California’s cap and trade program leads the way on US climate action

November 28, 2017 | and

 

In recent weeks, California has continued to cement its leadership role in American climate policy – most recently at the COP23 climate conference in Bonn, Germany. In partnership with other states, cities, indigenous communities, businesses and investors, faith organizations, and numerous other institutions, California has led the U.S. “We Are Still In” coalition representing more than 130 million Americans and more than $6.2 trillion of the U.S. economy.

California Governor Jerry Brown recently announced plans to boost technical and political cooperation on carbon markets with the leaders of the EU and China. This announcement follows enormous legislative progress, compromise, and policy innovation in recent years in California to provide long-term certainty and stability to California’s cap and trade program and broader climate policy regime. This legislative progress includes:

  • SB 350, which strengthens energy efficiency standards for buildings and increases California’s renewable portfolio standard to 50% by 2030
  • SB 32, which legislatively reiterates and extends previous emissions goals to 40% below 1990 levels by 2030
  • AB 398, which legislatively extends the cap and trade program to 2030

AB 398 – the extension of cap and trade through 2030 – is an enormous boon to one of the world’s most effective, large-scale, economy-wide carbon pricing regimes, and an important fortification of California’s climate policy infrastructure.

Prior to the extension, cap and trade revenues were used for high-speed rail and numerous other climate finance projects throughout the state, with 25% of revenues specifically earmarked to support projects in disadvantaged communities. However, California Air Resources Board (CARB) allowance auctions in early 2017 reflected legal and policy uncertainty about the future of cap and trade, and failed to sell out.

The passage of AB 398, with a legislative supermajority, puts to rest past concerns about legal challenges from the fossil fuel industry on the basis of California’s Proposition 13 or Proposition 26 rules regarding new taxes or fees. This decisive victory for carbon-pricing prompted record-breaking sellouts of allowances in the recent August and November auctions, totaling close to $2 billion in revenue generated, sold at clearing prices well above the price floor in both auctions. Analysis from Energy Innovation suggests that the cap and trade extension will generate at least an additional $1.3 billion in revenue for the Greenhous Gas Reduction Fund between now and 2020, and an additional $26 billion in new revenue from 2021-2030.

To achieve this level of support, AB 398 involved key compromises on compliance measures and on how revenues are spent, to assuage concerns from both environmental justice advocates and from traditional industry opponents of cap and trade policy. The key agreements of AB 398 are:

  • It increases the allocation for local climate finance for investments in disadvantaged communities to 35%.
  • It decreases the fraction of compliance that can come from offsets.
  • A companion measure AB 617 increases regulation of local air quality to prevent pollution hotspots in vulnerable communities.
  • And statewide ballot measure ACA1 goes before voters in 2018 proposing a constitutional amendment that would set a higher (two-thirds) legislative threshold for how future cap and trade revenues are spent.

California’s cap and trade extension is not a panacea, and no legislation in an economy and a political landscape as large and complex as California can be perfect. Future challenges to reaching 2030 goals (like allowance oversupply) remain. And California’s climate policy regime will have to remain dynamic and innovative in order to continue to lead, and to make good on stated goals.

But the extension of California’s cap and trade program remains an important legislative step forward, giving markets the stability they need to function while achieving success in pursuit of aggressive emissions reductions.

Climate Policy Initiative’s California Carbon Dashboard continues to provide the latest news, prices, and information to understand California’s cap and trade program and suite of climate policies. You can learn more at www.calcarbondash.org.

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How Big Dollars Are Catalyzing India’s Small-Scale Solar Market

October 23, 2017 |

 

In order to meet India’s energy access goals, distributed solar has to scale significantly. While there has been growth in this Indian market segment, it has been from a very small level of installations. While the government’s target for distributed solar power deployment is for 40 gigawatts by 2022, only 1.4 gigawatts had been deployed by early this year. That means we need a 100 percent compound annual growth rate between now and 2022 — a blistering pace of development.

Luckily, the distributed solar market in India is ripe for rapid expansion, with falling technology costs and government initiatives that have reduced the levelized cost of electricity to make rooftop solar competitive with not only commercial and industrial tariffs, but also with residential tariffs in many cases. However, it’s also a young industry. Many of the companies are in significant need of early stage funding for project preparation services to help them scale up, de-risk and become investment-ready.

