offers an understanding of what the energy transition looks like if we are to keep global warming under 1.5°C.
In this scenario, there is no room for the development of any new oil and gas fields. This stems from the fact that emissions generated by consuming currently exploited fossil fuel reserves would largely exceed the remaining carbon budget to remain within 1.5°C of global warming. The immediate end to the development of new fossil fuel production projects is a common characteristic of 1.5°C scenarios with low or no overshoot that rely on a limited volume of negative volume and a priority for climate action, emphasized by the UN
Another aspect of a 1.5°C-aligned energy transition, also confirmed by such scenarios, is the need to restructure our energy network to rapidly and drastically increase the development of alternative energy capacity in order to reach carbon neutrality of the power sector by 2040.
In the NZE, annual investments in the energy transition must more than double by 2030 while investments in fossil fuel rapidly decrease. This means that, for every dollar invested in fossil fuels, ten must be invested in the energy transition. That includes: six dollars in “clean energy” supply (production and distribution) and four dollars in energy efficiency and end-uses. This gives us a 6:1 ratio of financing for power supply.
About sustainable power
The terminology “clean” implies the mistaken idea that some energy sources have no impact, while “dirty” energy sources have harmful impacts. Every kWh of electricity production requires the extraction and consumption of natural resources, has a spatial footprint, and produces greenhouse gas emissions. Over the entire life cycle, all energy sources have an impact on the climate, on ecosystems, and on people. In that context, energy cannot be “clean”. In the same way, “low carbon” or “renewable” sources do not encompass all of the environmental and social aspects that matter for a just and successful transition. Consequently, we use the term “sustainable”. Financial institutions should always be explicit about what is and what is not included in their scope.
The IEA’s projections in the NZE scenario are based on a definition of « clean energy » that includes technologies that are incompatible with a rapid and just transition of our energy system, such as biomass or nuclear energy. It also anticipates the development of immature or non-existent technologies at a commercial scale, such as Carbone Capture Use and Storage (CCUS), and hydrogen produced using fossil fuels and CCUS. Those technologies, whose development is uncertain or associated with damaging social, environmental and climate impacts or risks, pose too great a risk to our ability to meet the 1.5°C objective and global biodiversity protection targets. Therefore, we believe that they should not be included in banks’ energy transition finance targets. As the IEA’s NZE scenario gives only a 50% chance of limiting global warming to 1.5°C, removing those technologies increases the chances of success and does not detract from the relevance of aligning with the investment targets set out in this scenario.
Sustainable power supply includes power produced by sustainable energy sources, development of which is guided by robust human rights policies. Such sources might include solar (photovoltaic and thermal), wind (on and offshore), hydropower under certain conditions, wave and tidal, geothermal. This also includes developing more flexible electricity grids (including transmission & distribution infrastructure, battery storage and other energy storage technologies), modernization (new and refurbishment) and off-grid sustainable power (mini-grid or stand-alone). Unsustainable solutions are excluded.
Unsustainable technologies and sources cannot be considered as credible solutions to achieve a timely energy transition. This includes: fossil fuels with Carbon Capture & Storage / Carbon Capture, Utilization & Storage (CCS/CCUS), biomass with or without CCS/CCUS, large-scale hydropower that does not comply with World Commission on Dams recommendations, nuclear energy, CCS/CCUS dedicated to power plants, DACC, waste-to-energy, hydrogen from non-sustainable sources, any non-fossil fuel power plant with significant share of fossil fuel backup or dedicated to support fossil fuel infrastructure.
Banks’ decarbonization targets for the power sector can be a useful tool—provided they meet several key criteria. For example, decarbonization targets should be based on physical (rather than financial) intensity targets, they should also be aligned with credible calculations of the sectoral efficiency improvements needed to match the absolute emissions pathways in 1.5°C scenarios, and they should include scope 3 emissions in addition to scope 1.
However, well-designed and ambitious decarbonization targets are only one part of a robust climate transition plan for banks. Robust transition plans should also include policies to end financing for new fossil fuel projects and the companies developing them, plans to finance the decommissioning of existing fossil fuel infrastructure, and targets to significantly increase financing for sustainable power supply. The Sustainable Power Policy Tracker assesses this focus on sustainable power supply financing.
Find out more in Reclaim Finance’s full analysis of banks’ decarbonization targets.
You can find our recommendations to banks for robust sustainable power policies here.
Find out more out more about our recommendations on Reclaim Finance’s website.
About technologies
Reclaim Finance is not in favor of the development of bioenergy in the energy sector, and specifically for power and large-scale heat generation. Bioenergy comes at the expense of agricultural land, human health, natural ecosystems, and biodiversity, with no gains in terms of climate change mitigation.
Although it could be possible to limit the negative impacts associated with some types of bioenergy supply under certain conditions, in practice it is very difficult to guarantee compliance with these conditions. This is the case especially if we want to produce enough bioenergy to meet the massive demand some climate scenarios project.
Regarding power, bioenergy competes with solar or wind for financing. Financial institutions should support truly sustainable power sources as a priority, such as solar and wind, and not include bioenergy in their energy transition financial and capacity targets, or in their energy transition frameworks.
The inclusion of carbon capture and storage technologies does not justify bioenergy use. The conversion of coal plants to bioenergy plants for power or heat must not be supported. Similarly, new fossil gas infrastructure should not be developed on the pretext that it will be used for biogas or syngas in the future.
Reclaim Finance encourages financial institution to support research and development as well as investment in this sector and will examine the subject as it evolves.
