How the Current Haze Disaster has Rekindled Hope for Indonesia’s Peatlands

Jane Wilkinson, November 25, 2015


This year’s forest and peat fires in Indonesia have reached unprecedented scale. The Global Fire Emissions Database[i] estimates that by 16 November, more than 122,000 forest and peat fires will have emitted 1.75 billion metric tons of CO2 equivalent. The World Resources Institute (WRI) calculated that as of 16 October, emissions from fires had exceeded those of the total US economy – more than 15 million tons CO2 per day – on 26 separate occasions, noting that the U.S. economy is 60 times larger than Indonesia’s.


Photo by Julius Lawalata, World Resources Institute

Put another way, in just three weeks, emissions from fires in Sumatra and Kalimantan exceeded the annual emissions of Europe’s largest economy, Germany.[ii] The fires have caused environmental havoc, a surge in respiratory illnesses and other health impacts, and economic losses around the region. After mounting international pressure, President Widodo announced radical new caps on peat use: an end to licensing for concessions on peat lands, a review of existing licensing, recognition of high carbon value lands, and the creation of a program to restore the carbon-rich forests and peatlands. The government is reportedly exploring the establishment of a new Peat-land Management Agency to spearhead efforts.

This is not the first time moratorium-like measures have been announced in Indonesia. Success will lie in the extent of implementation and especially, in enforcement. But there is very real potential here for Indonesia to transform the way peat is used, particularly in the agricultural sector—with international assistance. Indonesia’s peatlands and tropical peat swamp forests, store more carbon than any other terrestrial ecosystem and are important reservoirs of biodiversity and ecosystem services such as water filtration. There is global significance in the efforts to find ways to rehabilitate peat forests degraded due to deforestation and inefficient agricultural practices.

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Making Climate Finance Count – Increasing Transparency in the Lead Up to COP 21

Barbara Buchner, November 23, 2015


As 2015 draws to a close, there is a strong hope that the Paris climate summit could represent a turning point in the global fight against climate change. To support discussions, Climate Policy Initiative (CPI) recently published two reports.

Earlier this week, we released our Global Landscape of Climate Finance 2015, the most comprehensive information available about which sources and financial instruments are driving investments, and how much climate finance is flowing globally. This report sheds light on global progress towards the level of low-carbon and climate-resilient investment needed to constrain greenhouse gas (GHG) emissions to levels consistent with the 2°C global temperature goal and to adapt to an already changing climate. It also illuminates how different types of public support are addressing different needs, and how they are interacting with private sources of finance. Such understanding can position policy makers and investors to more effectively manage the risks and seize the opportunities associated with climate change.

We found that global climate finance flows reached at least US$391 billion in 2014 as a result of a steady increase in public finance and record private investment in renewable energy technologies. Public actors and intermediaries committed US$148 billion, or 38% of total climate finance flows. Private finance increased by nearly US$50 billion in 2014 and resulted in a record amount of new renewable energy deployment, particularly in China. About 74% of total climate finance flows, and up to 92% of private investments were raised and spent within the same country, confirming the strong domestic preference of investors identified in previous years’ Landscape reports and highlighting the importance of getting domestic frameworks for attracting investment right.

This global outlook provides a complementary, big picture perspective to a recent report prepared by the Organisation for Economic Co-operation and Development (OECD) in collaboration with CPI to provide an up-to-date aggregate estimate of mobilized climate finance and an indication of the progress towards developed countries’ commitment under the UNFCCC to mobilize US$100 billion annually for climate action in developing countries by 2020. While US$100 billion will not meet the climate challenge by itself, it is currently the primary political benchmark for assessing progress on climate finance and an important starting point for getting us on a low-carbon, climate-resilient pathway.

Our estimates indicate that climate finance reached US$62 billion in 2014 and US$52 billion in 2013, equivalent to an annual average over the two years of US$57 billion. Bilateral public climate finance represents a significant proportion of this aggregate, provisionally estimated at US$22.8 billion on average per year in 2013-14, an increase of over 50% over levels reported in 2011-2012. Multilateral climate finance attributable to developed countries is estimated at US$17.9 billion in 2013-2014. The remaining finance consists of preliminary and partial estimates of export credits and of private finance mobilized by bilateral and multilateral finance attributable to developed countries.

