Tag Archives: energy

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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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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Two instruments for attracting foreign investment to renewable energy in India

March 17, 2016 |

 

As India prepares to meet its increasing energy demands, which will likely double by 2030, the government has set a path towards ambitious renewable energy targets of 175GW by 2022, and likely 350GW by 2030. These targets are good for the Indian economy, the climate, and the 400 million Indian citizens who currently lack access to electricity.

Raising enough finance will be an essential piece of achieving these targets. Currently, it’s estimated that reaching the 2022 targets would require USD $160 billion.

Domestically, India faces a shortage of available capital for renewable energy projects. The Indian government has stated several times, most recently at the Paris climate talks, that, in order to meet these targets, a significant portion of funding will need to come from foreign sources.

At the same time, the governments of developed countries are willing to provide some of this capital, but would also like to leverage their public-sector spending, by attracting private investment to renewable energy. Indeed, greatly scaling up investment from the private sector will be essential to mobilize the full amount of capital needed to meet India’s renewable energy targets.

However, private foreign investment in renewable energy projects in India faces two key barriers: currency risk and off-taker risk.

To address both of these major risks, there are potential short-to-mid-term solutions that can both drive private foreign investment and leverage public finance from Indian and foreign development institutions and governments.

Renewable energy in India - Outside of Jaisalmer, Rajasthan.

Photo credit: Flickr user Daniel Bachhuber

A Currency Hedging Facility to mitigate currency risk

Because currency exchange rates can be volatile, when a renewable energy project is financed by foreign capital, it requires a currency hedge to protect against the risk of currency devaluation; otherwise, foreign investors risk losing their gains due to depreciations in the Indian currency. However, longer-term currency hedges (beyond three to five years) are not easily available in the Indian market. In addition, market-based hedging in India is expensive (for example, 7% or higher for a ten year hedge), ultimately making foreign financing just as expensive as domestic financing.

One solution to currency risk could be currency hedging sponsored by the Indian government. Recent analysis by Climate Policy Initiative shows that a government-sponsored currency hedging facility, if designed appropriately, could not only provide long-term hedges (ten years) but also reduce the hedging costs by up to 50%. To do so, this standby facility, in order to reach India’s sovereign credit rating, would need to be approximately 30% of the hedged capital.

A Payment Security Mechanism to mitigate off-taker risk

The second major barrier to foreign investment is off-taker risk. In India, the major off-takers are the public sector electricity distribution companies (DISCOMs), which are in a precarious financial situation. Because of the financial state of DISCOMs, investors are concerned that the DISCOMs might default, jeopardizing their investment.

One solution to mitigate off-taker risk could be a payment security mechanism which would cover payments to investors in case of potential defaults. This would significantly reduce the perception of default risk and encourage foreign investment, thereby improving the availability of foreign capital. Climate Policy Initiative’s analysis shows that payment security mechanisms would need to be approximately 7% of capital expenditure to cover defaults over one year.

How the Indian government can help

The Indian government is in the best position to manage both currency and off-taker risks. For currency risk, macroeconomic conditions are key drivers of currency movements, and government policy can influence macroeconomic conditions. For off-taker risk, the DISCOMs are public-sector entities, essentially supported by the government.

Therefore, the Indian government and public finance should play a significant role. The Indian government can use some of its own money to fund the currency hedging facility as well as the payment security mechanism – for example, from the National Clean Energy Fund, or from the expenditure budget.

How international governments and development institutions can help

The international community can pitch in by not only supporting technical assistance but also contributing funds to these facilities. For the currency hedging facility, there may also be gains from diversification by creating the facility for multiple currencies, given that currency movements will likely offset each other.

The international community can also help by creating political will around this process of creating these facilities. This would require key engagement from government stakeholders from both developed countries and developing countries, in addition to development finance institutions like the World Bank, Asian Development Bank and the Asian Infrastructure Investment Bank.

