RenewableEnergyFundingin2023:A“CapitalTransition”UnleashedSeptember2023Thisarticle,byS&PGlobalRatingsandS&PGlobalCommodityInsights,isathoughtleadershipreportthatneitheraddressesviewsaboutindividualratingsnorisaratingaction.S&PGlobalRatingsandS&PGlobalCommodityInsightsareseparateandindependentdivisionsofS&PGlobal.spglobal.com©2023S&PGlobal.Allrightsreserved.AuthorsS&PGlobalRatingsTrevorD’Olier-LeesGonzaloCantabranaFernandezAneeshPrabhuLauraLiPierreGeorgesEvanGunterS&PGlobalCommodityInsightsPeterGardettRogerDiwanEduardSaladeVedrunaChrisDeLuciaContributorsAngelaLongCarlaDonagheyKeyTakeawaysGovernmentsareturningtocapital–Manygovernmentsaroundtheworldhavebeenmakingprogressmobilizingpublicandmarketsbecauseofprivatecapitaltoacceleratetheenergytransition,withsignificantmoneyinflowsintotheimmensescaleofprojectsinrecentyears.Theseinflowsarenecessarytomeetthetriplingoffundinginvestmentexpectedneedsforlow-carbonprojectsacrosssectorsby2030tomeet2050net-zerogoals.tobeneededinthecomingdecades.–TheseinflowsareparticularlypronouncedintheUnitedStates,ChinaandtheEuropeanUnion–respondingtohigh-levelpolicygoals,yetexecutedthroughdistinctivefinancingchannels.Theseachievements,however,stillfallshortofwhatisneededtomeetnet-zerogreenhousegasemissionsgoalsaslaidoutintheParisAgreement–particularlygivenloweractivityoutsidethesekeyregions.–Weseecapitalflowscurrentlystronglyfavoringrenewablepowergeneratingassets,namelywindandsolar,withlessfocuson,forexample,transmissionandstorage.Thisdislocationbetweenpolicyintentandcurrentinvestmentislikelytoresultinintegrationbottlenecksanddysfunctioningenergymarketsunlessmarketdesignevolvesquickly.–Adaptingpoliciesandregulationsalsocomeswithrisksfordevelopersandinvestors,withreducedvisibilityandpredictabilityinmarketforecasts.IntroductionNationalgovernmentsandglobalfinancialinstitutionshaveplacedcapitalallocationattheheartoftheirenergyandindustrialpoliciestoaccelerateandshapetheenergytransition.Governmentsareturningtocapitalmarketsbecauseoftheimmensescaleofinvestmentexpectedtobeneededinthecomingdecades.Ititsestimatedthatcurrenttargetsagreedtobytheworld’smajoreconomiesundertheParisAgreementwouldrequireatleasttriplingofglobalenergytransitioninvestment(includingalldecarbonization)tomorethan$5trillioneachyearbetween2023and2050,wellbeyondwhatgovernmentbalancesheetscanhandlealone.Investmentinrenewablegeneratingassetsisakeypartofthetransition,withestimatedannualinvestmentof$1.4trillion1through2050.1.InternationalRenewableEnergyAgency(IRENA)WorldEnergyTransitionsOutlook2023,www.irena.org.spglobal.comCapitalTransitionUnleashed2CurrentS&PGlobalCommodityInsightsInflectionsReferenceCaseforecastsexpect$700billionperyearofrenewableenergyinvestmentthrough2050,whichmeansthattheannualfundinggaptomeetthenet-zeromodeledtargetcouldbeaslargeas$700billion.Theglobalrenewableenergyfundinggapisalsohighlyconcentratedinemergingmarketsduetohigherrisk,andhence,lowerappetitefrominvestors.Forexample,while65%oftheglobalpopulationlivesoutsideofthemarketsinChinaplusthedevelopedeconomiesasanalyzedinthispaper,cleanenergyinvestmentinthosesamecountriesisonly20%oftheglobaltotal.Incontrast,themarketsonwhichwefocusinthisreport—theUnitedStates,EuropeandChina—donotfacethesamedegreeofunderinvestmentrisk.Inthesemarkets,investmentcapitalismoreavailableandthefinancinggapissmaller,albeitstillnotsufficienttomeettheregion’snet-zerogoals.Investmentsindevelopedeconomiesaremorelikelytobeinvestmentgrade,andwheretheyfallshortofinvestmentgrade,sophisticatedlocalcapitalmarketsareabletocopewiththeassociatedrisks.Tospurgreenspending,governmentshaverolledoutnewincentivesthroughdifferenttypesoffinancialmechanismsaimedatde-riskinginvestmentsandreducingdecarbonizationcoststoboostcapitalavailabilityandallocations.Suchpolicieshaveevolvedovertime.IntheUSandEurope,historically,therewasaninitialbiastowardrenewablepower(renewableportfoliostandards,governmentofftakecontractsandfeed-intariffsinEurope,andinvestmenttaxcredit/productiontaxcreditintheUS)andnowfinallytowardindustrialdecarbonization(intheUS,theInflationReductionActof2022[IRA];inEurope,thechangeofEmissionsTradingSystemrulesandauctionsforhydrogenandcarboncaptureandstorage).TherearesomedifferencesbetweentheUSandEuropeanpolicies.IntheUS,theIRAgivestaxcreditstoavarietyofprojectsandinvestors,whocanpickwheretheywanttodirecttheflowoffunds.Incontrast,thereislessflexibilityinEuropebecausethepolicyframeworkandincentiveforeachinvestmenttypeisquitedifferent.1.5°Cscenarioinvestmentrequirements,aggregate,2023–2050($T)Conservationandefficiency43Renewablepowergeneration39Powergridsandflexibility22Electrification16.612FossilfuelssupplyRenewabletechnology64.7Greenhydrogen3Carbonremoval1.9Fossilfuelgeneration1.6NucleargenerationDataaccessedJuly28,2023.Source:InternationalRenewableEnergyAgency(IRENA)WorldEnergyTransitionsOutlook2023.©2023S&PGlobal.spglobal.comCapitalTransitionUnleashed3PolicyframeworksandincentivesinChina,theEuropeanUnionandtheUnitedStatesEconomicblocPolicyIncentivetypeEnergysectorbeneficiaries14thFive-YearPlanTargets,varioussoftUtility-scaleincentives(e.g.,cheaprenewables,gridChinafinancing,land)expansion,storageTargets,state-backedRenewablesEuropeanUnionREPowerEUloansFitfor55Targets,state-backedRenewables,loanshydrogen,efficiencyInflationReductionTaxcredits,loanRenewablesActof2022guaranteesTaxcredits,grantsEnergytransitionUSCHIPSActof2022;assetsAmericanJobsPlanof2021AsofJuly28,2023.Source:S&PGlobalCommodityInsights.©2023S&PGlobal.PoliciesarehavingunintendedconsequencesHowever,relyingonprivate-sectoractorstoultimatelymakeinvestmentdecisionsistransformingexistingmarketstructuresandbusinessmodelsinwaysthatwerenotnecessarilyenvisioned.Governments,forinstance,mightnothaveexpectedthemarketresponsetobesoheavilytiltedtowardinvestmentsingeneratingassets,particularlysolarphotovoltaic(PV)assets.Thosetechnologiesandmarketsareprimedforprivate-sectorinvestmentinwaysthattechnologiesforindustrialdecarbonizationsuchasgreenhydrogen,anothermajorgoalforpolicymakers,arenot.Insomeways,itisunderstandablethatassetmanagersaredirectingtheirfundsintogeneratingassets(particularlysolarPV).SolarPVhasgenerallybecomeabankable,proventechnologyandoperatesundercontractsorfeed-intariffs,generatingsteadyreturns.However,thepronouncedinfluxofcashintorenewableswilllikelyhavedisruptiveimplicationsforexistingpowerandfuelmarketsthatarelikelytobecomesignificantovertime.spglobal.comCapitalTransitionUnleashed4Privatecapitalenergytransitioninvestmentbysegment,August2022–June2023($B)Renewableelectricityproduction59.5Advancedmanufacturing33.6Industrialdecarbonization9.7GovernmentpoliciessuchastheIRAandDigitalenergymanagement9.2RePowerEUhaveprovidedadegreeofEnergystorage8.1policyandregulatorycertaintytofinancialHydrogen/RNG/SAF6.8investors.AsofJuly28,2023.RNG=renewablenaturalgas;SAF=sustainableaviationfuel.Source:S&PGlobalCommodityInsights.©2023S&PGlobal.Eachmajoreconomicblocandeachcountrymayhavetakenaslightlydifferentapproachtoleveragingglobalfinanceandcapital,buttheglobalsimilaritiesaremorestrikingthanthenationalorregionaldifferences,withgovernmentsdrawingfromthesametoolkitofsolutions(seethetable“Policyframeworksandincentives”).TheemphasisintheUSIRAtowardincentivestounlockcapitalallocationhasinitiatedaracetoprovideinvestmentopportunitiesacrosstheworld.Onedifference,though,isthattheUSandEuropeareseedingnewandgreenfielddevelopmentoflocalsupplychains,whereasChinaisbothdefendingandexpandingitssupplychains.Theaccelerationofthisprocessbuildsuponanexistingtoolkitestablishedandnowmaintainedbyfinancialinstitutions,bothpublicandprivate,andfinancialregulators,bothnationalandglobal.Financialandcapitalfirmshavecarvedoutasignificantroleasthemarketmakersoftheenergytransitionbyenablinggovernmentsandcorporatesectorstomeasuretherisksofclimatechangeaschanneledthroughfinancialassetpricing,andtosupportinvestmentopportunitiesindecarbonizedenergyandelectrifiedinfrastructure.GovernmentpoliciessuchastheIRAandRePowerEUhaveprovidedadegreeofpolicyandregulatorycertaintytofinancialinvestors.Theseinvestorstooktheinitiativetomaptheimplicationsofclimate-changeriskandassessthepotentialofnewtechnologiestoshiftassetpricing,andnowgovernmentsarerelyingonthoseearlyeffortsaspathwaystoreshapingenergypolicy.Whileactivistgroupsandothersprimedtheseframeworks,increasinglyitisbanksandinstitutionalinvestorsthatarecreatingthedatastreams(e.g.,pricingandemissionsanalysis),frameworksandstrategicplaybooksforbothupgradinganddecarbonizingindustrialeconomies.spglobal.comCapitalTransitionUnleashed5Newinvestmentinenergytransitionbycapitaltype($M)PrivateequityandcreditPublicequityVenturecapitalDebt25,00022,50020,00017,50015,00012,50010,0007,5005,0002,5000Aug.Sept.Oct.Nov.Dec.Jan.Feb.MarchAprilMayJune20222022202220222022202320232023202320232023AsofJuly28,2023.Source:S&PGlobalCommodityInsights.©2023S&PGlobal.RegionalfocusInexaminingtherapiddeploymentofrenewablepowerproductioncapacityinresponsetopolicychanges,whilethereareglobalsimilaritiesintheapproach,thereremainimportantregionalvariationsinthemechanismsbywhichcapitalisallocated.Differentwaysofstructuringaccesstocapital,thevarietyoffinancialinstitutionsineacheconomicbloc,andtheregulatorycontextinwhichinvestorschanneltheirfundstonewprojectsallmeaningfullyimpactthecharacterandspeedoftheglobalrenewablepowerrollout.Liketheirglobalcapitalmarketscounterparts,majoreconomicblocshavereliedonthetoolsavailabletothem,ofteninwaysthatalignwiththekindsoffinancialinstitutionsthatfacilitateinvestmentsintheirnationalmarkets.AsweturntoexaminethecapitaltransitioninChina,theEuropeanUnionandtheUnitedStates,thestrikinglydifferentwayseachmarketfundsrenewablepoweradditionsinresponsetosimilarnet-zeropolicychangesprovidesamoredetailedunderstandingoftheemergingfundinggap.spglobal.comCapitalTransitionUnleashed6China’sgovernment-ownedfinancialinstitutionsarecentralGreatercontributiontotheenormousrenewablerollout,butprivatefundingisfromtheprivatesectorultimatelyneededtomeetgoalswouldbenecessarytoachieveChina’sChina’senergytransitionwillrequireasubstantialincreaseininvestmentoverthenextambitiouscarbonfewdecades,eventhoughitalreadyaccountedfornearlyhalfoftheglobalenergyneutralitygoal.transitionsectoralspendingin2022.China’sprimaryenergymixcurrentlyremainshighlyreliantonfossilfuelsanddemandisexpectedtocontinuetogrow,implyingalongperiodofmassivefundingisnecessarytobuildupa“modernenergysystem”thatisnon-fossildominatedbyaroundmidcentury.China’spowersectoristakingtheleadalongsidethistransitionthroughacceleratedinvestmentsmainlyinrenewablesgenerationcapacity,powergridsandenergystorage.Chinaappliestop-downpolicydecisionsandmechanismsforthisimmensegovernmentambition.Itscentralandkeylocalstate-ownedenterprisesdominateinvestmentsinthepowersector.Theirstrengthsarebasedoncontinuousgovernmentsupport(bothoperationallyandfinancially)anddecentcapabilityforlargeprojects(suchasutility-scalerenewablesandbighydro).Thefinancialsystemessentiallyisunderstatecontrolanddominatedbystate-ownedbanks.GreatercontributionfromtheprivatesectorwouldbenecessarytoachieveChina’sambitiouscarbonneutralitygoal.Policymakershavebeentryingtopromoteprivateinvestment,yetincentivesforprivatecapitalandappropriateregulatoryframeworkswouldneedtobeexpandedthroughdeepeningmarketreform.Privatecapitalisconstrainedinasmallportionofcommerciallyviableprojects.Publicfinancecontinuestoplayacentralroleinthemajorityofprojectsandinnewenergytechnologyinnovation.Mostofthefundingisraiseddomestically.Ahighpercentagecomesfromstate-ownedbanksandnationaldevelopmentfinanceinstitutions.Chinesecompaniesfavordebtfinancingaslendingrateshavebeenkeptatlowlevelstoboosttheeconomy,andrenewablesprojectscanaccesspreferentialrates.Asoneofthelargestgreenfinancemarkets,China’sgreenloanbookforcleanenergyprojectsgrewsharplyby32%-35%yearoveryearduringthepastfewyears,attaininganoutstandingbalanceof6.8trillionrenminbi($954billion)asofJune2023(seethechart“China’sgreenloanbookforcleanenergyisgrowingvigorously”).ChinaunveileditsGreenBondPrinciplesinJuly2022,attemptingtoadoptgloballyacceptednormstoattractawiderpoolofcapital.In2022,overhalfofitsgreenbondissuanceproceedswereusedforcleanenergy.China'sgreenloanbookforcleanenergyisgrowingvigorouslyGreenloanbalanceforcleanenergyYear-over-yeargrowth(%)(trillionrenminbi)8(Trillionrenminbi)407(%)3062052019202020212022104031H20232102018AsofAug.29,2023.1H=firsthalfofyear.Sources:Wind,People'sBankOfChina;S&PGlobalRatings.