Published September 22, 2022 | Version Version 1
Working paper Open

Financing the Polycentric Energy Transition - Definitions, literature review and research gaps

  • 1. Leuphana University of Lüneburg
  • 2. Institute for Ecological Economy Research


The transformation of the energy system will require massive investments in the coming years. The total global investment requirement from 2018-2050 is estimated at 110 trillion US dollars. The magnitude of the investment needs makes it clear: investments are needed by all actors. An increasingly important role is played by citizens. They can invest individually and become prosumers (self-consumers of self-generated electricity) or they can organize themselves in bottom-up models such as Energy Communities, Community Energy or Local Energy Initiatives and jointly finance the investment costs.
But how is financing actually defined? What are the financing instruments? And what are the connections between financing (-instruments) and the energy transition? And what role do bottom-up models play in the energy transition? The aim of this paper is to trace and illustrate the links between financing, energy and the current role of bottom-up models in financing of the energy transition.
Financing can be understood in two different ways. In an energy economic sense, financing means the refinancing of capital employed. This includes energy sector regulations such as energy market design, environmental policies or private contracts. In a managerial sense, financing means the procurement of funds. A distinction can be made here between private and public financing. Not least because of the great importance of the regulatory framework, both aspects - energy policy instruments and financing in the managerial sense - are interrelated: The type and scope of the design of the financial requirement (e.g., the implemented support programs) directly influence the coverage of the financial requirements in the managerial sense. In the context of this study, we provide a brief overview of the various financing instruments. The financing instruments have already been intensively researched. For bottom-up models it emerges that risk-minimizing, transparent instruments such as FITs are advantageous. However, the question arises as to what overall effects on the system the various financing instruments have.
Based on a literature review on energy and financing, four perspectives were identified that have been discussed in past research. These include: micro-level perspectives, policy perspectives ("sustainable finance discourse"), system-level perspectives and literature studying the effects of developments in the energy sector on financial markets ("energy-to-finance"). Each of these perspectives contains elements of all three approaches to the topic of financing (managerial, energy economic, regulatory).
Looking at the bottom-up models, it is clear that considerable changes have taken place in recent years. Both technological progress, which has facilitated decentralized energy generation, and regulatory interventions, such as the Clean Energy Package, have strengthened bottom-up models in recent years. While research on bottom-up models has been conducted in the past in several countries with well established bottom-up models, research needs to be extended to other countries in order to generate transferable results. It is also clear that bottom-up models bring new challenges. One example is a tradeoff between investor risk management and the ability to finance bottom-up models. This also needs to be addressed in further research.