Tag Archives: Climate Investment Funds

Uncertain Future of the Climate Investment Funds Makes Achieving Climate Finance Goals Tougher

June 14, 2016 | and

 

On June 15th and 16th members of the Joint Trust Fund Committee of the Climate Investment Funds (CIF) meet in Oaxaca, Mexico, to discuss, among other issues, the strategic direction of the fund. One topic to be discussed is the CIF’s “sunset” clause, which was conceived at the fund’s establishment and requires it to conclude its operations once a new financial architecture – now embodied by the Green Climate Fund (GCF) – is effective.

Now that the GCF is operational, some feel that the “sunset” clause should be activated. In any case, the CIF does not currently have sufficient resources to finance the projects in its pipeline or those of new pilot countries.

Contributing governments are certainly in a tough position. They are faced with the question of whether or not to re-up their financial commitment to the CIF, but have recently pledged significant resources to the GCF – over $10 billion in total – and their budgets for climate aid are under pressure as resources are diverted to address other immediate needs such as the European migration crisis.

The lack of clarity regarding the future of the CIF is having a real impact. The dearth of financial resources for the CIF and uncertainty regarding whether new resources will be made available is disrupting recipient countries’ project pipelines and delaying the development of investment plans for new CIF pilot countries. This is also creating doubt within the multilateral development banks (MDBs) regarding how much and what type of concessional finance they will have access to. This is important because of the role concessional finance plays in overcoming investment barriers and helping MDBs to mobilize internal resources to meet their climate finance commitments.

As the CIF Joint Trust Fund Committee meets this week and makes major decisions on the fund’s future direction, it is worth reflecting on what role the CIF has played within the global climate finance architecture and what unique elements it has brought to the table. A study recently published by CPI – The Role of the Climate Investment Funds in Meeting Investment Needs – can help inform this reflection. The report highlights climate-relevant investment needs and assesses the CIF’s distinctive role in bridging investment gaps compared to other multilateral climate funds.

It concludes that the CIF should be kept in operation to maintain progress towards meeting international climate finance targets, particularly while the GCF gets up to speed and in light of key temporal and structural differences that exist between the two funds. The CIF has played a particularly important role in financing climate action because of a few distinctive features. These include:

  • The CIF’s programmatic approach. In partnership with the MDBs – the CIF’s implementing entities – the fund involves recipient countries’ private and public stakeholders in the development and implementation of policy reforms and investments aligned with countries’ climate strategies. It starts with countries being informed of the indicative amount of resources they are eligible for, followed by the development and endorsement of the investment plans and finally approval of projects. This approach, which has provided a certain level of predictability to both the recipients and implementing partners, represents a role model for the development and implementation of countries’ Intended National Determined Contributions (INDCs). Translating INDCs into concrete investments will similarly require the mobilization of multiple stakeholders under coherent strategic investment plans and the development of supportive policy and governance frameworks.
  • The range of financial instruments available through the CIF and the fund’s risk appetite. Although some have yet to be fully utilized, the range of financial instruments offered by the CIF has proven to be particularly well-suited to foster the piloting of first-of-a-kind approaches and business models, and to take on market risks that others are not willing to take. A survey of developing countries and their climate finance priorities indicates that flexibility in financing terms and types of financial instruments provided is of “critical” importance to advance climate objectives.
  • The CIF’s focus on private sector engagement in mitigation, forestry and adaptation. The CIF has allocated more finance to drive private sector investment in these sectors than any other multilateral climate fund. It has also been the first to develop dedicated approaches to achieve this end, such as the private sector set-asides for forestry and adaptation, and is one of the only multilateral climate funds that offer concessional loans for these activities, as opposed to just grants. Building on this experience, the CIF holds the potential to further enhance private sector engagement in these areas going forward.

The CIF has experience and a functional structure in place, which can help to maintain momentum and bridge major climate investment gaps. Other climate funds have notable strengths, but do not necessarily offer the same capabilities as the CIF.

While the establishment of the GCF is intended to fill investment gaps, questions remain regarding the extent to which the fund will be able to deliver the scale and type of support recipient countries need in the short to medium-term as it gets up to speed.

