It’s SOS for Climate Negotiations: Scale, Outcomes, and Speed

December 18, 2019 | and


The 25th annual Conference of the Parties (COP25) global climate negotiations in Madrid kicked off with a reality check. UN Secretary-General António Guterres stated “the point of no return is no longer over the horizon. It is in sight and hurtling towards us…” This was followed by a series of harrowing reports (Oxfam , Save the Children, Intergovernmental Panel on Climate Change and the World Meteorological Organization) highlighting the climate emergency and urgent need for fast and bold actions.

What were the expectations?

The COP25 aimed to achieve the following outcomes:

  • Strengthening and raising climate ambitions: With 2020 at the doorstep – when all Parties to the Paris Agreement are expected to raise climate ambition in their new and revised nationally-determined contributions (NDCs) — the 2019 COP aimed to set the stage for next year.
  • Address Article 6 covering carbon markets: The COP25 aimed to conclude work on the Paris Agreement’s Article 6 – an outstanding issue in the ‘Katowice rulebook – which includes internationally transferable mitigation outcomes (ITMOs), a market mechanism, and non-market approaches.
  • Review of the Warsaw International Mechanism (WIM) for Loss and Damage: This COP reviewed performance of the WIM to tangibly respond to climate change impacts and support those most affected vulnerable developing countries.
  • Take work forward in several areas: Crucial climate action work to be taken forward at this COP include work on finance, the transparency of climate action, forests and agriculture, technology, capacity building, indigenous peoples, cities, ocean and gender.

 So how did it go? The main take-away by many experts is that while governments, corporates, and other stakeholders at COP25 made incremental progress on several key themes within the ongoing climate finance discourse, much is still to be delivered.

In terms of national commitments, there was some good news: Ireland announced joining the Carbon Neutrality Coalition (CNC) – an alliance of around 29 countries committed to reaching carbon neutrality by 2050 in line with the Paris Agreement. The European Commission presented the European Green Deal, which will make the EU the world’s first climate-neutral continent by 2050, (even though Poland opted out). Also ahead of COP, the UK government announced it will double its international climate finance to at least £11.6 billion between 2021-2025. All these are steps in right direction to raise ambitions at the national level.

However, at the same time other developed countries, including Australia, Singapore, Japan, and the United States were either missing in action, obstructed negotiations, or had no intent to enhance/update their NDCs. Many concerns were raised on progress of developed countries towards the achievement of the USD 100 billion goal per year by 2020 to support developing nations in addressing climate change. Big emitters like China and India stressed that the delivery of finance and support promised by developed countries would be required before enhancing their current targets. This came despite a stark warning that even if every nation meets its Paris Agreement pledges the planet will still warm by about 2.8 °C by the end of the century (Climate Action Tracker).

While countries lagged in raising ambitions, COP25 saw increased initiatives from corporations, businesses, and finance institutions. For example, over 60 film studios, unions, and other members of creative industries launched the ‘Creative Industries Pact on Climate Change,.’ UK’s energy company Drax also announced its ambition to become carbon negative by 2030. The ‘Coalition for the Energy Efficiency of Buildings (CEEB)’ was also launched to develop the market for financing net-zero carbon and climate-resilient buildings in the UK by accelerating the pace of financial innovation and scale-up. CPI’s Global Innovation Lab for Climate Finance announced its instruments crossed USD 2 billion in finance for sustainable development. The “Coalition of Finance Ministers for Climate Action,” a group of 51 finance ministers, outlined their “Santiago Action Plan” which aims to “bring considerations of climate change into the mainstream decision-making about economic and financial policies.”

However, negotiations on Article 6 around establishing new rules to govern the controversial new global carbon market failed with no outcome. Parties were at loggerheads related to corresponding adjustments (i.e. when one country sells emissions reductions to another, it must adjust its ledger accordingly to avoid double counting) and carry over of unsold carbon credits from the Clean Development Mechanism (CDM), established under the 1997 Kyoto Protocol, among other issues. These discussions will now continue in 2020.

On the Warsaw Institutional Mechanism (WIM) for Loss and Damage, the key demand was to establish a new financial facility to channel new and additional loss and damage finance to countries facing climate emergency. However, the final agreement was far weaker than expected and had no reference to any developed country obligations on finance. However, Parties agreed to setting a ‘Santiago network’ in 2020 to catalyze technical support; developed countries to scale up finance; and the Green Climate Fund to provide financial support.

