Driving geothermal development in developing countries

Valerio Micale, August 26, 2015

 

Geothermal has the potential to play a big role in a low-carbon energy transition but while deployment of wind and solar has taken off in recent years, deployment of geothermal has remained steady but unspectacular for decades. This despite the fact that it is broadly cost competitive with fossil fuel alternatives across the world and is the cheapest source of available power in some developing countries with rapidly growing energy demand.

Among developing countries, only Turkey and Kenya exceeded forecasts for geothermal deployment over the last five years. Elsewhere, over 3GW of power has been left in the ground, mainly in Indonesia and the Philippines but also in new markets such as Chile and Ethiopia.

We estimate that approximately USD 133 billion would be needed for investment in geothermal in developing countries if current plans to build 23 GW of capacity by 2030 are to be met. The scarcity of public finance available for geothermal in these countries is a barrier to achieving these targets but private investment could fill this gap. Many governments in countries with significant resources have liberalized energy and electricity markets and this could result in an investment opportunity of USD 60-77 billion, with average returns on equity of 14-16% if the main project related risks are addressed.

Our analysis, commissioned by the Climate Investment Funds to improve understanding of the role of public finance in different developing countries, suggests that governments and development finance institutions would need to provide the rest of the USD 133 billion in the form of financing and risk mitigation tools needed to attract private investment in these countries.

This requires a 7-10 fold increase in current allocations of public money to the sector for future development. In addition, while significant efforts at the global level to increase public finance commitments for the early stages of geothermal project development mean they now account for 11% of current commitments, in order to meet demand, finance allocated to this stage of projects should be up to 17% of public finance distributed and targeted particularly at the test drilling phase. Part of current public finance could also be refocused on the management of resource risk during the later stages of project operations.

In our most recent report, we draw lessons from a year of analysis of geothermal projects and markets in developing countries to identify how public finance from governments and development finance institutions can be used to best drive private investment. Key factors include:

  • Supportive regulatory frameworks for geothermal, the basic condition for growth together with well-designed feed-in-tariffs aligned with the project‘s lifetime or loan terms available in the local debt market
  • Differentiated public support during the exploration phase, supporting early public exploration and tendering of proven fields in markets with challenging investment environments, while incentivizing early stage exploration in more mature private markets
  • Favorable loan conditions and measures to unlock its provision

Following these recommendations could increase energy access and put those developing countries with geothermal resources on a path to green growth. Our case studies of geothermal projects suggest this can be done without increasing the levelized cost of electricity generated, and thus power tariffs for consumers. When national and international public measures lower financing costs and address specific political, currency and exploration risks relevant for the private sector, private development models can deliver power at similar or lower cost than public development models. This allows governments to increase energy supply and access while committing only 15-35% of what they would invest were they to develop the whole project through local public utilities, freeing resources for further investment. This is something that should be at the forefront of the minds of national energy policymakers and the development banks that support them.

A version of this blog first appeared as an opinion piece on Environmental Finance.

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Charting a low-carbon course to economic growth

Maggie Young, August 13, 2015

 

Global momentum towards a climate resilient, low-carbon economy is building quickly. We have reached a tipping point, where it has become clear that transitioning to a low-carbon energy system is good for both the economy and the planet.

China, India, the US, the EU, and many other governments have announced ambitious plans to reduce carbon emissions and increase climate investment. Leaders from thirteen of the largest American businesses also recently pledged to cut emissions and invest at least $140 billion in renewable energy. And investors of all sizes are opting to divest from fossil fuel assets and invest in assets that boost a low-carbon future along with their bottom lines.

However, because the global economy has been built on high-carbon growth until now, current policies and business models – which were developed to meet the needs of fossil fuel generation – are inefficient for large scale deployment of renewable energy. They are ill-suited to take full advantage of the financial opportunities that the transition could provide.

For the past few years, Climate Policy Initiative’s Energy Finance program has been exploring new and better ways to maximize the financial benefits of transitioning to a low-carbon energy system, while minimizing the cost to public budgets and private balance sheets. We’ve worked with key actors around the world to evaluate and improve policy, and to design new financial vehicles that can lower costs and increase returns from low-carbon energy.