Recognizing this need, the Indian and U.S. governments jointly created — in partnership with the Indian Ministry of New and Renewable Energy, the Indian Renewable Energy and Development Agency (IREDA), the Overseas Private Investment Corporation (OPIC), the William and Flora Hewlett Foundation, the Good Energies Foundation, the John D. and Catherine T. MacArthur Foundation, the David and Lucile Packard Foundation, and the Jeremy and Hannelore Grantham Environmental Trust — a facility that leverages the unique risk attributes of grant dollars to mobilize finance for early stage project preparation for Indian distributed solar power developers, called U.S.-India Clean Energy Finance (USICEF). Climate Policy Initiative serves as the program manager.

USICEF will deploy millions of dollars in early-stage project preparation support, including market estimation, product development and testing, and engineering and legal costs, which will help developers become ready enough to attract commercial investment. USICEF’s support catalyzes long-term debt financing for distributed solar power from OPIC, IREDA and other public sector financial institutions, to in turn drive more investment from private sources.

USICEF is based on the Africa Clean Energy Finance Facility, a similar program that successfully leveraged $1 billion in clean energy investment with as little as $20 million in early-stage grants.

Announced a year ago, USICEF recently became operational. It selected its first round of grant recipients, which in total will receive an estimated $900,000 in project preparation support. They are:

  • Argo Solar, which provides custom designed end-to-end solar rooftop power solutions for commercial and industrial organizations in India
  • HCT Sun India, a subsidiary of U.S.-based HCT Sun LLC and an early-stage rooftop solar developer in India
  • OMC Power, an integrated rural power utility company that brings affordable and reliable power to mobile tower operators, surrounding small businesses and communities through smart mini-grids
  • SMG Ventures, which implements rooftop solar projects primarily for commercial and industrial customers in India
  • SunFunder, an experienced debt provider for beyond the grid and grid deficit solar projects and companies, which will provide inventory, construction, and structured asset finance loans for solar lighting, home systems, mini-grids and commercial rooftop solar projects in India

USICEF is continuing to accept applications for support from distributed solar power companies through its website.

The question that arises for these young companies and the dozens of others that USICEF will support throughout the life of the program is whether early-stage project preparation can help distributed solar reach scale. By creating a pipeline of projects, USICEF is hoping to answer that question with an emphatic yes — an answer that can drive the investment needed for India to achieve a robust, distributed solar power market and energy access for all.

***

A version of this blog first appeared on Greentech Media. Gireesh Shrimali serves as India Director at the Climate Policy Initiative. Justin Guay is a program officer at the Packard Foundation.

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Climate Finance Insight Videos: Meeting the goals of the Paris Agreement

October 4, 2017 |

 

On May 8-9 2017, at the sixth meeting of the San Giorgio Group (SGG) in Venice, Climate Policy Initiative (CPI) brought together key financial institutions actively engaged in green, low-emissions finance for frank discussions on the most pressing policy and investment issues related to scaling up climate action. Hosted this year by Fondazione Eni Enrico Mattei (FEEM), the SGG is organized by CPI in collaboration with the World Bank Group, China Light Power (CLP), and the Organisation for Economic Co-operation and Development (OECD).

In a series of interviews filmed during this year’s SGG, produced in collaboration between CPI and ICCG, representatives of governments and financial institutions discuss financing needs, opportunities, and trends as countries work to achieve the goals of the Paris Agreement.

Several representatives of governments and financial institutions discuss financing needs, opportunities, and trends as countries work to achieve the goals of the Paris Agreement in a summary video.

Barbara Buchner, Executive Director of the Climate Finance program at CPI, reflects on what has changed in climate finance since the first SGG in 2011.

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CPI receives MapBiomas team for workshop on land mapping and use in Brazil

August 17, 2017 |

 

MapBiomas workshop in CPI in Rio de Janeiro

Project aims at helping researchers with a fast and detailed system

Climate Policy Initiative (CPI) hosted the Brazilian Annual Land Use and Land Cover Mapping Project (MapBiomas) team for a workshop to present the platform and explain how it operates. The event, held in early August at CPI’s office in Rio de Janeiro, gathered researchers, analysts and university faculty from CPI and other institutions including IBGE, FIOCRUZ, BVRio, and UFRJ.

