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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EU winter package brings renewables in from the cold

December 1, 2016 |

 

Joint press conference by Maroš Šefčovič and Miguel Arias Cañete on the adoption of a Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy

Christmas came early yesterday in Brussels, with the release of some heavy reading for the EU’s parliamentarians to digest over the festive season. Or at least that was the more jovial take on the launch of the EU winter package from Maroš Šefčovič, the EU vice-president in charge of the Energy Union (pictured).

Targets to cut energy use 30% by 2030, the phasing out of coal subsidies and regional cooperation on energy trading are central to the proposals, which updates the regulations and directives that support targets set out in 2014 as part of the Energy Package 2030.

Whether this gift is not just for Christmas will be down to the EU parliamentarians who have two years to debate these proposals and implement them.

So where does it leave us with the growth of renewables, the underpinning for a decarbonised power sector? If the EU meets its 2030 target, 50% of electricity should be renewable compared with an EU average of 29% today. That target remains unchanged, so those engaged in producing clean energy for Europe’s electricity grid should be reassured – up to a point.

A great deal was made of scrapping priority dispatch for renewables after that proposed change was ‘leaked’. In the end, the Commission merely soften its language but the outcome remains the same on priority dispatch, implying that policymakers think that renewable generation should be more responsive to the market.

Yesterday, Šefčovič and the Commissioner for Climate Action and Energy Miguel Arias Cañete both acknowledged that renewables need to be more integrated into wholesale markets, and those markets need to be more coordinated with each-other. Specifically, the package encourages member states to:

  • ensure that renewables participate in wholesale and balancing markets on a “level playing field” with other technologies. In particular, the new package removes the requirement for renewables to be given priority dispatch over other generation types (which most, but not all, member states currently abide by). It instead requires dispatch which is “non-discriminatory and market based”, with a few exceptions such as small-scale renewables (<500kW). In addition, renewables should face balancing risk and participate in wholesale and balancing markets.
  • increase integration between national electricity markets across the EU. Requirements include opening national capacity auctions to cross-border participation and an interconnection target of 15% by 2030 (ie, connecting 15% of installed electricity production capacity with neighbouring regions and countries). Earlier this year, the Commission established an expert group to guide member states and regions through this process.

What does this all mean for investors? The obvious concern is that removal of priority dispatch and exposure to balancing markets will increase revenue risk for renewables generators.

So, why is the EU removing these rules on priority dispatch once the mainstay of the Commission’s wholesale market rules? The main argument is to help reduce the costs of balancing supply and demand, and managing network constraints. Generally, it is most economic to dispatch renewables first because their running costs are close to zero regardless of whether they have priority dispatch.

But, when there is surplus generation, the most economic option is sometimes to curtail renewables ahead of other plant. For example, turning down an inflexible gas plant only to restart and ramp it up a few hours later can be expensive and inefficient. By contrast, wind generators can be turned down relatively easily.

Therefore, giving renewables priority dispatch can sometimes increase the overall costs of managing the system. When renewables were a small part of the market, any inefficiencies caused by priority dispatch were small and easy to ignore, while it helped reduce risks around renewables investment. But now renewables are set to become the dominant part of electricity markets it is harder to ignore.

Nevertheless, risks around balancing for wind can cause real headaches for investors. In our report from earlier this year, Policy and investment in German renewable energy we found that economic curtailment could increase significantly, potentially adding 17% to onshore wind costs by 2020.

The amount a generator is curtailed depends on a wide range of uncertain factors which wind investors have little or no control over (eg, electricity demand, international energy planning, network developments and future curtailment rules).

What could happen next?

So to maintain investor confidence (and avoid costly lawsuits) existing renewables investments need to be financially protected as rules are changed. There are many ways to do this. For example, priority dispatch status could be grandfathered for existing generators (as the winter package suggests) or, as set out in our recent report of Germany, generators could be fully compensated for curtailment through “take-or-pay” arrangements.

More generally, very clear rules around plant dispatch and curtailment are needed to avoid deterring investment. Ideally, dispatch will be determined by competitive, well-functioning balancing markets, where renewables are paid to be turned down based on what they offer, rather than by a central system operator curtailing without compensation.