For example, we’ve demonstrated that, through the right policies, governments can reduce the risk of stranded assets and generate trillions in global savings through the transition to low-carbon energy. Utilities can pioneer new utility business models which can attract more investment and lower the cost of renewable energy by up to 20%. And financial service providers can create new financial vehicles which could unlock green investment from institutional investors.waterfall transparent

As more and more governments and financial leaders are looking to take advantage of the financial opportunities of a low-carbon economy, the demand is growing for analysis and tools which can lower the costs and accelerate the benefits of transitioning. CPI’s Energy Finance team has been busy at the center of this, working on several important projects for key actors, including:

Unlocking investment for renewable energy in Germany, Spain, Italy, the UK, and Nordic nations,through deep dive analyses for the European Climate Foundation and the New Climate Economy program, which highlight potential investors whose risk-return profiles are aligned with renewable energy assets, and identify new financing mechanisms that may attract investment from these sources.

Accelerating states’ transition to a clean grid in the US,through advising regulators in New York, Colorado, and other states on how to reduce the carbon intensity of the power sector while minimizing economic losses, and how to incentivize utility-scale renewable energy.

Managing the risk of stranded assets in developing countries,by supporting the European Bank for Reconstruction and Development on how to assess and estimate the financial impact of climate change policies on national budgets and what options are available to manage risks and benefit from opportunities, and by exploring financial levers to curb fossil fuel investments in China.

Lowering the cost of capital for renewable energy projects,by working with institutional investors to develop new financial vehicles for clean energy infrastructure investment, and by analyzing the opportunities and limitations of YieldCos and other emerging financial vehicles for renewable energy.

Increasing the availability of finance at attractive terms for renewable energy in India,by evaluating the cost-effectiveness of different government subsidy mechanisms, and determining the potential of investment in renewable energy from key sets of investors, including institutional investors and foreign investors.

Countries, businesses, and individuals around the world are choosing to chart a better, cleaner course to economic growth. CPI’s Energy Finance team is with them at the helm, working together to find new ways to transition to a low-carbon economy most cost-effectively.

To meet the increased demand for our services, we are currently looking to expand our team of analysts in San Francisco, Delhi, and London, to continue identifying ways in which finance can catalyze the global transition to low-carbon energy. Visit our hiring page for more information.

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Managing the risks of dollar-linked tariffs in India and other developing countries

Gireesh Shrimali, August 3, 2015

 

A version of this blog first appeared in Environmental Finance. 

India recently announced plans to use dollar-linked tariffs for solar power in order to attract investment and cut costs. India has an ambitious target of 100 GW of solar power by 2022, but also has a limited budget and a shortage of debt at attractive terms and interest rates with which to achieve these targets.

The hope is that dollar-linked tariffs might provide cheaper and longer-term dollar-based foreign debt, and increase the capital available for renewable energy projects. This could reduce the delivered cost for solar energy by up to 30%, and make it more competitive with conventional power.

However, one risk of dollar-linked tariffs is unexpected currency devaluation. Exchange rates can be volatile. A successful design of dollar-linked tariffs requires risk management strategies to hedge against these exchange rate fluctuations. Otherwise, extreme devaluations in currencies may put a lot of pressure on the power purchasers that have committed to pay these dollar-linked tariffs.

For example, dollar-linked tariffs were used extensively in the 1990s, by India and other developing countries, in order to provide much needed foreign debt at attractive terms to infrastructure projects, including power projects. But, many of these dollar-linked tariffs proved to be politically unviable because the currency devaluation risk was eventually passed on through the power off-takers to the end consumers, raising their cost of electricity in an extreme and unexpected manner.

Photo credit: Flickr user @gaganmoorthy
Photo credit: Flickr user @gaganmoorthy

One way to manage this risk of exchange rate fluctuations is to buy a currency hedging product in the market. However, this may not always be ideal,for two reasons.

First, market-based currency hedges may not be available.

Second, market-based hedges may be so costly as to nullify the cost savings of attractive foreign debt over domestic debt. For example, in the case of India, 10-year foreign debt may be available for 5.5%, but a market hedge at 7% increases the eventual rate to 12.5%, making it nearly as expensive as domestic debt.