MapBiomas is an initiative that involves a collaborative network of biomes, land use, remote sensing, GIS (Geographic Information System) and computer science experts. It relies on Google Earth Engine platform and its cloud processing and automated classifiers capabilities to map and present dynamics of land use changes in agriculture, farming, forests and urban areas, among others.

In Brazil, CPI works to support policymakers to implement the most effective policies for protecting Brazil’s natural resources while also advancing the nation’s agricultural production.

For CPI executive director Juliano Assunção, MapBiomas greatly expands the volume of information for land use analysis in Brazil and provides an example for other initiatives involving collaborative work. Assunção believes that the project enhance CPI’s research. “CPI focuses its efforts on generating evidence on the effectiveness of policies and their various impacts on Brazilian society. With MapBiomas, we can now investigate dynamics of land use conversion inside and outside the Amazon biome with much more precision,” he says.

 

Land use and land cover maps, satellite images mosaics, and a public web platform are among the MapBiomas products. According to the coordinator of the project Tasso Azevedo, the platform aims to provide analysts and researchers with the tools needed to analyze data and build on. “We wanted to replace the simple matrix “forest and non-forest” with a more nuanced one. The challenge is and has always been to map in a cheap, fast and historical way”, he says. One of the unique characteristics of MapBiomas is that it classifies using temporal and spatial filters, which can be applied to a more detailed analysis.

MapBiomas provides a series of scientific analyses for the improvement of policies. According to Assunção, besides putting together detailed information on territories, MapBiomas presents the data in an intuitive and comprehensible way. “Although the actual data are not precise for calculating deforestation rates, for example, its potential is huge. For example, important topics such as infrastructure can be studied in depth,” the CPI director says.

Currently, only Brazil develops a mapping of tropical countries and their lands. Nevertheless, it is expected that over the next two years a project like MapBiomas might become a potential investment for other countries. The development of MapBiomas is constant and an updated version, with adjustments in the filters, will be launched soon.

For more information about MapBiomas, see http://mapbiomas.org/.

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Mainstreaming energy efficiency in International Finance Institutions could lower cost of meeting green growth goals

July 7, 2017 |

 

One of the many topics of discussion on the agenda for this weekend’s discussions at the G20 leader’s summit will be on how to kickstart the global economy. Leaders should take a serious look at energy efficiency as a means of increasing productivity and boosting growth.

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Financial institutions identify opportunities to accelerate climate action

June 28, 2017 |

 

This week, we posted an in-depth summary of the main insights from this year’s San Giorgio Group, a CPI event organized in collaboration with the World Bank Group, China Light Power (CLP) and the Organisation for Economic Co-operation and Development (OECD), and kindly hosted by Fondazione Eni Enrico Mattei. The San Giorgio Group brings together key financial institutions actively engaged in green, low-emissions finance for frank discussions on the most pressing policy and investment issues related to scaling up climate action. Here are some of the key takeaways:

  • If you can’t measure it, you can’t manage it. We have made a lot of progress in recent years on getting a clearer idea of climate finance flows, and of investment risks related to climate change, through efforts by CPI and other groups. However, there are still data gaps. These are particularly prevalent for adaptation finance, as well as in defining mobilization of climate finance and understanding more broadly how to track progress towards implementation of the Paris Agreement. The main challenge remains to make tracking helpful for decision makers and to ensure that they have ownership of it. There is a need to further integrate climate change considerations into daily decision-making and the financial system more generally, to enable investors to understand both the risks and opportunities related to climate change. Legislation such as France’s recent climate-reporting law, which introduces mandatory climate change-related reporting for institutional investors, will enable investors to access data on companies’ climate risks and use this information to allocate capital. In this vein, balancing the need for robust disclosure data and tools and the need for simple, comparable, and standardized formats will be key. It is clear that the discussions started in the Task Force on Climate-Related Financial Disclosures, which aim to create one set of standardized metrics for climate reporting, will need to continue. Elsewhere, national-level data and tracking is an important starting point to realign public budgets and incentives to promote climate action particularly if it is tailored to countries’ own definitions and accounting systems.
  • Green banks or greening banks? There was a consensus among San Giorgio Group attendees on the importance of refocusing attention on domestic actors, especially in light of national commitments made as part of the Paris Agreement and given the fact that most green investment is raised and spent domestically. There was a discussion of whether new entities such as green banks are needed, or whether mainstreaming climate considerations into existing institutions’ practices can address the current climate finance gap. In many countries, the latter may prove more efficient. Additionally, streamlining international climate finance architecture to reduce overlaps, improve efficiencies, and channel more finance through domestic organizations could increase the effectiveness of the system as a whole.
  • Cities need better access to finance but for new technologies. Many of the actions needed to prevent dangerous temperature rise and adapt to climate change involve cities. Cities and their many layers of decision-making present a challenge but also a huge investment opportunity. There was a consensus among San Giorgio Group attendees on the need to increase cities’ access to finance and better target city-relevant solutions, and discussion on whether there is an opportunity for cities to leapfrog to better, more innovative technologies.
  • With the right investment products and a pipeline of bankable projects, investors are ready to act on climate. The investment needs for transitioning to low-carbon, resilient economies are such that public finance alone will never be enough. Green growth requires increased finance from mainstream private investors, some of whom already invest at significant levels in some green technologies in some countries. There is capital available and many investors looking for opportunities. Innovative financial instruments that blend public and private finance will help but simplicity, scale, and speed are essential.