©2023S&PGlobal.spglobal.comCapitalTransitionUnleashed7AsChina’spowermarketreformdeepens,renewablepowerwillseegrowingmarket-basedtrading,sothatpricescanfluctuatemorefreelybasedonmarketconditions,meaningpossiblefuturereturnvolatilitytoo.Thismayhelpimprovepowersystemflexibilityandrenewableenergyintegration,aswellasreducegenerationcapacityreserve.Chinaisestablishinga“unifiednationalenergymarket”designedtocontributetocontinuedstrengtheningcross-regionalpowertrading,localpowermarketscoordinationandancillaryservicesexpansion,by2030astargeted.China’sRenewableEnergyLawandsupportingpolicies,suchastaxbreaksandprioritizedpurchasesofrenewableenergy,willremaininstrumentaltoenablethehighgrowthofinvestment.RenewablesrepresentsignificantlyhighershareofcapacitythanconsumptioninChina(%)Solar&windshareofSolar&windshareofgenerationcapacitypowerconsumption504030201002020202120221H20232019AsofAug.29,2023.1H=firsthalfofyear.Sources:Wind,NationalEnergyAdministrationofChina;S&PGlobalRatings.©2023S&PGlobal.NewlawsintheUShaveunlockedasignificantflowofInthe10monthssincefundsintosolarPVassetsthatisincreasinglynegativeforthepassageoftheIRA,powermarketsandputsgreateremphasisonstorageandprivateequityfirmstransmissionneedshavecommittedmorethan$100billiontoIntheUS,thefederalstructurelimitsthedegreetowhichcentralgovernmentnewrenewableenergymandatescandirectlyshapeenergyinvestment.AtriooflawspassedbytheUSinvestmentsthatwouldCongressandbeingimplementedbytheBidenadministrationhavethepotentialtoqualifyfortaxcreditscollectivelydrivewellover$1trillionininvestmentcapacitytoenergytransitionassets,inthenextsixyears.buttheyrelyonstateandlocalgovernments,companiesandcapitalmarketstoselecthowthatfundingisallocatedandused.WhiletheAmericanJobsPlanandtheCHIPSActbothcontainextensivefundingforenergytransitionassets,itistheIRAthatmostclearlyunleashestheprivatesectortofreelydirectinvestmentthatcanqualifyforafter-the-factincentives.IntheIRA,USpolicymakershaverevisedthetaxcodetorewardenergytransitioninvestmentnomatterwhichcompanyundertakesit.Theresultingrushofinvestmentandcapitalcommitmentshasattractedglobalattention.Inthe10monthssincethepassageoftheIRA,privateequityfirmshavecommittedmorethan$100billiontonewrenewableenergyinvestmentsthatwouldqualifyfortaxcreditsinthenextsixyears.ThatnewdeploymenthasthepotentialtotransformtheUSpowermarketswithmorethan350gigawatts(GW)ofnewgeneratingcapacity,anditisontopoftheroughly$120billioninnewcorporatecapitalcommitmentsthatgenerallycarrylongerdeploymenttimelines.spglobal.comCapitalTransitionUnleashed8NewrenewableenergyandenergystorageprojectcommitmentsintheUSbyprivateequityandutilities(GW)PrivateequityUtilities27.211.212.372.811.741.14.241.117.92.61.239.725.13.68.89.59.110.1Sept.Oct.Nov.Dec.Jan.Feb.MarchAprilMay202220222022202220232023202320232023AsofJuly28,2023.ThewaveofnewGW=gigawatts.investmentinSources:S&PGlobalCommodityInsights;S&PGlobalMarketIntelligence.renewablepowerassets©2023S&PGlobal.isacceleratingfasterthanthebroadercapitalWhenaddedtotheloanguaranteesandgrantsavailablethroughallthreelaws,marketfundingofthefederalgovernmenthasmatchedstate-levelmandatesandprogramswithinvestmentinenergyunparalleledlargessethatrewardsablendofreshoredmanufacturingcapacityandstorage.newenergyinfrastructureinvestment.WhiletheresultingdealflowisfrontloadedintoincorporatingrenewableenergyintotheUSpowersystemandassociatedadvancedmanufacturing,industrialdecarbonizationeffortslinkedtohydrogenproductionandcarboncaptureutilizationandstorage(CCUS)projectbuildoutsarerapidlyapproachingfinancialcloseandthestartofconstruction.USprivate-sectorcommitmentstoCCUSprojectsin2023amounttoroughly$3.4billion,lessthan5%oftheroughly$120billioncommittedtoUSrenewableenergybuildoutbyprivate-sectorinvestorsandcompaniesthisyear.Thewaveofnewinvestmentinrenewablepowerassetsisacceleratingfasterthanthebroadercapitalmarketfundingofinvestmentinenergystorage.Amongprivatecapitalplayers,theproportionsaremorebalanced,partlybecausethoseinvestorsaredeployingassetsinmarketswhereenergystorageisrewardedinmarketdesign.Iftheseassetsareincreasinglyexposedtomarketprices,therecouldbeacompoundingadversecreditimpactwithpricecannibalizationoccurringduringperiodsofexcessgeneration.Peakgenerationofrenewablepower,particularlysolar,isnotalwaysalignedwithpeakdemand.IntheUS,thisimpactismostnotableintheduckcurveforpowerpricesinCalifornia,whichsignifiesproblemsforthegridandcurtailmentofsolargeneration.Intheabsenceofasimilarboomofinvestmentinstorageandtransmission,therisksofgridinstabilityandpricingcannibalizationwillincreasebothattheglobalandUSlevel.spglobal.comCapitalTransitionUnleashed9Totalglobalcleantechspending,2022–2023($M,real2022)6%SolarPV(utilityscale)7%SolarPV(distributed)Onshorewind23%Offshorewind4%OtherrenewablesEnergystorage14%EnergystoragecomprisesHydrogenproductiononly7%oftotalplannedcleanpowercapexthrough203026%20%AsofJuly28,2023.TheEUassumesthatPV=photovoltaic.renewableswillneedtoSource:S&PGlobalCommodityInsights,CleanEnergyTechnology(CET)—GlobalCleanEnergyTechnologyMarketdeliverapproximatelyOutlook2023.70%ofthepower©2023S&PGlobal.tomeettheoverallrenewableenergytargetByfocusingonenergysecurityandlowerprices,Europeby2040.hasbeenbuildingrenewablegeneratingassetsfasterthansupportingtransmissionandstoragecapacityTheEuropeanenergycrisishasacceleratedtheconsensusandimpetusforthedevelopmentofrenewables,withever-highergoalsofachieving1,200GWofinstalledrenewablescapacity(i.e.,windandsolar)by2030comparedwith513GWin2021.Environmentalconsiderationsarenolongertheonlymotivationforrenewablesdevelopment;keepingpowercostsdownforconsumersandensuringsecurityofsupplyfortheEUarenowvitalpriorities.Suchconcernshavematerializedintherevisedandverychallenginggoalsetbytherenewableenergydirectivetoproduce42.5%-45.0%oftheenergysupplyusingrenewablesby2030.TheEUassumesthatrenewableswillneedtodeliverapproximately70%ofthepowertomeettheoverallrenewableenergytargetby2040.Acceleratingrenewablesgrowthwillrequiremorethangoalsandsubsidies,andaseriesofnonfinancialcomplexitiesandhurdlesmustbeovercome.Inthepastyear,theEUhasproposedareviewofthebloc’senergymarketdesignandisclosetoanagreement.Amongotherchanges,itwillconfirmthatrenewableprojectsinEuropecanchooseoneofthreebusinessmodels:—Operateasamerchantasset—Sellpowerunderapowerpurchaseagreement(PPA)—Participateinauctionsandreceiveagovernmentcontractspglobal.comCapitalTransitionUnleashed10ThenoveltyoftheagreementliesinthefactthattheEUwillrequireprojectswithgovernmentsupportorsubsidiestoincludetwo-waycontractsfordifferences