Another, potentially cheaper way to manage exchange rate fluctuations is through a government-sponsored foreign exchange hedging facility. There are several reasons why a government might want to bear currency risk. First, it may have some influence over foreign exchange rates because it can influence the macroeconomic conditions which drive them. Second, in supporting the local currency (INR) devaluation risk for renewable energy financing, it may be offsetting risks associated with future purchases of imported fossil fuel-based power which are paid for in USD.

In a recent report, Climate Policy Initiative modeled a possible government-sponsored foreign exchange hedging facility for India, and examined its expected costs and risks.We found the following for a 10-year, dollar-linked loan.

The cost of covering the expected devaluation in local Indian currency INR with a government-sponsored foreign exchange hedging facility is approximately 3.5%, which is 50% lower than the cost with a market hedge. This expected cost can either be absorbed by the facility or passed onto the counterparty (the project developer or the off-taker). Eventually, this could reduce the cost of renewable energy by up to 20% and the cost of government support by more than 50%. This is a promising option for covering the risk of expected currency devaluation.

However, the government should also be aware of the risk of unexpected currency devaluation.

One way to protect against unexpected and extreme currency movements is for the government to cover the risk through a sovereign guarantee. A capital buffer (or reserve) is one option for this. This capital buffer could be supported by the Indian National Clean Energy Fund (NCEF), or by grant capital from multilateral development banks, such as the Asian Development Bank (ADB) or the World Bank.

However, an adequate capital buffer may need to be large, with the size growing with higher risk coverage. For example, to reach India’s sovereign credit rating of BBB-, which is the gold standard for foreign lenders, the buffer needs to be approximately 30% of the original loan.

Coming back to the Indian government’s dollar-linked tariff scheme, it does appear to account for the expected devaluation in INR, by creating a fund that is supported by an approximately 1 INR per unit surcharge on the tariff. This is good news.

But our analysis also shows that it does not account for the risk of unexpected devaluation. The surcharge is just enough to cover the expected devaluation, and does not appear to provide coverage for the volatility in exchange rates. In fact, this surcharge would barely cover India’s sovereign credit rating for less than half the duration of the underlying power purchase agreement. This is bad news. It appears the government’s dollar-linked tariff scheme might follow in the footsteps of the politically unviable and controversial schemes of the 1990s.

We recommend that the Indian government further explore how to manage the risk of unexpected devaluation under the dollar-linked tariff scheme. Properly managing this risk is key to ensuring that the dollar-linked tariffs achieve their objective of providing renewable energy at competitive rates.

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Three zero-cost solutions for deploying renewable energy in India

Gireesh Shrimali, July 10, 2015

 

The Indian government has ambitious renewable energy targets of 100GW of solar power and 60GW of wind power by 2022. However, the government is also facing large deficits and competing budget priorities, and will need cost-effective ways to achieve these targets.

Climate Policy Initiative has identified three zero-cost solutions to the government, or ways to increase deployment of renewable energy which would not require subsidies for generation. These zero-cost solutions, when accompanied by support policies that would remove non-cost related barriers, could lower the overall cost of meeting India’s renewable energy targets and hasten deployment.

In all three solutions, the cost of renewable energy is compared to a baseline of the fossil fuel energy that additional renewable energy would likely replace. The government would need to subsidize additional renewable energy only if it is more expensive than the baseline.

First, for utility scale renewable energy, focus on rapid deployment of onshore wind power.

The cost of wind power, at INR 5.87/kWh, is already cheaper than the unsubsidized cost of imported coal at INR 6.81/kWh, which is the fuel it is most likely to replace.  Thus wind power does not require government subsidies. The technical potential of wind power is estimated to be at least 100GW. Thus, 100GW of wind power, which is higher than the 2022 target of 60GW, is a zero-cost solution for the government.

To ensure that India reaches 100GW, the government could encourage rapid deployment through policies which address non-cost related barriers for project developers, such as land acquisition, resource assessment, transmission interconnection, and guaranteed offtake.

Second, for distributed renewable energy, focus on rapid deployment of rooftop solar power.

The unsubsidized levelized cost of energy from rooftop solar power, at less than INR 7-8/kWh, is already cheaper than the retail rate of electricity for many industrial, commercial, and residential consumers, at up to INR 10/kWh (or higher). The realizable potential of rooftop solar PV is at least 57GW by 2024. Though the full zero-cost potential would require further investigation, approximately 15GW of rooftop solar PV is likely to be another zero-cost solution for the government.

