COP28 came to a close in December 2023 with the announcement several significant measures. The key decisions will be well known to most; however the following are some of the more noteworthy announcements:
- Enhanced emission reduction targets and actions have been proposed by all major economies, including China, India, the US, the EU, Japan, and others.
- Increased adaptation and resilience support for vulnerable countries and communities, especially small island developing states and least developed countries.
- Mobilization of $100 billion per year in climate finance by 2025, and a roadmap to increase this finance beyond 2025.
- Recognition of the role of sustainable agriculture and food systems, health systems, and nature-based solutions in the response to climate change.
- Strengthened cooperation and innovation on clean energy, carbon capture and storage, hydrogen, and other low-carbon technologies.
- Enhanced transparency and accountability for climate action, with common rules and guidelines for reporting and review.
As with previous COP meetings, these announcements are general statements of principle or impose macro-level obligations on participating countries. However, advisers on large scale infrastructure projects have seen for some years now real impacts from these, and previous COP decisions, on the transactions which we work on.
Financing
In 2021 the OECD announced that the UK, USA, EU, Australia and Canada would no longer use export credit agencies to support unabated coal fired power plants. Further just before COP28, the Net Zero Export Credit Agencies Alliance was announced which aims to reach net zero emissions from recipient projects by 2050. Participating ECAs include UKEF, Export and Investment Fund of Denmark, Export Development Canada, and the Swedish Export Credit Corporation. AIIB has also set an ambitious target of ensuring that 50 percent of overall approved financing by 2025 will be directed toward climate finance.
These changes are very significant, ECA financing has been instrumental in supporting a lot of the large scale infrastructure development in the region and this change in approach will certainly alter the calculations of procurers and developers.
We are also beginning to see a shift in the approach which international lenders are taking to financing carbon intensive projects. 141 banks are now members of the Net Zero Banking Alliance, representing 41% of global banking assets and these banks are committing to "the operational and attributable greenhouse gas (GHG) emissions from their lending and investment portfolios to align with pathways to net-zero by 2050 or sooner".
The appetite of ECAs and international banks to finance carbon intensive project is diminishing and when these projects look to refinance, there may be a smaller pool of interested institutions than expected.
Lock-in
Particularly in the power sector for hydrocarbon based generation projects, we are now seeing developers requiring much more generous positions around lock in. Typically one would expect the lead technical and financial investors to be locked in for around 3 – 5 years post commercial operation, however now developers are requiring shorter periods.
The justification for these changes is the prospect of regulatory or internal policy changes which will require the divestment of more carbon intensive assets. The greater flexibility puts procurers in a difficult position as they no longer can rely on the bidding consortium which they awarded a project to remain part of the project for the initially expected period.
A further consequence of this is that there will be a smaller pool of developer who are willing to take on multi-decade thermal power developments and this will cause procuring entities major headaches in the procurement of their dispatchable generation capacity.
Feedstocks
For power and other energy intensive industries the fact that COP28 has stated for the first time that the world will "transition away from fossil fuels in energy systems" is a signal for major change in the future. This short statement implies trillions of dollars of investment and many years' hard work from governments, developers and contractors. Whilst there is no deadline associated with this transition, the fact that there is a clear statement to move away from hydrocarbons creates great uncertainty for projects with a multi-decade lifespan.
We would expect as a result of this that energy intensive projects will be designed from the outset with more feedstock flexibility incorporated into the engineering. For example we have seen Jindal Shaheed's USD3bn steel plant in Duqm being launched with an intention to use both natural gas and green hydrogen, and in Tunisia the Rades C plant has turbines which can also burn hydrogen.
For large, green field standalone projects these decisions are relatively easy to make, however retrofitting green hydrogen compatibility to existing projects is a challenge due to the nature of hydrogen. For example, pipelines are unlikely to be able to switch from natural gas to hydrogen and the heat rate of hydrogen will be very different from existing fuels.
There will need to be significant amendments made to existing project agreements in order to facilitate any move to hydrogen as a feedstock.
The COP28 consensus makes further incremental movements towards a less carbon intensive future. Whilst there is concern at the pace and breadth of change, the increasingly clear statements around the need to move away from hydrocarbons are already having an impact on how large infrastructure projects are procured.