(CFDs)insteadofone-waycontractsthatprovideunilateralprotectiontothegenerator.Inpractice,mostnewrenewablesprojectsponsorswillingtocontracttheirrevenueswouldoptforcontracts(eitherCFDsorPPAs)thatprovidethelong-termvisibilityrequiredtoobtainfinancing2,oralternatively,merchantcontracts.NonfinancialchallengesstemfromthelengthypermittingprocessintheEU,agrowingshortageofgridcapacityandbottlenecksintheglobalsupplychain.AcrossEurope,ittypicallytakesbetweenthreeandsixyearstogetaprojectfullypermitted,aswellasthegridconnection,andthetimelineisoftenlongerinthecaseofwindpower.Thisprotractedprocessmateriallylimitsthemarket’sabilitytodeploynewrenewablesatscaleandatpaceovertheshorttomediumterm.Evolutionofmanufacturingcapacitysharebyregion,2022to2026(%)ChinaEuropeNorthAmericaRestofWorld100%90%80%70%60%Europeaimsoverthecomingdecadeto50%reinforceitssupplychainandrevert40%anegativetrendcementedoverthe30%previousdecade.20%10%0%2022202620222026202220262022202620222026SolarPVOnshorewindOffshorewindBatteriesElectrolyzerAsofSept.1,2023H2=hydrogen;PV=photovoltaic.Source:S&PGlobalCommodityInsights.©2023S&PGlobal.Europeaimsoverthecomingdecadetoreinforceitssupplychainandrevertanegativetrendcementedoverthepreviousdecade.AccordingtotheInternationalEnergyAgency,Europe’sshareinallthemanufacturingstagesofsolarpanels(suchaspolysilicon,ingots,wafers,cellsandmodules)declinedfrom20%in2010to8%in2021.Incomparison,China’sshare,whichwas29%in2010,jumpedto80%by2021.Thecosttodeveloprenewables,afterfallingforadecade,begantoincreasemateriallyinEuropefromthesecondhalfof2020,whichwasthencoupledwithhigherinterestrates,pressuringtheeconomicsofprojectsthathadalreadylockedinofftakecontracts.However,thecostappearstohavepeakedalreadyandwilldecline.Thus,inourview,whereastheEUandmemberstates’governmentscandolittletomitigatetheimpactsofsupplychainissuesandofinflationandinterestratesontherenewablescapacitybuildup,creditriskswouldbemitigatedtosomeextentfromimprovedvisibilityonthemarketstructure,keepingcertainprotectionsonpricefloorsforrenewableprojectsand/orimprovingthepermittingprocessesandtimings.2.Forfurtherinformationonthistopic,pleaseseetheS&PGlobalCommodityInsightsreport“EU’sProposedEnergyMarketRedesignMitigatesMerchantRisksandAcceleratesRenewables,”publishedApril3,2023.spglobal.comCapitalTransitionUnleashed11Shareofglobalcleantechmanufacturingcapacitybyregion,2022(%)ChinaNorthAmericaEuropeRestofWorld100%90%80%70%60%50%40%30%20%10%0%CellsModulesBladesNacellesTowersBladesNacellesTowersCathodesElectrolyzersSolarPVOnshoreOffshoreBatteryH2AsofSept.1,2023H2=hydrogen;PV=photovoltaic.Source:S&PGlobalCommodityInsights.©2023S&PGlobal.Materiallyincreasingthecontributionfromrenewableswhileatthesametimeelectrifyingtheendusesandhittingreliabilitytargetsrequiresmoreflexibility,includingtheextensionofcapacityremunerationtoensurethecontinuityofbackupgenerationaswellasthegrowthofnewflexiblesupplytechnologiessuchasstorage.Europeisveryfocusedongeneration,whileinvestmentsinregulatednetworks—includinginterconnections—havenotbeenprioritized.Forexample,inBeneluxandGermany,itisincreasinglyclearthatpowergridoperatorsneedbothfasterpermittingandmuchmorecapitaltopreparegridsforamassiverenewablesbuildupandawaveofnewgridconnections,fromEVstoelectrifiedfactories.AnotherexamplewouldbethelimitedelectricityinterconnectionacrossthemostpopulatedEUcountries,suchasFrance,Germany,ItalyorSpain.Capitaltransition,enabledbypolicy,stillneedstoaddressafundinggapThefundinggapillustratedabovepersistsacrossbothdevelopedandemergingeconomies,absentfurtherpolicyinterventions.Financialfirmsandcapitalallocatorsmayleadintheimplementationoftheenergytransition,buttheyalsofollowastechnologyandpoliticschangethemarketsandeconomiesinwhichtheyoperate.Thedegreetowhichfinancialincentivesmaydislocateenergymarketsandimpactriskmetricsforfirmscurrentlyinthosemarketsisincreasingovertime.Financialandcapitalmarketsmaybepartofshapingtheenergytransitionastheyrespondtogovernmentpolicy,butitistherealitiesoftheenergytransitionthathavecreatedavectoralongwhichgovernmentsarecompetingforeconomicpreeminence.Itistheavailabilityofprogressivelycheaperandmoreefficientrenewableenergytechnologies,high-performancebatteriesandincreasinglyviableindustrialdecarbonizationtechnologythatultimatelycreatethecontextforpolicycreationthatcanrelyoninvestmentshiftstodrivetheenergytransition.spglobal.comCapitalTransitionUnleashed12CONTACTSwww.spglobal.comwww.spglobal.com/en/enterprise/about/contact-us.htmlCopyright©2023S&PGlobalInc.Allrightsreserved.Thesematerials,includinganysoftware,data,processingtechnology,indexdata,ratings,credit-relatedanalysis,research,model,softwareorotherapplicationoroutputdescribedherein,oranypartthereof(collectivelythe“Property”)constitutetheproprietaryandconfidentialinformationofS&PGlobalIncitsaffiliates(eachandtogether“S&PGlobal”)and/oritsthirdpartyproviderlicensors.S&PGlobalonbehalfofitselfanditsthird-partylicensorsreservesallrightsinandtotheProperty.Thesematerialshavebeenpreparedsolelyforinformationpurposesbaseduponinformationgenerallyavailabletothepublicandfromsourcesbelievedtobereliable.Anycopying,reproduction,reverse-engineering,modification,distribution,transmissionordisclosureoftheProperty,inanyformorbyanymeans,isstrictlyprohibitedwithoutthepriorwrittenconsentofS&PGlobal.ThePropertyshallnotbeusedforanyunauthorizedorunlawfulpurposes.S&PGlobal’sopinions,statements,estimates,projections,quotesandcredit-relatedandotheranalysesarestatementsofopinionasofthedatetheyareexpressedandnotstatementsoffactorrecommendationstopurchase,hold,orsellanysecuritiesortomakeanyinvestmentdecisions,anddonotaddressthesuitabilityofanysecurity,andthereisnoobligationonS&PGlobaltoupdatetheforegoingoranyotherelementoftheProperty.S&PGlobalmayprovideindexdata.Directinvestmentinanindexisnotpossible.Exposuretoanassetclassrepresentedbyanindexisavailablethroughinvestableinstrumentsbasedonthatindex.ThePropertyanditscompositionandcontentaresubjecttochangewithoutnotice.THEPROPERTYISPROVIDEDONAN“ASIS”BASIS.NEITHERS&PGLOBALNORANYTHIRDPARTYPROVIDERS(TOGETHER,“S&PGLOBALPARTIES”)MAKEANYWARRANTY,EXPRESSORIMPLIED,INCLUDINGBUTNOTLIMITEDTOANYWARRANTIESOFMERCHANTABILITYORFITNESSFORAPARTICULARPURPOSE,FREEDOMFROMBUGS,SOFTWAREERRORSORDEFECTS,THATTHEPROPERTY’SFUN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