CPI analysis supports C40 call for action on increasing cities’ access to climate finance

October 19, 2016 | and


This week at Habitat III in Quito, Ecuador, C40 Cities Climate Leadership Group (C40) is making a call for action on municipal infrastructure finance, highlighting the financing needs of cities and their key role in driving sustainable, low-carbon and resilient growth.

Climate Policy Initiative (CPI) endorsed this call to action as part of our work to support cities’ access to climate finance and to help them achieve value for money. In the last year, we worked with the Cities Climate Finance Leadership Alliance to publish its State of City Climate Finance 2015 report and are currently analysing the green bond markets in order to develop guidelines for cities in developing countries to raise climate finance from this fast growing source of climate finance. This second piece of work is part of the Green Bonds for Cities project.

Our work supports C40 findings. For instance, C40’s call to action identifies multilateral and bilateral development banks as important actors in responding to city needs. Our analysis finds that taken together DFIs provide 94% of all green bond flows to cities in developing countries and multilateral and bilateral DFIs provide 82% of all green bond finance channelled to developing countries in general.

There are other possibilities for cities to tap green bond finance flows, however, aside from cities issuing their own bonds. National development banks provide an interesting option, for instance. While multilateral DFIs were the first to direct green bond flows to developing countries, domestic DFIs such as national development banks (NDBs) are now providing a growing share, now up to 18% of flows.

Green Bond DFI Flows to Developing Countries

The market is changing elsewhere too. Development finance institutions were the sole providers of green bond finance to developing countries from 2008-2013 but domestic corporates in the renewable energy sector have since begun to issue bonds. They have been joined by commercial banks from China and India which have linked the finance raised to green loans. City or municipal-based infrastructure development companies also commonly raise finance for cities in developing countries such as China, often with central government guarantees.

Global green bond market flows to developing countries

Our market analysis will feed into guidelines for city administrators and stakeholders in developing countries on how to access increased finance from the green bonds market. In the coming weeks, CPI and partners working on the Green Bonds for Cities project will provide toolkits and training sessions. The project is funded as part of the Low-Carbon City Lab (LoCaL) under Climate KIC.

CPI will also soon publish analysis looking into the role of NDBs in supporting implementation of nationally determined contributions. Sign up here for updates on these and other projects.

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Millennials: the new power generation fueling the future with clean energy

October 12, 2016 |



You might expect wind industry executives at last week’s AWEA Wind Energy Finance & Investment Conference 2016 in New York to talk enthusiastically about the transition to clean energy. But over the last year, utility companies and Independent Power Producers (IPPs) have joined them – proclaiming that that the clean energy future has arrived now – much sooner than any of us thought possible.

What’s driving this? First, in much of the US it now costs more to generate additional electricity by burning more fossil fuel in existing plants than it does to buy it from a new utility-scale onshore wind or solar PV farm. This is a result of steady policy support and steep cost reductions in solar and wind costs.

But another, less well-known driver is that the millennial generation – the largest generation in US history, even bigger than the Baby Boomers – wants renewable energy. Utilities and IPPs point to surveys that indicate a strong demand pull from millennials as their emerging customer base with a strong desire to get off coal. Millennials want their electric vehicle, or better still car share vehicle, to be powered by the sun and wind, not millennia-old carbon.

For the renewables industry, it’s a perfect storm. But one of the challenges the industry now faces is to figure out how it can finance all that new generation in a market with low costs of generation, low demand growth, falling prices, and subsidies that are scheduled to phase out over the next decade.

The only way this can happen is if costs can keep falling.

One way this could happen is through continued technological progress. Last month, researchers at the National Renewable Energy Laboratory and the Lawrence Berkeley National Laboratory published their forecast for a 24%-30% drop in the Levelized Cost of Electricity for wind by 2030 and a 35%-41% drop by 2050.

But we think the decrease in costs could be even more dramatic than that with new financing instruments that could reduce the cost of financing by 20%, which in turn will accelerate those LCOE reductions.

Over the past year, we have been working with investors on such an instrument as part of a program funded by the Rockefeller Foundation. Despite the volatility YieldCos experienced last year, we believe there is a new model that can salvage the positive elements of this design, while restoring a much closer link to the cash flows of the underlying renewable assets.