To ensure that India reaches 15GW, the government could encourage deployment through supporting policies such as net metering. In addition, innovative business models like Solar City in the U.S. would enable financing of the initial costs of solar panels. The government could help create the market by facilitating these models, and also by establishing reasonable technology performance standards and informational platforms to ensure product and business quality.

Third, for off-grid distributable renewable energy, focus on rapid deployment of off-grid solar power.

Distributed solar PV is cheaper than diesel generation in most cases, which is the fuel it would likely replace. The realizable potential of distributed off-grid solar PV is estimated to be 15GW by 2022. While additional research is still needed, a significant fraction of this is likely to be another zero-cost solution for the government. Similar to rooftop solar PV, business innovation to finance upfront costs, along with a supportive policy environment, can encourage the deployment of off-grid solar PV.

In addition to these three zero-cost solutions, there are other ways to significantly reduce the cost of government support for renewable energy. One way is to shift policies to reduced cost, extended tenor debt. For example, for utility scale solar power, this could reduce the cost of government support by up to 96%.

These are some options available to India that will help it accelerate renewable energy deployment at a zero or low cost for the government. In a world of tight budgets and ambitious dreams, these opportunities are worth considering.

 

A version of this blog first appeared in Mint

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Könnten neue Investitionsstrukturen im deutschen Markt für erneuerbare Energien die Finanzierungskosten senken?

Brian O'Connell, June 19, 2015

 

Deutschland befindet sich mitten in einer großen Energiewende – die auch für den Rest der Welt als ein Vorbild dienen kann. Die hauptsächliche Herausforderung ist es die erneuerbaren Energien weiter auszubauen (und somit die Abhängigkeit von Kohle zu verringern), und gleichzeitig die Kosten für die Öffentlichkeit und für die Verbraucher zu begrenzen.

Entscheidungsträger in Deutschland versuchen die Kosten im Zaum zu halten, indem sie die Einspeisevergütung die eine Verbreitung und eine Verringerung der Kosten für erneuerbare Energien bewirkt haben, mit neuen wettbewerbsorientierten Mechanismen zu ersetzen. Allerdings könnte diese veränderte Politik unfreiwillig zu höheren Kosten führen, wenn sie ohne Beachtung der Folgen für die Projektfinanzierung durchgeführt wird. Jedwede Änderung der Rahmenbedingungen sollte ein breites Verständnis der gegenwärtigen und potentiellen Investoren in erneuerbare Energien voraussetzen, das auch die Auswirkungen unterschiedlicher Fördermechanismen und Finanzierungsstrukturen auf deren Investitionskosten und -möglichkeiten miteinbezieht.

Unterstützt durch die European Climate Foundation, untersucht die Climate Policy Initiative diesen wichtigen Aspekt der Energiewende, um so energie- und finanzpolitische Rahmenbedingungen anzuregen, die es Deutschland erlauben würden diesen Wandel bei geringeren Kosten voranzutreiben. Als Teil dieses Projektes werden wir:

  1. Für verschiedene potentielle Investorengruppen in diesem Sektor – Energieversorger, Projektentwickler, Finanzinvestoren, Großverbraucher, Kleinverbraucher, Genossenschaften sowie Kommunen und die öffentliche Hand – das Investitionspotenzial der unterschiedlichen Arten erneuerbarer Energien vermessen.
  2. Die Marktchancen von neuen Finanzierungsinstrumenten (z.B. neue Finanzierungsstrukturen wie YieldCos, Eigenverbrauchsmodelle, genossenschaftliche oder kommunale Finanzierung) bewerten, die sich schon in einem früheren Projekt als potentielle Möglichkeiten identifiziert worden sind.
  3. Politische Rahmenbedingungen hervorheben, die entweder größtmögliche positive Auswirkungen auf Investitionen haben oder die größten Hindernisse darstellen könnten. Basierend auf Interviews mit verschiedenen Investorengruppen und Interessenten sowie auf einer Reihe von Fallbeispielen und unseren Modellberechnungen werden wir die Auswirkungen von veränderten Rahmenbedingungen auf die Finanzierungskosten in verschiedenen Marktsegmenten untersuchen.