COP25 was designated as ‘Blue COP’ by Chile to increase awareness of the impact of climate change on ocean and mainstream the potential of ocean-based solutions into NDCs to implement the Paris Agreement. To support this, Chile launched a Platform of Science Based Ocean Solutions (PSBOS) to bring together key methodologies and tools to co-design climate-ocean actions strategies and help incorporate oceans into countries’ NDCs (39 countries have already committed to do this).

Nature-based solutions were also central at COP25, and featured in several discussions as one of the most promising solutions to mitigate climate change, protect biodiversity, and increase resilience. These include innovative financial approaches to conserve and restore ecosystems which are being piloted around the world (like the Lab instrument RISCO).

A rare win story at COP25 was the unanimous adoption of a new five year ‘Gender Action Plan’ (GAP) – successfully building on the first GAP agreed at COP20 in Lima – which intends to support the implementation and scaling up of gender-related decisions as well as human rights, just transition, and indigenous people’s challenges in the UNFCCC process. However, more work is warranted to clearly define indicators and targets for measuring and monitoring its implementation.

Discussion also centered on how blended finance has the potential to scale investments needed and how public capital can effectively leverage private investments. CPI’s work estimates that eight high-potential countries in Sub-Saharan Africa and South and East Asia alone offer more than USD 360 billion in blended finance investment potential in clean energy by 2030. Stakeholders provided different perspectives, for example: that successful projects should blend finance but also ideas and technologies; that public finance needs to de-risk investments and promote additionality, financial sustainability and accountability; that the private sector is often unable to take first loss risk despite sufficient capital; that small investment ticket size and financial regulations further constrain equity investments; and that partnerships and collaborations are crucial in the early stage of a blended finance deal.

As cities account for 70% of greenhouse gas emissions and provide diversified investment opportunities across sectors, the decarbonisation of urban areas continues to be a hot topic at COP. Local governments denounced the lack of financial, human, and technical resources to turn ideas into bankable projects. DFIs and other investors instead mentioned the lack of creditworthiness and bankability of projects as the main constraint, together with small investment sizes, missing regulatory frameworks linking investment plans and national policies, need for blended finance and support for project preparation advisory and capacity building. Consensus is shifting beyond a project by project approach towards a portfolio approach and targeting systemic transformation through the whole value chain.

For the first time, we saw protests by young campaigners taking place inside the COP25 venue with more than 200 Observers who had their badges removed, preventing them from returning to the talks. They were expressing a rising sense of disappointment with the slow progress of the negotiations, which is in marked contrast to the urgency of the science.

So what to look out for in 2020?

The next Bonn intersessional meeting (June 2020) is expected to address – and possibly conclude – some of the discussions that ended in impasse at this COP,  allowing the next COP26 in Glasgow (9-19 November 2020) to at least start on the right foot.

2020 will be a critical year as nations look to resubmit their NDCs, with observers and experts calling for raised ambition and greater action. In other words, given the overall disappointing negotiations at COP25, it is SOS time – scale, outcomes, and speed.

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David Nelson on market design at IRENA Innovation Week 2018

July 15, 2019 |


David Nelson, the executive director of Climate Policy Initiative Energy Finance, presents on Market design for an integrated and RE-based energy system at IRENA’s Innovation Week 2018.

IRENA Innovation Week 2018: Solutions for a Renewable-Powered Future brought together around 250 leading companies, innovators and policymakers from across IRENA’s diverse global membership to explore how innovations in enabling technologies, business models, system operations and sector coupling can accelerate the renewable power transition.

The International Renewable Energy Agency (IRENA) is an intergovernmental organisation that supports countries in their transition to a clean economy and promotes the widespread adoption of renewable energy.

Read more about IRENA here.

You can also download the presentation here.

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Finding a Common Language to Advance Energy Access

April 3, 2019 | and


“Finance for electricity and clean cooking remains dramatically short of what is needed to meet SDG7 and deliver universal access on time. Concessional development finance for electricity access declines by 7%. Sub-Saharan Africa, with an already low share of commitments, is falling even further behind.” These are just some of the discouraging findings that emerged from the latest Energizing Finance report, published in November 2018 by Sustainable Energy for All (SEforALL) in partnership with the Climate Policy Initiative.

With just under 1 billion people still lacking access to electricity and 3 billion without access to clean cooking alternatives, it is crucial that this reality check is heard by donors and recipient governments, development finance communities, investors and private sector companies aiming to mobilize greater funds to ensure clean energy access for all. As concerted international policy and finance responses to achieve the SDGs evolve, strengthen and gain momentum, so must the systems for tracking progress toward the goals.

However, during our research for Energizing Finance, we found that multiple working definitions, metrics and indicators are being used to measure progress towards energy access goals, differing from institution to institution.