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CPI participates in a project that encourages rural producers to reforest Mata Atlântica

May 23, 2017 |

 

Dimitri Szerman explains the initiative, which takes place in the South of Bahia

Interview with one of the 3,000 rural producers selected for the Sul da Bahia project. Photo: Dimitri Szerman

 

Encourage forest restoration in the northeastern Brazilian of Bahia – this is what the South of Bahia project aims to. Supported under INPUT, it is a collaboration between Climate Policy Initiative (CPI), Brown University, Floresta Viva Institute and Santa Cruz State University. The survey project that began in 2015 and includes nearly 3,000 producers will evaluate payment for environmental services to rural producers of the cacao region of Bahia. Dimitri Szerman, CPI analyst, coordinates part of the work related to economic issues. He explains the project in the following interview.

WHAT IS THE SOUTH OF BAHIA PROJECT’S OBJECTIVE?

DIMITRI SZERMAN: This project consists of payments for environmental services, with two main objectives. The first objective is to understand how to motivate rural producers to restore their properties with species from the Mata Atlântica biome. Also, we seek to understand more about the biome’s natural vegetation restoration process. Our focus is how sustainable rural development aligns with compliance with the Forest Code.

WHO IS INVOLVED IN THE PARTNERSHIP? AND WHAT IS CPI’S CONTRIBUTION?

DS: The project is the result of a partnership between CPI, Brown University, Floresta Viva Institute and Santa Cruz State University. The multidisciplinary team of researchers is composed of ecologists, agronomists, sociologists, and economists, such as me. CPI’s contribution is to design financial incentives for restoration and to analyze rural producers’ choices and preferences.

 

“This involves constant care. Generally,

the challenge is greatest in the driest areas or

where pastures have prevailed for many years”

 

HOW IS THE PROJECT RECEIVED BY RURAL PRODUCERS?

DS: Very well. We have already been collecting field data for one year. We selected 3,000 producers at random from the region to participate in the project. Most of them agreed to talk to our team and we have already completed two rounds of interviews with each one of them. Our implementing partner’s team in the field has contributed to such a high participation rate. Sixteen young agronomists from the region, who recently graduated from the State University of Santa Cruz, were selected for the Floresta Viva Institute survey team.

WHAT ARE THE OBLIGATIONS OF RURAL PRODUCERS WHO WILL RECEIVE FINANCIAL INCENTIVES TO RESTORE VEGETATION IN THEIR PROPERTIES COMPLETE?

DS: They must set aside a half of a hectare of their property for the restoration, and look after this area for the restoration to occur. This includes removing species that are not woody, planting seedlings, and, in some cases, enclosing the area so that cattle do not disturb it. This involves constant care. Generally, the challenge is greatest in the driest areas or where pastures have prevailed for many years.

 

“The availability of labor workers 

is an obstacle for restoration”

 

WHERE IN BAHIA IS THE WORKING GROUP BEING CONDUCTED AT THIS MOMENT? HOW FREQUENTLY HAVE YOU TRAVELED TO BAHIA?