The move to integrate renewables into balancing markets means they will compete with other options to balance the system such as storage and demand-side measures. These flexibility options should benefit from the sharper price signals and greater interconnection implied by winter package. But there is no clear consensus yet on the right business and regulatory models to support investment in flexibility. However, CPI is currently working on a programme as part of the Energy Transitions Commission to explore the role of flexibility in a modern, decarbonised grid and will be publishing our findings soon.

Ultimately, there is an unavoidable trade-off in designing electricity markets: it is very difficult to provide incentives for generators, storage and the demand-side to dispatch efficiently through market mechanisms without also exposing them to some risk. Yesterday’s announcement in the winter package means more countries will have to face this dilemma.

Disclaimer: Unless otherwise stated, the information in this blog is not supported by CPI evidence-based content. Views expressed are those of the author.

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Powering climate action – the 2016 Fire winners

November 28, 2016 |

 

The Paris Agreement marks the start of a new era in climate policy, with commitments to climate action made by governments, private sector entities, and NGOs around the world. However, for these commitments to be realized and a corresponding transition to a 2-degree pathway achieved, trillions of investment will need to be mobilized – and quickly, with a significant portion coming from private sector sources.

Climate Policy Initiative (CPI) is at the forefront of work to respond to the urgency of the climate challenge by targeting scarce public resources to mobilize significant private finance into low-carbon, climate-resilient development. As part of its climate finance program, CPI serves as Secretariat to The Global Innovation Lab for Climate Finance (The Lab), which convenes public and private stakeholders to design, pilot, and accelerate transformative financial instruments, with the aim to drive billions of dollars of private investment into climate change mitigation and adaptation in developing countries.

The Lab and its initiatives have been endorsed by the G7 and have raised nearly USD 600 million in seed funding for renewable energy, energy efficiency, and climate resilience projects. Currently, the Lab is seeking ideas for its next cycle that can drive finance in India and Brazil. The Lab also presents The Fire Awards, which identify and accelerate powerful, early-stage pilots and businesses that can unlock private finance for clean energy and green growth around the world.

Indeed, in the six months following the Bloomberg New Energy Finance (BNEF) Future of Energy Summit in New York, there have already been several successful outcomes for the 2016 Fire Winners, which kicked-off implementation of work plans to achieve growth goals, with support of Fire Working Groups in May:

  • In September, the team behind Affordable Green Homes, a project to catalyze a market for affordable green housing in Sub-Saharan Africa, was invited to participate in the formal launch of a UN and private sector platform to generate financing solutions for the Sustainable Development Goals. At the launch meeting, led by UN Secretary General Ban Ki Moon, International Housing Solutions (the global private equity firm leading Affordable Green Homes) was recognized for its innovative approach to drive investment in and deliver energy and water efficient housing. The team will continue to help shape the direction of the UNSG platform.
  • The Developing Harmonized Metrics for the PAYG Solar Industry initiative championed by Anna Lerner of the World Bank Group, also moves forward, achieving a major milestone with the recent publishing of a white paper titled, How can Pay-as-you-go Solar be Financed?. The paper, which was one of the main outputs of the Fire Working Group, explores a number of the risks and challenges associated with structured finance solutions for the PAYG sector. On 11th October, the paper was also presented and discussed in a dedicated session at the BNEF Future of Energy EMEA Summit in London. The session was led by Itamar Orlandi (Head of Applied Research, BNEF). Panelists included Fire Working Group Members, David Battley (Director of Structured Finance, SunFunder) and Peter Mockel (Senior Industry Specialist, Climate Business Department, IFC), as well as Giuseppe Artizzu (Head of Global Energy Strategy, Electro Power Systems Group), Mansoor Hamayun (Chief Executive Officer, BBOX), and Manoj Sinha (Co-Founder and CEO, Husk Power Systems). The white paper is available on the BNEF website.
  • An announcement was released on the planned scale-up of the Investor Confidence Project (ICP), an Environmental Defense Fund led initiative to standardize and increase investment in energy efficient buildings. The scale-up plan is founded on a new partnership with the Green Business Certification, Inc. (GBCI), which also administers the LEED, EDGE, PEER, WELL, SITES, GRESB, and Parksmart certification programs. The new partnership aims “to achieve a true, worldwide standard to unlock the potential of energy efficiency.” The Fire Secretariat will host a dedicated 2 hour roundtable in London on 7th December to discuss and build momentum for the new partnership. The roundtable will comprise Fire Working Group Members and key stakeholders in the investment and real estate sectors. If you would like to attend, please let us know at info@financeforresilience.com. More information on the new partnership is available on the ICP and decentralized energy
  • Finally, Grips, which provides reliable, clean energy beyond the world of fossil fuels and public grids, was supported by a Fire Working Group to make connections with over a dozen investors, which will help the initiative move forward. In recognition of its innovative approach to deliver competitive, clean energy to industrials in developing countries, Grips’ CEO, Alexander Voigt, was also invited to participate in the technical workshop to set up a UN-led platform to scale-up finance for the Sustainable Development Goals.