To this end, a well-calibrated, consistent and credible measurement and evaluation system, and a common set of definitions specifically targeted to track progress towards SDG7 (and other SDGs as well) is warranted.

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Reflecting on climate finance in Indonesia from 2018

January 17, 2019 |


As we reflect upon the progress Indonesia has made on climate finance in 2018, we anticipate an even more momentous 2019. Some highlights, from our perspective, include:

COP24 Highlights

The COP24 ended with adoption of a “rulebook” containing guidelines for the Paris Agreement’s implementation in 2020. The rules for climate finance reporting under Article 9 of the Paris Agreement make it mandatory for developed countries and voluntary for developing countries to report biennially on any climate finance provided or committed, hopefully paving the way for more granular and uniform data for analysis of finance effectiveness.

COP24 also served as an important place to continue building knowledge and scale on climate finance more generally, and in total the CPI global team hosted five panels and participated in 15 events at the COP24 Pavilions, including an event on the importance of fiscal policy and blended finance to mobilize public and private capital, as well as a panel on blended finance for marine conservation featuring the Indonesian Minister of Bappenas, the Seychelles Minister of Environment, OECD, ADB, and RARE.

One step closer to the Environmental Fund

In September 2018, the Government of Indonesia finally issued Presidential Regulation No 77/2018 that mandates the establishment of an Environment Fund managed via a public services agency (badan layanan umum).

CPI Indonesia has worked since 2016 with the Ministry of Environment and Forestry to facilitate the design and inter-ministerial discussions leading up to the Environment Fund establishment. The Ministry of Finance is currently working on a regulation to formally establish the Fund, which is designed to channel payments for emissions reductions activities, and to receive revenues from multiple sources both public and private.  Once established, the Fund will be the first public services agency able to receive international donor funding.  In 2019 we hope to see the Fund’s establishment, as well as the beginning of the Fund’s operations.

Emerging importance of blended finance tools

In October 2018, PT Sarana Multi Infrastuktur (PT SMI) and the Ministry of Finance launched SDG Indonesia One (SIO) Fund, an integrated platform that supports funding for SDG-related projects through blended finance instruments.  At the day of the launch, SIO attracted investment commitments of up to USD 2.3 billion – an incredible achievement, highlighting the level of investment possible when instruments are designed correctly.

CPI Indonesia was one of 22 partner organizations to sign a Letter of Intent supporting the SIO implementation at the launch.  CPI Indonesia provided technical assistance to PT SMI in designing the SIO platform – drawing on our experience designing innovative financing schemes through The Global Innovation Lab for Climate Finance.

In 2019, we hope to see SIO begin to alleviate the financial barriers hampering projects and attract more private financing at scale.

What’s next for renewable energy finance?

In 2018, CPI Indonesia released two new publications on renewable energy finance.  The first, “Energizing Renewables in Indonesia: Optimizing Public Finance Levers to Drive Private Investment”, finds that between 2012 and 2016, public finance provided by the Government of Indonesia to support clean energy development amounted to at least IDR 12.4 trillion. It also shows that these funds would have higher impact if spent through a certain few financial instruments.

The second study, “Energizing Finance: Understanding the Landscape 2018”, is part of a global study to capture investment in two key areas of energy access: electrification and clean cooking.  It finds that globally, energy access investments continue to fall far short of what is needed to close the energy access gap, and heavily favor non-residential customers (industrial and commercial sectors), as well as fossil fuel and grid solutions. Off-grid solutions remain miniscule at 1.3% of the total finance, despite the fact that these investments need to be increased if we want to see increased quality of life and electricity access to those who need it the most.

In 2019, expect more analysis from CPI in the area of renewable energy finance, particularly as we look at a closer depth into the costs of financing solar power and energy efficiency projects.

Sustainable regional growth means economically diverse growth

In 2018, CPI Indonesia released three new publications on optimizing land use finance in regional areas, finding, overall, that a stronger case should be made for diversified livelihoods, instead of a single-commodities based regional economy, to support land intensification.

The first study, “Indonesia’s Village Fund: An Important Lever for Better Land Use and Economic Growth at the Local Level”, looks at how the Village Fund has been spent predominantly on a single sector and could be optimized to support sustainable land use activities.

The second study, “Towards a More Sustainable and Efficient Palm Oil Supply Chain in Berau, East Kalimantan”, looks at how Berau can reach optimal palm oil production and meet mill capacity needs with minimal land expansion, but needs to address several challenges currently faced by smallholders, particularly access to finance. In East Kalimantan where crops are relatively young, finance for replanting is not yet viable, and therefore attracting financing by diversifying livelihoods is the more viable option needing further exploration.

