Tag Archives: renewable energy

Optimizing Public Payment Support to Enhance the Credit Rating of Renewable Projects in India

June 29, 2018 | , and

 

Investors in Indian renewable energy projects often cite the counterparty risk as one of their primary concerns. Counterparty risk is the risk of purchasers failing to meet their contractual agreement to pay on time – most often in the form of delays in payments, and sometimes by defaulting on the payments altogether. A recent CPI study found that this risk perception can add as much as 1.04% to the cost of debt for renewable energy projects.

A major driver of this risk perception are state-owned utilities’ (called DISCOMs) history of payment delays and defaults. DISCOMS are, by far, the largest off-takers of power in the country, either directly or through government-owned power aggregators, such as the Solar Energy Corporation of India and NTPC Vidyut Vyapar Nigam Limited (NVVN). As a result, power projects, which rely on these incoming cash flows to sustain their operations and interest payments, often find themselves strapped for cash, leading to poor credit ratings by lenders. These delays are the result of the systemic inefficiencies plaguing the Indian utilities sector. While various long-term government reforms targeting this sector are under different stages of implementation, they do not show great promise in curbing the issue of payment defaults in the near term. Government-sponsored risk-mitigation interventions called Payment Support Mechanisms (PSMs) arose from a need to build up the renewable energy power sector in light of this adverse investment environment.

These PSMs are funded pools of capital that provide working capital for projects when the associated off-takers default on their payment obligations. In the past, two such well-intentioned, but opaquely designed, PSM schemes have failed to be successful. Subsequently, tripartite agreements between the central government, state governments, and power aggregators (SECI and NVVN) have acted as powerful deterrents for DISCOMs against payment defaults to the aggregators. However, the counterparty risk in the case of direct procurement still persisted.

A recent technical paper by CPI provides a methodical framework for sizing a PSM with the explicit objective of enhancing the credit ratings of projects under the scheme. This empirical approach employs stochastic modeling of default events under various scenarios to arrive at differing probabilities of a project defaulting, in both the presence and absence of a PSM. Further, unlike a one-size-fits-all approach used by previous PSM constructs, this methodology takes into consideration the differing credit profiles of the DISCOMs gleaned using empirical financial reporting data.

The study provides interesting results, including that by providing a payment support large enough, the credit ratings of renewable energy projects can be enhanced to as much as a BB rating. Further, projects involving DISCOMs, such as in Gujarat and West Bengal, off-takers can achieve a BB rating even in the absence of any payment support. On average, the study finds that most DISCOMs require payment support equivalent to 8-17 months of payment, on average 12 months’ payment.

A concentrated effort from various government bodies has the potential to ensure a positive investment climate and assure that investors will receive payments owed to them at a moderate cost to the exchequer. This will reduce the cost and increase the availability of capital, thereby catalyzing the renewable energy sector. Further refinements towards employing public finance efficiently using empirical evidence is the way ahead to achieve the developmental objectives using available public resources.

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A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Mobilizing Institutional Investment in Indian Renewables

June 12, 2018 | and

 

India has been a sweet spot for renewable energy investment exhibiting an 11% compound annual growth rate (CAGR) between 2004 and 2017, and ranked among the top five renewable investment destinations in the FS-UNEP Report. Some major contributing factors have been India’s strong macroeconomic fundamentals, its large and well-diversified renewable market, and India’s ability to offer higher excess returns than several comparable markets like China and the United States.

Excess returns on renewable investments

Mobilizing investments by institutional investors, foreign and domestic, is a requisite for India to meet its clean energy targets.

However, this momentum needs to be accelerated to achieve its ambitious clean energy targets, which include 175 gigawatt (GW) of installed renewable energy by 2022, 40% of the total installed capacity to be renewable by 2030 and 30% of vehicles to be electric by 2030.

