Six climate finance themes out of Lima that will shape 2015

Barbara Buchner, December 17, 2014

 

Government representatives from around the world met last week in Lima, Peru to negotiate global emissions reductions as part of the annual UNFCCC Conference of Parties (COP20). Once again, the need to mobilize more investment in a low-carbon, climate-resilient economy was an important point of debate.

Climate Policy Initiative’s analysis is playing a key role informing serious discussion on climate finance and finding solutions to increase the effectiveness and scale of climate finance investments. Here are the themes we saw at this COP that we feel will shape climate finance action and debate over the next year.

Entrance-to-Lima-Cop20

Entrance to Lima COP20

1. Finance is flowing but it’s not enough.

The COP20 High-Level Finance Ministerial began with a presentation of the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014. This research, which draws on Climate Policy Initiative’s work to track climate finance, tracked between 340 and 650 USD billion in annual investment. As CPI has shown, this figure is far short of the need.

Global Landscape of CLimate Finance needs

Annual climate investment compared to the need

2. Governments voiced support for innovative initiatives that unlock private finance.

CPI’s analysis shows that while public finance often provides the conditions for climate investment to take place, private investors contribute the largest share of finance, year after year, in countries across the world. It also shows that public finance alone will not be enough to meet the investment need. Several government representatives spoke of the need to find innovative ways to unlock increased private investment. Representatives from Denmark, the Netherlands, the UK, and U.S. used their time on the COP plenary floor to voice support for one such initiative – The Global Innovation Lab for Climate Finance – which CPI supports as its Secretariat, advancing innovative financial instruments to drive significant additional investment in developing countries.

3. The Green Climate Fund reached more than $10 billion in commitments – good progress ahead of COP21 in Paris next year.

Following the pledges from Japan, the U.S. and UK over the last weeks, Australia, Belgium, Mexico, Peru, Colombia, Austria, Spain, Norway, and Canada helped the Green Climate Fund reach its $10bn goal at this COP with new pledges. These pledges to help developing nations deal with climate change are good news. They increase the chances for a global climate deal next year in Paris, and if spent wisely, can supplement domestic public resources where they fall short and drive billions in private investment toward low-carbon and climate-resilient growth.

4. Finance for adaptation is becoming a higher priority.

The Green Climate Fund restated its intention to use half of its finance for adaptation purposes. Germany also stepped up on adaptation, committing an additional 50 million euros to the Adaptation Fund. CPI’s work shows that while adaptation finance grew by 12% last year, it still falls short of the need.

 5. Tracking of climate finance continues to improve.

Following on recommendations from the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014, many countries used their time on the COP20 plenary floor during the Finance Ministerial to talk about the need for an agreed-upon definition of climate finance and improved tracking systems. CPI’s analysis supports this need and shows that climate finance tracking can support countries’ attempts to formulate better policies.

 6. Economic growth and combating climate change can go hand in hand.

Last but not least – there was a growing sense that acting on climate can also spur economic growth at this year’s COP. Many experts have documented that climate change and the resulting extreme weather would have huge social and financial costs to the global economy. This year, the New Climate Economy report showed that measures that reduce climate risk can not only help to avoid a shrinking economy in the future, but can also help grow the economy, today.

 FelipeCalderon-speaks-about-New-Climate-Economy-from-COP20

President Felipe Calderón speaks about the New Climate Economy report from the COP20 plenary floor

Going into 2015, one big-picture lesson is clear – climate finance will continue to be an important focal point for those working to respond to climate change. CPI will continue to work to provide analysis that supports these discussions.

Read More

Tracking climate finance can support better policy in developed and developing countries

Jane Wilkinson, December 12, 2014

 

Climate finance tracking is one of the topics under discussion at the international climate negotiations taking place in Lima this week. Our work on tracking climate finance for countries like Germany and Indonesia and in upcoming reports for organizations has demonstrated the benefits of mapping climate finance flows. This video shares some of the insights from the recent Landscape of Public Climate Finance in Indonesia we carried out with the Ministry of Finance in Indonesia and describes how it is supporting Indonesian policymakers to develop more effective tracking systems and policies.