 
Zusätzlich zu diesem Projekt arbeitet die CPI auch noch mit dem Stockholm Environment Institute (SEI) an dem Projekt New Climate Economy, in dem die Barrieren für Investitionen in erneuerbaren Energien in 5 Ländern bzw. Regionen Europas (Deutschland, Großbritannien, die nordischen Staaten, die iberische Halbinsel, Italien) identifiziert und untersucht werden.

Die Erkenntnisse aus diesen Projekten werden für Europa und auch darüber hinaus von Bedeutung sein. Um Europas neue und anspruchsvollere Ziele für erneuerbare Energien und CO2-Minderung bis 2030 zu erreichen, werden sowohl Veränderungen der Gesetzgebung der EU wie auch der Mitgliedsstaaten notwendig sein.

Letztendlich wird es für die Wende zu einer erneuerbaren Energiewirtschaft grundlegender Veränderungen in Politik, Technologie, Marktstrukturen, Konsumentenverhalten, Wirtschaftsstruktur und Finanzen bedürfen. Sich mit dem finanziellen Teil dieser Gleichung zu beschäftigen, ist unerlässlich um sich ein realistisches Bild von den Prioritäten für die politische Rahmensetzung in Deutschland und darüber hinaus zu verschaffen.

Dieser Blogbeitrag wurde von Kirsten Hasberg übersetzt, die in diesem Projekt für die European Climate Foundation als Beraterin für CPI arbeitet.

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Reaching the USD 100 billion goal by 2020: Lessons for the G7 on scaling up climate finance

Jane Wilkinson, June 11, 2015

 

On Monday, G7 leaders in Germany reiterated their determination to mobilize USD 100 billion per year in developing countries by 2020, a commitment originally made by developed countries six years ago at the international climate negotiations in Copenhagen. They also announced initiatives to increase to 400 million the number of people in the most vulnerable developing countries covered by insurance against climate impacts by 2020, and to support the development of renewable energy in Africa and other developing countries to reduce energy poverty.

While decisions on what is included in the USD 100 billion will be taken at the international climate negotiations in Paris later this year, the experience of the last six years offers lessons to political leaders at the G7 on what developed country governments could do to ensure the USD 100 billion goal is met on time and how they can ensure the finance mobilized has the maximum possible impact in terms of helping developing countries achieve low-carbon, climate-resilient growth.

Today, flows of climate finance in developing countries have increased but still fall short of this goal. Significant new sources of international climate finance have emerged. Some sources that were expected to play a large role back at the beginning of the decade – like revenues from a global carbon price – haven’t come to fruition. Others are performing above expectations.

In 2013, public climate finance flows from developed to developing countries reached USD 32 billion, 10% of global climate finance captured. Bilateral agencies and development finance institutions chanelled USD 26.5 billion of this. Multilateral development banks and climate funds also played an important role, and with the pledges made to the Green Climate Fund and the new Asian Infrastructure Investment Bank in the process of being set up, these banks and funds will play an increasing role in future. USD 2 billion in renewable energy project investments flowed directly from private investors in OECD countries to developing countries in 2013.

In total, that makes USD 34 billion that we can track. The true figure is undoubtedly higher – data gaps in some sectors make it impossible to see how much private investment is flowing from developed to developing countries – but it is clear that public institutions such as bilateral agencies, bilateral development financial institutions, and multilateral development banks play a pivotal role channeling and mobilizing resources. So what lessons can developed countries – including G7 members – draw from these results and the experience of the last years?

1. As shareholders of development finance institutions, developed countries should require them to integrate climate considerations into all development activities. By ensuring their activities are consistent with climate goals, these institutions could achieve climate co-benefits, policy coherency and better value for money.

2. Countries should consider providing grant finance to build technical capacity and to encourage investment in climate resilience, in particular. In countries and markets where private investors are not yet investing, grant finance plays an important role by helping governments to develop the policy frameworks that enable private investments, by demonstrating the benefits of climate-resilient investments, and by building private actors’ capacity to evaluate and make those investments. Experience shows that predictable regulatory and economic frameworks are essential to mobilizing private investment which provides the majority of climate finance globally. This is particularly true for adaptation policies, which tend to lag behind those for mitigation.