DS: The survey was launched in 26 municipalities in the cacao region of Bahia. On average, I travel every three months to supervise the field work. I attend meetings with producers and communicate directly with the team to better understand the reality on the ground. Good communication with the team in Bahia is fundamental to the quality of the work, since I have to understand what is going on in the field and they have to understand the survey’s requirements.

Dimitri Szerman, CPI analyst

 

PLEASE EXPLAIN IN GENERAL TERMS THE METHODOLOGY THAT IS BEING APPLIED FOR THE PROJECT.

DS: The methodology is the same as in a controlled clinical trial, known as Randomized Controlled Trial (RCT). The idea is to test different types of incentives for restoration, as well as different restoration methods. To do so, the 3,000 producers are sorted to receive different types of incentives. As such, it is possible to isolate the effects each type of incentive has on the acceptance of the restoration program, as well as on its fulfillment.

 

After the drought that hit the region last year

many farmers started to better understant the forest’s

importance in building resilience for their crops”

 

ARE THERE ANY PRELIMINARY RESULTS?

DS: We are still analyzing the data, but we already have a good description of the producers’ profiles. Some features are surprising. For example, the average age of respondents is 59 years – they are older than we might have expected.

We have also observed the availability of labor workers is an obstacle for restoration. Taking care of these areas and planting seedlings demand a lot of work.  If you are a small producer living in a rural area, it is not always easy to find people to work on your property. We have also learned that after the drought that hit the region last year many farmers started to better understand the forest’s importance in building resilience for their crops. Let’s see how much this influences their attitudes towards restoration.

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New partnership offers world-class expertise to support countries implementing NDCs

May 3, 2017 |

 

The Paris Agreement marked a new era in climate policy, and with it, a new imperative to accelerate climate action. Developing countries need support to build the capacity to create the legal, policy, financial, and institutional frameworks to mobilize public and private finance quickly, and at scale. Delay will increase the economic cost and threaten the feasibility of the Paris goals.

CPI is attending the Global NDC Conference 2017 in Germany today and excited to see the range of support available to countries looking to accelerate implementation of Nationally Determined Contributions (NDCs) and raise ambition on green growth. We are also in Berlin to promote a new partnership called GNIplus that we believe can provide governments with the best available policy, technical, financial, governance, and legal expertise to support countries implementing NDCs by combining the strengths of three world-leading organizations – Climate Policy Initiative (CPI), AECOM, and Baker McKenzie.

GNIplus responds to this urgent need by drawing on its partners expertise to support governments to embed the fundamental regulatory and financial prerequisites of long-term, sustainable growth and development, and mobilize private investment. GNIplus will deliver concrete, practical actions to: reform legal, policy, financial, institutional, and governance frameworks; stress-test the designs of infrastructure projects; and develop financial tools and instruments to de-risk investment and mobilize private finance at scale.

The GNIplus partners are already collaborating deeply with governments, multilateral agencies, and private investors to facilitate climate action and will work together to support and enhance existing national strategies and initiatives to maximize impact, starting in Kenya.

So what makes GNIplus unique?

1. ACTION-ORIENTED
GNIplus partners have a proven ability to implement actions on the ground. We have the skills and experience to draft policy and legislation, assess the technical feasibility of infrastructure projects, access public finance, engage private investors, and design public-private financing instruments. GNIplus will deliver tangible implementing actions, not another report that will be shelved.

2. PRIVATE SECTOR FOCUS WITH PUBLIC SECTOR EXPERTISE GNIplus combines public and private sector experts and experience, with a deep understanding of their goals, requirements, and processes. GNIplus can therefore facilitate public–private engagement and support the design of effective policies and financial instruments to mobilize private investment and enable the private sector to take up low-carbon, climate resilient investment opportunities.

3. SPEED AND RESPONSIVENESS
Our long history of in-country expertise and operational presence on the ground in 162 countries means that we are ready-to-go. GNIplus is also a flexible initiative that can keep pace with the private sector; our experts can respond to identified needs, fill gaps and complement other national and international actors – offering bespoke solutions with potential to scale. We will promote swift, effective action by collaborating with other actors to maximize synergies, build on lessons learned and avoid duplication. GNIplus will therefore accelerate NDC implementation.