The OECD report makes a significant contribution to informing international discussions and enhancing transparency on climate finance ahead of COP 21 in Paris in two ways. It provides a robust number including preliminary estimates of mobilized private finance for the first time and does so based on a transparent methodology. This represents real progress. In 2011, when we began gathering data for our Global Landscape of Climate Finance reports there was very little in the way of common methodologies and definitions. Since then, we have worked with the OECD, a group of Multilateral Development Banks, the International Development Finance Club and the UNFCCC Standing Committee on Finance and others, to develop definitions and methodologies that have helped to close data gaps, improve comparability and increase understanding of climate finance.

Ultimately, of course, it is up to international negotiators to decide what should and should not count towards the US$100 billion commitment and how best to approach the wider climate challenge. Our hope is that the lessons learned from our recent climate finance reports can help to further improve the transparency and comprehensiveness of climate finance measurement and reporting to develop tracking systems that ultimately help governments to spend money wisely.

A proper measurement, tracking, and reporting system is a critical building block to ensure finance is used efficiently and targeted where it is needed the most. By shedding light on the intersection between public policy, finance and private investment, we will continue to help decision makers from developed, developing and emerging economies optimize the use of their resources.

This article was originally published on Climate Change Policy & Practice, a knowledge management project of the International Institute for Sustainable Development (IISD). See:

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Changing land use patterns in Brazil

Juliano Assunção, October 29, 2015


As the demand for food and climate change risk both increase, a new study explores paths to more efficient land use in the country.

As Brazilian President Dilma Rousseff promised to reduce Brazil’s greenhouse gas emissions by 43 per cent by 2030. Brazil became the first major developing country to pledge an absolute reduction in emissions over the next fifteen years. Since the country is an agricultural leader with abundant natural resources, it clearly has many challenges ahead. One of the questions that arises is whether it is possible to simultaneously promote economic growth and improve ecosystem protection within Brazil’s rural landscape.

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Institutional Investors Can Help India Meet Its Climate Action Pledge

Gireesh Shrimali, October 8, 2015


Earlier this month, India announced its pledge for action on climate change beyond 2020, ahead of the United Nations summit on climate change negotiations this December in Paris. India’s pledge, called an INDC (Intended Nationally Determined Contribution), has been much anticipated, since it is the last to be announced of the countries which are major contributors to climate change. It promises that renewable energy will be 40% of the country’s expected energy mix in 2030, along with a 35% reduction in greenhouse gas emissions by 2030 from 2005 levels.

India’s INDC is laudable and an important step forward that will be good for both the climate and for the nation’s economic growth and energy supply. However, it is also very ambitious, given that the amount of renewable energy needed will be a significant jump from India’s current supply of less than 5GW of solar power and less than 25GW of wind power.

Cost-effective financing will be critical to India achieving its INDC. The growth of renewable energy in India has been dampened by both a lack of financing, and financing at unattractive terms. In particular, the high cost, short tenor and variable interest rates of debt have made renewable energy in India approximately 30% more expensive than in the US or EU.

Achieving India’s INDC is going to require mobilising a lot more financing, at more attractive terms. There are several avenues the government could explore for a more cost-effective and realistic pathway to the INDC.


Photo credit: Yahoo

One promising avenue is institutional investors in India,such as domestic insurance companies and pension funds.

Renewable energy in India has traditionally relied on domestic commercial banks for debt financing. However, the typical tenor of bank loans is around 10 years, whereas most renewable energy projects require longer term financing that matches their project life cycles of 20 to 25 years.

Compared to commercial banks, institutional investors not only invest over longer terms, but also accept lower returns in exchange for lower risks, providing a better match with the low risk, low return profiles of renewable energy projects.

Analysis by Climate Policy Initiative shows that domestic institutional investors may have the capacity to finance $15 billion of operational renewable projects up to 2019. This is a significant share of the $100 billion of investment in infrastructure needed to meet India’s previous target of 175GW of renewable energy by 2022.

However, one key barrier stands in the way: institutional investors are restricted to investing in projects above a certain credit rating threshold, which is AA or above in the case of India. Most renewable energy projects fall below this threshold.