These achievements mark major milestones for the 2016 Fire Winners, as they continue to blaze forward and grow their impact. For those interested in learning more about any of the 2016 Fire Winners or to be involved in upcoming consultations, please contact us at info@financeforresilience.com.

“Getting access to international experts and advice made it possible to accelerate the launch of the KPI framework, grow our partner network and identify new useful applications for the data platform.” –Anna Lerner, World Bank Group

“Winning FiRe has clearly accelerated the implementation of Grips. Through the increased exposure to an international audience of financial and energy experts we have received an increasing number of project leads, partnership requests, and financing offers. We are currently advancing discussions on all sides.”–Arvid Seeberg-Elverfeldt, Grips

The Global Innovation Lab for Climate Finance identifies, develops, and pilots transformative climate finance instruments, with the aim to drive billions of dollars of private investment into climate change mitigation and adaptation in developing countries. Made up of public and private sector members, the Global Lab and its initiatives have been endorsed by the G7 and have raised nearly USD 600 million in seed funding for renewable energy, energy efficiency, and climate resilience projects.

The Fire Awards accelerate powerful, early-stage pilots and businesses that can unlock finance for clean energy and green growth. Climate Policy Initiative serves as the secretariat for the Fire Awards alongside the Global Innovation Lab for Climate Finance (The Lab). The Fire Awards and The Lab are funded in part by Bloomberg Philanthropies, and Bloomberg New Energy Finance provides in-kind support.

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A call for innovative green finance ideas to help India meet its climate goals

November 24, 2016 |

 

Last week, I was in Marrakesh speaking at this year’s UN climate change conference, COP22, where I witnessed an important transition in moving from talk to action. Just a few weeks before the start of COP22, the Paris Agreement officially entered into force – the historic international agreement for action on climate change that emerged from COP21 last year. While COP21 was about promises and commitments, COP22 was about working out the details to put those promises in place.

Under the Paris Agreement, India has pledged that renewable energy will be 40% of the country’s expected electricity generation capacity in 2030, along with a 35% reduction in carbon intensity by 2030 from 2005 levels. In addition, India has also set one of the most ambitious renewable energy targets of all – 175 GW of renewable energy by 2022, including 100 GW of solar power.  These important targets are not only good for the climate, but can also help meet the energy demand of India’s rapidly growing economy and population.

However, a lack of sufficient financing for renewable energy in India may present a formidable barrier to achieving these targets. This was a key item of discussion at COP22.

An upcoming report from Climate Policy Initiative shows that in order to meet the target of 175 GW of renewable energy by 2022, the renewable energy sector in India will require $189 billion in additional private investment, a significant amount. The potential amount of investment in the renewable energy sector in India is $411 billion, which is more than double the amount of investment required. However, in a realistic scenario, the amount of investment expected falls short of the amount required by around 30%, for both debt and equity.

figure-7

In this context, and as India moves to implement its commitments under the Paris Agreement, the work of the India Innovation Lab for Green Finance is increasingly important. The India Lab is a public-private initiative that identifies, develops, and accelerates innovative finance solutions that are not only a better match with the needs of private investors, but that can also effectively leverage public finance to drive more private investment in renewable energy and green growth.

