How do we finance and stimulate the transition?
In 2017, Sweden adopted a climate policy framework. This consists of a climate law, climate goals, and a climate policy council. The long-term goal for Sweden is to have no net greenhouse gas emissions into the atmosphere by 2045, and to achieve negative emissions thereafter.
In my previous analysis, I concluded that with the expansion of wind and solar power, we will also need to develop energy storage solutions to reduce the inherent volatility of these energy sources and balance consumption with production. The increased demand for energy is driven by the rapid electrification that accompanies the transition from fossil fuels to fossil-free alternatives. All of this will of course, require financing - at a time when the cost of money has skyrocketed and we are in a recession.
We must realize that achieving our 2045 goal will require significant investments in Sweden. So the question is, how will this financing be done? This question is significant and is likely to determine the pace of the transition. If we zoom in on the financing needs of the electricity market alone, we can look at Sweco's recent report, which states that investments of SEK 945 billion will be needed in the electricity grids by 2045.
A prerequisite for activating this financing is for capital to fully understand that the transition is not just about costs but also about economic growth. Sustainability is a prerequisite for profitability. That's why we now see owners and companies quickly investing in sustainable solutions, whether it's mega-projects like H2 Green Steel or Jämtkraft, which have invested in battery systems integrated into hydropower plants (improving turbine operation). Financial institutions are now showing a clear direction in this regard. So is private capital. The realization has come: it is by transitioning that we create future profitability.
A key component for a functioning energy system is what is usually referred to as the balancing market, which aims to maintain balance between production and consumption. The responsibility for this lies with the Swedish transmission system operator (TSO) Svenska kraftnät. To succeed in this, they purchase support services in various ways to maintain balance in the system.
For Stella Futura, which works with energy storage and battery systems, as well as smart financing, there are great opportunities to offer solutions that have both climate and societal benefits while being profitable. Therefore, we are developing financial solutions that mean the client, the one acquiring the solution, does not need to finance it themselves. The client utilizes the solution, and by connecting it to Svenska Kraftnät's balancing market, there are revenues that can cover the financing. So far, Stella Futura has completed over 80 installations, many of which are based on these types of "battery as a service" solutions.
If we want to accelerate this development and fully take advantage of the increased wind and solar energy, the financing possibilities need to be improved. As banks and other financiers need frameworks and predictability to make long-term investments, these need to be improved and clarified - permits need to be granted more quickly, and the predictability of revenue streams needs to be clearer. Those of us working in the industry have a responsibility to constantly educate all actors in our ecosystem and work just as much on business development as on technology. For example, we have been working with one of our major banks for a long time to find solutions for leasing stationary batteries, and a leasing agreement was signed a few months ago.
Since much of the risk in new business models and products/services is involved, the question is whether the Swedish pension capital could play a major role here. All the capital in our pension funds is ultimately aimed at being managed long-term. Now we are facing a green transition where future growth will be in the fossil-free and renewable sector. Imagine if pension capital could find ways to bridge the uncertainty that sometimes exists in these projects. It could further accelerate the development.
However, it is not only up to private capital to be responsible for this transition. No, around us, in leading industrialized countries, we see how governments are using the tax system to accelerate sustainable development. This is also happening in countries that we do not normally associate with tax policy incentives. In a market economy like Sweden, the toolbox needs to be expanded with policy instruments that are not dependent on public application processes and budgets.
The United States is an example where they use the tax system by providing a temporary tax deduction for companies' climate-related investments. Germany and France are introducing similar tax technical solutions. However, Sweden, which traditionally uses tax mechanisms to stimulate development, does not to the same extent. It could further boost green investments. Instead, subsidies are given in the form of electricity support, which is counterproductive and does not create incentives for industry and business to transition.
President Joe Biden's Inflation Reduction Act (IRA) increases the general corporate income tax rate by one percentage point and provides a tax relief to all those who invest in energy transition equivalent to 25-35 percent of the total investment. IRA also gives investors who do not otherwise pay income tax a cash payment from the tax authorities equivalent to the tax deduction they would receive if they were a company. The tax relief for hydrogen production, aviation fuels, solar cells, and especially batteries, is 50 percent or higher. In addition, the tax deductions in IRA are transferable, which means that project developers and entrepreneurs can sell or pledge them in exchange for cash.
France has announced that it will introduce tax incentives corresponding to 25-40 percent of the production companies' total investments in, among other things, renewable energy, hydrogen, batteries, and heat pumps. German Economy Minister Robert Habeck has given similar signals.
Sweden should be more proactive. Wouldn't it be a good idea to do a "IRA"-like reform with a general, temporary tax deduction for companies' climate-related investments? Moreover, this tax deduction, like the American solution, should be transferable so that companies can sell or pledge the credit in exchange for cash. If we are to reach our 2045 goal, we need to create better conditions for financing. This can accelerate the green transition.
Ulrika Tornerefelt
CEO, Stella Futura AB
