We had the chance to speak to Gerald Koch, Shareholders’ Representative in the Investment Committee at Three Seas Initiative Investment Fund and senior climate change impact professional.

Mr. Koch was a panelist on this year's Energy Panel at the Three Seas Business Forum, which took place in Riga, Latvia, on June 21-22. The full panel can be viewed online. We caught up with him after the panel for more insight on his topic – energy, investment, and climate.

How was your panel – did it go as expected?

It was extremely well organized and professionally prepared. It proceeded much as anticipated and I enjoyed the lively debate which took place.

One of the main topics of this year's event was, of course, the war in Ukraine and its impact on the 3SI region. What else has a major influence on the energy industry today? How exactly does it influence it?

Obviously, the war is a major influence. The second big influence are supply chain problems. And the third influence is financing costs.

The supply chain issues are varied with different impacts for PV (solar) plants and for wind farms.

The construction of PV parks is in particular influenced by the fact that most of the PV equipment comes from East Asia, China, and the congestion of containers and ships.

And with the rising skepticism towards China you can easily also imagine that it could become even more of a problem.

So that's one – supply chain crunch.

On the wind side, the supply chain needs are a bit different. It is the need for construction equipment, e.g. cranes, and for raw materials. To a degree, there is a competition for steel, because either you build a tank or you build a tower. It's more or less the same amount of steel that goes into it. In fact, wind turbines might be even more steel intensive.

Steel is not the only scarce material. It's similar for copper. At least a lot of the wind equipemt is still produced by European OEMs.

There are a lot of plans to build offshore wind farms in the Baltic Sea. But that's being challenged by bottlenecks at services companies or by not having ships for the second half of the decade. You can't build an offshore wind farm if you don't have a ship that builds it.

What implications does this have on the Three Seas fund?

The Three Seas Fund itself is a financial investor – it doesn't face supply chain or other challenges directly. But our portfolio companies do. There are longer lead times for projects and it takes more time to build a project than was anticipated.

We see a slowdown in many areas.

Do you have any idea of how it will be moving forward?

We have bottlenecks in global trade, and the supply chain problems just need to unstick over time.

So, as long as China keeps shutting major ports for four weeks, we'll be in trouble. Because it means ships can't get loaded with crucial equipment. Containers are stuck either empty or full. Ships are stuck too. It's a very physical problem.

Among others the fund has invested in a port company which we expect to play an important role in realizing renewables in the southern 3SI region.

Which country [-ies] from the 3SI region makes the greatest advancements in the energy industry, and what is it doing?

It feels like all countries are now making good progress. If 4-5 years ago it was very difficult to find backing for the renewable energy sector, then now, skeptics have been converted and the industry can leverage the knowhow and experience that's been gained in other countries.

What was the most surprising thing you heard during your panel? What's your opinion on it?

From my perspective and in the energy panel in particular, it is the continued aspiration to build new nuclear plants reflected as a nuclear technology representative on the energy panel.

And why is that surprising?

Because I think nuclear does very little to address today's problems unless the plant is already in operation. If the plant is already in place, and you can just ramp it up or continue to run it, like Germany can, then it addresses urgent problems of power supply. But nuclear has a famous or infamous track record of two things. It's always slower than anticipated. And the costs are also much higher than anticipated.

And that means new nuclear, could possibly contribute to a solution in the 2040s. But that doesn't solve any problems today. And it will cost much more money than deploying renewables and power storage.

From that perspective, I was really surprised that there is any thinking about new nuclear power plants in the Three Seas region at all.

There's been a lot of discussion about nuclear energy in the Baltics recently, and I think that that might also be a contributing factor.

Yeah, but I'm really surprised it is. Because it's not going to be a reasonable solution to any short-term problems.

Plus, as you can see in Ukraine, it's not necessarily a great idea to fight a war around a nuclear power plant, no matter what type of nuclear power plant it is.

And for the Baltic countries which are relatively small places – if anything happens to a nuclear plant, big parts of the country can become uninhabitable.

If there's one thing you'd want viewers to take from this year's Energy panel, what is it?

That regulatory processes and permitting need to be simplified and accelerated.

The length of processes and the complications in any permitting process are really tough. Because even a fairly sizable PV plant can be physically built within three to six months. But the permitting takes anywhere between 3-10 years. And that is obviously too long.

This is a message to the policymakers, really. More ambitions for renewables targets do not help if you do not at the same time enable the implementation of projects in line with policy objectives.

Are there any emerging trends that, in your opinion, will get more attention at next year's panel?

For sure financing costs and inflation. I think most people underestimate the impact this will have.

If you think about financing costs going from one to two to 5%, this will make costs for renewables much higher. And it will make deployment much, much slower.

At the same time, raw material costs could really go up, because steel and electronics are in high demand. Or maybe it's partially blocked because it's being supplied out of China.

Yes, we're deploying renewables for energy independence, but mainly for combating and mitigating climate change. And the speed of deployment is much slower than needed.

So, while everyone will celebrate big ambitions and great targets, I think people will soon find themselves scratching their heads as to why these goals are not being implemented.

We previously discussed the number of jobs created by the renewable energy sector as a major trend.

Yes, I think that the number of jobs is a major point for policymakers.

I feel that policymakers are eternally focused on how important it is to maintain jobs in the coal mining or similar industries, but the simple fact is that renewables, be it PV or wind, create a lot of qualified jobs throughout the country. And because you are deploying them throughout the country you create jobs throughout the country. This point is often ignored, and it shouldn't be.

Unless you train people to take these jobs, you won't have the workers to build and maintain the equipment. There are two opportunities here.

First of all, there is an opportunity to do training for people coming out of other jobs or looking for new options.

And it's really an opportunity for the government to push for the right education programmes to train people to work in the renewable sector.

If you had more time available, what other topics would you have brought up during your panel and why?

Inflation and financing cost, because I think it's going to impact the speed of deployment in the next couple of years. And it's underestimated.

If energy and steel costs go up, it all becomes much more expensive and implies that over time, renewables will deploy much slower and require continuously higher levels of investment.

One of the big advantages that's always cited is that renewable plants don't have significant marginal costs, and therefore, power prices in an all-renewables world should be much lower.

But if the initial investment costs due to financing costs and material expenses are higher, then these plants will need to be confident to capture higher power prices to operate. High inflation, high materials costs and expensive financing costs, destroy some of the advantage renewables plants have for consumers.

And if the industry took to heart this message, what do you think they would do differently or would anything be done differently?

We need to recognise that deployment may be slower because of high financing expense and material cost. While we can be ambitious we need to be conscious that with just ambition nothing is done.

The second element that we need to think about is continuously tightening regulatory targets.

There's a vicious cycle at play. Because we haven't reached today's targets, they'll be more ambitious tomorrow. This could mean that tomorrow, conditions will be made more favourable.

This, in turn, incentivizes investors to hold off until more favorable conditions appear, creating a delay cycle that's detrimental to the overall climate change mitigation ambitions. A realistic plan which is actually implemented is more beneficial than ambitious targets which are not.