The third study, “Empowering Oil Palm Smallholder Farmers through Alternative Livelihoods”, delves deeper into the business model aspects of two alternative livelihoods for oil palm smallholders that could promote better access to finance as well as maintain land intensification: cattle feed and fisheries, with application specifically to the East Kotawaringin and Katingan districts of Central Kalimantan. While both business models yield promise for scale and profitability, fish cultivation requires lower investment and maintenance.

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Are we getting climate finance all wrong?

July 22, 2018 |


This post originally appeared on Climate Home.

By Jessica Brown and Ilmi Granoff

It’s widely accepted that by the year 2050, the world needs to be approaching net-zero carbon if the goals of the Paris climate deal are to survive.

This long term rallying point, laid down by experts, has been followed by political commitments from countriescities, and businessesBut much of the thinking on financing this ambition remains stuck in the short term.

Meeting these goals will require enormous progress on energy efficiency, decarbonisation of electricity and fuels, electrification of most transport fleets, building, and industry energy needs.

It will also need massive investments in electricity generating capacity, grid infrastructure, and storage, as well as in both zero-emissions and carbon negative solutions including nuclear energy, carbon capture and storage, soil carbon sequestration, and afforestation and reforestation.

But, despite rapidly increasing clarity on the array of climate solutions needed, the investment implications of achieving midcentury decarbonisation are less understood beyond the need to “scale-up”.

Given the fundamental role finance plays in all facets of the global economy, it’s time to ask: How does a focus on 2050 change how we spend money today?

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Optimizing Public Payment Support to Enhance the Credit Rating of Renewable Projects in India

June 29, 2018 | , and


Investors in Indian renewable energy projects often cite the counterparty risk as one of their primary concerns. Counterparty risk is the risk of purchasers failing to meet their contractual agreement to pay on time – most often in the form of delays in payments, and sometimes by defaulting on the payments altogether. A recent CPI study found that this risk perception can add as much as 1.04% to the cost of debt for renewable energy projects.

A major driver of this risk perception are state-owned utilities’ (called DISCOMs) history of payment delays and defaults. DISCOMS are, by far, the largest off-takers of power in the country, either directly or through government-owned power aggregators, such as the Solar Energy Corporation of India and NTPC Vidyut Vyapar Nigam Limited (NVVN). As a result, power projects, which rely on these incoming cash flows to sustain their operations and interest payments, often find themselves strapped for cash, leading to poor credit ratings by lenders. These delays are the result of the systemic inefficiencies plaguing the Indian utilities sector. While various long-term government reforms targeting this sector are under different stages of implementation, they do not show great promise in curbing the issue of payment defaults in the near term. Government-sponsored risk-mitigation interventions called Payment Support Mechanisms (PSMs) arose from a need to build up the renewable energy power sector in light of this adverse investment environment.

These PSMs are funded pools of capital that provide working capital for projects when the associated off-takers default on their payment obligations. In the past, two such well-intentioned, but opaquely designed, PSM schemes have failed to be successful. Subsequently, tripartite agreements between the central government, state governments, and power aggregators (SECI and NVVN) have acted as powerful deterrents for DISCOMs against payment defaults to the aggregators. However, the counterparty risk in the case of direct procurement still persisted.

A recent technical paper by CPI provides a methodical framework for sizing a PSM with the explicit objective of enhancing the credit ratings of projects under the scheme. This empirical approach employs stochastic modeling of default events under various scenarios to arrive at differing probabilities of a project defaulting, in both the presence and absence of a PSM. Further, unlike a one-size-fits-all approach used by previous PSM constructs, this methodology takes into consideration the differing credit profiles of the DISCOMs gleaned using empirical financial reporting data.

The study provides interesting results, including that by providing a payment support large enough, the credit ratings of renewable energy projects can be enhanced to as much as a BB rating. Further, projects involving DISCOMs, such as in Gujarat and West Bengal, off-takers can achieve a BB rating even in the absence of any payment support. On average, the study finds that most DISCOMs require payment support equivalent to 8-17 months of payment, on average 12 months’ payment.

A concentrated effort from various government bodies has the potential to ensure a positive investment climate and assure that investors will receive payments owed to them at a moderate cost to the exchequer. This will reduce the cost and increase the availability of capital, thereby catalyzing the renewable energy sector. Further refinements towards employing public finance efficiently using empirical evidence is the way ahead to achieve the developmental objectives using available public resources.

A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Mobilizing Institutional Investment in Indian Renewables

June 12, 2018 | and


India has been a sweet spot for renewable energy investment exhibiting an 11% compound annual growth rate (CAGR) between 2004 and 2017, and ranked among the top five renewable investment destinations in the FS-UNEP Report. Some major contributing factors have been India’s strong macroeconomic fundamentals, its large and well-diversified renewable market, and India’s ability to offer higher excess returns than several comparable markets like China and the United States.