The new instruments – Clean Energy Investment Trust (CEITs) – will still be publicly traded listed vehicles, but instead of a growing portfolio of assets, each CEIT will consist of a fixed portfolio of assets generating reliable cash flows over the life of the vehicle. A closed pool of assets, the CEIT would offer a fixed income-like return profile that would be more sustainable over the long term but at a level somewhat higher than currently available on investment grade bonds.

uday-on-awea-panel-cropLast week, I spoke about CEITs during an AWEA conference panel moderated by Susan Nickey at Hannon Armstrong who led the introduction of Real Estate Investment Trust (REITs), a market now worth $1.8 trillion in the US.

We’re hoping for a similarly transformational impact from pension funds and insurers looking to match their investments with their long-term liabilities. Our analysis shows that US-wide, a 10% reduction in Power Purchase Agreement prices would allow wind to economically displace an additional 30.5GW of mostly coal generation and 154.5 million tons of CO2 – equivalent to taking 28.2 million cars off the road.

CPI Energy Finance’s executive director, David Nelson, will this week present some of our work on CEITs so far to an audience of institutional investors – pension funds, life insurance companies – at the IPE Real Assets & Infrastructure Investment Strategies Conference in London. We will also be publishing several reports on CEIT structure and market potential by the end of the year, the first of which you can read here.

Pensions and life insurance policies are probably the furthest thing from the minds of Millennials, many of whom are just now coming of age and entering the job market. But their expectations about the world they want to live in and actions to mitigate climate change are driving a transformation in energy that will benefit not only their generation, but those that follow them.


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Four ways to jumpstart rooftop solar power in India

September 15, 2016 |


The Indian government has rightly made rooftop solar power one of its top clean energy priorities – here’s how they can jumpstart the nascent market.

With a bold goal of delivering 100 GW of solar power by 2022 India is helping to create one of the world’s fastest growing solar markets. Impressive strides have been made towards building out the 60 GW of utility-scale solar power necessary to make good on the goal. However, the remaining 40 GW of rooftop solar power needs a boost. Getting this market right can help put a serious dent in the energy poverty suffered by 80 million households currently lacking electricity, and is critical for supporting the country’s growing middle class.

Rooftop solar power has enormous potential in India and has experienced steady growth in recent years. It offers electricity consumers a lower electricity bill (on average 30% savings for businesses and 18% for industry), and a reliable alternative to intermittent electricity from the grid. The problem is, while the market is growing at a “blistering 300% pace”, even more is needed to get from approximately 1 GW today to 40 GW in 2022. A new report from Climate Policy Initiative (CPI) shows a few ways we can unleash even greater growth.

Figure 1

Support Third Party Financing

A third party financing model consists of a rooftop solar developer, a third party financier, and a consumer. The developer installs a rooftop solar plant on a consumer’s property and the third party financier invests in the project. The consumer agrees to purchase electricity at a specified price for 15 to 25 years, with no upfront cost except their monthly electricity bill. The third party financing model removes the burden of high upfront installation costs for the consumer, as well as perceived performance risk, or the perception that the technology may not perform as expected over its lifetime.

The third party financing model has been a significant driver of growth in the rooftop solar industry globally, especially in the US where up to 72% of rooftop solar installations in 2014 were third party-owned. The model has also started picking up recently in other countries, including China and Japan.

But in India it only supports 13% of rooftop solar installations under operation or construction. The industry believes that there is potential to increase the total installed capacity under the third party financing model to more than 20 GW by 2022, meaning that it could unlock more than half of the government’s 40 GW target.

The third party financing model is also a good opportunity for investors. With government incentives, all states in India offer internal rates of return (IRR) of at least 14% and as high as 42% for rooftop solar projects financed by third parties. And, as the cost of solar falls, more sectors in Indian states are becoming profitable without these incentives. Over 40% of the opportunities  already offer IRRs of 14%-34% even without government incentives.

Train Banks to Help Unlock Local Debt

It’s no secret the solar business is capital intensive. That means access to debt finance is critical to its long term success. Since the rooftop solar sector is new and transaction costs are high (due to the smaller size of projects), bankers don’t yet feel comfortable lending to projects. The most significant challenge to the third party financing model today is low access to debt finance.