The India Lab has recently opened its call for ideas for the next wave of cutting-edge finance instruments for the 2016-2017 cycle, in the areas of renewable energy, energy efficiency, and public transport. Interested parties can visit www.climatefinanceideas.org. The deadline to submit an idea is December 23rd.

The India Lab is comprised of 29 public and private Lab Members who help develop and support the Lab instruments, including the Indian Ministry of New and Renewable Energy, the Ministry of Finance, the Indian Renewable Energy Development Agency (IREDA), the Asian Development Bank, the World Bank, and the development agencies of the French, UK, and US governments.

In October 2016, the India Lab launched its inaugural three innovative green finance instruments, after a year of stress-testing and development under the 2015-2016 cycle. They will now move forward for piloting in India with the support of the Lab Members. The three instruments include a rooftop solar financing facility, a peer-to-peer lending platform for green investments, and a currency exchange hedging instrument. Together, they could mobilize private investment of more than USD $2 billion to India’s renewable energy targets.

Now that the Paris Agreement has been ratified and the real work begins, the India Innovation Lab for Green Finance can help India transition from talk to action by driving needed private investment to its renewable energy targets. Visit www.climatefinanceideas.org to learn more and submit your innovative green finance idea by December 23rd.

A version of this first appeared in the Huffington Post.

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Increased understanding of how finance is mobilized can support efforts to spend resources wisely

November 16, 2016 |

 

Developed countries’ goal to ‘mobilize’ USD 100 billion per year by 2020 to address the climate action needs of developing countries will not close the global climate finance investment gap. However, it is an important political benchmark for assessing progress on climate finance within the context of multilateral negotiations. This provides policy makers with both challenges and opportunities.

On one side, reaching more consistent definitions for climate finance and eligible activities will be politically challenging. However doing so could promote transparency and help build trust between countries.

On the other, close scrutiny of the USD 100 billion could help to maximise its impact and help policymakers everywhere to learn lessons about what works and what works better in terms of ensuring international and national public resources drive private investment in climate action.

One word in the negotiating texts best encapsulates both the challenge and the opportunity – ‘mobilize’. The goal to ‘mobilize’ USD 100 billion a year was originally set at the international negotiations in Copenhagen in 2009. Last year’s Paris Agreement also refers to a ‘collective mobilization goal.’

CPI has helped to unpack the diversity of opinions about how this term should be applied. However, few disagree that in part this ‘collective mobilization goal’ is a recognition that implementing countries’ nationally determined contributions will require trillions not billions of dollars. To make this shift, public finance must be catalytic, driving private investment by tackling viability, risk and knowledge gaps that private actors cannot or are unwilling to bear.

In some sectors and markets, this means public finance will need to play more of a leading role in discovering, developing, and piloting new technologies and approaches that do not yet deliver returns sufficient to satisfy private investors, or which are perceived as having unmanageable risks.

Initiatives and studies from a range of organizations have explored different methodological approaches to estimate the extent to which public climate finance, support or policy can be said to have ’mobilized’ private climate-related investments. These include the co-financing approach proposed by multilateral development banks (MDBs), the methodology of the Technical Working Group composed of donors from the OECD member countries that was applied by the OECD and CPI in the “Climate Finance in 2013-14 and the USD 100 billion goal” report, and a CPI report on mobilized private finance for adaptation which explored the legitimacy and feasibility of measuring the more “indirect” impacts of public finance and support on mobilizing finance.

The accounting methods and data provided in these reports are helping countries and individual actors to understand two things. Firstly, what is being counted and what is being excluded in different ’mobilization’ approaches. Secondly, the complex interplay between different sources of finance and the range of actors and instruments involved in its delivery – work that CPI has led since 2010.

The Paris Agreement may also help. It charges the UNFCCC’s Subsidiary Body for Scientific and Technological Advice (SBSTA) with developing accounting guidelines for national-level reporting by 2018 to support better tracking of finance provided and ‘mobilized’ through public interventions.