Enabling institutional investment will require financial instruments that can raise the credit rating of renewable energy projects. Two promising instruments may be able to do this: infrastructure debt funds by non-banking financing companies, which are pooled investment vehicles designed to facilitate investment across infrastructure sectors, including renewable energy, and renewable energy project bonds with partial credit guarantees, which are a form of credit enhancement where the borrower’s debt obligations are guaranteed by a guarantor with a strong credit rating.

While both instruments currently face structural and regulatory barriers that have impeded their use as investment vehicles, the government can address these with appropriate policy changes.

Another potential source of more financing for renewable energy is foreign institutional investors. However, foreign investors face a key risk. Because currency exchange rates can be volatile, when a renewable energy project is financed by a foreign loan, it requires a currency hedge to protect against the risk of currency devaluation.

Market-based currency hedging in India is too expensive, making foreign financing just as expensive as domestic financing. Reducing the cost of foreign financing by reducing the currency hedging cost can mobilise foreign capital and spur investments in renewable energy.

One way to do this could be through currency hedging sponsored by the Indian government. Recent analysis by Climate Policy Initiative shows that government-sponsored currency hedging, if designed appropriately, could reduce hedging costs by nearly 50%, lowering the cost of renewable energy by nearly 20%.

As India embarks on its ambitious journey towards reaching its INDC, attracting institutional investors through improved policy, such as credit enhancement for renewable energy projects and smartly designed government-sponsored currency hedging for foreign investment, could prove key in providing the critical low-cost, long-term financing needed for renewable energy growth.

A version of this blog first appeared in the Huffington Post.

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Five Ways to Build Effective Climate Finance Readiness Programs

Angela Falconer, October 6, 2015


The Green Climate Fund (GCF) will review its first project proposals at its eleventh meeting later this year, just in time for the international climate negotiations at COP 21 in Paris. This important milestone for the Fund comes after it has received USD 10.2 billion of initial contributions as part of developed countries’ commitment to mobilize $100 billion climate finance per year by 2020 from public and private sources. The impact for developing countries could be significant, with countries receiving substantial funding from the GCF to combat climate change and protect its infrastructure and people from its effects.

However, this promising start is only half the battle. Countries also need systems in place to absorb money, mainstream climate change considerations into national policies, and coordinate across government and partners to build a good project pipeline to channel funds effectively and to mobilize more public, private, domestic and international resources.

To respond to this need, a number of climate finance readiness programs from international actors have emerged in recent years, including a Readiness and Preparatory Support Initiative under the GCF itself and the Climate Finance Readiness Program run by GIZ and KfW and commissioned by Germany’s Ministry for Economic Cooperation and Development. For example, Vietnam, with support from GIZ, is working with the Ministry of Planning and Investment on coordinating and assessing international climate finance, building capacity, and kick-starting a process that in the end will support the country to fulfill the direct access option of the GCF.

CPI has worked to assess these types of approaches in a new paper that measures mobilization of finance from technical assistance and climate finance readiness support, based on detailed analysis of five GIZ technical assistance programs. Below we draw out five early lessons on how international actors and recipient countries can maximize the impact of their readiness programs:

1. Strong coordination of readiness support programs by recipient countries will likely be more cost-effective and raise more climate finance. With a number of readiness support programs starting to operate in single countries, caution needs to be taken to avoid overlap and overburden on recipient countries. Readiness support from multiple partners is usually justified due to the range and volume of needs. But strong direction and coordination has to come from recipient countries themselves so that support does not become fragmented. The GCF and other providers of readiness support are already making efforts to coordinate their support but systematic, recipient-led approaches could ensure countries get the most out of the process. On their side, donors can consider co-financing existing programs as the Czech Republic did with the GIZ program.

2. Readiness programs can support countries to build the necessary frameworks and institutions to both absorb international climate finance and channel domestic finance. Countries need to combine a vision for low-carbon and climate-resilient growth with a focused and realistic implementation plan in which the role of both domestic and international stakeholders is clear. Readiness support can help countries to develop these visions, carry out planning, integrate GCF financing into planning frameworks and build institutions that can absorb the funding. Readiness support providers should strive for a stable and long-term in-country presence to support this.

3. Readiness programs need to provide different types of support to help governments to mobilize different sources of finance. In many markets, governments are looking for ways to combine finance from public and private actors to achieve their policy goals. This requires different types of support from readiness programs, e.g. support to meet the institutional and fiduciary requirements to access international climate finance; technical assistance to support the design of financial incentives and national mechanisms that can mobilize domestic public finance; and advice on legal frameworks, building attractive markets, and developing project pipelines to unlock private investment.