One promising opportunity lies in institutional investment, both foreign and domestic, through pension funds, insurance companies, and sovereign wealth funds. These investors mostly seek yield-generating investments in low-risk and long-duration assets which align well with the investment profile of renewable energy. Also, over the course of time, the needs of foreign investors have evolved from seeking small size, high-risk and high-return investments to large size, medium-risk and moderate return investments that are well-matched by the renewable sector offerings.

However, certain sector-specific issues such as off-taker risk, limited availability of listed securities and low credit ratings of renewable energy securities restrict the flow of investments. In order to address these barriers, a recent report by Climate Policy Initiative offers potential solutions to stakeholders, including policymakers and regulators.

Sector-specific barriers and potential solutions

The off-taker risk adds as much as 1.07% of additional risk premium to the cost of debt for renewable energy projects. A long-term solution is to fix the root causes, like the one being tried by the Ujwal DISCOM Assurance Yojana (UDAY). Though UDAY has shown promise in reducing operational inefficiencies and improving financial performance in selected cases, it is still early to measure the effectiveness of the scheme in reducing the off-take risk.

Some other promising short-mid term options include tripartite agreements between the Central government, State governments and the Reserve Bank of India; and a credible payment security mechanism (PSM) either by the corresponding state governments or on a standalone basis. However, both the effected PSM and tripartite agreements are available only for public sector intermediaries – National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India Ltd. (SECI) – between renewable power developers and state DISCOMs. There is need to extend these arrangements to producers who sell power directly to state DISCOMs, which ensures the most judicious use of the public capital employed.

Another key reason for low investment levels from domestic institutional investors in the renewable energy sector is lack of investable securities (listed and liquid) since most developers are borrowing and not issuing securities. Indian policymakers have been aware of the need for these vehicles, and they have been gradually created, both for debt (green bonds and infrastructure debt funds) as well as equity (infrastructure investment trust) financial vehicles. However, green bond issuances (at corporate, not project level), no renewable energy specialized Infrastructure Debt Funds (IDFs), and Infrastructure Investment Trusts (InvITs) are indicators that investors are still trying to get comfortable with these vehicles.

In this context, one potential solution is to incentivize banks and Non-Banking Financial Companies (NBFCs) like Indian Renewable Energy Development Agency (IREDA), to securitize their renewable energy project loan portfolio. The government can cover costs related to securitization of renewable energy loan pools (transaction cost) and subsidize partial guarantee fees on bonds issued through securitization structures.

The third major barrier restricting the flow of investments is limited renewable securities with AA domestic rating – the minimum rating required by institutional investors to invest. Though there is a specific solution, in the form of a partial credit guarantee (PCG) offered by India Infrastructure Finance Company Limited (IIFCL), this is not considered successful yet, with only two renewable energy issuances so far, and those in 2016. One of the key issues with these credit-enhanced bonds is that though these are priced appropriately in the market, the net benefit compared to bank debt does not justify transaction costs. As an example, with PCG, the benefit is a maximum of 1.50%. With cost of PCG at least 0.5% and cost of transaction at least 0.5%, the net benefit of at most 0.5% does not justify the hassle of a bond issuance. Initial subsidization of guarantees and transaction fees may encourage issuers to actively pursue PCG-backed bonds in the renewable energy sector.

Need for regulators to espouse investors to go green

Apart from addressing the aforementioned sector-specific barriers, there is a clear need for insurance regulators to introduce certain guidelines to insurance companies pertaining to climate risk management framework and carbon footprint disclosure. Introductions of such regulations will allow them to actively assess their portfolio exposure to sectors likely to be adversely affected by climate change in the coming year. This will give them a head start to gradually diversify their current investments from such high carbon sectors and ultimately accelerate finances into low carbon infrastructure sectors, including the renewable energy sector.

Another step in the right direction would be to mandate all companies to provide green ratings on their financial securities. These ratings will allow investors who evaluate environmental aspects in their investment decision-making to make more informed decisions around securities. To introduce such a mandate, the government can initially provide incentives to companies or rating agencies to introduce green ratings.

