Averting a 'Gasmaggedon' and securing a just transition; Green infra investment - The public sector cannot do it alone…

It’s good to be back after the summer break, batteries recharged and fresh reports for you in our (hand) baggage so as not to get lost or delayed. It doesn’t always come easy to think of heating and energy security during the sweltering past weeks, but the looming risk of a gas crisis and the risk of energy poverty for many households across Europe (and beyond) is all too real. We’ve analyzed which measures we see as most promising to mitigate the regressive impact of climate policy and to safeguard the green transformation. As we transition into a lower-carbon future, greater private sector participation in the planning, construction and operation of infrastructure can help attenuate public sector constraints in funding the green transition; our take on why an enabling regulatory environment is key for green infra investment. Plus our weekly wrap-up on relevant economic events this week, and a revised risk reports for a batch of countries in Africa/the Middle-East.

Averting 'Gasmageddon' and securing a just transition

Our full assessment can be found here.

The gas crisis threatens to morph into “Gasmageddon”: Energy poverty is an old scourge in the EU, even before today’s energy crisis began. The situation has worsened significantly this year as the invasion of Ukraine has caused gas prices to explode to levels not seen in well over a decade. A dual-pricing scheme could address the shortcomings of the counter-measures implemented so far.

Exploding gas prices are aggravating an already dire situation: the number of households in energy poverty in the EU28 has increased by more than +50% until June 2022. But worse is still to come: Looming gas shortages could drive retail prices up by 200%, tripling the share of German households struggling to pay energy bills to 8.4% by the end of the year. Implemented counter-measures such as tax cuts and price caps have serious shortcomings, not least in curtailing incentives to save energy. A dual-pricing scheme could be a better approach. This would allow each household to buy a pre-defined quantity of energy to power its home at an administered price, while all further energy needs have to be bought at market price.

Beyond this first layer of ad-hoc crisis measures, a new social contract is needed to mitigate the regressive impact of climate policy and to safeguard the green transformation. The best solution would be the introduction of a new benefit, a type of “energy money” but with a twist: the payment (full or smaller amounts) is made to a so-called “energy savings account”, i.e. the amounts are not consumed but (partially) saved; these savings are topped up by the state. In this way, two birds can be killed with one stone, resulting in behavioral changes to use less energy and the build-up of financial reserves by low-income households.

Green infrastructure investment: The public sector cannot do it alone

The full report can be found here.

The war in Ukraine underscores that scaling up investment in climate-smart infrastructure is necessary to ensure energy and food security as we transition to a lower-carbon future. Well-planned green infrastructure projects not only raise potential output growth and enhance resilience but can also help reduce the carbon footprint that comes with economic progress.  

However, current public investment plans alone will not be sufficient for strategic rebalancing toward climate-friendly infrastructure. Important investment gaps remain, especially in electricity and networks (in Europe ranging from the 1.6% and 1.3% of GDP per year in Spain and France, respectively, to 0.6% and 0.4% in Italy and Germany), where investment needs are the largest. However, public investment can be a catalyst for greater private participation, especially in green infrastructure. We estimate that a one percentage-point increase in public investment, private investment rises by 0.51pp. A green crowding-in “multiplier” is even larger.

Greater private sector participation in the planning, construction and operation of infrastructure can help mitigate public sector constraints in funding the green transition. Life insurers and pension funds in particular will be critical to mobilizing private capital. Infrastructure investment can bring predictable yields and stable cash flows, providing a natural match to their long-term liabilities.

Mobilizing long-term finance will require creating an enabling regulatory environment for green infrastructure investment. Our findings based on a comprehensive dataset of project loans suggest sufficient scope for lower capital charges to be applied to infrastructure investment, which have a more favorable risk profile than corporate debt. Especially “green projects” seem to default only half as often over a 10-year period as “brown projects”, with a greater difference in emerging markets relative to advanced economies. Capital charges that recognize the declining downgrade risk of infrastructure debt over time could potentially free up costly capital in an environment of monetary tightening; this would help mobilize resources to finance infrastructure—thus promoting the green transition.

Weekly wrap-up

The war in Ukraine underscores that scaling up investment in climate-smart infrastructure is necessary to ensure energy and food security as we transition to a lower-carbon future. Well-planned green infrastructure projects not only raise potential output growth and enhance resilience but can also help reduce the carbon footprint that comes with economic progress.  

However, current public investment plans alone will not be sufficient for strategic rebalancing toward climate-friendly infrastructure. Important investment gaps remain, especially in electricity and networks (in Europe ranging from the 1.6% and 1.3% of GDP per year in Spain and France, respectively, to 0.6% and 0.4% in Italy and Germany), where investment needs are the largest. However, public investment can be a catalyst for greater private participation, especially in green infrastructure. We estimate that a one percentage-point increase in public investment, private investment rises by 0.51pp. A green crowding-in “multiplier” is even larger.

Greater private sector participation in the planning, construction and operation of infrastructure can help mitigate public sector constraints in funding the green transition. Life insurers and pension funds in particular will be critical to mobilizing private capital. Infrastructure investment can bring predictable yields and stable cash flows, providing a natural match to their long-term liabilities.

Mobilizing long-term finance will require creating an enabling regulatory environment for green infrastructure investment. Our findings based on a comprehensive dataset of project loans suggest sufficient scope for lower capital charges to be applied to infrastructure investment, which have a more favorable risk profile than corporate debt. Especially “green projects” seem to default only half as often over a 10-year period as “brown projects”, with a greater difference in emerging markets relative to advanced economies. Capital charges that recognize the declining downgrade risk of infrastructure debt over time could potentially free up costly capital in an environment of monetary tightening; this would help mobilize resources to finance infrastructure—thus promoting the green transition.

Country risk reports

We’ve recently updated our assessments for the African / Middle-East countries:

Congo (Republic of): Rated D4 (high risk for enterprises), as caught in a low growth-high debt loop.

Israel: Rated BB1 (low risk), with strong economic growth but continued political uncertainty in 2022-2023.

Mauritius: Rated BB2 (medium risk), as debt-sustainability concerns require monitoring.

Tanzania: Rated C3 (sensitive risk), yet showing some resilience to global shocks.

Uganda: Rated C3 (sensitive risk), as the gradual recovery after Covid-19 continues.