Tag Archives: climate finance

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

September 6, 2016 |

 

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

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

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

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

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

Global green bond market flows

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

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

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

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

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

Global green bond market flows to developing countries

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

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

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

Green Bond DFI Flows to North and South

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

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

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

This op-ed was originally published on Environmental Finance.

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Video: Dr. Buchner on Translating NDCs into Investment Plans

June 21, 2016 |

 

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

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Video: Dr. Buchner on Climate Finance Beyond Paris

April 22, 2016 |

 

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

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From Talking the Talk to Walking the Walk on Climate Finance

April 18, 2016 |

 

After Paris – The need to move from talk to action

The Paris Agreement reached by 194 countries at the COP21 Climate Summit in December 2015 marks a historic turning point in a 20-year conversation about how to tackle climate change. Up to this point, there have been examples of incremental progress, though the overarching policy ambition necessary to curb climate change have been slow to come. The need to act is urgent in order to keep global temperature rise to ‘well below 2 degrees C,’ the stated goal of the Paris Agreement.

How to finance the transition to a low-carbon and climate-resilient world is a challenging question, especially for developing countries, which often lack the policy and financial capacity needed to spur the necessary investment.

Since 2009, developed countries have been working to scale up climate finance for developing nations, with a goal to mobilize USD 100 billion per year from multiple sources. The good news is that investment is growing – especially in key emerging economies such as China. According to the Global Landscape of Climate Finance, 2015 saw the largest amount of climate-related investment to date, with USD 391 billion of finance flowing to mitigation and adaption globally. In the lead up to Paris, the OECD, in collaboration with CPI found that countries are well on their way to achieving this goal, with an average of USD 57 billion of mobilized climate finance flowing from developed to developing countries in 2013-14.

While progress is certainly being made, the IEA estimates that approximately USD 16.5 trillion will be required from 2015-2030 to re-orient global systems to a scenario consistent with a sub 2-degree future. The need to pick up the pace and move from talk to the most concrete of actions is what defines the post-Paris world. The challenge of bridging this gap is profound, and will require concerted efforts from private and public actors, households around the world, and civil society. It will require an understanding of the actual barriers faced by all types and classes of investors, and the use of public policies and finance to minimize these. This in turn necessitates political will, robust technical analysis, and above all, innovation.

Crowdsourcing Innovation for Climate Finance

The Global Innovation Lab for Climate Finance (The Lab) supports efforts to leverage investment flows to the developing world to speed up the transition to a low-carbon future by identifying, developing and piloting new financial instruments and public-private partnerships designed to overcome barriers, maximize impact, and attract private sector capital. The Lab crowd-sources ideas from the global climate finance community, including private and public investors, financial institutions, technical experts, and policy makers. Then, incorporating the guidance of a diverse set of advisors and external experts, the Lab develops, stress-tests, and refines the best of these ideas into innovative, instruments with financial backing for concrete pilots on the ground.

The approach is simple – solving the climate finance challenge, and addressing climate change on a broader level, will require bold collaboration and innovation that spans actors and sectors. Successful pilots can be scaled to incorporate larger investments, new investors, other sectors and geographies.

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Three ways international development partners can help Indonesia solve its land use challenges

February 24, 2016 | and

 

At least 25 major aid organizations have been actively engaged in efforts to reduce Indonesia’s greenhouse gas emissions from land use over the last five years. Several of these funders, including the UK Climate Change Unit Indonesia, and the Norwegian Agency for Development Cooperation, have even refocused a large portion of their programs in Indonesia on the land use challenge.

Photo credit: Elysha Rom-Povolo

Photo credit: Elysha Rom-Povolo

This sharp focus isn’t surprising when you take into account that 44% of global land use and forestry emissions came from Indonesia in 2012 Last year saw unprecedented emissions from forest and peat fires in Indonesia, with emissions from fires alone expected to reach around 1750 MtCO2-eq., which is almost equal to Indonesia’s entire greenhouse gas emissions from all sectors in 2012.

The involvement of many international development organizations is also good news given that the Government of Indonesia has sent strong signals to the international community that their support is needed. Indonesia has committed to reduce greenhouse gas emissions by 26% by 2020, scaling up to 29% by 2030, and further extending their ambition to 41% with international support. Around 90% of that target is anticipated to come from reducing deforestation and peat emissions.

The question is, have the efforts been working?

We recently took on this question in a study that looked at international public climate finance flows to land use from major development partners, “Taking Stock of International Contributions to Low Carbon, Climate Resilient Land Use in Indonesia.”

We found mixed results.

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COP21: A good deal for climate and for growth

December 13, 2015 |

 

COP21-good-deal-for-growth

This weekend, world leaders signed on to a new climate deal that aims to limit global temperature rise to well below two degrees, continue $100 billion a year in climate finance, and ramp up action every five years.

I’ve been present at the climate negotiations since the beginning, and I will leave Paris tomorrow optimistic for the future, but not for the reasons you might expect.

While the deal itself is a big step forward, the larger leap has been the recognition, all over the world, that action on climate change and economic growth can – and should – go hand-in-hand.  The Paris agreements have recognized that the substantial gaps between the costs of clean and fossil energy have collapsed, and that returns increase when we produce food by using less land better. The spread of market driven activities consistent with these realizations will provide the foundations on which the Paris commitments will deepen.

The deal this week wouldn’t have been possible if nations and businesses weren’t already moving in this direction. The plans for climate action that countries committed to ahead of Paris were already enough to cover a large portion of needed emissions reduction. And while analysts pointed out that the sum total of the plans pre-Paris wouldn’t be enough to limit warming from dangerous levels, they still show that there is significant momentum.

Businesses, too, stepped up this year. High-worth individuals, family offices, and foundations committed to financial support to help move new clean energy solutions to viability, and heads of large companies, including Richard Branson and Paul Polman, called for zero emissions by 2050.

Why have nations and businesses changed their tune?

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

November 23, 2015 |

 

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

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

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

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

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

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

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

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

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

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Five Ways to Build Effective Climate Finance Readiness Programs

October 6, 2015 | and

 

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

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

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

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

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

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

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

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

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

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