Shared risk assessment framework key to low-carbon transition

A better shared understanding of the risks and rewards associated with low carbon clean technologies is key to delivering the capital needed for decarbonisation, a report has said.

Written for HSBC Centre of Sustainable Finance by researchers from Imperial College London, Lending to Low Carbon Technologies proposed a new risk assessment framework for low carbon technologies in a bid to close the knowledge gap. POMLET – taking into account policy, operational, market, legal, environment social and governance, and technical risks – was applied to three technologies considered crucial enablers to the 2050 net zero target, solar PV, heat pumps and carbon capture and storage (CCS).

For solar PV, it found overcoming market risk was critical to unlocking its investment potential and increasing rates of deployment. Instruments to hedge market exposure – such as market-based price auctions like the CfD auctions – along with ancillary services were cited as important drivers of profitability and a way of laying the groundwork for this.

Policy and market risks represented the biggest risks to heat pumps, with the report recommending a stable long-term policy environment and clear strategy on decarbonisation of heat, along with clear incentives with an emphasis on helping with upfront capital costs, as methods to overcome this. Elsewhere, the report found that risks must be mitigated in both policy and market if commercial deployment of CCS is to be achieved. To enable this would require a “sufficiently high price” on CO2, making all stages of the capture, transport and storage process economically viable, the report said. It warned that without a carbon price or large-scale alternative use for captured CO2, large-scale deployment of CCS is unlikely.

The report concluded that risk perceptions will drive the rate of capital deployment towards climate-friendly technologies, adding that a shared framework for risk assessment would play a critical part in facilitating the low-carbon transition.

HSBC