On short-term storage:
Reclaim Finance recommend investing in both li-ion and hybrid flow batteries as they are fundamental to the energy transition. In the shorter term, li-ion batteries are the most mature and will be a key element before 2030 to ensure a rapid transition.
Due to critical materials present in batteries, financial institutions should conduct a robust due diligence to ensure sustainable production of batteries all along the value chain, including the monitoring of environmental damages, respect of human rights – including acceptable working conditions, and transparency. The development of recycling must also be endorsed to improve the collection and reuse of critical materials and other key components.
On long-term storage:
Reclaim Finance recommend investing in mechanical and thermal storage as they are fundamental to the energy transition. A combination of these technologies will be necessary, as the choice of a particular technology will depend on system preferences and design parameters, among other considerations. Similarly, monthly and seasonal storage needs will change according to several variables, including climatic and regional conditions.
Mechanical and thermal power storage technologies are still in the early stages of development and adoption. The faster their development, the less need there will be for legacy thermal power plants and hydrogen-based energy storage, freeing up hydrogen for other sectors where its use could be more efficient.
Reclaim Finance is not in favour of the development of CCUS in the power sector. While it will have a role to play in achieving carbon neutrality as part of a 1.5°C-aligned scenario, it should be reserved for specific industrial sectors with no alternative for reducing CO2 emissions. In the power sector, CCUS appears to be a waste of money and presents the serious risk of slowing down GHG emissions reduction efforts. Financial institutions should not include CCUS for power generation in their energy transition financial and capacity targets, or in their energy transition frameworks.
Existing CCUS facilities in the power sector have proven not to be up to the task of reaching the theoretical 90% capture rate, achieving rates well below and failing to deliver promised emissions mitigations. CCUS engagement also results in higher fossil fuel consumption and higher methane emissions to produce the same amount of power as non-retrofitted power plants. In existing cases, captured CO2 is used to extract even more oil. This seriously compromises the pertinence of considering this technology as a climate solution.
Moreover, implementing CCUS requires large investments that drastically increase both capital and operational expenditure. The much higher costs per kW and higher exposure to volatile gas markets would likely incite the valorisation of captured CO2 instead of its storage. This indefinite storage is also yet to be proven. For the end-use consumer, deployment of CCUS at large scale would likely make the electricity wholesale price higher.
Far from being a solution, CCUS for power generation is making the climate crisis worse. Given the urgency of the situation, we must act swiftly to achieve a rapid and just energy transition. This requires actively reducing our reliance on fossil fuels, not delaying their phase-out. Instead of financing unproven technological bets like CCUS, financial institutions should focus support towards sustainable energy sources, such as wind and solar, that are already commercially mature, competitive, and rapid to deploy.
Find out more about CCUS in power in the dedicated factsheet.
On hydrogen production:
Reclaim Finance is not in favor of supporting hydrogen production using fossil fuels, with or without CCUS. Producing hydrogen using fossil fuels is highly carbon intensive and CCUS has no positive impact on the climate, and even a negative impact, compared to traditional use of fossil fuels. Financial institutions should not include hydrogen produced from fossil fuels in their energy transition financial and capacity targets, or in their energy transition frameworks.
Instead, financial institutions should focus their support on electrolytic hydrogen, which is the only form of hydrogen compatible with a fossil fuel-free energy system. In our view, it is the only hydrogen that can be labelled “sustainable”, provided it is produced using sustainable power.
While the current pipeline of electrolytic hydrogen projects is significant, it needs to drastically increase. Even so, the gap with the planned capacity for 2030 in the NZE seems unlikely to be closed. Financial support is critical; Reclaim Finance recommend actively supporting the development and deployment of electrolytic hydrogen projects. To enable this at the required scale, electrolyser manufacturing capacity must additionally increase; we recommend actively supporting these projects.
On hydrogen demand:
Reclaim Finance is not in favour of supporting the use of hydrogen for power storage or heating. Though hydrogen could bring benefits to power systems as a storage solution and help integrate variable renewable energy, other hydrogen-free solutions can provide this service more efficiently.
Considering the few decarbonization options available to some sectors and the strong competition for hydrogen, financial institutions should support the development of hydrogen-based transition solutions for specific hard-to-abate sectors, such as the hydrogen-based Direct Reduction of Iron and the use of hydrogen-based fuels in long distance transportation, primarily shipping.
Considering the significant risk of negative impacts on biodiversity, human rights, and climate, Reclaim Finance recommends conditioning the financing of new hydropower projects (greenfields and brownfields) to the strict application of robust standards.
Although some forms of hydropower may have a role to play in a rapid and just energy transition, its vulnerability to climate events like droughts and extreme rainfall – both growing in frequency and intensity with global warming – mean that it cannot be relied upon to a large degree. PSH is likely to remain an important storage source and grid stability factor, yet priority should be given to energy sources and technologies with fewer impacts and that are less exposed to climate change risks, such as wind and solar, and batteries for short-term storage.
To reduce the need for new hydropower plants, priority in this sector should be given to the maintenance and rehabilitation of existing hydropower infrastructure and, where relevant, additions or increases of generating capacity at existing dams. In particular, no new hydropower should be developed in Europe, as most of hydropower potential has already been harnessed, with significant negative impacts on ecosystems and biodiversity and increasing hydropower capacity should exclusively rely on refitting and upgrading existing hydropower plants.
New hydropower projects must be examined on a case-by-case basis, should apply the recommendations and principles of the World Commission on Dams, and should respect the consent of local populations with the FPIC principle for Indigenous Peoples. For both new and existing hydropower plants, a project must not compromise any efforts to restore riverine and riparian ecosystems.