SEIFA project – Market potential and constraints in the CEE region
The Sustainable Europe Investment Plan, the investment pillar of the European Green Deal, aims to mobilize at least €1tn in additional private and public capital for renewable energy projects in the next decade 1. The availability of a large-scale pipeline of investable projects is essential for the success of achieving climate and energy targets. However, public authorities, individuals, or businesses often lack the skills and capacity to set up, implement and finance ambitious sustainable energy projects 2. The overall concept of the SEIFA project is to coordinate and support actions for establishing operational financial mechanisms and project aggregators for sustainable energy investments to industrial projects across the CEE region.
A stronger diversification of the financial sector in the CEE region
The CEE region economy is relying almost completely on a bank-based financial system, and it represents a limitation to growth. The capital stock in CEE is less than 50% of the EU average and the investment gap is particularly present in the private sector. In some CEE countries such as Slovakia, almost 75% of the overall investments comes from the public sector that cannot support the increasing need for funding. Consequently, a stronger diversification of the financial sector is necessary 3.
Three factors worsening the investment gap
The shortage of investments is unlikely to be sustainable in the long term without negative implication for growth. Several factors suggest the persistence of this gap in the future:
- The capital endowment of CEE countries remains well below the EU average and the level of investments is still inferior to what was experienced in countries that have successfully graduated from medium to high income. Catching up will require a long period of higher investments.
- Investments are still below the pre-crisis level in a number of CEE countries. It is yet unknown whether that is a permanent or temporary factor, but the crisis has led to an increase in risk premia and Western European countries being more careful.
- The progress in reforms has slowed down or is even being reversed in many CEE countries.
- The current geopolitical situation is amplifying these problems, making it even more necessary to achieve energy security and overcome the need for fossil fuels from foreign countries
A combination of low profitability, low attractiveness of bank loans, and limited own resources have resulted in companies being largely unwilling to shift to renewable energy in their production processes. Integrating finance into climate and energy policy has become a central challenge for government not only in the CEE region but around the world.
The CEE region market potential
Renewable energies implementation in industrial processes is an area with large potential for improvements in the CEE region. The energy service companies may include implementing energy-efficiency projects together with renewable energy projects, in many cases on a turn-key basis. To fully develop the potential equity investments for energy service, companies need to improve their credit rating and help with commercial financing, allowing for larger-scale investments 4. Strong local teams, with substantial capacity on the ground, have demonstrated that they can help an equity instrument to have a strong impact and to achieve its goals, especially in a long-term development perspective 5.
The SEIFA project, thus, makes a strong emphasis on building capacity for and supporting regional and national project aggregators as well as establishing new operational financial mechanism specifically for sustainable energy projects in the CEE region.
1 RE NEWS. Retrieved at 01/08/2020 from: https://renews.biz/59539/investors-shell-out-19bn-on-new-european-wind/
2 COM(2016) 860 final. ANNEX 1 Accelerating clean energy in buildings. Clean Energy For All Europeans
3 Deutsche Borse Group. Trading venues. Retrieved at 1/08/2020 from: https://www.deutsche-boerse.com/dbg-en/regulation/regulatorydossiers/mifid-mifir/mifid-mifir-virtual/mifid-i-to-mifid-ii/market-structure/trading-venues
4 European Investment Bank (2015). State of play – Financial Instruments in Croatia. ESIF fi-compass
5 European Investment Bank (2018), Slovenia Overview. https://www.eib.org/attachments/efs/eibis_2018_slovenia_en.pdf