4. Technical capacity building organizations should coordinate closely with development finance institutions. Doing so will not only increase countries’ abilities to absorb GCF funds but also give them a pipeline of climate-relevant projects to channel those funds to. Readiness support can work to bring on early stage ideas and develop a more complete and strategic flow of the kind of finance-ready projects that financial cooperation partners are typically looking for.

5. Mainstreaming climate change into national, subnational and sectoral planning, polices and budgets builds policymakers’ capacity and improves mobilization of domestic and private finance. Mainstreaming can encourage governments to divert resources from high-carbon and inefficient alternatives to climate-compatible interventions and supports the development of policies that help to mobilize private investment. By revealing more clearly how finance is flowing it can also provide donors with the opportunity to align their activities with national policies and priorities.

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Unblocking debate on the USD 100 billion climate finance goal

Jessica Brown, September 29, 2015


At the Sustainable Development Summit in New York last week, the question of progress toward existing climate finance targets was once again a key point of debate. While mobilizing the USD 100 billion per year that developed countries have agreed to provide to developing countries by 2020 will not meet the climate challenge by itself, it is currently the primary political benchmark for assessing progress on climate finance.

Improving understanding of different stakeholders’ perspectives on what counts towards the USD 100 billion commitment could improve the chances of reaching an agreement. That’s why Climate Policy Initiative’s latest paper, written with Overseas Development Institute (ODI), and World Resources Institute (WRI), aims to untangle the key issues arising in debates about “what counts”, and provide an approach to classifying climate finance in politically relevant ways that can facilitate discussion.

The paper takes no position on what should count towards the $100 billion. It leaves interested parties to draw their own conclusions. We feel it can help at this point in the lead up to Paris because:

  • It distills the debate into five main issues and defines and explores each in depth. They are: 1) Motivation; 2) Concessionality / source (an imperfect but useful conflation); 3) Causality; 4) Geographic origin; and 5) Recipient.
  • It represents each issue in “onion diagrams” organizing different categories into concentric circles according to political consensus. The closer to the center a category is, the more notional consensus there is among stakeholders that it should count toward the goal.

The paper ends by pulling all five variables together into diagrams like the one below that summarize the debate and help interested parties define and discuss what they feel should count.


This paper does not attach quantitative estimates to the various categories of flows. This was a deliberate decision. While quantifying flows associated with the various layers and rings of each “onion” diagram is an essential step for future work, we hope that, by encouraging stakeholders to discuss the principles behind their views before focusing on the numbers, this paper may help to de-politicize these debates and support deeper reflection on underlying assumptions and preferences.

Allocating numbers to these flows will, in any case, be a challenge. Poor data quality and availability remain an issue for some variables as do accounting issues that affect how flows of climate finance are being counted by different countries and organizations.

While this paper does not provide definitive solutions on what should count towards the USD 100 billion, it supports deeper reflection on the assumptions and preferences that often underlie international climate finance negotiations. Such reflection may help to de-politicize these debates while fostering better mutual understanding of perspectives.

We also believe the insights highlighted in this paper can also facilitate constructive discussion in other ongoing debates on financing for development, what counts as official development assistance and others. The global community and by extension all countries could benefit from more common understanding.

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Indonesia’s INDC – A step forward or a missed opportunity?

Jane Wilkinson, September 28, 2015



Indonesia submits its INDC

As the Paris climate negotiations draw closer, countries have been asked to submit their Intended Nationally Determined Contributions – INDCs – by 1 October. INDCs identify the actions a government intends to take as the basis of post-2020 global emissions reduction commitments, that will be included in the future climate agreement. The process of setting the INDC is bottom-up and country-led, in contrast to the top-down approach of the Kyoto Protocol. INDCs already submitted have been heavily scrutinized and judged for the level of ambition or leadership.

Given the importance of the INDCs as a way for nations to take stock of their goals and needs and to chart paths towards an ambitious outcome in Paris, our question here is whether Indonesia has taken full advantage of this opportunity to close the gaps in existing and newly proposed policy frameworks, to pave the way for a prosperous, decarbonized economy.