In conclusion, there is an immediate need for policymakers to implement the aforementioned solutions in order to create an investment environment that lowers risk perceptions of investors in the renewable energy sector. These solutions complemented with evolving regulations and the disclosure landscape will be key to scale-up institutional investment in India.

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A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Greening institutional investment in India

March 20, 2018 | and

 

India’s energy demand is increasing, and, to achieve its clean energy target of 175 GW by 2022, finance will be crucial.

One promising opportunity lies with foreign and domestic institutional investors who have $70 trillion and $564 billion assets under management, respectively. These investors are bound by their fiduciary duties meant to maximize financial returns to their beneficiaries, without taking excessive risks, while also meeting their liabilities over the long-run. Renewable energy, though a relatively new technology, is well matched to these needs as it offers high returns as well as meets environmental, social and governance (ESG) considerations in their investment strategies.

However, how can India unlock this opportunity to create a clean energy future?

A recent study by Climate Policy Initiative attempts to answer this question by developing a business case for institutional investors to invest in the Indian renewable energy sector, identifying key barriers to investment, and proposing potential pathways forward.

The changing economics of energy in India
According to the report, the renewable sector is becoming increasingly attractive compared with other energy investment opportunities in India. For instance, the solar tariff has actually become 23% cheaper than coal plants, and coal plants exhibit greater risk in cash flows (i.e. 40%) as compared to wind (i.e., 20%) and solar (i.e.,10%).

In the medium term, these changing economics mean that the existing power portfolio of investors, who are mostly exposed to fossil based investments instead of renewable investments, would underperform due to declining demand for fossil based power. Consequently, it is in the interest of institutional investors to gradually rebalance their portfolio in favour of climate friendly investments, in India and elsewhere.

Is India an attractive renewable energy market for institutional investment?
The study builds a case that India as a market is strong and economically attractive for foreign institutional investors compared to other similar markets across the world.

First, it benefits from strong renewable policy commitments as well as a large market size — ~480 GW expected capacity addition over 2016-40 — that is third only to China and the United States. Second, India is ranked 2nd in Ernst & Young’s renewable energy country attractiveness index, based on five pillars including macroeconomic environment, policy enablement, supply–demand dynamics, project delivery, and technology potential. Third, renewable energy in India provides a financially attractive investment, as measured via excess returns,  the difference between the expected return on capital invested and the weighted average cost of capital. India offers higher excess returns of 3.5% compared with other large markets, such as the US (2.4%) and China (1%). While some markets provide higher excess returns than India—for example, Mexico, Canada, and Chile – these are much smaller markets.

So what’s next?
Institutional investors with long-term investment horizons are mostly seeking yield generating investments in low risk and long duration assets, i.e., traits that align well with the current investment profile of renewable energy; this has changed from small size and high risk-high return investments to large size and medium risk-moderate return investments. Although the expected return from renewable energy projects have come down from 20% to 15% over time, this still matches institutional investors’ overall India market portfolio return requirements.

Renewable energy sector stages with risk-return mapping

However, our study finds there are still some barriers to unlocking this apparent match – including, sector specific risks like off-taker risk and limited listed and highly graded investment opportunities, along with currency risk.

The good news is that with appropriate regulatory and policy changes, the sector can provide a high match with institutional investors’ investment objectives.

For example, the central and state agencies could address the off-take risk through a transparent and credible payment security mechanism. Regulators could consider developing incentives to encourage banks and Non-Banking Financial Companies (NBFCs) to securitize their renewable energy loan portfolios, freeing up capital for more renewable energy projects. And investors themselves can consider developing risk management frameworks to assess and manage climate risk, identifying and investing in forward looking investment opportunities, renewable energy being one, to mitigate climate risk in their portfolio.