4. SUPPORTING NATIONAL OWNERSHIP & BUILDING CAPACITY
GNIplus partners understand the importance of country ownership and the need for NDC implementation to be nationally driven. We have extensive local networks and existing collaborations with national governments, communities, NGOs, development banks, and investors. GNIplus partners have a track record of building local expertise and capacity. By using a ‘train the trainer’ model we aim to ensure local policy-makers, lawyers, economists, engineers, and others are able to take ownership of the NDC implementation plan. GNIplus will make a sustainable, long-term impact.

5. GLOBAL REACH
GNIplus partners have extensive local presence and knowledge through our offices in 162 countries. We are also deeply connected at a global level, with existing collaborations with global actors – from UN bodies to multilateral agencies, development banks, climate funds, and international investors. This enables us to advise national governments on the requirements of international law; international climate finance flows, actors and processes to support access to finance for NDC implementation, and the requirements of the Paris Agreement.

The GNIplus approach combines the expertise of three world-leading organisations - CPI, AECOM, and Baker McKenzie - to support countries implementing NDCs

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Flexibility — the workhorse of the global energy transition

April 27, 2017 |

 

Every day it seems that generation from variable renewables hits new milestones. In March, California hit a new record in renewable energy production by supplying 56% of midday demand. And every day, prices for new projects seem to get cheaper. In February, an auction for a 750MW solar park in Madhya Pradesh attracted bids as low as $49/MWh, the lowest yet recorded in India. In the Middle East and Chile meanwhile, auction prices have fallen below $30/MWh.

These low prices have been driven by dramatic declines in technology costs, which in turn have driven a boom in deployment, creating a virtuous cycle of scale that drives down cost. Last year, 161GW of intermittent renewables were deployed around the world, bringing global cumulative capacity to 2,006GW.

A low-cost, low-carbon grid seems within our grasp.

In our report, Flexibility: the path to low-carbon, low-cost electricity grids, we find that a future grid powered mostly by the sun and wind will be cheaper than one fuelled by natural gas — even without a price on carbon. While a gas-based system may cost $73/MWh, a renewables-based system — including nearly $30/MWh of flexibility costs to integrate a high share of renewables — would be competitive at $70/MWh.

Our analysis was commissioned by the Energy Transitions Commission, which this week published its report, Better Energy, Greater Prosperity. Our key findings support the ETC’s challenge to business, governments and investors to seize this opportunity for a more prosperous economy while cutting annual carbon emissions from energy from 36GT today, to 20GT by 2040.

Decarbonization of our electricity is a cornerstone of the ETC’s strategy to transform the global energy system, which is responsible for 75% of total greenhouse gas emissions. Cleaning up our electrons is also one of the most achievable transition pathways identified by the ETC in its report and will account for almost half of those emissions reductions. However, this seemingly attractive future is by no means guaranteed.

Just last week, the US Energy Secretary Rick Perry ordered a study into impacts of state wind and solar subsidies on baseload coal and nuclear, with the assumption that these plants are a proxy for grid reliability.

Our view is that grid reliability depends not on large inflexible baseload generation, but increasingly on the ability of the grid to be flexible, adapt to changing conditions and a different set of risks. In fact we see flexibility, as a key enabler of a decarbonized electricity system.

A lack of flexible capacity is often cited as a constraint on the amount of variable renewable energy we can add to the grid. But in our report, we found that most systems already have enough latent flexibility to meet over 30% of their electricity demand from solar and wind. Moreover, technologies that exist today could support much higher shares of wind and solar; 80% or more.

Flexibility needs are well covered over the next 10 years in the four regions we looked at — California, Germany, Maharashtra and the Nordic region. But over time, higher penetrations of renewables will require more flexibility, especially for daily and seasonal balancing.

In California, ramping and daily balancing are expected to become pressing concerns as the state increasingly depends on solar to meet power needs. By some estimates, in 2040 utility- and residential-scale solar is expected to supply 36% of the state’s electricity, while wind at 30%, should constitute the second-largest resource.

California has ample flexibility in its electricity system; responsive demand, interconnections with neighbouring states, and significant existing hydro and gas capacity can all help reduce the cost of meeting the state’s flexibility needs. We have estimated the cost of providing one form of flexibility — daily shifting on peak days — could be reduced by 30%–50% by 2040 by making use of these existing flexibility resources.

