The war between Russia and Ukraine has profoundly impacted the energy transition. The main result has been an increase in the price of hydrocarbons, particularly oil and natural gas. Many analysts have seen this as a blessing for the energy transition. However, in addition to the headwinds in the real economy facing the green energy sector, the climate finance landscape will change with the war. This will have a significant impact on what, as well as where, new projects will receive funding.

Despite greater public attention, private money faces new obstacles

Public sector support will likely assume a more significant part of the energy transition since private financing will likely face headwinds. After years of lax monetary policy, the economic adjustment cycle initiated by the Federal Reserve of the United States, the Bank of England, and other global central banks is beginning to depress the set of capital available for green investment while making green investments with higher risk or lower return less attractive in the margin. Compared to more traditional investments, green finance returns are difficult to analyze since many of the funds are provided by investors who seek green investment.

However, there are signs of a slowdown in the private financing market. For example, the supply of available venture capital financing decreased in the first quarter of 2022 after the expansion throughout the pandemic. This decrease supports our current forecast that the overall credit package granted to the private sector in North America, Western Europe, and Asia, the largest sources of green investment, will stagnate significantly in 2022 after growth in 2020 and 2021. The impact of monetary tightening on green finance is likely less extreme than in other sectors, such as information and communication technology, due to the dedicated group of green investors and the continued interest of the public sector. However, this slowdown will limit the private green funds available in the coming years.

Implementation is more complex, innovation is easier

Globally, governments have seen the war in Ukraine as a wake-up call to invest in alternative energy sources, including fossil fuels and renewable energies. In the short term, most countries are working to increase the supply of oil and natural gas to compensate for Russia’s lost capacity. In the medium term, however, there are divergences in the strategy. Countries like the United States and Australia, with crucial national hydrocarbon sectors, are investing in more excellent oil and gas extraction. However, for governments such as the EU, Japan, and the United Kingdom, this mainly means focusing on renewable energy. As the region most exposed to a possible cut in Russian hydrocarbon exports (either due to Russian action or as part of extended sanctions), the EU has announced the acceleration of the deployment and granting of permits for the deployment of renewable energy and the increase in investment in hydrogen and biomethane technologies.

The gap between advanced and developing countries will widen

Higher costs, tighter public budgets, and monetary constraints will exacerbate the divergence between developing and advanced economies in financing the energy transition. In advanced economies, higher construction and private financing costs are likely offset by more significant direct public financing and an initial advantage in essential investment in the energy transition. However, much of the energy transition in developing countries is financed by international aid from advanced economies.

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