Reaching agreement will be a complex, technical and politically challenging exercise for the SBSTA but will build on existing work to further enhance transparency around domestic climate finance and allow decision-makers to assess more easily the role different actors in the financial system play in achieving overarching economic and environmental goals.

CPI remains committed to supporting this process and to improving decision makers’ understanding of climate finance flows at the global, national and local levels.

Since 2010, CPI has supported decision makers from the public and private sectors, at international, national and local levels, to define and track how climate finance is flowing from sources and actors, through a range of financial instruments, to recipients and end uses. Providing decision makers with robust and comprehensive information helps them to assess progress against real investment goals and needs. It also improves understanding of how public policy, finance and support interact with, and drive climate-relevant investment from diverse private actors, and where opportunities exist to achieve greater scale and impact.

This blog is part of a series on climate finance tracking challenges. Read more here.

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National-level climate finance tracking can help countries meet NDC goals effectively

November 10, 2016 |

 

Around the world, 74% of total global climate finance and over 90% of total private climate finance is raised and spent in the same country. As low-carbon, climate-resilient assets become increasingly attractive to national actors compared to the alternatives, action on climate is largely happening within national contexts.

In fact, the domestic bias of climate finance is likely understated. CPI’s Global Landscape of Climate Finance reports have repeatedly highlighted substantial data gaps around domestic budgets in particular.

In 2014, the majority of global climate finance was raised and spent in the same country. Because domestic investment dominates, it is vital to get policies right. This requires robust national-level climate finance tracking.

The majority of finance was raised and spent in the same country. Because domestic investment dominates, it is vital to get policies right. This requires robust national-level climate finance tracking.

Clearly, understanding how finance flows within countries is key to accelerating countries’ transitions toward low-carbon and climate-resilient economies.
CPI has worked with counterparts in Germany, Indonesia and most recently Côte d’Ivoire to track their climate finance and other organizations are also tracking climate finance at the national level. For example, Institute for Climate Economics (I4CE) used CPI’s approach as a foundation to conduct a similar exercises in France, Trinomics has done similar work in Belgium, and the United Nations Development Programme (UNDP) has worked with seven Asia-Pacific countries to understand climate-related public expenditures in their national budgets.

While these countries have made a start, more work is urgently needed as improved national tracking will critically inform countries’ efforts to implement their Nationally Determined Contributions (NDCs) submitted under the Paris Agreement. The International Energy Agency (IEA) has estimated that, to implement NDCs, energy efficiency and low-carbon technologies require$13.5 trillion in investment over the next 15 years. Ensuring that investment from a range of national and international sources is optimized will help ensure impact and value for money.

There are many benefits to improving national-level climate finance tracking systems

Identifying, tagging, and tracking budget allocations that respond to climate change challenges enhances governments’ ability to allocate appropriate resources at the national and local levels and ensure they are being spent as intended.

Increasing understanding of what different domestic and international, public and private actors are investing, in which climate-relevant activities, and what instruments they are using to deliver finance, can help identify blockages, and highlight opportunities to better coordinate spending and reallocate finance to areas where it will have more impact.

Extending the scope of tracking exercises beyond climate finance can reveal how much public money is flowing to support business-as-usual investments including in fossil fuels, and unsustainable land use. Understanding where public incentives are misaligned with climate goals can highlight opportunities to improve policies and ensure public spending is coherent.

CPI has designed related tools to inform decision makers thinking around this broader question and is applying them in the context of REDD+ related finance in Côte d’Ivoire to support the country’s work to develop a REDD+ strategy.

Ultimately, such tracking provides a basis for decision makers to ensure that limited domestic and international public resources are targeted where and how they are needed most to help countries achieve their goals. Effective tracking provides a starting point to inform discussions about what is happening, and informs the design of more cost-effective policies and financial instruments to mobilize investment.

CPI remains committed to improving understanding of climate finance flows at the national and local levels.

Since 2010, CPI has supported decision makers from the public and private sectors, at international, national and local levels, to define and track how climate finance is flowing from sources and actors, through a range of financial instruments, to recipients and end uses. Providing decision makers with robust and comprehensive information helps them to assess progress against real investment goals and needs. It also improves understanding of how public policy, finance and support interact with, and drive climate-relevant investment from diverse private actors, and where opportunities exist to achieve greater scale and impact.