Excess returns on renewable investments

Mobilizing investments by institutional investors, foreign and domestic, is a requisite for India to meet its clean energy targets.

However, this momentum needs to be accelerated to achieve its ambitious clean energy targets, which include 175 gigawatt (GW) of installed renewable energy by 2022, 40% of the total installed capacity to be renewable by 2030 and 30% of vehicles to be electric by 2030.

One promising opportunity lies in institutional investment, both foreign and domestic, through pension funds, insurance companies, and sovereign wealth funds. These investors mostly seek yield-generating investments in low-risk and long-duration assets which align well with the investment profile of renewable energy. Also, over the course of time, the needs of foreign investors have evolved from seeking small size, high-risk and high-return investments to large size, medium-risk and moderate return investments that are well-matched by the renewable sector offerings.

However, certain sector-specific issues such as off-taker risk, limited availability of listed securities and low credit ratings of renewable energy securities restrict the flow of investments. In order to address these barriers, a recent report by Climate Policy Initiative offers potential solutions to stakeholders, including policymakers and regulators.

Sector-specific barriers and potential solutions

The off-taker risk adds as much as 1.07% of additional risk premium to the cost of debt for renewable energy projects. A long-term solution is to fix the root causes, like the one being tried by the Ujwal DISCOM Assurance Yojana (UDAY). Though UDAY has shown promise in reducing operational inefficiencies and improving financial performance in selected cases, it is still early to measure the effectiveness of the scheme in reducing the off-take risk.

Some other promising short-mid term options include tripartite agreements between the Central government, State governments and the Reserve Bank of India; and a credible payment security mechanism (PSM) either by the corresponding state governments or on a standalone basis. However, both the effected PSM and tripartite agreements are available only for public sector intermediaries – National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India Ltd. (SECI) – between renewable power developers and state DISCOMs. There is need to extend these arrangements to producers who sell power directly to state DISCOMs, which ensures the most judicious use of the public capital employed.

Another key reason for low investment levels from domestic institutional investors in the renewable energy sector is lack of investable securities (listed and liquid) since most developers are borrowing and not issuing securities. Indian policymakers have been aware of the need for these vehicles, and they have been gradually created, both for debt (green bonds and infrastructure debt funds) as well as equity (infrastructure investment trust) financial vehicles. However, green bond issuances (at corporate, not project level), no renewable energy specialized Infrastructure Debt Funds (IDFs), and Infrastructure Investment Trusts (InvITs) are indicators that investors are still trying to get comfortable with these vehicles.

In this context, one potential solution is to incentivize banks and Non-Banking Financial Companies (NBFCs) like Indian Renewable Energy Development Agency (IREDA), to securitize their renewable energy project loan portfolio. The government can cover costs related to securitization of renewable energy loan pools (transaction cost) and subsidize partial guarantee fees on bonds issued through securitization structures.

The third major barrier restricting the flow of investments is limited renewable securities with AA domestic rating – the minimum rating required by institutional investors to invest. Though there is a specific solution, in the form of a partial credit guarantee (PCG) offered by India Infrastructure Finance Company Limited (IIFCL), this is not considered successful yet, with only two renewable energy issuances so far, and those in 2016. One of the key issues with these credit-enhanced bonds is that though these are priced appropriately in the market, the net benefit compared to bank debt does not justify transaction costs. As an example, with PCG, the benefit is a maximum of 1.50%. With cost of PCG at least 0.5% and cost of transaction at least 0.5%, the net benefit of at most 0.5% does not justify the hassle of a bond issuance. Initial subsidization of guarantees and transaction fees may encourage issuers to actively pursue PCG-backed bonds in the renewable energy sector.

Need for regulators to espouse investors to go green

Apart from addressing the aforementioned sector-specific barriers, there is a clear need for insurance regulators to introduce certain guidelines to insurance companies pertaining to climate risk management framework and carbon footprint disclosure. Introductions of such regulations will allow them to actively assess their portfolio exposure to sectors likely to be adversely affected by climate change in the coming year. This will give them a head start to gradually diversify their current investments from such high carbon sectors and ultimately accelerate finances into low carbon infrastructure sectors, including the renewable energy sector.

Another step in the right direction would be to mandate all companies to provide green ratings on their financial securities. These ratings will allow investors who evaluate environmental aspects in their investment decision-making to make more informed decisions around securities. To introduce such a mandate, the government can initially provide incentives to companies or rating agencies to introduce green ratings.