To increase access to debt for rooftop solar power, the Ministry of New and Renewable Energy (MNRE) can work with development banks to provide a system of trainings to bankers in India to increase their understanding and comfort with rooftop solar loans. Trainings can include how to assess rooftop solar projects, how to process solar loans, and the dynamics of the rooftop solar industry and associated risks.

Given the depth and breadth of the local banking system, and the $625 million it now has to solve this problem thanks to the World Bank, high leverage interventions like these can get the money flowing.

Get DISCOMs in the Game

Another important step is addressing consumer credit risk. Consumer credit risk is the second biggest challenge to the third party financing model. Low availability of credit assessment procedures, low enforceability of agreements, and lengthy and costly legal processes in the case of a dispute or payment default all conspire to hold back investment.

One way to reduce consumer credit risk is for MNRE and state governments to include India’s state-level public electricity distribution companies (DISCOMs) as a party to the power purchase agreement between the developer and the consumer. While DISCOM balance sheets don’t exactly inspire confidence, they do have the power to terminate grid supply which can provide an effective ‘stick’ to ensure customer payment.

DISCOMs are also responsible for implementing net metering, which is a policy that has been passed in nearly all states that makes rooftop solar power more viable by enabling consumers to use solar power generated during the day at night. However, at present, there is little incentive for DISCOMs to prioritize net metering implementation which means most rooftop solar companies don’t take advantage of it. One way to overcome DISCOMs’ reluctance would be to incentivize them to fulfill their Renewable Purchase Obligation (RPO) requirement – a government requirement to install solar power – via rooftop solar installations, by providing 30% more credit to rooftop solar power generation compared to utility-scale solar power.

Invest in Financial Innovation

Last but not least it’s clear that financial innovation has been key to unlocking clean energy abroad, and it is likely to be useful inside India as well. The India Innovation Lab for Green Finance, a public-private initiative, administered by CPI and modeled after the successful Global Innovation Lab for Climate Finance, is currently developing several instruments which have the potential to drive significant investment into third party financing for rooftop solar power.

The first, Loans4SME, is a peer-to-peer lending platform that connects investors directly with borrowers and could help improve access to debt financing for the rooftop solar industry. The second, the Rooftop Solar Sector Private Financing Facility backed by the IFC, could increase access to debt financing for the rooftop solar industry by creating a warehouse structure that aggregates and purchases large numbers of small projects helping to inject liquidity into the market. This also enables an aggregate deal size large enough and of sufficient credit quality to attract more attention from investors, especially institutional investors.

Taken together, these policy and financial solutions can jumpstart India’s rooftop solar industry and put it on track to achieve the government’s target of 40 GW of rooftop solar power by 2022, a goal the whole world should get behind.

This post was co-authored by Gireesh Shrimali of CPI and Justin Guay of the David and Lucile Packard Foundation. A version of it first appeared in Greentech Media and also in The Huffington Post.  


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Understanding green bond data can help cities in developing countries tap the market

September 6, 2016 |


The population in developing and emerging countries is urbanizing at three times the rate of developed countries. But cities in the ‘Global South’ have limited access to capital to invest in water, energy, housing and transportation systems to meet the needs of growing urban populations.

Many of them raise capital through local banking sectors whose loan terms are often unsuitable for funding new infrastructure. Capital markets offer an alternative source of cheaper and longer-term finance but less than 20% of cities in developing countries have access to local capital markets and only 4% have access to international capital markets.

In recent years, green bond markets have emerged as a new way for investors in the capital markets to access sustainable investments. Cities have taken note. European cities in France and Sweden have been issuing green bonds since 2012. Municipalities in the US have a long track record of raising low-cost debt in the municipal bond market but only recently have begun to label bonds as ‘green’ in order to meet this demand signal from investors.

So how much finance has flowed from green bond markets to cities in developing countries?

Climate Policy Initiative (CPI) analysis shown in the chart below shows that approximately USD 2.2 billion of total flows in the green bond market have been directed towards cities in developing countries (“the South”) compared to USD 17 billion in developed countries (“the North”).