Baselines – going back to the drawing board

Indonesia is presenting its INDC as a deviation from business as usual using projections based on the historical trajectory (2000-2010). It assumes projected increases in the energy sector in the absence of mitigation actions, however details of these assumptions and how they are modelled have not been disclosed in the INDC document.

As Indonesia’s INDC sets out a 26% emission reduction by 2020 and 29% emission reduction by 2030 based on a 2010 projected business as usual scenario, at a glance, this seems to imply that the first target was very ambitious, or perhaps that the new one, which adds a further 3% over the next 10 years, is hedging bets. It could also imply that the Government of Indonesia has calculated the variables with extra care and has set a more realistic target. In any case, because inventory and monitoring systems have not been able to estimate progress to date, it is hard to decipher where Indonesia stands with respect to business as usual and where they could go.

Casting more light on this situation in the latest inventory, and outlining in detail the baseline as well as assumptions and modelling underlying it, for each sector, would add credibility to Indonesia’s upcoming Third National Communication to UNFCCC in 2016.

Capitalizing on low hanging fruits

Since forestry emissions (from land and land use change, as well as peat and forest fires) as per Indonesia’s Second National Communication to the UNFCCC of 2010 account for 63% of the emissions profile, a landscape-scale ecosystem management approach, emphasizing the role of sub-national jurisdictions to decarbonize the economy, could be highly relevant to Indonesia. The INDC document describes its strategic approach as recognizing that climate change adaptation and mitigation efforts are inherently multi-sectoral in nature and require an integrated approach. However current on-going efforts, such as the moratorium on the clearing of primary forests, are not enough to curtail rising pressures on land. Increased palm oil production and the recent push for expanding markets for biodiesel, upcoming food security programs which open one million hectares of new paddy fields, and 35 GW of power to be installed by 2019 – much of it coal based, while all important to Indonesia’s growing economy, could threaten Indonesia’s sustainability goals if not managed properly.

Climate Policy Initiative’s protection and production and land management approach (PALM), applied in applied in Central Kalimantan, in collaboration with the University of Palangkaraya, aims to lead the way in this regard by bringing together private, public, and smallholder-farmer stakeholders to unlock a new, collective approach to agriculture that will promote food security, energy security, socially inclusive economic development and environmental sustainability. The project has already identified opportunities to increase profitability and productivity for smallholder farmers through larger scale management in the form of cooperatives. Such opportunities reduce pressure on land, support sustainable development of the palm oil economy, and provide livelihood benefits to the smallholder community. Such initiatives could also potentially lead to quantifiable emissions reductions.

Scaling up climate finance required to deliver the INDC

The Landscape of Public Climate Finance in Indonesia conducted by the Indonesian Ministry of Finance’s Fiscal Policy Agency and CPI found that public climate finance in 2011 reached at least IDR 8.377 billion (USD 951 million). The Government of Indonesia disbursed at least IDR 5,526 billion (USD 627 million) or 66% of those flows. The finance was well targeted, with most of it flowing through to the forestry sector (73%) and laying a strong foundation for decarbonizing the economy through policy development and capacity building.

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Investing in a healthier climate

Dario Abramskiehn, September 14, 2015


Hockey great Wayne Gretzky once said, “I skate to where the puck is going to be, not where it has been.”

The same holds true for investing. Those who invest today in the assets that set the world up for a low-carbon, climate resilient future will be the winners of tomorrow.

Last week, California’s legislature passed a bill that will require the two largest pension funds in the United States—CalPERS and CalSTRS, which together manage $476 billion in assets—to divest from coal. Representatives in support of the bill cited both the declining value of coal stock and the need to take action on climate change as reasons to divest.

California’s move is the latest in a slew of recent victories for the divestment movement, which also includes Stanford University, the Church of England, Rockefeller Brothers Fund, and Norway’s $890 billion sovereign wealth fund.

The movement’s success has amplified ongoing conversations about the risks of high-carbon assets. But there is more to solving climate change—and to maintaining a balanced investment portfolio—than divestment alone. Accounting for a variety of climate-related risks such as water scarcity, supply chain disruptions, and infrastructure damage, for example, can reduce portfolio volatility while rewarding the most resource-efficient companies in each sector.