This blog is part of a series on climate finance tracking challenges. Read more here.

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If you would like our support tracking your climate finance flows, get in touch here.

This article first appeared on Public Finance International.

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Improved and integrated private disclosure data can help broader tracking efforts

November 8, 2016 |

 

As part of efforts to limit the increase in the global average temperature to well below 2°C, the Paris Agreement states that countries participating in the international climate negotiations shall make ‘finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’.

CPI’s Global Landscape of Climate Finance and San Giorgio Group Case Studies have highlighted the important role of public resources and policies in influencing growth pathways. However, while data collection at the international level has improved in recent years (for example through the OECD DAC system), many governments and public organizations still lack a comprehensive system to track and report domestic climate-related expenditures and international climate finance.

In terms of collecting and publically reporting information about its climate finance investments, the private sector lags even further behind.

Finance captured by Global Landscape of Climate Finance 2015 and data gaps

This is problematic for governments and investors alike. Exposure to climate risks will have widespread effects on the value of assets and therefore, the ability of pension funds and insurance companies to pay out to their beneficiaries. Costs of compliance with standards or policies, risks of stranded assets, changing agricultural and commodity prices, increased scarcity of essential resources like water, disruptions in business supply chains, and damage to infrastructure and other assets will all impact companies’ and investors’ financial performance, as well as countries’ economic growth.

Investors are gaining more clarity on the exposure of their financial assets to climate change risk through companies’ increasing disclosure of environmental, social, and governance (ESG) data. To date, demand for companies to disclose the climate risks they face has mainly been driven by disclosure initiatives and pressure from investors, with mandates from financial regulators and exchanges increasing in importance.

However, as CPI analysis has shown, there is little consistency in the quality and scope of information disclosed. Definitions are applied in different ways and many metrics are preliminary. Last December, the Sustainability Accounting Standards Board (SASB) reported that 93% of listed U.S. companies face some degree of climate risk but only 12% have disclosed it.

The challenge in the medium-term is to harmonize and improve definitions and metrics to provide investors and policymakers with comparable and reliable data with which to compare performance and formulate investment policies. Forthcoming recommendations on how to standardise such disclosures from the Taskforce on Climate-Related Financial Disclosures are due in December could provide some guidance. In the short-term, increased transparency is a good start.

Green bonds provide a case in point. Concerns about where finance raised from these bonds goes have led a number of different organizations to develop different assurance solutions. However, recent trends show issuers may be choosing transparency as the least cost option.

In 2015, 72% of green bond market by value sought an independent review. In the third quarter of this year, less than half did so, with issuers themselves opting instead to disclose how the proceeds of bonds will be used, and their process for selecting green projects.

Investors in the market seem broadly satisfied with this for now but this could change.

French investors now face their own for disclosure requirements both on how they are managing climate risk and how they are contributing to “energy and ecological transitions.” A French law, the first to introduce mandatory carbon reporting by investors, requires investors with a balance sheet of €500 million or more to submit their first reports on how they are approaching these issues by June 2017.

What remains less clear is whether such disclosure will provide enough comparable and reliable detail on the kind, location and performance of assets (e.g. in terms of emissions reductions, increased energy productivity, or increased resilience to adverse weather conditions) to provide more comprehensive overviews of how finance is accommodating climate change impacts and opportunities.

While some questions remain, increased transparency will certainly support investors and regulators’ efforts to mainstream ESG investment, and to move from understanding to managing climate risk, thus optimizing climate-related investment opportunities.

Increased transparency will also open new opportunities for financial product and service providers to refine existing and create new green investment products that reduce capital costs for the organizations driving energy and land use transitions.

Investment framework for managing climate risks and opportunities

Greater clarity on public and private finance flowing to climate-relevant sectors where little reliable information is currently available can also improve policymakers’ understanding of how public and private interests and capabilities interact, enabling them to refine support frameworks to ensure effective spending and to maximise the economic benefits of transitions in energy and land use.