Global green bond market flows

The figure below breaks down the sources of those flows to cities in the North and South. Cities in the North mainly use their own municipal (MUNI) issuance power (84%) but also benefit from Development Finance Institutions (DFI) linking city-based projects to their green bonds (13%) while cities in the developing countries in contrast rely almost entirely on DFIs to raise finance for their projects (94%).

To date, Johannesburg’s USD 137 million bond is the only municipal green bond issued in developing countries. Important work to help address this imbalance is underway. It aims to develop local capital markets and improve the creditworthiness of cities.

But if a city cannot issue bonds, what is the potential of other channels open to them to access finance from green bond markets? Helping local governments and city administrators in developing countries to identify these channels and increase their access to the green bond markets is one way to close this investment gap. This is why CPI is contributing analysis and developing guidelines for accessing the green bond markets as part of the Green Bonds for Cities project.

Our analysis shows the sources of green bond market flows to developing countries are diversifying.

Since 2008, USD 39 billion has been directed to projects or activities in developing countries. From 2008-2013, this consisted entirely of flows from Development Finance Institutions but, from 2014, domestic corporate issuance began to grow and was then joined by issuance from commercial banks from China and India in 2016.

Global green bond market flows to developing countries

Clearly, cities don’t necessarily need to issue their own bonds to tap the green bond market. City or municipal-based infrastructure development companies could provide one option for them to do so. Such companies commonly raise finance in developing countries such as China, often with central government guarantees.

Public-private partnerships with corporations or commercial banking institutions could help cities leverage their green bond issuances for new infrastructure developments.

Perhaps the avenue with the most significant potential is through domestic, bilateral and multilateral development finance institutions (DFIs). DFIs could scale up their own green bond mandates to increase support for city-based infrastructure in developing countries, work to source and help finance projects, and eventually support cities to issue their own bonds through guarantees or other risk mitigation instruments.

Green Bond DFI Flows to North and South

The chart above reveals three interesting insights into DFIs’ green bond issuance:

  • Domestic DFIs in developing countries, such as NAFIN in Mexico and the Agricultural Bank of China, already account for 18% of total flows from DFIs’ green bonds to the South. They could provide a potential source of collaboration for cities.
  • Multilateral DFIs such as the World Bank, EIB, ADB and AfDB currently only link USD 2 billion of the USD 18 billion flowing to the south to city-based projects. There is potential to scale-up.
  • In combination, multilateral and bilateral DFIs such as EIB, EBRD and KfW’s send more green bond flows to projects in the North than the South. USD 25 billion of flows goes to the North versus USD 21 billion of flows to projects in the South.

CPI’s analysis will inform guidelines for city administrators and stakeholders in developing countries on how to develop a market access strategy for the Green Bonds for Cities project. From autumn 2016, this project will provide toolkits and training sessions with the aim of expanding green bond market flows to cities in the South.
CPI is working with South Pole Group on this in collaboration with ICLEI and Climate Bonds Initiative. The project is funded as part of the Low-Carbon City Lab (LoCaL) under Climate KIC.

This op-ed was originally published on Environmental Finance.

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Video: Dr. Buchner on Translating NDCs into Investment Plans

June 21, 2016 |


The Paris Agreement commits countries to holding global temperature rise well below 2 degrees and to pursue efforts to limit it to 1.5 °C. Significant investments are needed to meet this target and accelerate the transition towards a low-carbon, climate-resilient future. In this video-lecture for the International Center for Climate Governance (ICCG), Dr. Barbara Buchner, Climate Policy Initiative’s Executive Director of Climate Finance explains how to scale up financing for climate action and how to translate countries’ nationally determined contributions (NDCs) into real investment plans.

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Philanthropy’s Role in Financing a Climate-Resilient World

June 16, 2016 |


Lorenzo Bernasconi, Associate Director, The Rockefeller Foundation and Dr. Barbara Buchner, Executive Director, Climate Finance, co-authored this piece, which originally appeared on The Rockefeller Foundation blog.

In April of this year, leaders from 177 countries signed the Paris Agreement, with a goal to put the world on track to keep global warming below 2°C in order to avoid the catastrophic impacts of a warming planet. While mitigating the future impacts of climate change is crucial, there is a concurrent need to address the effects that are already present, and that are sure to increase. The Paris Agreement also raised the political profile of climate resilience, recognizing that adaptation represents a challenge with local, national, and international dimensions.