As we move forward with the historic climate agreement that emerged from COP21 in Paris, there has never been a better or more important time to develop and implement the solutions that can drive the required finance to India’s renewable energy targets.

The Indian government, governments of other nations, development finance institutions, and private investors all have key roles to play in moving these targets from dreams to reality.

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Graphic Spotlight: What is the role of public finance in deploying geothermal energy in developing countries?

March 9, 2016 |

 

Despite great potential, geothermal deployment in developing countries has been below expectations since 2010. Geothermal energy has the potential to provide significant amounts of low-carbon electricity in many developing countries and is the cheapest source of available power in some developing countries.

The major barrier is securing early-stage project finance given the scarce public resources available to invest in exploration and development. While some countries are pursuing policies to liberalize energy and electricity markets to attract private investment, significant difficulties remain.

CPI analyzed three case studies on behalf of the Climate Investment Funds, with the aim of helping policymakers and development finance institutions understand which policy and financing tools to use in order to enable rapid and cost-effective deployment of geothermal for electricity.

Role of public finance in deploying geothermal energy

Our case studies show that the increase in tariffs needed to provide sufficient returns to incentivize private investment can be entirely offset by public measures addressing specific risks. This graphic illustrates how these public risk mitigation measures (orange) combine to result in a final levelized cost of electricity for a privately developed project (dark grey) that is even lower than what it would have been for the state to develop it (light grey).

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The Paris Agreement is a signal to unlock trillions in climate finance

December 14, 2015 | and

 

The objectives laid out in the Paris Agreement are visionary but not overambitious as they build on trends already happening in reality. The agreement’s guiding star is the science-based goal of limiting temperature rise to ‘below 2 degrees Celsius’. In combination with the mention of 1.5 degrees Celsius, this goal sends a clear signal, giving governments and businesses an incentive to escalate efforts to decarbonise their economies, supply chains and business models. Even more importantly for business, this deal has teeth. It includes a mechanism to ramp up action every five years, starting in 2018, and importantly, does not allow backsliding.

A strong signal steering investors away from fossil fuels, towards sustainable growth

For business and investors, it means the direction of travel is clear and with appropriate support it is time to seize the opportunities on offer. “This is one of the greatest wealth opportunities in human history,” says Jigar Shah of Generate Capital. The Paris Agreement also signals that investment in fossil fuels is no longer a low-risk enterprise – or, as Anthony Hobley, CEO of The Carbon Tracker Initiative, puts it, “[it] tells markets the fossil fuel era is over.”

The Agreement also builds the case for both public and private actors to explore low-carbon and climate-resilient options. For developing countries and emerging economies and their partners, the clear message is that growth without sustainability is off the table, whereas sustainable growth is a win for climate and development. As Hillary Clinton, former United States Secretary of State, says, “We don’t have to choose between economic growth and protecting our planet – we can do both.”

Many investors are already on board

CPI’s Global Landscape for Climate Finance estimated USD 391 billion in primary investment flows in 2014, up 18% from the previous year. Private investment surged 26% from 2013, reaching 62% of total global investment in climate action driven largely by falling renewable technology costs supported by government measures.

The Paris Agreement means that these investors and project developers who have already started transitioning their business models can now have the confidence to continue shifting their assets, in order to avoid stranding their own portfolios.

From ambition to action: the critical role of national policy

However, right now the bulk of climate investment (74%) originates and is spent in the same place, whether in developed or developing countries. This indicates there is still work to do to scale up finance that crosses borders, and our research indicates that policy frameworks and enabling environments are the first prerequisite. As Felipe Calderon, former President of Mexico, says, “The next step is for governments to turn their commitments into national policy.”