In conclusion, there is an immediate need for policymakers to implement the aforementioned solutions in order to create an investment environment that lowers risk perceptions of investors in the renewable energy sector. These solutions complemented with evolving regulations and the disclosure landscape will be key to scale-up institutional investment in India.


A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Solar Municipal Bonds: Unlocking India’s Energy Potential

June 7, 2018 | and


India has topped the charts across the world in bad air quality. A recent study by the World Health Organisation (WHO) shows that 14 out of the 15 most-polluting cities in the world are in India. New Delhi, the capital of India and the second most polluted city in the world, can serve as an apt example to reveal the grave situation where breathing in open air is equivalent to smoking three packs of cigarette in a day. While car exhaust is a major culprit, fossil fuel-based power plants also play a large role in this situation.

Switching from fossil fuel based power plants to clean energy power from sources like wind and solar can play a key role in combating air pollution and climate change. Clean energy, especially distributed solar power, is also critical to solving the issue of energy access to millions of unpowered homes in India.

To address this twin challenge of air pollution and climate change, India has set aggressive targets of 40 GW of rooftop solar by 2022 which would require an investment of ~USD 40 billion in next 4 years. This would be a significant undertaking given that the current rooftop solar capacity installation stands at ~1.8 GW. Moreover, India is likely to install only ~13 GW of rooftop solar by 2022, considering the current rate of annual capacity addition. This is merely 33% of the set target.

Although rooftop solar is increasingly becoming cost-competitive, it still requires investment upfront to buy and install panels. Rooftop solar is approximately 17% and 27% cheaper than the average industrial and commercial tariff respectively. Despite the falling prices,   high upfront cost of rooftop solar installation, limited access to debt finance, and perceived performance risk restrict rooftop solar adoption.

Our previous research suggests a third party financing model or the “RESCO” model to help address these barriers. However, the success of this model has been limited as only 360 MW (18%) of the total of 1,800 MW have been installed under the RESCO model. This is mainly due to inadequate availability of debt capital for project developers.

So what’s the solution?

A recent study by Climate Policy Initiative (CPI), Indian Council for Research on International Economic Relations (ICRIER), and Stockholm Environment Institute (SEI), creates a case for municipal entities to promote rooftop solar in India by issuing green bonds in capital markets.

The study proposes a transaction structure wherein a special purpose vehicle (SPV) or a corporate municipal entity (CME) owned by the municipal corporation would raise the green bonds and disburse the proceeds of these bonds to SPVs owned by project developers via capital lease arrangements. In our paper, we also provide a detailed roadmap for municipalities to deploy the proposed model. After the installation and payment is complete for rooftop solar, cash flows would funnel back to the initial capital financiers. The proposed transaction structure is a Public Private Partnership (PPP) approach, similar to the Design-Build-Finance and Operate (DBFO) model with financing activity taken care by a public entity such as Municipal Corporations.

Transaction Structure to raise Municipal Bond for Rooftop Solar Financing

Municipal bonds have already been successfully tried in India for other infrastructure projects that serve the public good. For example, Pune Municipal Corporation recently issued a municipal bond for its water sector. With a 7.5% of coupon over 10 years, the 12 times oversubscribed bond showed significant appetite of investors for investing in such instruments. The solar municipal bond would help reduce costs for rooftop solar power at those same rates, by around 10-14%. This is a large financial savings that will ultimately help the electricity consumers by reducing the cost of already-cheaper solar power further.

In addition to reducing the cost of rooftop solar, municipal bonds also have the potential to mobilize significant untapped investment from new sources such as domestic institutional investors which has a potential of USD 56 billion in the green bond market and reached a total issuance size of USD 156 billion in 2017.

Still, financing rooftop solar via municipal bonds would face some barriers. This includes finding municipalities with credit ratings of A+ or more, reluctance of municipal corporations to issue bonds, lack of municipal mandate to promote electricity generation, high transaction costs, etc. which may hamper the uptake of this mechanism. However, the study points to several fixes like credit enhancement mechanisms, first loss capital, and legislative amendments from the central government that could encourage municipal bond issuance for rooftop solar.

These recommendations, and the others we outline in the CPI-SEI-ICRIER study, are a win win for all – for India, it will help reach its rooftop solar targets. For municipal corporations, it will help build organizational capacity to raise municipal bonds for other projects. And for the very cities struggling with clean air, this innovative but proven model can help residents save money on electricity, something that helps everyone breathe easier.