Read More

3 Reasons for Measured Optimism about Climate Finance

Barbara Buchner, December 4, 2014

 

A version of this blog first appeared on Responding to Climate Change: http://www.rtcc.org/2014/11/21/three-reasons-to-be-optimistic-about-climate-finance-flows/

This year’s UN climate talks opened in Lima earlier this week and for those who hope the world can avoid dangerous climate change, some major recent announcements have given cause to celebrate. Last month, the world’s two largest emitters – the U.S. and China – reached a deal to tackle emissions. Then, the U.S., Japanese, and UK governments joined others by pledging billions to the Green Climate Fund to help developing nations deal with climate change. These political announcements are clearly timed to inject momentum into the negotiations taking place in Lima. But key questions remain unanswered: What do these financial pledges mean in terms of existing investment in a low-carbon economy future? How should money be spent? And are we on the right track?

At Climate Policy Initiative, our analysis of global climate finance flows helps to identify who is investing in climate action on the ground, how, and whether investments are keeping up what is needed to transform the global economy. We have just released the latest edition of our Global Landscape of Climate Finance report. It shows global climate finance has fallen for the second year running and we are falling further behind the level of investment needed to keep global temperature rise below two degree Celsius – but reveals some positive news as well.

Firstly, that nations around the world are investing in a low-carbon future in line with national interests. Last year, climate finance investments were split almost equally between developed and developing countries, with USD 164 billion and USD 165 billion respectively. With almost three-quarters of total investments being made in their country of origin, the majority of climate finance investments are motivated by self-interest—either for governments or businesses. Motivations include increasing economic productivity and profit, meeting growing energy demand, improving energy security, reducing health costs associated with pollution, and managing climate risk including investment risks.

Secondly, that getting domestic policy settings right offers the best opportunity to unlock new investment. When policy certainty and public resources balance risks and rewards effectively, private money follows. In 2013, private investments made up 58% of global climate finance with the vast majority (90%) of these being made at home where the risk to reward ratio is perceived relatively favorably. Addressing the needs of domestic investors offers the greatest potential to unlock investment at the necessary scale. This is not to say that international and domestic public policies, support and finance don’t have complementary roles to play. It is significant, for instance, that almost all of the developed to developing country finance we capture in our inventory of climate finance flows came from public actors. But ultimately, it is getting domestic policy frameworks right, with international support where appropriate, that will drive most of the necessary investment from domestic and international sources.

Thirdly, that despite a fall in overall investment, money is going further than ever. While investment fell for the second year running, this is largely because of decreased private investment resulting from falling costs of solar PV and other renewable energy technologies. In some cases, deployment of these technologies is staying steady or even growing, even though finance is shrinking. In 2013, investment in solar fell by 14% but deployment increased by 30%. Technological innovation is reducing costs and because of this renewable energy investments in some markets are cheaper than the fossil fuel alternatives, particularly in Latin America. Achieving more output for less input is one of the basic foundations of economic growth, so this is great news. From solar PV, to energy efficiency and agricultural productivity, growing numbers of low-carbon investments are competing with or cheaper than their high-carbon counterparts. This despite a highly uneven playing field in which global subsidies to fossil fuels continue to dwarf support for renewables and where carbon prices do not reflect the true costs of emitting CO2.

So what do our findings mean for the recent China/U.S. deal and Green Climate Fund pledges? Increasing political pressure on other countries to keep pace in terms of their domestic action and international commitments is an encouraging sign as the deadline nears for finalizing a new global climate agreement in Paris just one year from now. Reaching a global accord offers the best prospect for tackling climate change. But we must recognize that international agreements are themselves, guided by collective national interests. There is clear recognition that international public resources should complement and supplement national resources where these are insufficient. But if we are to bridge the investment gap they should also be focused on finding ways to lower costs, boost returns and reduce risks for private actors. Public finance alone will not be enough to meet the climate finance challenge.