As decision makers shape the international climate finance architecture and make choices about which funds and approaches they choose to support, they should consider the unique and positive features of existing funding mechanisms and how these features can help effectively address countries’ current and future investment needs.

Given the real scarcity of resources available, there is no easy answer. If they decide to keep the CIF alive, it may be worth exploring and taking decisions on alternative funding modalities to maintain at least certain elements of the CIF operational and mitigate a potential loss in the momentum it has created.

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Driving geothermal development in developing countries

August 26, 2015 |

 

Geothermal has the potential to play a big role in a low-carbon energy transition but while deployment of wind and solar has taken off in recent years, deployment of geothermal has remained steady but unspectacular for decades. This despite the fact that it is broadly cost competitive with fossil fuel alternatives across the world and is the cheapest source of available power in some developing countries with rapidly growing energy demand.

Among developing countries, only Turkey and Kenya exceeded forecasts for geothermal deployment over the last five years. Elsewhere, over 3GW of power has been left in the ground, mainly in Indonesia and the Philippines but also in new markets such as Chile and Ethiopia.

We estimate that approximately USD 133 billion would be needed for investment in geothermal in developing countries if current plans to build 23 GW of capacity by 2030 are to be met. The scarcity of public finance available for geothermal in these countries is a barrier to achieving these targets but private investment could fill this gap. Many governments in countries with significant resources have liberalized energy and electricity markets and this could result in an investment opportunity of USD 60-77 billion, with average returns on equity of 14-16% if the main project related risks are addressed.

Our analysis, commissioned by the Climate Investment Funds to improve understanding of the role of public finance in different developing countries, suggests that governments and development finance institutions would need to provide the rest of the USD 133 billion in the form of financing and risk mitigation tools needed to attract private investment in these countries.

This requires a 7-10 fold increase in current allocations of public money to the sector for future development. In addition, while significant efforts at the global level to increase public finance commitments for the early stages of geothermal project development mean they now account for 11% of current commitments, in order to meet demand, finance allocated to this stage of projects should be up to 17% of public finance distributed and targeted particularly at the test drilling phase. Part of current public finance could also be refocused on the management of resource risk during the later stages of project operations.

In our most recent report, we draw lessons from a year of analysis of geothermal projects and markets in developing countries to identify how public finance from governments and development finance institutions can be used to best drive private investment. Key factors include:

  • Supportive regulatory frameworks for geothermal, the basic condition for growth together with well-designed feed-in-tariffs aligned with the project‘s lifetime or loan terms available in the local debt market
  • Differentiated public support during the exploration phase, supporting early public exploration and tendering of proven fields in markets with challenging investment environments, while incentivizing early stage exploration in more mature private markets
  • Favorable loan conditions and measures to unlock its provision

Following these recommendations could increase energy access and put those developing countries with geothermal resources on a path to green growth. Our case studies of geothermal projects suggest this can be done without increasing the levelized cost of electricity generated, and thus power tariffs for consumers. When national and international public measures lower financing costs and address specific political, currency and exploration risks relevant for the private sector, private development models can deliver power at similar or lower cost than public development models. This allows governments to increase energy supply and access while committing only 15-35% of what they would invest were they to develop the whole project through local public utilities, freeing resources for further investment. This is something that should be at the forefront of the minds of national energy policymakers and the development banks that support them.

A version of this blog first appeared as an opinion piece on Environmental Finance.

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Is concentrated solar power getting any cheaper? And what role can policy play in bringing costs down?

January 22, 2014 |

 

In the past, renewable energy technologies have been much more expensive than their fossil fuel competitors but costs of wind and solar have come down after public support has deployed them at scale. In fact, costs of solar photovoltaic power plants have decreased roughly 20% and wind power plants 15% every time installed capacity has doubled.

For concentrated solar power (CSP), experts have projected a cost reduction of 10-15% for every doubling of capacity. However, new CPI analysis shows that CSP has not demonstrated cost reductions at the global level with increased deployment over the last five years, but it has done so in some regions for some CSP technologies.

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