Investment is an equally important piece of the financing conversation. We’re falling further behind the International Energy Agency’s goal of $5 trillion in additional clean energy investments by 2020 to keep temperatures from rising past two degrees (the internationally accepted limit to avoid the most dangerous effects of climate change). However, investors have a variety of emerging opportunities to invest in climate solutions that are good for both the planet and their bottom lines.

A new report from Climate Policy Initiative, an analysis organization that focuses on climate finance, examines this world of risks and opportunities that climate change presents to investors. To add clarity to a complex climate investment landscape, the report explores the data, tools, and financial products available to investors to help manage it.


Climate finance is flowing but it’s not enough. We are falling further behind investment levels needed to reach global temperature targets. 

So where does data on climate risks and opportunities come from and how useful is it?

Environmental, social, and governance (ESG) data is the predominant source of information for investors who want to understand the risks that they face from climate change. ESG information gives investors insight into company performance across climate-relevant factors including emissions, water consumption, energy use, and many other variables.

ESG data is incredibly valuable information. There’s mounting evidence that companies and funds that score highly on ESG metrics financially outperform their average- and low-ESG peers.

There are several kinds of financial products based on ESG data that allow investors to manage the financial implications of climate change:

  • Exclusionary indexes remove fossil fuel assets or particular subsets, such as coal and tar sands, from their holdings.
  • Non-exclusionary indexes take a different tack, tilting portfolios to overweight high-ESG performers and underweight low ones without excluding fossil fuels or other energy intensive/extractive industries. Some think of this colloquially as “picking the cleanest players in a dirty space.”
  • Green thematic indexes pursue pro-climate investments such as renewable energy and alternative fuels, often targeting companies that are deemed leaders in climate change mitigation and adaptation. However, it is not always clear how “green” a given thematic index actually is. Their value is not in offering pure-play green investments, but rather, variations on mainstream market trends that capture small structural movements toward clean technologies.

Overall, ESG-inclined indexes are a promising beginning, and they’re emblematic of the increasing recognition and incorporation of environmental issues within the investment community. Nonetheless, for managing risk, they often lack the levels of transparency needed for investors who are trying to tackle many of the complex risks embedded within their portfolios. And their ability to capture significant long-term green outperformance is not yet clear.

Other green financial products such as green bonds and YieldCos are growing quickly and deserve exploration.

Green bonds are fixed-income securities that link bond proceeds to green activities such as renewable energy or agricultural resiliency. The appetite for them has been enormous. In 2014, the green bond market grew to nearly $40 billion, an increase of more than 160 percent from 2013.

But in spite of investor enthusiasm and important efforts to govern green bonds, there is no single definition of what a green bond actually is. It remains unclear whether green bonds are actually raising new financing for climate action or simply repackaging existing corporate bonds. Investors must remain aware of these limitations when considering green bond investments today and support efforts for greater due diligence in the future.

YieldCos are publicly traded spin-offs of energy companies that hold long-term, yield-oriented assets such as renewable energy and infrastructure. Renewable assets have very different risk profiles from their fossil counterparts. For example, solar electricity has no fuel costs, and thus is far less susceptible to volatility from changing oil prices. Holding renewable energy and fossil fuel assets separately can price their respective risks better, leading to lower costs of capital while expanding opportunities to invest in renewable energy.

However, the more than $20 billion market has been predicated on the belief that parent companies and asset owners will continue to move more and more renewable energy assets into current and future YieldCos. Today’s YieldCos focus on growth and may not meet the needs of all investors; large institutional investors, for example, may seek more stable growth and dividends over time.

In short: Green bonds aren’t necessarily green. And YieldCos are probably more accurately described as “GrowthCos.” Neither is perfect, but they both represent an important start.

As California adds to the momentum of the divestment movement, investors should keep in mind that investing in climate opportunities is just as important as divesting from risks, but opportunities are currently less developed.

To improve this, financial product and service providers can work with investors to create new financial vehicles for green investments and improve existing ones. The $5 trillion clean energy financing challenge demands green investment vehicles that make sense for all types of investors—across industries, geographies, and asset classes.

Investors can also lead the way by calling for greater ESG disclosure from companies, by continuing to integrate ESG factors into their investment decisions, and by sharing best practices for minimizing climate risks and maximizing climate opportunities.

A version of this blog first appeared in the Stanford Social Innovation Review.

