Although renewable energy investment will exceed US$3 trillion in 2024, exceeding spending on oil, gas and coal for the first time, financial constraints are delaying many projects.

“As the era of cheap borrowing comes to an end, certain kinds of investment are being held back by higher financing costs,” the Paris-based International Energy Agency wrote in its World Energy Investment 2024 report.

Lease financing, a mainstay of the transport equipment market, will unlock financing for projects that might struggle to find conventional support, according to Samuel Sun, president of the Asia Development and Investment Bank, a regional policy bank with offices in Hong Kong and Malaysia.

ADIB has just formed an alliance with DeepGreenX, an AI provider offering project management and carbon trading services, to invest $140 billion into lease financing for alternative energy during the next five years.

Leasing made possible the modern auto and aircraft industries, and the ADIB alliance to DeepGreenX may establish critical mass in the green energy equipment market.

ADIB’s $140 billion commitment might finance a much larger volume of equipment sales because equipment leases can be repackaged into asset-backed securities and resold to investors. Securitization of auto leases is a $30 billion a year market in the United States, while the aircraft lease securitization market is perhaps half that size.

Large government subsidies haven’t been sufficient to unblock renewable energy projects in Europe as well as the Global South, largely because the upfront costs of equipment are prohibitive. Lease financing allows project operators to pay for the use of equipment out of operating cash flow, rather than raise the whole capital amount in advance.

The ADIB-DeepGreenX approach could have a major impact on the global volume of project finance. Coherent Market Insights, an India-based market intelligence and consulting firm, wrote earlier this year, “The global solar lease service market size is estimated to be valued at $14.84 billion in 2023 and is expected to reach $49.26 billion by 2030.” The ADIB program is an order of magnitude larger than the firm’s projections for the lease market.

The right kind of finance can have transformative effects on a major market. Before 1983, home mortgage financing in the US was the province of more than 11,000 thrift institutions, constrained by their local circumstances.

Cash-rich savers in the Northeast of the US couldn’t lend to cash-strapped homebuyers in the Sunbelt. Securitization of mortgages mobilized trapped savings and propelled the US into a housing boom.

Lease financing has special advantages for green energy equipment, according to Samuel Sun, a project finance veteran who serves as ADIB’s president.

“60 to 70% of the cost of a project is in equipment,” Sun said in an interview. “That equipment cost puts a lot of pressure on the investor and the project owner. We are trying to use lease financing to solve that kind of problem. That’s the future model of green energy business. It’s the best way to support green energy projects using cash low. There are successful models in the car and aircraft industry.”

“We just signed an agreement with Saudi Arabia,” ADIB’s Sun explained. “They will buy 100,000 Chinese cars, mainly EVs, for government and public use. They will lease them rather than buy them, so the assets remain on the books of the car manufacturers. We use Central Bank Digital Currency to buy the cars, tokenize the assets, pay the manufacturers, and ship the cars to Saudi Arabia. We receive the monthly lease payments for a five-year term.”

The advantage to the car user is that the resale value risk remains with the car manufacturer. Due to rapid improvements in technology, the resale value of a five-year-old EV is extremely low.

The car manufacturer has no problem owning that risk because it stems from improvements in EV technology that produce more profits for the manufacturer. By removing the resale risk from the car user, the car manufacturer increases sales.

Digital technology can accelerate the securitization of leased assets and increase capital turnover, according to ADIB’s Sun. Securitized assets can be tokenized with Real World Asset (RWA) technology. ADIB anticipates that trading in asset-backed securities based on green equipment leases will clear in Central Bank Digital Currencies (CBDC’s), enhancing liquidity and investor interest. 

Sun expects investment products based on real-world assets to be tradable as early as the first quarter of 2025, with a product offering in Hong Kong.

“We can also use this system for green energy equipment,” Sun said while noting the leasing model can reduce financing costs substantially. “Normally the effective financing rate for auto leases is 16% to 18%. Our tokenized RWA model can reduce effective leasing interest to 5%. Investors in our lease-based token can obtain a return of 10%.”

Conventional cryptocurrencies like Bitcoin have no inherent rate of return. Investors who own Bitcoin hope that its scarcity will lead to a price increase. Tokenized RWAs, though, are based on real-world assets that generate a rate of return, like equipment leases.

As distributed ledger technology makes RWA investing available to a broad public, assets denominated in CBDCs with an inherent rate of return may compete successfully with Bitcoin and other popular crypto vehicles.

ADIB has taken a 36% stake in Deep Green X at a post-investment valuation of $58 billion. DeepGreenX provides several AI-based services for green energy, including an AI platform for engineering, procurement and construction (EPC) to optimize project efficiency. DeepGreenX will also provide AI technology to create securitized assets based on green energy leases and other real-world assets.

According to a company release, “DeepGreenX has established itself as a leader in various sectors, securing European projects on national virtual grid construction, photovoltaic power plants, grid energy storage centers, wind and microgrid equipment manufacturing, computing centers, and micro-nuclear power services, as well as US-based stored energy battery production.”

Barclay Knapp, CEO of DeepGreenX, said in a company release: “We expect this initiative to open crucial pathways for green energy industries to expand globally, overcoming a status quo where cross-border capital and standalone profitable business models have been in scarce supply. Just as lease financing transformed the auto and aerospace industries, we believe our new fund will bring similar breakthroughs in the alternative energy sector. Alongside ADIB, we are building an international capital and data-driven profitability platform of unparalleled power and scale that is designed to prevail over these legacy challenges.”

DeepGreenX’s Knapp started his career building some of the first cellular phone networks in the United States. The first cell phones were prohibitively expensive and conventional wisdom said that ordinary users would balk at the cost.

“Leasing removes the entry barrier,” CEO Knapp said in an interview. “The minute we could finance phones, it took off; people who couldn’t shell out $1,500 for a phone would pay $150 a month to lease one.” He expects the same transformational impact from lease financing for green energy equipment.

DeepGreenX’s project management software is one of several AI applications. Applying AI to measuring carbon credit may be the most important.

“It’s the Wild West out there in carbon measurement. It isn’t that you have no law, but that you have laws everywhere in a fragmented market for carbon credit,” Knapp Said. “We can do precise measurement and verification. And once you have verification, digitizing that and turning it into a financial product is straightforward using AI and blockchain technology. That cuts through the confusion and maximizes value for carbon credits.”

Follow David P Goldman on X at @davidpgoldman