So what does this mean for policymakers? We believe that they should be emboldened to raise their renewable energy ambitions, knowing that there are already many sources of latent flexibility in their electricity systems, and that the costs of renewable energy integration are likely to remain low.

But policymakers should also begin to make changes to planning, regulation, and market design— getting that last 20% of carbon out of the grid is likely to be the hardest step on the path a cost-effective low-carbon electricity systems.

In addition, a portfolio of approaches is needed. Shifting consumer demand or utilizing existing hydroelectric dams may be inexpensive, but they are limited in scale. Moreover, some technologies are great for shifting energy on a short time frame, but would be very expensive to shift energy across weeks, much less seasons. A combination of options will be needed to meet the full suite of flexibility needs demanded by a low-carbon grid.

Planning and market design of our electricity systems need to evolve to align investment decisions with the goal of decarbonization. In other words, if we make investments today that aren’t suited to meet the needs of the grid in 15 years, those investments could potentially be stranded down the line.

Finally, flexibility technologies are rapidly evolving. We need to make sure our markets and policies create long-term incentives for innovation, so that we can unlock low cost options to balance the low carbon grid of the future.

Read the full version of this blog with supporting analysis in the CPI Energy Finance Insights series on Medium.com. You can also watch the webinar that introduces our findings.

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How are European policymakers and investors embracing the ‘new normal’ in EU renewable energy policy?

December 7, 2016 |

 

The growth of solar PV in Germany has benefited from small-scale investors

Costs have declined dramatically in the renewable energy sector and deployment levels are at an all-time high. But why does the outlook for future investments seem so mixed across Europe?

Today, policy and finance issues are now arguably at least as important as technology, with policy now the key determining factor in ensuring continued growth in renewables. Policymakers are not in the same position as they were five years ago however when the costs of technologies such as solar were much higher and policy decisions had very different outcomes. Even the costs of offshore wind are falling significantly as indicated by DONG’s recent winning bids for the Borssele 1 and 2 projects at €72.2/MWh and Vattenfall’s astonishing €49.9/MWh bid for Kriegers Flak.

In future, investment will need to come from a variety of sources and not just from large utilities which has traditionally been the case. This means that policy will need to change dramatically to adapt to this new, broader range of potential financing options.

Our latest report which is published today, European Renewable Energy Policy and Investment 2016 finds that the cost of financing will be driven as much by the types of investors as by how investors evaluate project risks, returns and policy. In other words, how investment is divided among utilities, institutional investors, households or companies is one of the most important factors determining the average cost of renewable energy to the system.

In Germany and Spain, for example, very different policy incentives were concentrated on very specific investor categories, ie, small end users in Germany and the utility sector in Spain. Both approaches achieved high levels of deployment in a relatively short time but were not necessarily cost-effective.

What does this mean for policymakers & investors?

We found that there is plenty of investment available to meet and exceed current EU and country level targets, if the right policy is in place. Policy will determine not only how much investment is available, but also the mix of investors and its cost. Policies set in motion today could develop, or close off, options that could be major sources of investment and technological advancement in the future.

In addition:

  1. Long-term targets are essential for attracting investment so a decrease in targets can be devastating for a developer since sunk development costs may need to be written off to reflect the reduced likelihood of completing the project
  2. The adoption of renewables across the EU has been fuelled by a varied mix of investor types, often introducing new entrants and causing a change to the previous ownership structure of energy systems.
  3. There is enough investment appetite in Germany to comfortably meet ambitious targets provided that support levels and other key policies are set appropriately. This gives comfort to policy makers that their ambitious targets can be achieved (and potentially exceeded), however there is insufficient capital for just one or two categories of investors to meet the targets on their own so policies must appeal to a broader investor base.
  4. Now is a good time to encourage investment with base rates at historically low levels, which in turn depresses equity return requirements, however policies are not in place to encourage this investment in many regions. Interest rate increases will necessitate higher support levels.
  5. Political risk perception is increasing and has a negative impact on investor appetite. Across the majority of EU regional contexts and renewable technologies we see a negative outlook of eroding investment sentiment.
  6. Misalignment of policies within EU member states and across EU directives is having unintended consequences, damaging the outlook for a rapid, coherent energy transition.