This is good news given that the effects of climate change are already threatening communities around the world. The Guardian recently reported that five islands in the Pacific have already been lost due to rising sea levels, and just last month US$49 million was committed to relocating an entire community of ‘climate refugees’ in rural Louisiana, with plans to move several other towns in the United States for similar reasons.

With the Paris Agreement—as well as the UN Sustainable Development Goals adopted in 2015—international attention on climate adaptation and resilience is rising, but so too are the costs.

The 2016 UNEP Adaptation Gap report estimates that adapting to climate change in developing countries could cost between US$280 and US$500 billion per year by 2050. Despite these rising costs, actual investments in climate adaptation lag. According to the Global Landscape on Climate Finance, only US$25 billion was invested in climate adaption activities globally in 2015—around 7 percent of total climate-related investment. While this is only a rough estimate due to a lack of information on domestic and private resilience investments, current investments clearly constitute only a fraction of what is needed to avoid costly and catastrophic future impacts.

Further compounding this gap is the fact that climate change disproportionally affects the poorest communities and individuals globally—those that often lack the means to build adaptive capacity. For example, the world’s 450 million smallholder farmers are especially vulnerable to droughts, extreme weather events, and other climate-related shocks, but have little financial or educational resources to build the resilience necessary to withstand this volatility.

“What’s needed is a paradigm shift to ensure that the benefits of building climate resilience—and the costs of failing to do so—are integrated into investment and planning decisions in both public and private sectors.”

It is clear from the rising costs and impacts that investing now in climate resilience makes good economic sense in the near and long term, but constrained national and local public budgets will not be enough to finance this transition.

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Uncertain Future of the Climate Investment Funds Makes Achieving Climate Finance Goals Tougher

June 14, 2016 | and


On June 15th and 16th members of the Joint Trust Fund Committee of the Climate Investment Funds (CIF) meet in Oaxaca, Mexico, to discuss, among other issues, the strategic direction of the fund. One topic to be discussed is the CIF’s “sunset” clause, which was conceived at the fund’s establishment and requires it to conclude its operations once a new financial architecture – now embodied by the Green Climate Fund (GCF) – is effective.

Now that the GCF is operational, some feel that the “sunset” clause should be activated. In any case, the CIF does not currently have sufficient resources to finance the projects in its pipeline or those of new pilot countries.

Contributing governments are certainly in a tough position. They are faced with the question of whether or not to re-up their financial commitment to the CIF, but have recently pledged significant resources to the GCF – over $10 billion in total – and their budgets for climate aid are under pressure as resources are diverted to address other immediate needs such as the European migration crisis.

The lack of clarity regarding the future of the CIF is having a real impact. The dearth of financial resources for the CIF and uncertainty regarding whether new resources will be made available is disrupting recipient countries’ project pipelines and delaying the development of investment plans for new CIF pilot countries. This is also creating doubt within the multilateral development banks (MDBs) regarding how much and what type of concessional finance they will have access to. This is important because of the role concessional finance plays in overcoming investment barriers and helping MDBs to mobilize internal resources to meet their climate finance commitments.

As the CIF Joint Trust Fund Committee meets this week and makes major decisions on the fund’s future direction, it is worth reflecting on what role the CIF has played within the global climate finance architecture and what unique elements it has brought to the table. A study recently published by CPI – The Role of the Climate Investment Funds in Meeting Investment Needs – can help inform this reflection. The report highlights climate-relevant investment needs and assesses the CIF’s distinctive role in bridging investment gaps compared to other multilateral climate funds.

It concludes that the CIF should be kept in operation to maintain progress towards meeting international climate finance targets, particularly while the GCF gets up to speed and in light of key temporal and structural differences that exist between the two funds. The CIF has played a particularly important role in financing climate action because of a few distinctive features. These include:

