Awash in green cash

Europe has now issued more than USD500 billion in green bonds, a tsunami of investment cash, some of it heading into a wind or solar farm near you.

Green or climate bonds are the same as conventional bonds: financial instruments issued by governments, banks and companies to raise money which is then invested in climate-related assets, projects or activities, typically renewable generation or other assets that demonstrate they are reducing emissions.

This green cash is coming from European governments, banks and companies who have committed the funds as part of their public environmental, social and governance (ESG) commitments to shareholders. According to the climate bonds initiative, most green bonds are use-of-proceeds bonds, where the issuer commits to funding a specific range of activities, and in return the bond holders are paid a modest yield. Typical green bond yields are below normal commercial bond yields, as the bond holders are willing to accept lower returns in exchange for the brand and purpose of funding emissions reductions.

The green capital is not just coming from European institutions. Australian banks like NAB have issued around AUD3.5 billion worth of green bonds to meet its sustainable development goals.

Al this clean and green money is trying to find a purposeful home somewhere. It’s one of the drivers behind Australia’s world record pace of renewables investment. Based on data collated by the International Renewable Energy Agency (IRENA) Australia installed 275 watts/per capita of new renewable generation in 2020, nearly three times more than China (94 w/capita) and the US (88 w/capita) and four times more than Germany (78 w/capita).

Leaderboard: the rate of renewable investment by country 2020, watts/capita (IRENA)

Australia’s aggressive pursuit of a transformation to a renewables based electricity system is being made possible by an abundance of space, sunlight and wind. In turn it is being rocket-fuelled by multi-billion dollar global-green-capital looking for a zero-emissions, low-yield home.

Billions of this European green investment is spilling, or trying to spill, into the hot Australian market, relatively unfused by deteriorating wholesale spot prices for wind and solar.

Green investors are keen, but not so keen that they are willing to invest in more than 40 battery storage projects with a capacity of more than 10GW lined up across the National Electricity Market. That’s because batteries are still so expensive they can only make money with large up front government handouts and selling technical services like frequency control. Pure arbitrage plays needed to firm renewables (buy low, sell high) need a regular spread of hundreds of dollars per MWh. And that lack of return has so far dissuaded this wave of green investors from completely doing their hemp shirts.

The cash is ready, but the NEM electricity machine really needs more large scale, fast start storage and less intermittent generation right now.