A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Blending finance for risk mitigation

April 18, 2018 |


Within developing economies, there are significant opportunities to increase investment in clean energy, however, risk remains a key barrier to climate investment. Blended finance is a critical tool to help nations meet their climate commitments, while also addressing the risks and barriers faced by investors when pursuing these opportunities.

In one of CPI’s early publications on risk – the 2013 Risk Gaps series – we highlighted how risk can prevent renewable energy projects from finding financial investors by jeopardizing their potential returns. At the time, investors in both developed and developing countries were demanding coverage for policy risk (such as retroactive changes to feed-in-tariff in Spain), while financing risks in developing markets were being driven by immature financial institutions, and not sufficiently addressed by financial instruments.

Today – five years later – even though clean energy costs have come down significantly, risks and barriers are still preventing investment in developing countries.

Our recent publication, “Blended Finance in Clean Energy: Experiences and Opportunities” looks at potential markets for high-impact investment opportunities requiring blended finance support – India, South Africa, Mozambique, Cambodia, Mongolia, Uganda, Kenya, and Rwanda – and identifies key barriers to investment using macro-indicators that best define specific risks in the region. Our analysis also evaluates blended finance initiatives in clean energy, diving in-depth into a subset of them, to understand how barriers are currently being addressed and to identity any remaining gaps.

Key barriers and risks in high-impact countries


Note: (*) indicates that in the absence of a quantitative figure to estimate the barrier or risk, the intensity has been qualitatively determined by combining expert judgement with performance of other risks within the same country. N/A indicates data not available

The main takeaway from our research is that, given the steep declines in clean energy costs, the public sector, when implementing blended finance initiatives, needs to shift its focus from covering the “viability gap” between clean energy and competing fossil fuel technologies, to a focus on targeted investment risks and barriers. Our analysis revealed that off-taker risk, currency risk, policy risk, and liquidity and scale risks are still relevant as early stage projects and clean energy companies face barriers in accessing financing. This has important implications for which financial instruments to deploy looking forward – with risk mitigation instruments, such as guarantees, insurance, and local currency hedging and financing, playing a key role.

More specifically, our research found that:

  • Only a few initiatives seem to target commercial risks, including currency risk or off-taker risk, in their design. One example from the Lab, TCX’s Long Term FX Risk Management initiative, which offers long-term risk hedging instruments in countries with underdeveloped capital markets, is an exception, having mobilized EUR 100m of investment with a EUR 30m foreign exchange hedging facility. Another example, GEEREF NeXt, the successor fund to GEEREF, aims to mitigate off-taker risk by engaging early with regulatory bodies in target countries.
  • Relatively few initiatives have reported a guarantee element in their design. An analysis of multilateral institutions indicated that guarantees represent only approximately 5% of their commitments, yet generate approximately 45% of their private sector mobilization. Furthermore, previous CPI research found that, even among the already low-risk instrument offerings, only 10% of risk instruments focused on climate related projects. Several administrative barriers prevent the wide use of guarantees as an instrument for private capital mobilization. For example, development finance institutions typically record guarantees in the same way they do loans for the purposes of risk capital allocation, thus discouraging the use of guarantees over loans. Furthermore, guarantees are not counted as official development assistance (ODA) by the OECD, and thus, many financial institutions are not incentivized to use them. In fact, several bilateral institutions are obliged, by law, to offer only ODA-eligible financial products, therefore excluding all guarantees.
  • Aggregating individual projects and private company investments into liquid assets (e.g., through securitization), is critical to overcome investment hurdles, including liquidity risk, and to access larger pools of capital, but there is little experience to date in emerging markets. However, some initiatives are currently raising financing successfully, including the Solar Energy Investment Trusts, the IFC’s Rooftop Solar Financing Facility in India, and the Green Receivables Fund in Brazil. For non-project-based financing, supporting energy generation companies, including distributed generation start-ups (via early stage blended risk finance) as well as established utilities (via risk mitigation instruments) to access capital markets financing will also help mainstream clean energy finance.
  • There are large gaps in accessing early stage risk financing for project preparation, distributed generation companies, and new technologies.This is particularly true for project preparation during the early stages of mid-to-large scale projects (e.g., over 10 MW). While some grant initiatives, notably the Africa Clean Energy Facility (ACEF) and U.S.- India Clean Energy Finance (USICEF), have focused on addressing gaps at this stage, a financially sustainable solution has not yet been established. However, several initiatives, including Climate Investor One’s Development Fund and a newly endorsed Lab instrument, the Renewable Energy Scale-Up Facility, seek to re-coup some costs by using innovative mechanisms. For technologies involving high upfront commitment combined with significant resource risk, a program developed by IDB combines public loans that are convertible to grants, with private insurance, both aimed at targeting resource risk during the exploration/ drilling phase. New renewable energy technologies, such as energy storage, also face a scarcity of early stage risk finance, including in developed markets. As such, a blended finance initiative in the U.S., the PRIME Coalition, works to deploy philanthropic capital in early stage clean energy technology companies to catalyze private investment, but large gaps remain. Finally, distributed generation also faces scarcity of investment at the earliest stages— including equity and debt—particularly in countries with under-developed financial sectors. ACEF sought to address this barrier as well through grants, while, in India, a group of philanthropies is working to build the India Catalytic Solar Finance Facility, which will use catalytic capital to help non-bank financial companies establish new business lines by co-investing in small and medium sized enterprises that are seeking to scale their clean energy businesses or deploy distributed solar generations.