These steps, and the others we outline in the study, are a win win for all – for India, it’s a way to get much needed capital in a much needed area. For investors, their long-term portfolios depend on it.

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How are European policymakers and investors embracing the ‘new normal’ in EU renewable energy policy?

December 7, 2016 |

 

The growth of solar PV in Germany has benefited from small-scale investors

Costs have declined dramatically in the renewable energy sector and deployment levels are at an all-time high. But why does the outlook for future investments seem so mixed across Europe?

Today, policy and finance issues are now arguably at least as important as technology, with policy now the key determining factor in ensuring continued growth in renewables. Policymakers are not in the same position as they were five years ago however when the costs of technologies such as solar were much higher and policy decisions had very different outcomes. Even the costs of offshore wind are falling significantly as indicated by DONG’s recent winning bids for the Borssele 1 and 2 projects at €72.2/MWh and Vattenfall’s astonishing €49.9/MWh bid for Kriegers Flak.

In future, investment will need to come from a variety of sources and not just from large utilities which has traditionally been the case. This means that policy will need to change dramatically to adapt to this new, broader range of potential financing options.

Our latest report which is published today, European Renewable Energy Policy and Investment 2016 finds that the cost of financing will be driven as much by the types of investors as by how investors evaluate project risks, returns and policy. In other words, how investment is divided among utilities, institutional investors, households or companies is one of the most important factors determining the average cost of renewable energy to the system.

In Germany and Spain, for example, very different policy incentives were concentrated on very specific investor categories, ie, small end users in Germany and the utility sector in Spain. Both approaches achieved high levels of deployment in a relatively short time but were not necessarily cost-effective.

What does this mean for policymakers & investors?

We found that there is plenty of investment available to meet and exceed current EU and country level targets, if the right policy is in place. Policy will determine not only how much investment is available, but also the mix of investors and its cost. Policies set in motion today could develop, or close off, options that could be major sources of investment and technological advancement in the future.

In addition:

  1. Long-term targets are essential for attracting investment so a decrease in targets can be devastating for a developer since sunk development costs may need to be written off to reflect the reduced likelihood of completing the project
  2. The adoption of renewables across the EU has been fuelled by a varied mix of investor types, often introducing new entrants and causing a change to the previous ownership structure of energy systems.
  3. There is enough investment appetite in Germany to comfortably meet ambitious targets provided that support levels and other key policies are set appropriately. This gives comfort to policy makers that their ambitious targets can be achieved (and potentially exceeded), however there is insufficient capital for just one or two categories of investors to meet the targets on their own so policies must appeal to a broader investor base.
  4. Now is a good time to encourage investment with base rates at historically low levels, which in turn depresses equity return requirements, however policies are not in place to encourage this investment in many regions. Interest rate increases will necessitate higher support levels.
  5. Political risk perception is increasing and has a negative impact on investor appetite. Across the majority of EU regional contexts and renewable technologies we see a negative outlook of eroding investment sentiment.
  6. Misalignment of policies within EU member states and across EU directives is having unintended consequences, damaging the outlook for a rapid, coherent energy transition.

What does this mean for policymakers?

Policy should always encourage the lowest possible cost investment from the most appropriate set of investors in keeping with four main objectives:

  1. Balance cost-effectiveness and deployment
  2. Balance short-term cost-efficiency versus longer-term development.
  3. Develop technology mixes and options.
  4. Shape the industry to achieve industrial objectives and/or public support.

Regional views

An important part of this work was the regional perspectives, looking specifically at two countries, Germany and the UK, and two regions, the Nordics and Iberia. We also looked at three widely deployed technologies, solar PV, onshore wind and offshore wind and have forecast investor appetite within those categories for each region up to 2020.

United Kingdom

Future offshore wind investments in the UK look promising among utilities, developers and financial institutions

Future offshore wind investments in the UK look promising among utilities, developers and financial institutions

While the UK has a solid track record with building renewable power assets and is the global leader in offshore wind, its slow progress with decarbonising the heat and transport sectors means that it is unlikely to hit its 2020 renewable energy targets with the current suite of policies.