  • The CIF’s programmatic approach. In partnership with the MDBs – the CIF’s implementing entities – the fund involves recipient countries’ private and public stakeholders in the development and implementation of policy reforms and investments aligned with countries’ climate strategies. It starts with countries being informed of the indicative amount of resources they are eligible for, followed by the development and endorsement of the investment plans and finally approval of projects. This approach, which has provided a certain level of predictability to both the recipients and implementing partners, represents a role model for the development and implementation of countries’ Intended National Determined Contributions (INDCs). Translating INDCs into concrete investments will similarly require the mobilization of multiple stakeholders under coherent strategic investment plans and the development of supportive policy and governance frameworks.
  • The range of financial instruments available through the CIF and the fund’s risk appetite. Although some have yet to be fully utilized, the range of financial instruments offered by the CIF has proven to be particularly well-suited to foster the piloting of first-of-a-kind approaches and business models, and to take on market risks that others are not willing to take. A survey of developing countries and their climate finance priorities indicates that flexibility in financing terms and types of financial instruments provided is of “critical” importance to advance climate objectives.
  • The CIF’s focus on private sector engagement in mitigation, forestry and adaptation. The CIF has allocated more finance to drive private sector investment in these sectors than any other multilateral climate fund. It has also been the first to develop dedicated approaches to achieve this end, such as the private sector set-asides for forestry and adaptation, and is one of the only multilateral climate funds that offer concessional loans for these activities, as opposed to just grants. Building on this experience, the CIF holds the potential to further enhance private sector engagement in these areas going forward.

The CIF has experience and a functional structure in place, which can help to maintain momentum and bridge major climate investment gaps. Other climate funds have notable strengths, but do not necessarily offer the same capabilities as the CIF.

While the establishment of the GCF is intended to fill investment gaps, questions remain regarding the extent to which the fund will be able to deliver the scale and type of support recipient countries need in the short to medium-term as it gets up to speed.

As decision makers shape the international climate finance architecture and make choices about which funds and approaches they choose to support, they should consider the unique and positive features of existing funding mechanisms and how these features can help effectively address countries’ current and future investment needs.

Given the real scarcity of resources available, there is no easy answer. If they decide to keep the CIF alive, it may be worth exploring and taking decisions on alternative funding modalities to maintain at least certain elements of the CIF operational and mitigate a potential loss in the momentum it has created.

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Identifying strategic opportunities for philanthropy to engage in sustainable land use finance

May 2, 2016 |


With growing global demand for food and fuel in a climate-constrained world, the question of how to best reorient land use towards more sustainable and productive practices is a key challenge for governments, businesses, and individuals. This is particularly true for developing countries, where agricultural expansion is a major source of economic growth and development, but also a major source of emissions and environmental degradation.

In recent years, significant international efforts have focused on developing mechanisms to deliver incentives for developing countries to maintain high-value ecosystems. This has happened primarily through bilateral and multilateral funds in support of Reducing Emissions from Deforestation and Forest Degradation (REDD+), as well as through voluntary carbon markets and ad-hoc payments for ecosystem services (PES) pilots. However, such mechanisms have often proved disappointing, failing to deliver on the intended results or suffering from inadequate funding and difficult implementation.

There is a need to better understand how investments are currently being delivered on the ground to support the land use sector, and to support the most appropriate interventions to shape investments towards more sustainable and less destructive land use activities.

To explore these opportunities, CPI partnered with the Climate and Land Use Alliance (CLUA) to identify entry points for philanthropic funders to unlock capital in support of more sustainable land use practices. CPI analysis shows that there are distinct, powerful, and accessible finance-related levers that philanthropy can use to unlock investment in and reorient capital towards more sustainable land use practices. Philanthropy can often act in more nimble and strategic ways compared with public donors who may be constrained by slow bureaucratic processes and competing political priorities.

These opportunities were presented to CLUA and key stakeholders at a retreat in early March, and are now presented here. In the coming months, CPI will continue this work with CLUA and will rank and more fully develop the most promising interventions that can be supported by philanthropy.

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Two policy improvements to drive more renewable energy deployment through mini-grids in Uttar Pradesh, India

April 26, 2016 | and


This post is co-authored by Stephen Comello, Associate Director of the Sustainable Energy Initiative at Stanford Graduate School of Business and a Research Fellow at the Steyer-Taylor Center for Energy Policy and Finance.

With about 80 million households across rural India lacking access to electricity, the country’s policymakers have been searching for solutions to close this development gap. At the same time, the public-sector electricity distribution companies (DISCOMs) are unable to systematically extend the central grid to where it is needed.