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Three ways to attract domestic institutional investment for renewable energy projects in India

Gireesh Shrimali, September 10, 2015


Institutional Investment

In order to achieve India’s renewable energy targets of 175 GW of solar and wind power by 2022, approximately USD 100 billion of investment in renewable energy infrastructure will be required, including USD 70 billion of debt.

While these ambitious renewable energy targets are important and admirable, financing them is going to be no easy task. Renewable energy in India has traditionally relied on domestic commercial banks for financing; however, this bank financing has become constrained by several limitations. Many banks are nearing their exposure limits to the power sector, and existing regulations do not distinguish between lending to fossil fuel-based power and renewable energy. In addition, the typical tenor of bank loans is around ten years, whereas most renewable energy projects require longer-term financing that matches the project life cycle of 20 to 25 years. Finally, bank debt at 12-13% interest rate is also costly; and together these inferior terms of debt – the high cost, short tenor, and variable interest rates – make renewable energy in India approximately 30% more expensive than in the US or the EU.

Achieving India’s renewable energy targets is going to require mobilizing a lot more debt at more attractive terms, from alternative sources.

One promising solution is domestic institutional investors, such as insurance companies and pension funds, who are ideally positioned to both increase availability of debt and provide debt at more attractive terms to renewable energy projects. Compared to commercial banks, institutional investors not only invest over longer terms, but also accept lower returns in exchange for lower risks, thus providing a better match with the risk-return profiles of renewable energy projects.

Preliminary analysis by CPI, performed earlier this year, shows that these institutional investors are likely to invest approximately USD 400 billion from 2014 to 2019. Based on their traditional share of 3.75% of their investments going to the power sector, if this share could be diverted to renewable energy, that would provide USD 15 billion of debt financing – a significant amount of the debt required to meet the targets.

So, what’s the catch? First, given high risks during construction, institutional investors, who prefer low risk, are unlikely to invest in renewable projects before they start operation. Second, even for operational projects, institutional investors require a domestic debt rating of AA or higher, which most renewable energy projects do not have.

The first issue is manageable – domestic banks can continue to fund projects under construction, and institutional investors can help refinance operational projects. This would free up bank debt to be used for new projects.

As to the second issue – enabling institutional investment will require financial instruments that can raise the credit rating of renewable energy projects. There are two promising instruments that may be able to do this: infrastructure debt funds by non-banking financing companies (IDF-NBFCs) and renewable energy project bonds with partial credit guarantees (PCGs).

IDF-NBFCs are pooled investment vehicles designed to facilitate investment across infrastructure sectors, including renewable energy. PCGs are a form of credit enhancement where the borrower’s debt obligations are guaranteed by a guarantor with a strong credit rating.

Both of these instruments can reduce risks to meet institutional investors’ minimum requirement of an AA rating. Compared to commercial loans, they have the potential to provide provide more attractive terms of debt by lowering the cost of debt by up to three percentage points, and increasing the tenor by up to five years.

However, both instruments face structural and regulatory issues which have impeded their use as investment vehicles. We identified three of the key issues that, if addressed with the right policy changes, could enable institutional investment in renewable energy.

First, for both instruments, the domestic debt market does not differentiate between construction and refinanced loans, making it hard for banks to release debt for refinancing. This can be addressed by encouraging public banking institutions to provide loans during the construction state of renewable energy projects, in order to catalyze the construction debt market.

Second, IDF-NBFCs require a three-way agreement between the project developer, the project authority (usually state-owned power distribution companies called DISCOMs), and the IDF-NBFC. However, in India, the poor financial health of DISCOMs presents a risk. The government can mitigate this risk by creating a model agreement for IDF-NBFCs which includes government guarantees for off-taker risk and robust termination provisions.

Third, for renewable energy bonds with PCGs, existing regulations limit institutional investors to investing in only up to 10% of the bond offering. This would require more than ten institutional investors per bond offering, which is difficult given associated transaction costs and the small number of institutional investors in India. Relaxing this regulation so that investors could subscribe to 25-33% of the bond offering would help address this barrier, making it possible to raise the required debt from only three to four institutional investors.

By taking these three steps, the government of India may be able to make significant progress towards financing India’s renewable energy targets, by harnessing the potential of institutional investment into renewable energy.

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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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