Over the last six years, the British government has changed several key renewable energy support policies including making cuts to feed-in tariffs for small and large-scale renewables, the transition away from a 14-year-old green certificate scheme with support levels set by government (the Renewables Obligation or RO) towards a Contract for Difference (CfD), with support levels set by competition. These changes have caused a period of uncertainty among investors.

If the current macroeconomic environment persists, investor interest in the UK market will likely mean sufficient capital is available to fund the existing project pipeline. However, it is likely that there will be less competition for projects as some investors are put off by political uncertainty, meaning less downward pressure on the cost of capital than there otherwise might have been.

Germany

Future investments across all categories in Germany look promising

Future investments across all categories in Germany look promising

Germany has the third-highest level of renewable energy installations by capacity in the world behind the US and China. It also has a range of ambitious targets that exceed the minimal levels set out by the EU. These targets include achieving 35% of generation from renewables in 2020, 50% by 2030 and 80% by 2050, and keeping CO2 levels at 60% of 1990 levels by 2020.

While Germany’s goals for onshore wind and solar remain ambitious, it is clear that policymakers are setting their sights on offshore wind as a major new source of energy. Our analysis indicates that these targets are, overall, achievable.

Now that amendments to Germany’s renewable laws have been announced uncertainty has reduced, although it will take some time before the significance of these changes is fully understood. Once investors fully understand the impacts of policy changes, then it is very likely that the ambitious renewable deployment targets can be achieved.

Iberia

Potential investments could be large in Iberia, but investor appetite is still low in the region

Potential investments could be large in Iberia, but investor appetite is still low in the region

The last decade has seen a period of upheaval in Spanish and Portuguese politics, and in particular in their once-thriving renewable energy sectors. Following the global financial crisis, governments in both countries have taken greater control of rates of growth in the renewable sector. The investor pool has shrunk, chilled by uncertainty and losses because of a series of regulatory changes.

In Portugal, recent M&A transactions suggest that international investor confidence in the sustainability of the regime remains, however, as in Spain, short term political objectives remain uncertain.

There are important lessons to be learned by policymakers both in the peninsula and outside about the importance of long-term planning, transparent regulation made by independent regulators, and a balance between the interests of all stakeholders in the energy system. These will be instructive if the countries are to pursue the next phase of decarbonisation successfully in the 2020s. Reducing the tariff deficit and increasing interconnection with the rest of Europe will be vital steps towards strengthening the case for more renewables.

 

Nordic region

Future investment in the Nordic region favours larger investors, such as utilities developers and financial institutions

Future investment in the Nordic region favours larger investors, such as utilities, developers and financial institutions

The Nordic region’s objective is to accelerate and implement a smooth energy transition in a market characterized by general over-capacity, low wholesale prices, flat or limited demand growth and most of the EU 2020 targets already achieved. In such a market, maintaining the momentum of the transition is not an easy task. In fact, investors that had initially piled into the Nordic wind market due to its intrinsic resource value, have more recently been hurt by low prices due to the oversupply of green certificates. These have resulted in investor losses, reduced incentives for new wind investments and an overall reduction in investor interest in the region.

However, investors and capital remain available, while the intrinsic long-term value of Nordic wind resources remains world class.

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EU winter package brings renewables in from the cold

December 1, 2016 |

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What could happen next?