Many private investors are ready to act. In September, over 300 institutional investors from around the world representing over $24 trillion in assets called on government leaders to phase out fossil fuel subsidies and implement the kind of carbon pricing policies that will enable them to redirect trillions to investments compatible with fighting climate change. Businesses and citizens are investing, and technological innovation means more and more investments are making economic and environmental sense. Accompanying innovation with policy, appropriately targeted finance and new business models can build the momentum and economies of scale to make the low-carbon transition achievable. The low-carbon transition isn’t just a way of reducing climate risk, it also represents a huge investment opportunity.

Read More

Geothermal: Risks shouldn’t overshadow benefits

Valerio Micale, November 12, 2014

 

Geothermal is competitive. Its low cost per unit of energy generated, when compared with other renewable energies and fossil-fuelled generation make it an attractive option for policy-makers in developing countries to meet growing energy demand.

It is also compatible with energy grid needs. Its high capacity factor and its ability to continuously feed into the energy system makes it particularly suitable for reliable baseload production while its potential flexibility makes it suitable to respond to fluctuating supply from technologies such as wind and solar PV depending on a power grid’s needs.

Geothermal costs compared to other energy technologies Cost comparisons between energy technologies show that geothermal requires high up front investment but can provide low cost power

However, risks in the early exploration and drilling phases, combined with high investment costs, have slowed the scale up of the technology and limited the private investment that is needed if geothermal is to play a bigger role in the energy system. Climate Policy Initiative’s (CPI) recently published analysis of global geothermal markets and financing models finds that public finance plays the most prominent role in financing geothermal. 76-90% of all project investments utilize some aspect of public debt or equity support, as well as support instruments.

Read More

Video: New business models for a low-carbon electricity system in the U.S. and Europe can save billions

CPI Staff, November 10, 2014

 

New finance and business models for a low-carbon electricity system in the U.S. and Europe can save consumers, investors, and taxpayers billions. Watch the video or read the analysis to learn more.

Read More

International public finance supports South Africa’s deployment of concentrated solar power

Anja Rosenberg, August 21, 2014

 

Among emerging economies, South Africa has particular potential for solar power because of the country’s excellent solar resources. While fossil fuel power generation currently provides over 90% of its electricity, South Africa is seeking to reduce its reliance on carbon-intensive coal-based energy.

The Government of South Africa (GoSA) has developed policies to transition to a clean and sustainable energy system. In order to exploit its abundant renewable energy resources, South Africa has adopted an ambitious plan to add 20 GW of new renewable power generation capacity by 2030 (almost 50% of current generation capacity). Of this, 3.3 GW is expected to be from concentrated solar power (CSP). This is approximately equal to the current installed capacity of CSP worldwide.

CSP: A promising technology for low-carbon energy systems
CSP is a promising energy technology for low-carbon energy systems as, in combination with thermal storage, it can store solar energy in the form of heat to deliver clean power when it is most needed. It offers a real chance to act as a viable substitute for coal-based energy. Despite its potential, CSP technology lacks a long deployment track record and still comes with high technology risks, which translate to higher financing and overall costs. This means that most projects need public assistance in the form of low-cost public finance or political support to be bankable.

South Africa’s state-owned electricity utility Eskom is currently planning to install its first CSP power plant in Upington in the Northern Cape region of South Africa. In a recent Climate Policy Initiative (CPI) case study, conducted with support from the Climate Investment Funds Administrative Unit, CPI examined this plant to understand how public support helped advance this project. It also looks at the financial and technological challenges for Eskom and the reasons behind the extended project development time.

Eskom CSP plant in Upington now back on track
Eskom CSP remains one of the most ambitious CSP power tower projects under development anywhere outside of the U.S. with respect to its technology choice, capacity and storage. After several years in development, the project was placed on hold in 2009 during the global recession, largely because reduced access to capital and increased pressure from GoSA to improve the country’s energy security at low cost led Eskom to reassess its investment priorities.

