Tag Archives: investment

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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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.

A call for innovative green finance ideas - Potential equity and debt investments

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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Identifying strategic opportunities for philanthropy to engage in sustainable land use finance

May 2, 2016 |

 

With growing global demand for food and fuel in a climate-constrained world, the question of how to best reorient land use towards more sustainable and productive practices is a key challenge for governments, businesses, and individuals. This is particularly true for developing countries, where agricultural expansion is a major source of economic growth and development, but also a major source of emissions and environmental degradation.

In recent years, significant international efforts have focused on developing mechanisms to deliver incentives for developing countries to maintain high-value ecosystems. This has happened primarily through bilateral and multilateral funds in support of Reducing Emissions from Deforestation and Forest Degradation (REDD+), as well as through voluntary carbon markets and ad-hoc payments for ecosystem services (PES) pilots. However, such mechanisms have often proved disappointing, failing to deliver on the intended results or suffering from inadequate funding and difficult implementation.

There is a need to better understand how investments are currently being delivered on the ground to support the land use sector, and to support the most appropriate interventions to shape investments towards more sustainable and less destructive land use activities.

To explore these opportunities, CPI partnered with the Climate and Land Use Alliance (CLUA) to identify entry points for philanthropic funders to unlock capital in support of more sustainable land use practices. CPI analysis shows that there are distinct, powerful, and accessible finance-related levers that philanthropy can use to unlock investment in and reorient capital towards more sustainable land use practices. Philanthropy can often act in more nimble and strategic ways compared with public donors who may be constrained by slow bureaucratic processes and competing political priorities.

These opportunities were presented to CLUA and key stakeholders at a retreat in early March, and are now presented here. In the coming months, CPI will continue this work with CLUA and will rank and more fully develop the most promising interventions that can be supported by philanthropy.

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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.

Climate Finance

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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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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Three ways to attract domestic institutional investment for renewable energy projects in India

September 10, 2015 |

 

Institutional Investment

In order to achieve India’s renewable energy targets of 175 GW of solar and wind power by 2022, approximately USD 100 billion of investment in renewable energy infrastructure will be required, including USD 70 billion of debt.

While these ambitious renewable energy targets are important and admirable, financing them is going to be no easy task. Renewable energy in India has traditionally relied on domestic commercial banks for financing; however, this bank financing has become constrained by several limitations. Many banks are nearing their exposure limits to the power sector, and existing regulations do not distinguish between lending to fossil fuel-based power and renewable energy. In addition, the typical tenor of bank loans is around ten years, whereas most renewable energy projects require longer-term financing that matches the project life cycle of 20 to 25 years. Finally, bank debt at 12-13% interest rate is also costly; and together these inferior terms of debt – the high cost, short tenor, and variable interest rates – make renewable energy in India approximately 30% more expensive than in the US or the EU.

Achieving India’s renewable energy targets is going to require mobilizing a lot more debt at more attractive terms, from alternative sources.

One promising solution is domestic institutional investors, such as insurance companies and pension funds, who are ideally positioned to both increase availability of debt and provide debt at more attractive terms to renewable energy projects. Compared to commercial banks, institutional investors not only invest over longer terms, but also accept lower returns in exchange for lower risks, thus providing a better match with the risk-return profiles of renewable energy projects.

Preliminary analysis by CPI, performed earlier this year, shows that these institutional investors are likely to invest approximately USD 400 billion from 2014 to 2019. Based on their traditional share of 3.75% of their investments going to the power sector, if this share could be diverted to renewable energy, that would provide USD 15 billion of debt financing – a significant amount of the debt required to meet the targets.

So, what’s the catch? First, given high risks during construction, institutional investors, who prefer low risk, are unlikely to invest in renewable projects before they start operation. Second, even for operational projects, institutional investors require a domestic debt rating of AA or higher, which most renewable energy projects do not have.

The first issue is manageable – domestic banks can continue to fund projects under construction, and institutional investors can help refinance operational projects. This would free up bank debt to be used for new projects.

As to the second issue – enabling institutional investment will require financial instruments that can raise the credit rating of renewable energy projects. There are two promising instruments that may be able to do this: infrastructure debt funds by non-banking financing companies (IDF-NBFCs) and renewable energy project bonds with partial credit guarantees (PCGs).

IDF-NBFCs are pooled investment vehicles designed to facilitate investment across infrastructure sectors, including renewable energy. PCGs are a form of credit enhancement where the borrower’s debt obligations are guaranteed by a guarantor with a strong credit rating.

Both of these instruments can reduce risks to meet institutional investors’ minimum requirement of an AA rating. Compared to commercial loans, they have the potential to provide provide more attractive terms of debt by lowering the cost of debt by up to three percentage points, and increasing the tenor by up to five years.

However, both instruments face structural and regulatory issues which have impeded their use as investment vehicles. We identified three of the key issues that, if addressed with the right policy changes, could enable institutional investment in renewable energy.