Building confidence for the next five years through enhanced transparency

Developed countries must continue to take the lead in implementing the world’s first universal binding climate agreement. Building confidence that commitments outlined in the agreement are being met is key, and transparency is critical to this goal. Transparency on progress toward the commitment to continue to mobilize at least USD 100 billion per year from 2020 onwards is a case in point, and here work remains to be done. The OECD Report done in collaboration with CPI on progress toward the USD 100 billion was the first serious attempt to estimate public and private finance mobilized by developed countries’ interventions in developing countries by applying a transparent accounting framework. CPI welcomes the fact the Paris Agreement puts efforts to increase consensus and transparency on this and other climate finance issues at the centre of its work plan going forward.

Such transparency can help ensure confidence that finance is flowing from north to south, and to the right technologies, and that private investors are being mobilised in line with country interests. As countries move from negotiations to implementation, CPI stands ready to support their efforts.

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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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Could New Investment Structures in the German Renewable Energy Market Make the Market More Cost-Competitive?

June 2, 2015 |

 

Germany is in the midst of a major energy transition, one that could serve as a model for the rest of the world. At the core of the challenge is the need to continue to grow renewable energy (and drastically reduce dependence on coal) while containing the cost of renewable energy to government and ratepayers.

German policymakers are looking to control costs by replacing the feed-in tariffs that have driven renewable energy deployment and cost reduction with new competitive mechanisms. However, if these policy changes are made without considering their impact on how projects are financed, they could inadvertently increase costs. Any changes to policy should be made with a comprehensive understanding of the current and potential investors in renewable energy and the impact that different policy mechanisms and financing structures could have on their costs and ability to invest.

CPI, with the support of the European Climate Foundation, is examining this important aspect of the transition to inform policy and financing activities that could allow Germany to advance its energy transition at lower cost. In this project, we will:

  1. Size the investment potential for different types of renewable energy across potential German investor groups in the sector – utilities, developers, financial investors, large energy users, small energy users, and municipal and other governments.
  2. Assess the market opportunity for new financing instruments, including new financing structures such as YieldCos, crowdsourcing, and municipal funding, which we identified as potential opportunities in previous work.
  3. Identify policy options that seem to have the most favorable impact or provide the biggest barriers to investment. Starting with opinions expressed by investor groups and their analysts and advisors, as well as a review of investment cases and our financial modelling, we will analyze the impact of policy changes to financing costs for different market segments.

 
Alongside this project, CPI is also working with the Stockholm Environment Institute (SEI) on a New Climate Economy project, to identify and analyze the barriers faced by investor groups across five European countries/regions (Germany, UK, Nordic countries, Iberia, Italy).

The lessons from these projects will be relevant for Europe and beyond. With Europe’s new, more ambitious renewable energy and carbon emissions reduction targets for 2030, changes to European policies and regulations will be necessary, as well as policy and regulation in EU member states.

Ultimately, the transition to a low-carbon electricity system will require wholesale changes to policy, technology, market design, consumer behavior, industry structure, and finance. Addressing the finance portion of the equation is critical to develop a true picture of the priorities for policy development in Germany and beyond.

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International public finance supports South Africa’s deployment of concentrated solar power

August 21, 2014 |

 

Among emerging economies, South Africa has particular potential for solar power because of the country’s excellent solar resources. While fossil fuel power generation currently provides over 90% of its electricity, South Africa is seeking to reduce its reliance on carbon-intensive coal-based energy.

The Government of South Africa (GoSA) has developed policies to transition to a clean and sustainable energy system. In order to exploit its abundant renewable energy resources, South Africa has adopted an ambitious plan to add 20 GW of new renewable power generation capacity by 2030 (almost 50% of current generation capacity). Of this, 3.3 GW is expected to be from concentrated solar power (CSP). This is approximately equal to the current installed capacity of CSP worldwide.

CSP: A promising technology for low-carbon energy systems
CSP is a promising energy technology for low-carbon energy systems as, in combination with thermal storage, it can store solar energy in the form of heat to deliver clean power when it is most needed. It offers a real chance to act as a viable substitute for coal-based energy. Despite its potential, CSP technology lacks a long deployment track record and still comes with high technology risks, which translate to higher financing and overall costs. This means that most projects need public assistance in the form of low-cost public finance or political support to be bankable.