CPI remains committed to supporting investors to improve their understanding of climate risks and highlighting how to make the most of the opportunities presented by countries’ transitions to low-carbon and climate-resilient economies.

Since 2010, CPI has supported decision makers from the public and private sectors, at international, national and local levels, to define and track how climate finance is flowing from sources and actors, through a range of financial instruments, to recipients and end uses. Providing decision makers with robust and comprehensive information helps them to assess progress against real investment goals and needs. It also improves understanding of how public policy, finance and support interact with, and drive climate-relevant investment from diverse private actors, and where opportunities exist to achieve greater scale and impact.

This blog is part of a series on climate finance tracking challenges. Read more here.

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What CPI Has Learned in Six Years of Tracking Climate Finance

November 4, 2016 |

 

Since 2010, CPI has supported decision makers from the public and private sectors, at international, national and local levels, to define and track how climate finance is flowing from sources and actors, through a range of financial instruments, to recipients and end uses. Providing decision makers with robust and comprehensive information helps them to assess progress against real investment goals and needs. It also improves understanding of how public policy, finance and support interact with, and drive climate-relevant investment from diverse private actors, and where opportunities exist to achieve greater scale and impact. Below, I share a few lessons we at CPI have learned from six years of work on these issues.

Sound data enables decision makers to evaluate progress towards their goals

Assessing whether financial resources are being used wisely, and what are the entry points to further scale up investments, requires sound data to identify sources of finance, the mix of financial instruments and investments, and the uses to which finance is put. The more comprehensive, clear and comparable data is, the easier it is to draw insights and share best practice.

The data produced by CPI’s tracking work is referenced by donors and policymakers in the context of the UNFCCC negotiations and used in national development plans and strategies drawn up by governments and financial institutions. It forms the solid foundation on which ours and others analysis is built.

Understanding how public and private climate finance interact is key

Robust information about how public resources and private interests interact will help to ensure public interventions effectively target, and eliminate the cost, risk, and knowledge gaps that impede private investors. Spent wisely, pubic resources can drive private investment while reducing the burden on taxpayers, optimizing returns for international and domestic public and private investors alike. CPI has focused much of its work at this intersection of the public and private actors.

CPI’s Global Landscape of Climate Finance highlights that private investors strongly prefer domestic markets and that, while public finance remains the driver of much private investment, it will not be enough on its own to meet countries investment goals. Familiarity with and confidence in domestic policies and regulatory frameworks is essential to attract climate-relevant investment because investors must have confidence they can balance risks and returns. National and international public finance play key roles building projects’ bankability by covering viability and knowledge gaps, driving huge increases in investment from the private sector.

CPI’s work analysing projects and portfolios of investments and tracking how to measure how public finance mobilizes private investment provides tools for policy makers to determine how effective public interventions have been. It also informs our work supporting the development of innovative solutions to drive further investment in climate action.

Significant progress has been made on tracking in the last six years

Significant progress has been made on tracking climate finance in the last six years helped in part by CPI’s tracking work and our focus on convening public and private climate finance actors to share insights and experiences and integrating both public and private source of climate finance data.

CPI’s reports were the first to provide a comprehensive picture of all climate finance data reported to or by other organisations including the Organisation for Economic Co-operation and Development (OECD), and Bloomberg New Energy Finance. We highlighted opportunities to improve data collection and harmonize reporting could help build a more robust overview.

The latest edition of CPI’s spaghetti chart showing the flow of climate finance from sources to end uses

Landscape main flow diagram

The engagement of key stakeholders in compiling these reports, and particularly providers of international public finance, has informed efforts by multilateral development banks, bilateral financial institutions and national development banks to close some of the gaps we reported in 2011. Our tracking methodologies have also been applied by others who have themselves developed innovations to suit national circumstances.

Many tracking gaps and challenges remain, and these are the subjects of a blog series that will be published over the coming weeks. By continuing to shed light on the intersection between public policy, finance and private investment, our work will continue to help decision makers optimize the use of their resources.

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

October 19, 2016 | and

 

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

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

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

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

Green Bond DFI Flows to Developing Countries

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

Global green bond market flows to developing countries

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

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

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

October 12, 2016 |

 

wind-turbines

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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