First, for both instruments, the domestic debt market does not differentiate between construction and refinanced loans, making it hard for banks to release debt for refinancing. This can be addressed by encouraging public banking institutions to provide loans during the construction state of renewable energy projects, in order to catalyze the construction debt market.

Second, IDF-NBFCs require a three-way agreement between the project developer, the project authority (usually state-owned power distribution companies called DISCOMs), and the IDF-NBFC. However, in India, the poor financial health of DISCOMs presents a risk. The government can mitigate this risk by creating a model agreement for IDF-NBFCs which includes government guarantees for off-taker risk and robust termination provisions.

Third, for renewable energy bonds with PCGs, existing regulations limit institutional investors to investing in only up to 10% of the bond offering. This would require more than ten institutional investors per bond offering, which is difficult given associated transaction costs and the small number of institutional investors in India. Relaxing this regulation so that investors could subscribe to 25-33% of the bond offering would help address this barrier, making it possible to raise the required debt from only three to four institutional investors.

By taking these three steps, the government of India may be able to make significant progress towards financing India’s renewable energy targets, by harnessing the potential of institutional investment into renewable energy.

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Eight steps to improve understanding of climate finance flows in your city or country

May 21, 2015 | and

 

Understanding how much climate finance is flowing, where it comes from and how it flows to which activities and projects on the ground is not only useful at the global level to help understand progress towards climate finance goals. It can also help countries, regions, cities, and organizations to understand their progress toward meeting their own development, economic, and environmental goals by:

– Establishing a baseline against which to measure progress, reveals current patterns of investment and any blockages in the system.
– Revealing interactions between public finance and private investment which can inform decisions about how to redirect flows from business-as-usual to low-carbon and climate-resilient investments.
– Helping international partners see how they can support domestic efforts.
– Identifying opportunities to increase climate finance and providing an important basis for policymakers to develop more effective policies, particularly when combined with analysis of what is working or not in different interventions.

Climate Policy Initiative produces the most comprehensive overview of global climate finance flows available. We have also carried out in-depth mapping of climate finance flows for Germany and Indonesia. The following eight steps summarise the approach we take to map climate finance flows in different contexts. Although the process is complicated because of significant data gaps and inconsistencies, the principles behind such mapping are relatively simple. Applying them can improve understanding of climate flows. They are:

1. Decide what finance you want to measure.The first step is to decide which activities you want to focus on. For some you’ll also need to decide what makes a particular activity low-carbon or climate-resilient. This is relatively easy to do for something like renewable energy generation. However if you want to understand how much finance is flowing towards more climate-resilient, productive and sustainable land use, you will have important decisions to make on what you want to include and what you should leave out.

2. Set the geographical scale.Are you going to track finance flowing to these activities at the international, national, regional, city or organizational level?

3. Decide whether to track public finance, private investment, or both. Information on some climate finance flows (e.g. official development assistance) is easier to track than for others and there are some – like private investment in energy efficiency – where very little reliable data is available at all. But ideally a mapping exercise for a country, region, or city would include both public and private flows to the extent possible because understanding how these different sources of finance interact is essential to making best use of your financial resources.

4. Consider total investments, not just additional investment costs.Research into the additional costs of low-carbon interventions above higher-carbon alternatives is useful and has even shown that some low-carbon transitions may be cheaper than business-as-usual. But, when dealing with the practicalities of tracking and managing climate mitigation and adaptation investment for planning purposes, it is simpler to consistently track current total investment rather than additional investment costs.

5. Focus on project-level primary financing.Project-level primary financing is finance going to activities and projects on the ground and the best indicator of progress on climate action. Aggregate data does not allow the same insights as project-level data while data on secondary market transactions (e.g. refinancing, selling stocks) represents money changing hands. Such transactions can play an important role in providing project developers with capital to reinvest in further projects but they do not necessarily represent additional efforts to reduce emissions or increase climate resilience.

6. Track public framework expenditures.Many projects would be impossible without the development of national climate strategies, specific regulations and enabling environments for investment but these costs are not seen at the project level. Tracking them is important to have a real understanding of how much public finance is flowing to and needed for climate action.

7. Exclude public revenue support for projects such as feed-in tariffs and carbon credit revenues.While these revenue support mechanisms are often essential for climate action they pay back the investments made in climate-relevant projects and activities that you are already counting. Including investment costs and policy-induced revenues would therefore mean you were counting the same flows twice.

8. Exclude private investments in research and development.These are investments that private actors try to recover when selling their goods and services so counting them in addition to investment costs would, once again, mean you were counting the same flows twice.