3. Public institutions should provide risk instruments to attract private investment. Bilateral and multilateral development financial institutions and export credit agencies have expanded the coverage of risk mitigation instruments such as guarantees, political risk insurance, foreign exchange risk coverage, and insurance so that they are now lowering the risks, reducing the costs, and improving the returns of climate investments. However, these instruments are still used more often for high-carbon rather than climate-friendly investments. This should change. Evidence shows that where investors can balance risks and returns, private finance will follow.

4. Both the public and private sector must continue to improve understanding of how public and private interests can be aligned to most effectively mobilize finance for climate investments. A number of initiatives are working to track private climate investments and to better understand the connection between public and mobilized private finance. This should further improve understanding of how public and private interests can be aligned to most effectively mobilize finance for climate investments, and how effective policies and instruments are in balancing risks and returns of climate investments.

The capital exists to achieve a wider global transition to a low-carbon and climate-resilient future. Mobilizing it will, however, require public, private, international, and domestic financial resources to shift from a high-carbon to a low-carbon economy. Whether scaling up finance to meet the USD 100 billion commitment, or for wider low-carbon investment needs, success will depend on the willingness of governments around the world to show strong leadership to align policies, pricing signals, and financial instruments to chart a path towards a low-carbon and climate-resilient future. It will not necessarily be easy, but it is possible. A prosperous future depends on it.

A version of this blog post first appeared in Business Green

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Could New Investment Structures in the German Renewable Energy Market Make the Market More Cost-Competitive?

Brian O'Connell, June 2, 2015

 

Germany is in the midst of a major energy transition, one that could serve as a model for the rest of the world. At the core of the challenge is the need to continue to grow renewable energy (and drastically reduce dependence on coal) while containing the cost of renewable energy to government and ratepayers.

German policymakers are looking to control costs by replacing the feed-in tariffs that have driven renewable energy deployment and cost reduction with new competitive mechanisms. However, if these policy changes are made without considering their impact on how projects are financed, they could inadvertently increase costs. Any changes to policy should be made with a comprehensive understanding of the current and potential investors in renewable energy and the impact that different policy mechanisms and financing structures could have on their costs and ability to invest.

CPI, with the support of the European Climate Foundation, is examining this important aspect of the transition to inform policy and financing activities that could allow Germany to advance its energy transition at lower cost. In this project, we will:

  1. Size the investment potential for different types of renewable energy across potential German investor groups in the sector – utilities, developers, financial investors, large energy users, small energy users, and municipal and other governments.
  2. Assess the market opportunity for new financing instruments, including new financing structures such as YieldCos, crowdsourcing, and municipal funding, which we identified as potential opportunities in previous work.
  3. Identify policy options that seem to have the most favorable impact or provide the biggest barriers to investment. Starting with opinions expressed by investor groups and their analysts and advisors, as well as a review of investment cases and our financial modelling, we will analyze the impact of policy changes to financing costs for different market segments.

 
Alongside this project, CPI is also working with the Stockholm Environment Institute (SEI) on a New Climate Economy project, to identify and analyze the barriers faced by investor groups across five European countries/regions (Germany, UK, Nordic countries, Iberia, Italy).

The lessons from these projects will be relevant for Europe and beyond. With Europe’s new, more ambitious renewable energy and carbon emissions reduction targets for 2030, changes to European policies and regulations will be necessary, as well as policy and regulation in EU member states.

Ultimately, the transition to a low-carbon electricity system will require wholesale changes to policy, technology, market design, consumer behavior, industry structure, and finance. Addressing the finance portion of the equation is critical to develop a true picture of the priorities for policy development in Germany and beyond.

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Eight steps to improve understanding of climate finance flows in your city or country

Angela Falconer, May 21, 2015

 

Understanding how much climate finance is flowing, where it comes from and how it flows to which activities and projects on the ground is not only useful at the global level to help understand progress towards climate finance goals. It can also help countries, regions, cities, and organizations to understand their progress toward meeting their own development, economic, and environmental goals by:

– Establishing a baseline against which to measure progress, reveals current patterns of investment and any blockages in the system.
– Revealing interactions between public finance and private investment which can inform decisions about how to redirect flows from business-as-usual to low-carbon and climate-resilient investments.
– Helping international partners see how they can support domestic efforts.
– Identifying opportunities to increase climate finance and providing an important basis for policymakers to develop more effective policies, particularly when combined with analysis of what is working or not in different interventions.