Read More

With new market structures and business models, consumers can help states reduce carbon emissions

Patricia Levi, July 8, 2014

 

On June 2, in a historic move towards addressing CO2’s climate impacts, the Environmental Protection Agency (EPA) released its Clean Power Plan proposed rule for regulating carbon emissions from existing power plants. The regulations encourage states to take advantage of a range of CO2-reducing methods, like energy efficiency and renewable energy, rather than requiring all emissions reductions to occur at the power plants themselves. Electricity consumers can play an important role in states’ plans to meet the regulations, if regulators can take advantage of all the resources they can provide. Fully utilizing consumers’ electrical resources may require the help of new market structures and business models.

The value that individuals, households, and businesses can provide to the electric grid could be quite significant. Technologies such as rooftop solar panels, “smart” thermostats, more efficient appliances, and electric vehicles, especially when combined with smart meters and other smart grid technologies, could enable consumers to reduce the demands on the grid at peak times and help absorb excess generation from renewable generation when demand is low. As CPI discusses in our Roadmap to a Low Carbon Electricity System, many factors are already conspiring to make these consumer-level resources more valuable and accessible.

Wise use of these so-called distributed energy resources could replace some of the fossil-fuel power plants that would otherwise be needed to balance a renewable-generation-heavy grid, creating cost-effective emissions reductions. They could even make the grid more resilient to future severe weather.

Read More

Paving the way for emissions reductions in California

Julia Zuckerman, July 1, 2014

 

California’s budget for the next fiscal year, signed by Governor Brown on June 20, includes $832 million in auction revenues from the Cap and Trade Program, which will go toward high-speed rail, public transportation, energy efficiency, and other projects to support low-carbon, sustainable communities. Where did that money come from? In some cases, from industrial firms like cement producers and food processors, which are responsible for 20% of statewide greenhouse gas emissions and are required to buy allowances to cover some of their emissions.

Our new study, Cap and Trade in Practice: Barriers and Opportunities for Industrial Emissions Reductions in California, explores how those industrial firms are making decisions under the Cap and Trade Program. More specifically, we wanted to know if industrial firms, given their typical decision-making processes, would invest in the emissions reductions options that are most cost-effective on paper — and if not, what are the barriers? We focus on the cement industry, which is a major player in the industrial sector and is also the largest consumer of coal in California.

The carbon price is making a difference

We find that the carbon price is making a difference in how cement firms approach business decisions about actions that would reduce emissions, such as investing in energy efficiency or switching to cleaner fuel. Firms are considering the carbon price when they make investment decisions, and our modeling shows that the carbon price significantly changes the financial attractiveness of several abatement options.

As an example, this graph shows how the carbon price adds to the value of an investment in energy efficiency. The additional savings from reducing the firm’s obligations under the Cap and Trade Program would add around 50% to the value of the investment if the carbon price is near the price floor — or could more than triple the value of the investment if the carbon price is at the top of its target range.

Cap and Trade - Lifetime Value of Energy Efficiency Investment

The Cap and Trade Program magnifies the value of an energy efficiency investment

Read More

The Clean Power Plan means changes for coal, but not the ones you might expect

Karen Laughlin, June 18, 2014

 

Under President Obama’s recently announced Clean Power Plan, the Environmental Protection Agency (EPA) proposed that states cut greenhouse gas emissions from existing power plants by 30 percent from 2005 levels.

Commenters on both sides of the aisle say this rule means big changes for the coal industry.

But before we get fired up about the changes, it’s important to take a look at the facts: While states will need to retire coal plants at the end of their useful lives to meet the proposed limits, EPA’s rule would give states a great amount of flexibility to avoid coal asset stranding and still meet emissions reduction targets. In fact, valuing the right services from coal plants will prove the more important question for a low-cost, low-carbon electricity system.

Let’s look at why.

