The financing systems of the U.S. are getting a clearer understanding of how to pay for what was previously seen as an oddity on the energy market, said the head of the government program tasked with moving the transition forward.

“What's happened is, is that people are starting to realize that there's a plan behind this commercialization effort,” said Jigar Shah, director of the U.S. Department of Energy Loans Program Office at a CERAWeek by S&P Global panel on March 18.

The panel of financial institutional leaders met to discuss the financial backdrop of the energy transition as the shift, guided by companies and governments around the world, enters into its adolescence.

“It took about 12 years to get the private markets to be fully on board with what we started in 2009,” Shah said. The DOE has billions available for loans to advance green projects, and the department has reached a point where it can be more selective, Shah said. The loan program office currently has about 203 applications for $260 billion in funds.

Globally, other countries have similar programs for driving the transition, noted Christian Bruch, president and CEO of Siemens Energy AG, a company focused on energy projects around the globe.

Bruch described the current financial market for energy transition projects to be “bumpy,” citing Siemens’ $5 billion loss last year from wind energy.

“Energy is still the most fantastic business you can be in, in terms of the opportunities it offers,” he said. “But it also means we do not have the business models today to achieve what we want. And this is, I think, what we have to figure out—how to work with government providing loans.”

Government-backed loans have been crucial for bringing along private equity, Shah said. There are plenty of private firms that want to invest in transitional projects. The problem is the way most companies are used to financing projects.

Many financial firms expect an investment return after four years, while the DOE is looking at more of a 20-year time scale.  

“All of these sectors are frankly quite nervous about first-time projects, but also they can't figure out how to make the numbers work with 100% equity approach,” Shah said. The government allows private firms more leverage to make the investment work.

Shah said what needs to happen to accelerate the transition is a different mindset from the traditional petrochemical sector. Since taking a beating in 2020 with COVID-19, many energy companies have focused so strongly on staying on solid financial ground for their investors that they are ignoring opportunities to grow new energy sources.

A lot of oil and gas companies are acting like “cash cows” for their investors, he said, with a goal of paying capital back through dividends and buybacks.

“They're buying back a lot of shares instead of using that cash to figure out how to dominate areas like carbon sequestration or hydrogen or geothermal,” he said. “They have to negotiate with their investors and figure out how to get the mandate to invest in all of these things.”

All of the panelists added that there is plenty of enthusiasm on funding a transition. The difficulty has been finding a safe formula for moving it forward.

“I think investors recognize that it's probably the biggest opportunity of a lifetime, because what we're doing is building a whole new energy system,” said Marcel van Poecke, chairman of energy of the Carlyle Group.

Shah said he expects the market, with the continued presence of government loans, to stabilize. One of the biggest difficulties the DOE program has had has been the lack of familiarity by both the government and private investors with the new financing process for new technologies.

“That dance was a little bit awkward in 2021,” he said. “I think today that dance is far smoother.”

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