Many innovators are already building the next generation of blended finance initiatives, increasingly focusing on risk mitigation. CPI’s Climate Finance team remains committed to supporting investors as they improve their understanding of climate risks, and seize the opportunities presented by countries’ transitions to low-carbon and climate-resilient economies.

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Greening institutional investment in India

March 20, 2018 | and


India’s energy demand is increasing, and, to achieve its clean energy target of 175 GW by 2022, finance will be crucial.

One promising opportunity lies with foreign and domestic institutional investors who have $70 trillion and $564 billion assets under management, respectively. These investors are bound by their fiduciary duties meant to maximize financial returns to their beneficiaries, without taking excessive risks, while also meeting their liabilities over the long-run. Renewable energy, though a relatively new technology, is well matched to these needs as it offers high returns as well as meets environmental, social and governance (ESG) considerations in their investment strategies.

However, how can India unlock this opportunity to create a clean energy future?

A recent study by Climate Policy Initiative attempts to answer this question by developing a business case for institutional investors to invest in the Indian renewable energy sector, identifying key barriers to investment, and proposing potential pathways forward.

The changing economics of energy in India
According to the report, the renewable sector is becoming increasingly attractive compared with other energy investment opportunities in India. For instance, the solar tariff has actually become 23% cheaper than coal plants, and coal plants exhibit greater risk in cash flows (i.e. 40%) as compared to wind (i.e., 20%) and solar (i.e.,10%).

In the medium term, these changing economics mean that the existing power portfolio of investors, who are mostly exposed to fossil based investments instead of renewable investments, would underperform due to declining demand for fossil based power. Consequently, it is in the interest of institutional investors to gradually rebalance their portfolio in favour of climate friendly investments, in India and elsewhere.

Is India an attractive renewable energy market for institutional investment?
The study builds a case that India as a market is strong and economically attractive for foreign institutional investors compared to other similar markets across the world.

First, it benefits from strong renewable policy commitments as well as a large market size — ~480 GW expected capacity addition over 2016-40 — that is third only to China and the United States. Second, India is ranked 2nd in Ernst & Young’s renewable energy country attractiveness index, based on five pillars including macroeconomic environment, policy enablement, supply–demand dynamics, project delivery, and technology potential. Third, renewable energy in India provides a financially attractive investment, as measured via excess returns,  the difference between the expected return on capital invested and the weighted average cost of capital. India offers higher excess returns of 3.5% compared with other large markets, such as the US (2.4%) and China (1%). While some markets provide higher excess returns than India—for example, Mexico, Canada, and Chile – these are much smaller markets.

So what’s next?
Institutional investors with long-term investment horizons are mostly seeking yield generating investments in low risk and long duration assets, i.e., traits that align well with the current investment profile of renewable energy; this has changed from small size and high risk-high return investments to large size and medium risk-moderate return investments. Although the expected return from renewable energy projects have come down from 20% to 15% over time, this still matches institutional investors’ overall India market portfolio return requirements.

Renewable energy sector stages with risk-return mapping

However, our study finds there are still some barriers to unlocking this apparent match – including, sector specific risks like off-taker risk and limited listed and highly graded investment opportunities, along with currency risk.

The good news is that with appropriate regulatory and policy changes, the sector can provide a high match with institutional investors’ investment objectives.

For example, the central and state agencies could address the off-take risk through a transparent and credible payment security mechanism. Regulators could consider developing incentives to encourage banks and Non-Banking Financial Companies (NBFCs) to securitize their renewable energy loan portfolios, freeing up capital for more renewable energy projects. And investors themselves can consider developing risk management frameworks to assess and manage climate risk, identifying and investing in forward looking investment opportunities, renewable energy being one, to mitigate climate risk in their portfolio.

These steps, and the others we outline in the study, are a win win for all – for India, it’s a way to get much needed capital in a much needed area. For investors, their long-term portfolios depend on it.

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