First, we need to understand what the rule really means for coal asset stranding. An asset is “stranded” if a reduction in its value (that is, value to investors) is clearly attributable to a policy change that was not foreseeable by investors at the time of investment.

In our upcoming analysis of stranded assets, Climate Policy Initiative finds that if no new investments are made in coal power plants and existing plants retire as planned (typically, 60 years for plants with pollution control technology investments and 40 years for plants without), the U.S. coal power sector stands to experience approximately $28 billion of value stranding from plants that are shut down. While that’s a big sounding number at first glance, it’s very small relative to the size of coal power sector. As the figure shows, that retirement schedule puts the U.S. coal power sector on track to come close to the coal power capacity reductions called for in the IEA 450 PPM scenario to limit global temperature increase to 2°C.

U.S. Coal Power w emissions (2)

Read More

Indian concentrated solar power policy delivers a world-leading CSP plant but still needs adjustment

Martin Stadelmann, June 5, 2014

 

Solar power is one of the most promising options for India to meet its growing electricity demand. While the construction of further fossil fuel power plants is slowing due to lower domestic coal production than expected and the high cost of fuel imports, installations of solar plants are on the rise.

As discussed in a CPI blog, the Government of India’s National Solar Mission, started in 2010, has achieved targets for promoting solar photovoltaic (PV), having seen 660 MW deployed by January 2014. However, plans to deploy concentrated solar power (CSP) – a less mature and currently more expensive alternative with key technological advantages that allow it to deliver power reliably and when it is needed – did not meet with the same success. Over the same period, the government tendered 500 MW of CSP but successful bidders have only installed 10% of this deployment target to date.

In the coming days, however, the National Solar Mission takes an important step forward in its CSP efforts, when the 100MW Rajasthan Sun Technique CSP plant – the largest CSP plant built so far in India and the largest worldwide using linear Fresnel technology – is connected to the grid. In a recent CPI case study, financed by the Climate Investment Funds Admin Unit, Climate Policy Initiative examined this plant to understand why this project was implemented, while others under the National Solar Mission are still delayed. Some of our key findings include:

  • The Government of India’s measures, including awarding a subsidized power purchase agreement (PPA) and payment security scheme through a competitive reverse auction, were essential to getting the Rajasthan plant built but they were not enough to deploy CSP at the desired scale. Indeed, the only winning bidders able to build CSP plants at the low tariffs that resulted from the competitive bidding process were those that had financially strong private stakeholders and were able to source public debt. The 100MW Rajasthan Sun Technique CSP plant, for instance, benefitted from USD 280mn of long-term foreign public debt, a project developer both willing to take risks to establish itself in the Indian CSP market and willing and able to accept low returns, and a technology provider that contributed comprehensive warrantees.
  • India’s CSP policy kept costs to the public low but it will need adjustment to increase the certainty and speed of deployment and meet the country’s ambition to establish a national solar industry. Strong competition among project developers resulted in several submitting bids at prices that put them among the cheapest CSP tariffs worldwide (see also our previous paper on the global CSP landscape). However, project delays, possible cancellations, and difficulties in sourcing technologies and financing experienced by several of these developers – due in part to the challenge of building at such low tariffs – meant India was unable to meet its CSP targets and capitalize more fully on learning-by-doing, establishment of local supply chains, and investments in basic infrastructure, as developed during the implementation of projects like Rajasthan Sun Technique.

If a reverse auctioning scheme is used in India for future scale up of CSP, the design could be substantially improved and the Indian government could increase the likelihood of timely project implementation by:

  • Including stricter qualification requirements for bidders in terms of CSP experience and financial strength
  • Setting out more realistic timelines for bidding
  • Making reliable on-site solar irradiation data available
  • Allowing sufficient time for construction but also then enforcing penalties more strongly for delayed projects

With the 100MW Rajasthan Sun Technique plant commissioning, Indian CSP policy takes an important step forward but there is still a way to go before large scale up of the technology allows the country to balance the cheaper but fluctuating solar PV and wind power with more reliable CSP plants.

Read More