Climate Policy Initiative produces the most comprehensive overview of global climate finance flows available. We have also carried out in-depth mapping of climate finance flows for Germany and Indonesia. The following eight steps summarise the approach we take to map climate finance flows in different contexts. Although the process is complicated because of significant data gaps and inconsistencies, the principles behind such mapping are relatively simple. Applying them can improve understanding of climate flows. They are:

1. Decide what finance you want to measure.The first step is to decide which activities you want to focus on. For some you’ll also need to decide what makes a particular activity low-carbon or climate-resilient. This is relatively easy to do for something like renewable energy generation. However if you want to understand how much finance is flowing towards more climate-resilient, productive and sustainable land use, you will have important decisions to make on what you want to include and what you should leave out.

2. Set the geographical scale.Are you going to track finance flowing to these activities at the international, national, regional, city or organizational level?

3. Decide whether to track public finance, private investment, or both. Information on some climate finance flows (e.g. official development assistance) is easier to track than for others and there are some – like private investment in energy efficiency – where very little reliable data is available at all. But ideally a mapping exercise for a country, region, or city would include both public and private flows to the extent possible because understanding how these different sources of finance interact is essential to making best use of your financial resources.

4. Consider total investments, not just additional investment costs.Research into the additional costs of low-carbon interventions above higher-carbon alternatives is useful and has even shown that some low-carbon transitions may be cheaper than business-as-usual. But, when dealing with the practicalities of tracking and managing climate mitigation and adaptation investment for planning purposes, it is simpler to consistently track current total investment rather than additional investment costs.

5. Focus on project-level primary financing.Project-level primary financing is finance going to activities and projects on the ground and the best indicator of progress on climate action. Aggregate data does not allow the same insights as project-level data while data on secondary market transactions (e.g. refinancing, selling stocks) represents money changing hands. Such transactions can play an important role in providing project developers with capital to reinvest in further projects but they do not necessarily represent additional efforts to reduce emissions or increase climate resilience.

6. Track public framework expenditures.Many projects would be impossible without the development of national climate strategies, specific regulations and enabling environments for investment but these costs are not seen at the project level. Tracking them is important to have a real understanding of how much public finance is flowing to and needed for climate action.

7. Exclude public revenue support for projects such as feed-in tariffs and carbon credit revenues.While these revenue support mechanisms are often essential for climate action they pay back the investments made in climate-relevant projects and activities that you are already counting. Including investment costs and policy-induced revenues would therefore mean you were counting the same flows twice.

8. Exclude private investments in research and development.These are investments that private actors try to recover when selling their goods and services so counting them in addition to investment costs would, once again, mean you were counting the same flows twice.

The quality of your mapping exercise will depend on the quality of the data you have. Fragmented data in the land use sector is the reason we are working with the European Forestry Institute and Climate Focus, in an upcoming publication, to provide policymakers with a series of mapping tools to understand potential entry points for climate finance flows in their land use sectors. Often these countries are aware of the opportunities to shift from unsustainable to sustainable land use but lack financing strategies to deliver their goals. This project will help them identify which fiscal and financial mechanisms are available to unlock new investors and more efficient investments.

We are happy to assist countries, cities, or organizations looking to better understand their climate finance flows by undertaking mapping exercises, just get in touch.
 

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Achieving India’s Solar Power Target Efficiently

Gireesh Shrimali, May 4, 2015

 

The government of India announced in its recent 2015-2016 Budget that it has set a target of 100GW of solar power by 2022, thirty times the existing capacity of approximately 3GW, and five times the previous target of 20GW under the 12th Five Year Plan.

Reaching this target is not going to be an easy task. Currently, the government is facing large deficits and competing budget priorities, so a cost-effective path is crucial.

Climate Policy Initiative and the Indian School of Business recently examined the costs and different policy pathways to achieving both the wind and solar power targets, in our latest report: Reaching India’s Renewable Targets Cost-Effectively. We found three key lessons for lowering the cost of achieving India’s solar power target.

First, we found that imported coal is the fossil fuel that the additional solar power would likely replace, and that a fair assessment of costs should compare the cost of electricity from renewable energy with the cost of electricity from imported coal.