Off-grid alternatives include kerosene lanterns and small, individual home solar systems. However, another alternative, called mini-grids, offers what these lanterns and small solar systems cannot ­­– the promise of at-scale, off-grid electrification with productive capacity; that is, the ability to simultaneously power multiple loads such as lighting, tools, appliances and machinery.

A mini-grid is a group of interconnected loads and distributed energy resources that acts as a single entity. On a per unit basis, mini-grids offer electricity at least 50% lower life-cycle cost than diesel generators, kerosene lanterns and individual home systems. Moreover, mini-grid development could spur entrepreneurship and local business opportunities in the energy sector.

Enabling mini-grid development by the private sector is mainly the purview of the State Energy Boards (SEBs) across India. While the central government has developed national mini-grid guidance, clear policy that creates the mini-grid market must originate with the state governments. Formation of such a policy is a delicate balance, as there are multiple significant barriers to mini-grid development, such as financing, revenue collection and system maintenance. Most of these hurdles can be overcome with well-formed business models, supported by effective policies.

Uttar Pradesh (UP), which has some of the lowest electricity access rates in the country, has recently announced a promising first-of-its-kind new policy promoting mini-grids, which could set the benchmark for other states to follow.

Uttar-pradesh Photo credit: Flickr user sandeepachetan

The policy offers developers flexibility with respect to the general business model to be pursued through the choice of two models. Model 1 offers a 30% capital subsidy, in exchange for the DISCOM regulating project location, mini-grid technical specification, the service level, and, customer-wise tariff rates. Model 2 is arguably the diametric opposite; no subsidy offered, with the developer free to choose location, technology service level and rate charged. Given the flexibility, there has been great interest in Model 2, with 85% of applications made under this scheme.

The policy also provides guidance with respect to the key risk for mini-grids – the threat of central grid extension. There have been multiple instances where the central grid eventually extended to a mini-grid and forced the operator out because entrepreneurs couldn’t compete with DISCOMs’ highly subsidized rates. This situation is known as a hold-up problem, where a developer is deterred from making any investment, given the lack of safeguards to provide the confidence of earning an appropriate return.

The UP policy specifies that if or when the central grid extends to the mini-grid, mini-grid electricity would be purchased by the DISCOM at “the tariff decided by UP Electricity Regulatory Commission or a tariff decided on mutual consent”, and “based on the cost-benefit analysis of the installed project, the project will be transferred to the DISCOM at the cost determined on mutual consent between DISCOM and developer by the estimation of cost (or profit loss) of the project installed by the developer.”

Unfortunately, the UP policy does not fully address the hold-up problem, primarily because of the ambiguity faced by the developer in terms of securing his investment at the time of central grid extension. Specifically, the prospect of the stated “cost-benefit analysis of the installed project”, provides no guidance or methodology necessary for a developer to understand the expected value of the mini-grid in the event of grid extension before the initial investment is made. This raises concerns about the effectiveness of the policy in deploying mini-grid capacity.

Thankfully, based on a recent study at Stanford Graduate School of Business, this policy gap can be closed with two amendments which ensure that the entrepreneur would be indifferent between the event of grid extension and continuing as an independent operator.

First, the entrepreneur should have the unilateral right to transfer ownership of all distribution and generation assets of the mini-grid to the DISCOM.

Second, the transaction price must be given by the current book value of these assets. The book value must be calculated so as to reflect economic fundamentals, based on the concept of replacement cost accounting. What this means is that if revenues are set so as to cover all operating costs, depreciation and a fair return, the developer will be indifferent between receiving a one-time buyout of the mini-grid equal to current book value, or continuing to operate the mini-grid.

Taken together, these amendments would significantly improve UP’s mini-grid policy, leading to UP maximizing mini-grid investment and, therefore, deployment. The success of UP’s mini-grid policy would send a positive signal to other states, and enable them to help India move towards its off-grid deployment targets of 3 GW.

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Video: Dr. Buchner on Climate Finance Beyond Paris

April 22, 2016 |


Today, delegates gather at the United Nations to sign the historic agreement to tackle climate change. Dr. Barbara Buchner, Climate Policy Initiative’s Executive Director of Climate Finance discusses next steps, pointing to three areas in particular where nations and investors should focus.

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