South Africa’s state-owned electricity utility Eskom is currently planning to install its first CSP power plant in Upington in the Northern Cape region of South Africa. In a recent Climate Policy Initiative (CPI) case study, conducted with support from the Climate Investment Funds Administrative Unit, CPI examined this plant to understand how public support helped advance this project. It also looks at the financial and technological challenges for Eskom and the reasons behind the extended project development time.

Eskom CSP plant in Upington now back on track
Eskom CSP remains one of the most ambitious CSP power tower projects under development anywhere outside of the U.S. with respect to its technology choice, capacity and storage. After several years in development, the project was placed on hold in 2009 during the global recession, largely because reduced access to capital and increased pressure from GoSA to improve the country’s energy security at low cost led Eskom to reassess its investment priorities.

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The Clean Power Plan means changes for coal, but not the ones you might expect

June 18, 2014 |

 

Under President Obama’s recently announced Clean Power Plan, the Environmental Protection Agency (EPA) proposed that states cut greenhouse gas emissions from existing power plants by 30 percent from 2005 levels.

Commenters on both sides of the aisle say this rule means big changes for the coal industry.

But before we get fired up about the changes, it’s important to take a look at the facts: While states will need to retire coal plants at the end of their useful lives to meet the proposed limits, EPA’s rule would give states a great amount of flexibility to avoid coal asset stranding and still meet emissions reduction targets. In fact, valuing the right services from coal plants will prove the more important question for a low-cost, low-carbon electricity system.

Let’s look at why.

First, we need to understand what the rule really means for coal asset stranding. An asset is “stranded” if a reduction in its value (that is, value to investors) is clearly attributable to a policy change that was not foreseeable by investors at the time of investment.

In our upcoming analysis of stranded assets, Climate Policy Initiative finds that if no new investments are made in coal power plants and existing plants retire as planned (typically, 60 years for plants with pollution control technology investments and 40 years for plants without), the U.S. coal power sector stands to experience approximately $28 billion of value stranding from plants that are shut down. While that’s a big sounding number at first glance, it’s very small relative to the size of coal power sector. As the figure shows, that retirement schedule puts the U.S. coal power sector on track to come close to the coal power capacity reductions called for in the IEA 450 PPM scenario to limit global temperature increase to 2°C.

U.S. Coal Power w emissions (2)

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Adjustments to Indian renewable energy policies could save up to 78% in subsidies

April 21, 2014 |

 

Recently, the Government of India announced plans to award licenses for an additional one gigawatt of solar in the next year – about half the capacity of the Hoover Dam and enough to meet the energy needs of two million people. This move is part of India’s already ambitious targets for renewable energy that aim to address rising energy demand, decrease the country’s dependence on fossil fuel imports, and mitigate climate change.

To ensure the country meets these targets, India provides a package of renewable energy support policies that includes state-level feed-in tariffs and federal subsidies, which are in the form of a generation based incentive – a per unit subsidy; viability gap funding – a capital grant; and accelerated depreciation.

However, given the ambitious goals, but limited budget in India, the cost-effectiveness of these policies is an important factor for policymakers.

Our recent study “Solving India’s Renewable Energy Financing Challenge: Which Federal Policies can be Most Effective?” took on the question of cost-effectiveness by comparing a range of policy alternatives to the status quo.

Our findings were striking. We found that a policy that both reduces the cost of debt and extends its tenor is the most cost-effective. In fact, for wind energy, reducing debt cost to 5.9% and extending tenor by 10 years can cut the cost of total federal and state support by up to 78%. For solar energy, which is more capital-intensive, reducing debt cost to 1.2% and extending tenor by 10 years can cut the cost of support by 28%.

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