The quality of your mapping exercise will depend on the quality of the data you have. Fragmented data in the land use sector is the reason we are working with the European Forestry Institute and Climate Focus, in an upcoming publication, to provide policymakers with a series of mapping tools to understand potential entry points for climate finance flows in their land use sectors. Often these countries are aware of the opportunities to shift from unsustainable to sustainable land use but lack financing strategies to deliver their goals. This project will help them identify which fiscal and financial mechanisms are available to unlock new investors and more efficient investments.

We are happy to assist countries, cities, or organizations looking to better understand their climate finance flows by undertaking mapping exercises, just get in touch.
 

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By the Numbers: Tracking Finance for Low-Carbon & Climate-Resilient Development

February 3, 2015 |

 

Landscape of Climate Finance 2014

 

In December 2015, countries will gather in Paris to finalize a new global agreement to tackle climate change. Decisions about how to unlock finance in support of developing countries’ low-carbon and climate-resilient development will be a central part of the talks, and understanding where the world stands in relation to these goals is a more urgent task than ever.

Climate Policy Initiative’s Global Landscape of Climate Finance 2014 offers a view of where and how climate finance is flowing, drawing together the most comprehensive information available about the scale, key actors, instruments, recipients, and uses of finance supporting climate change mitigation and adaptation outcomes.

Climate finance has fallen, mainly due to reductions in solar PV costs

Overall, the gap between the finance needed to deal with climate change and the finance delivered is growing while total climate finance has fallen for two consecutive years. This could put globally agreed temperature goals at risk and increase the likelihood of costly climate impacts.

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Six climate finance themes out of Lima that will shape 2015

December 17, 2014 |

 

Government representatives from around the world met last week in Lima, Peru to negotiate global emissions reductions as part of the annual UNFCCC Conference of Parties (COP20). Once again, the need to mobilize more investment in a low-carbon, climate-resilient economy was an important point of debate.

Climate Policy Initiative’s analysis is playing a key role informing serious discussion on climate finance and finding solutions to increase the effectiveness and scale of climate finance investments. Here are the themes we saw at this COP that we feel will shape climate finance action and debate over the next year.

Entrance-to-Lima-Cop20

Entrance to Lima COP20

1. Finance is flowing but it’s not enough.

The COP20 High-Level Finance Ministerial began with a presentation of the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014. This research, which draws on Climate Policy Initiative’s work to track climate finance, tracked between 340 and 650 USD billion in annual investment. As CPI has shown, this figure is far short of the need.

Global Landscape of CLimate Finance needs

Annual climate investment compared to the need

2. Governments voiced support for innovative initiatives that unlock private finance.

CPI’s analysis shows that while public finance often provides the conditions for climate investment to take place, private investors contribute the largest share of finance, year after year, in countries across the world. It also shows that public finance alone will not be enough to meet the investment need. Several government representatives spoke of the need to find innovative ways to unlock increased private investment. Representatives from Denmark, the Netherlands, the UK, and U.S. used their time on the COP plenary floor to voice support for one such initiative – The Global Innovation Lab for Climate Finance – which CPI supports as its Secretariat, advancing innovative financial instruments to drive significant additional investment in developing countries.

3. The Green Climate Fund reached more than $10 billion in commitments – good progress ahead of COP21 in Paris next year.

Following the pledges from Japan, the U.S. and UK over the last weeks, Australia, Belgium, Mexico, Peru, Colombia, Austria, Spain, Norway, and Canada helped the Green Climate Fund reach its $10bn goal at this COP with new pledges. These pledges to help developing nations deal with climate change are good news. They increase the chances for a global climate deal next year in Paris, and if spent wisely, can supplement domestic public resources where they fall short and drive billions in private investment toward low-carbon and climate-resilient growth.

4. Finance for adaptation is becoming a higher priority.

The Green Climate Fund restated its intention to use half of its finance for adaptation purposes. Germany also stepped up on adaptation, committing an additional 50 million euros to the Adaptation Fund. CPI’s work shows that while adaptation finance grew by 12% last year, it still falls short of the need.

 5. Tracking of climate finance continues to improve.

Following on recommendations from the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014, many countries used their time on the COP20 plenary floor during the Finance Ministerial to talk about the need for an agreed-upon definition of climate finance and improved tracking systems. CPI’s analysis supports this need and shows that climate finance tracking can support countries’ attempts to formulate better policies.

 6. Economic growth and combating climate change can go hand in hand.

Last but not least – there was a growing sense that acting on climate can also spur economic growth at this year’s COP. Many experts have documented that climate change and the resulting extreme weather would have huge social and financial costs to the global economy. This year, the New Climate Economy report showed that measures that reduce climate risk can not only help to avoid a shrinking economy in the future, but can also help grow the economy, today.

 FelipeCalderon-speaks-about-New-Climate-Economy-from-COP20

President Felipe Calderón speaks about the New Climate Economy report from the COP20 plenary floor

Going into 2015, one big-picture lesson is clear – climate finance will continue to be an important focal point for those working to respond to climate change. CPI will continue to work to provide analysis that supports these discussions.

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