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Responsible Investment New Thinking for Financing Renewable Energy

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Responsible Investment New Thinking for Financing Renewable Energy Strategic research partner Knowledge partner Responsible investment New thinking for financing renewable energy Deloitte | Responsible investment | New thinking for financing renewable energy Contents 04 05 06 07 Foreword Acknowledgments Executive summary Introduction 08 16 19 23 Regulatory, economy and Innovative financing Industry and practitioners’ Thought leaders’ policy support alternatives perspective perspectives 27 48 49 Appendix A: Country cases Appendix B: Abbreviations Appendix C: Thought I. MENA: Saudi Arabia, UAE, leadership reports Bahrain II. Asia: Malaysia, Pakistan III. Europe: Kazakhstan, Turkey and UK 03 Deloitte | Responsible investment | New thinking for financing renewable energy Foreword We are delighted to announce the release This study presents an analysis of the of our sixth Deloitte Islamic Finance report main drivers and factors for building the in a series of publications aimed at business case of a new thinking to finance engaging and educating industry sustainable development in the energy stakeholders’ about the opportunities for and renewable energy sectors. corporates, governments and investors and its value proposition as a catalyst for Our discussions with energy practitioners, economic growth in the Middle East and policy-makers, Islamic Finance beyond. professionals and thought leaders have produced interesting consensus over the This industry study comes at a time when debate on whether Islamic Finance can Islamic financial services are increasingly play a major role in financing sustainable playing a crucial role in financing development and energy projects in core development and infrastructure projects markets where it operates. And, if so, how in the Middle East. Needless to say, this can Islamic Finance leaders capture Dr. Hatim El Tahir, FCISI industry creates numerous opportunities opportunities in the renewable energy Director, Islamic Finance Group for both governments and private sector industry and take a lead as a responsible Leader, Deloitte Middle East corporates to diversify their sources of investment platform in the development Islamic Finance Knowledge capital and project funding. and economic growth of societies? Center (IFKC) The study examined energy regulatory The development of green Islamic Finance frameworks in eight countries and looked in Asia and the Middle East, for example, at the renewable energy initiatives and would arguably create an opportunity for government support on those countries both governments and corporates to and assessed the size and patterns of diversify their investment capital and investment projects in KSA, UAE, Bahrain, provide a new asset class featuring a Malaysia, Pakistan, Turkey, Kazakhstan and balanced risk-sharing element for issuers, the UK. and fixed-income returns for investors. Islamic Finance is no doubt a key We are pleased to share with you this contributor to economic growth in almost report, based on original research all of the countries of the Middle East, and combined with the insights and first-hand the industry, supported by international experience of many of Deloitte’s leading multilateral development banks (MDBs), practitioners and industry experts. We has for several decades helped raise hope you find this report insightful and capital for numerous infrastructure informative. projects around the world. 04 Deloitte | Responsible investment | New thinking for financing renewable energy Acknowledgments We extend our thanks to the respondents • Michelle Melki, Senior Consultant, Industry supporters of our online survey questionnaire and Monitor Deloitte Deloitte professionals who contributed to • Sakinah Jamil, Senior Manager, Risk this report. We are particularly grateful to Advisory the industry thought leaders who • Sajida Ali, Business Analyst, Islamic generously offered their time and gave Finance Group insightful comments on the report. Their • Rana Thoba, Energy & Resources, participation was instrumental in Industry Coordinator identifying the key factors that may drive interest in green Islamic Finance. In Industry contributors & associate particular, this group included Stella Cox, researchers CBE, Managing Director, DDCAP Group; • Professor Yelena Kalyuzhnova, Vice Dean Professor Simon Archer, Visiting Professor (International), Henley Business School, ICMA Center, HBS University of Reading; Director, the Center for Euro-Asian Peter Casey, Advisor, Advisory Board Studies, University of Reading. Member, IFSB, ESCA Daud Vicary Abdullah, • Dr. Irum Saba, Assistant Professor, President & CEO, INCEIF; Sohail Jaffer, Center of Excellence in Islamic Finance Deputy CEO, FWU Takaful and Omar Shaik, (CEIF), Institute