What does this mean for policymakers?

Policy should always encourage the lowest possible cost investment from the most appropriate set of investors in keeping with four main objectives:

  1. Balance cost-effectiveness and deployment
  2. Balance short-term cost-efficiency versus longer-term development.
  3. Develop technology mixes and options.
  4. Shape the industry to achieve industrial objectives and/or public support.

Regional views

An important part of this work was the regional perspectives, looking specifically at two countries, Germany and the UK, and two regions, the Nordics and Iberia. We also looked at three widely deployed technologies, solar PV, onshore wind and offshore wind and have forecast investor appetite within those categories for each region up to 2020.

United Kingdom

Future offshore wind investments in the UK look promising among utilities, developers and financial institutions

Future offshore wind investments in the UK look promising among utilities, developers and financial institutions

While the UK has a solid track record with building renewable power assets and is the global leader in offshore wind, its slow progress with decarbonising the heat and transport sectors means that it is unlikely to hit its 2020 renewable energy targets with the current suite of policies.

Over the last six years, the British government has changed several key renewable energy support policies including making cuts to feed-in tariffs for small and large-scale renewables, the transition away from a 14-year-old green certificate scheme with support levels set by government (the Renewables Obligation or RO) towards a Contract for Difference (CfD), with support levels set by competition. These changes have caused a period of uncertainty among investors.

If the current macroeconomic environment persists, investor interest in the UK market will likely mean sufficient capital is available to fund the existing project pipeline. However, it is likely that there will be less competition for projects as some investors are put off by political uncertainty, meaning less downward pressure on the cost of capital than there otherwise might have been.

Germany

Future investments across all categories in Germany look promising

Future investments across all categories in Germany look promising

Germany has the third-highest level of renewable energy installations by capacity in the world behind the US and China. It also has a range of ambitious targets that exceed the minimal levels set out by the EU. These targets include achieving 35% of generation from renewables in 2020, 50% by 2030 and 80% by 2050, and keeping CO2 levels at 60% of 1990 levels by 2020.

While Germany’s goals for onshore wind and solar remain ambitious, it is clear that policymakers are setting their sights on offshore wind as a major new source of energy. Our analysis indicates that these targets are, overall, achievable.

Now that amendments to Germany’s renewable laws have been announced uncertainty has reduced, although it will take some time before the significance of these changes is fully understood. Once investors fully understand the impacts of policy changes, then it is very likely that the ambitious renewable deployment targets can be achieved.

Iberia

Potential investments could be large in Iberia, but investor appetite is still low in the region

Potential investments could be large in Iberia, but investor appetite is still low in the region

The last decade has seen a period of upheaval in Spanish and Portuguese politics, and in particular in their once-thriving renewable energy sectors. Following the global financial crisis, governments in both countries have taken greater control of rates of growth in the renewable sector. The investor pool has shrunk, chilled by uncertainty and losses because of a series of regulatory changes.

In Portugal, recent M&A transactions suggest that international investor confidence in the sustainability of the regime remains, however, as in Spain, short term political objectives remain uncertain.

There are important lessons to be learned by policymakers both in the peninsula and outside about the importance of long-term planning, transparent regulation made by independent regulators, and a balance between the interests of all stakeholders in the energy system. These will be instructive if the countries are to pursue the next phase of decarbonisation successfully in the 2020s. Reducing the tariff deficit and increasing interconnection with the rest of Europe will be vital steps towards strengthening the case for more renewables.

 

Nordic region

Future investment in the Nordic region favours larger investors, such as utilities developers and financial institutions

Future investment in the Nordic region favours larger investors, such as utilities, developers and financial institutions

The Nordic region’s objective is to accelerate and implement a smooth energy transition in a market characterized by general over-capacity, low wholesale prices, flat or limited demand growth and most of the EU 2020 targets already achieved. In such a market, maintaining the momentum of the transition is not an easy task. In fact, investors that had initially piled into the Nordic wind market due to its intrinsic resource value, have more recently been hurt by low prices due to the oversupply of green certificates. These have resulted in investor losses, reduced incentives for new wind investments and an overall reduction in investor interest in the region.

However, investors and capital remain available, while the intrinsic long-term value of Nordic wind resources remains world class.

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