A fair comparison is key to determining the cost of achieving India’s solar power target. Imported coal is the likely fossil fuel because domestic coal and natural gas are both limited in supply, and because imported coal currently accounts for 18 per cent of India’s total power generation, higher than India’s target of 15 per cent of generation from renewable energy by 2020.

Second, through our analysis, we found that solar power will be competitive with imported coal by 2019. The cost of installing solar power will continue to decrease, as developers become more efficient with experience. Meanwhile, fossil fuels will become increasingly more expensive, primarily due to inflation and increased transportation costs.

Currently, the cost of electricity from solar power is 11.79 per cent higher than from imported coal, and will require some government support from 2015 to 2019. In order to achieve a target of 20 GW of solar power by 2022, the total cost of government support would be Rs 46.97 billion, or Rs 2.71/W, under the current federal policy of accelerated depreciation.

Third, we looked at more cost-effective policy pathways, and found that government support could be significantly reduced by 96 per cent by replacing the current federal policy with reduced cost, extended tenor debt. Under reduced cost, extended tenor debt, the government would make direct loans to project developers below the commercial rate of interest for longer than the usual commercial tenor. The cost of support would fall by 96 per cent to Rs 1.81 billion, or Rs 0.1/W.

This is because, under reduced cost, extended tenor debt, the net cash outflow for the government is recovered over time since policy support is provided in the form of a loan rather than a grant. It also provides an opportunity for interest arbitrage in cases where the government lends at a higher rate of interest to the developer than its own cost of borrowing (7.8 per cent on a 10-year government bond), the net cash flows for the government are positive. Project economics are still improved as long as government rates are more attractive than current market debt rates. Lastly, when debt is cheaper, the developer can substitute equity with more debt in the project while meeting debt servicing conditions. By replacing expensive equity with cheaper debt, the overall cost of capital is reduced.

India has ambitious targets for renewable energy; however, with a limited budget, it’s important that the government take the most cost-effective policy path. Adjusting current policy to more effectively deploy solar power would help lower costs. To accelerate solar power sooner to meet the Budget 2015 goal of 100 GW, revised upwards from 20GW, the government would need to provide more financial support.

We also found that wind power is already cheaper than power from imported coal, and will remain competitive beyond 2022. The government should encourage rapid deployment of wind power through policy measures that address non-cost related barriers to wind power, for example challenges in land acquisition and delays in environmental clearances.

To read our full report, visit http://climatepolicyinitiative.org/publication/reaching-indias-renewable-energy-targets-cost-effectively/.

A version of this blog first appeared in Businessworld.

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California’s New 2030 Climate Target Aims to Reduce Emissions by 40%

Dario Abramskiehn, May 1, 2015

 

This week, California Governor Jerry Brown issued an ambitious new emissions reduction target of 40% below 1990 levels by 2030. It’s being lauded as one of the most aggressive climate targets in North America.

The new target is as an important step between California’s goal of reducing emissions to 80% below 1990 levels by 2050, set in an earlier executive order, and the interim target of 1990 levels by 2020, set under California law AB32 in 2006.

In 2013, AB32 launched one of its key policies to reduce greenhouse gas emissions and meet these targets – the Cap and Trade program. Unlike many such programs around the world, California’s Cap and Trade program acts as a backstop to a series of complementary policies that cover major emitting sectors in the state with the goal of returning California emissions to 1990 levels by 2020.

CPI’s California Carbon Dashboard continues to offer the latest on AB32 and California’s Cap and Trade program, including current and historic carbon prices in California, emissions caps and history by sector, and relevant updates from the California Air Resources Board. It also provides a comprehensive overview of AB32 and complementary policies, as well as the role of the Cap and Trade program in meeting the emissions reduction target.

CPI analysis shows that the carbon price is making a difference. A 2014 study explored how industrial firms, which are responsible for 20% of statewide greenhouse gas emissions and are required to buy allowances to cover some of their emissions, are making decisions under the Cap and Trade Program. We focused on the cement industry, which is the largest consumer of coal in California, and found 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.

It’s clear that California is well on its way to achieving the 2020 target, but meeting the 2050 target would require reducing emissions five times faster than the current pace. Governor Brown’s new 2030 target will put pressure on the state to pick up the pace. The next step is for California’s legislature to put in place a legal framework for post-2020 emissions reductions. CPI will update the California Carbon Dashboard once a post-2020 framework is in place.

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