of Business Executive Board Member, Islamic Finance Administration, Pakistan. Council UK. • Dr. Nihat Gumus, Financial Sector Specialist, Center for Applied Research Report contributors in Finance (CARF), Bogazici University. Deloitte project team • Dr. Alaa Alaabed, Chief Research Officer, • Dr. Hatim El Tahir, Director, Islamic Finocracy. Finance Group • Mohamed Isa, School of Business and • Sultanbek Khunkaev, Senior Manage, Economics, Loughborough University. Monitor Deloitte 05 Deloitte | Responsible investment | New thinking for financing renewable energy Executive summary An increasing emphasis on energy Policy development and regulation efficiency has given rise to a new way of • Despite the achievements made over the thinking in relation to alternative energy past few years, there is still significant sources. Both regulatory regimes and room for improvement in regulation to financial institutions have taken steps to accommodate for Islamic Finance and of the survey participants agree address opportunities and challenges to promote the renewable energy industry. on the availability of a defined finance the renewable energy industries. • Nearly half (48%) of the survey renewable energy strategy in respondents indicated that the Gulf their market For example, the GCC states have Cooperation Council countries, Jordan, established ambitious energy efficiency Egypt and Lebanon have the most programs and set clear targets in desirable regulatory and government renewable energy strategies. These commitment to renewable energy. strategies have created opportunities for the private sector, financial institutions, as Innovative Islamic financing well as energy manufacturers, operators • Islamic financial structures will broaden believe the defined renewable and distributors. equity capital and provide new risk- energy strategy is in progress return profiles for project funding and Our study reveals a number of challenges investors. associated with these opportunities, which • Three-quarters (75.6%) of respondents investors and governments need to believe that there is a need for address to help make energy efficiency broadening equity capital in energy and programs work. renewable energy investment through Islamic Finance. The challenges revealed in our report, • Industry regulators and standard-setters analysis and responses from industry will need to promote and design new, practitioners are summarized below: innovative green investment structures • Fast-changing industry technology and and the necessary documentation falling cost of renewable energy. process to promote these structures • Inefficient procurement practices, amongst investors and governments. regulations and laws. • Political instability in some parts of the Government support and awareness Middle East. • Governments and industry stakeholders • Lack of consumer awareness of the will need to work more closely to design benefits of renewable energy. strategies and implementation methods • Lack of education in funding through for renewable energy and funding Islamic Finance. requirements. • Investors looking for high and quick • 61.7% of the survey participants agree returns (renewable energy technology on the availability of a defined renewable is expensive). energy strategy in their market, while • Conflicts with oil and gas revenues. 28.3% believe it is in pro gress. Our report also identified three broad game-changers for Islamic Finance to tap into the emerging real economy sector opportunities. These are: 06 Deloitte | Responsible investment | New thinking for financing renewable energy Introduction The global energy landscape will Regulatory and policy support has Financing decisions of corporates have experience a major transformation in the returned as a major driver for the also been affected by the rising need for coming decades, with renewables and renewable industries in the countries we funding infrastructure projects in Europe, natural gas the big winners in the race to examined for the purposes of this report. the US, Asia, Africa and the Middle East. meet energy demand growth until 2040, Financing alternatives have been This is evident in the growth of the green according to the latest edition of the supported by multilateral development bond market in many parts of the world. World Energy Outlook, the International banks (MDBs) and energy-specialized Energy Agency’s (IEA) flagship publication. agencies and industry groups, and have Green or socially responsible investment helped make the sector more attractive to (SRI) around the world is perceived as The IEA reported that a cumulative US$44 the private sector. complementary to the principles of Islamic trillion in investment is needed in global Finance, which advocates financing and energy supply, 60% of which goes to oil, gas, and coal extraction and supply, including
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