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

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

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

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

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

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

October 19, 2016 | and

 

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

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

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

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

Green Bond DFI Flows to Developing Countries

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

Global green bond market flows to developing countries

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

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

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

October 12, 2016 |

 

wind-turbines

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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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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EU Curtailment Rules Could Increase German Wind Costs by 17% by 2020

April 14, 2016 |

 

This week, members of CPI’s Energy Finance team traveled to Brussels to present and discuss findings from our analysis of financing for European low-carbon energy transitions to a panel of EU policymakers and regulators including representatives from DG Energy and DG Competition and investors. This followed a meeting in February to present findings on the German low-carbon energy transition to the Federal Ministry of Economic Affairs and Energy (BMWi) and the Federal Ministry of Finance (BMF). The discussions focused in particular on the subject of economic curtailment an issue that is not yet fully appreciated by most investors but has the potential to reduce the availability and increase the cost investment. BMWi are in the process of designing policy to help mitigate this risk.

Analysis from our latest report suggests that without appropriate policies to lessen curtailment risk the cost of onshore wind in Germany could increase by over 17% by 2020 and by even more in future years. German policymakers are in the process of designing policy to help mitigate this risk.

So what is economic curtailment? Under European Commission state aid guidelines, renewable energy generators should have no incentive to generate electricity at times of negative prices. In other words, revenue support should be suspended during these times so that suppliers of renewable power will stop generating electricity because they will be out of pocket if they continue to do so. We have defined this issue as ‘economic curtailment’ (as distinct from ‘grid curtailment’ which occurs when the grid has no more capacity to take on power) and, as renewable energy deployment increases, it is an issue that is likely to become more relevant until such time as effective energy flexibility solutions (e.g. storage and demand response) are found.

Germany has an agreement with the European Commission that this rule does not need to be applied until prices are negative for six consecutive hours or more. This reduces the potential impact on the levelised cost of electricity somewhat. Curtailing support on an hourly basis could increase the cost of electricity by over 30% in 2020. Applying a six hour rule almost halves the cost increase requirement to 17% by significantly reducing the number of negative price hours affected and therefore lowering the cost of investment by increasing the amount that debt investors would lend.

We identified and tested additional approaches that could further address the needs of policymakers and investors. The solutions we evaluated were:

Take-or-pay: One option would be to curtail production from renewable energy but continue to pay generators for the lost output. This option provides the lowest cost and risk while still offering flexibility, but under current interpretations would fall foul of EU state aid regulations by incentivising production when it was not needed.
Proportional curtailment: Negative prices generally occur when wind or solar generation is high. Our analysis shows that on average a reduction of only 15% of wind output during negative price hours would move prices into positive territory. Thus, a system that could curtail only the excess generation and allocate the cost of this curtailment amongst all fixed tariff generators would better reflect system economics. This option would only be 5% more expensive than the cost of electricity under the take or pay option.
Add to the end: Under this option any hours that are curtailed during the 20-year support period – after incorporating the 6 hour rule – can be accrued and power generation beyond this support period can claim additional support until such time as the accrued hours are used up. However, high discounting of cash flows 20 years from now, as well as the fact that such a policy does not extend the operating life of the generation assets (and therefore would add no value if future energy prices are at or higher than the fixed tariff prices), means that this policy would add almost no additional value to investors.
Cap: under this option we assume that in addition to the 6 hour cut-off there is a limit to the number of hours that can be economically curtailed each year. The impact varies depending on the cap level.

Figure 37 - Impact on bid prices of hourly, 6 hour rule and proportional

The appeal of these additional approaches depends on policymakers’ priorities and investors’ needs but our analysis suggests that if take-or-pay was not available as an option to remove economic curtailment risk then a low level cap or proportional curtailment would be the next best approaches for attracting levels of investment consistent with meeting renewable energy deployment targets and doing so at low cost.

The analysis presented in Brussels was financed by the European Climate Foundation and the Global Commission on the Economy and Climate to examine how policy impacts the availability and cost of investment for low-carbon energy transitions. It aims to inform thinking on how renewable energy deployment targets can be achieved whilst minimising the cost to consumers.

For more information, please see our paper ‘Policy and investment in German renewable energy’.

And keep a look out for a forthcoming paper that will also examine finance for renewable energy in other European countries, namely the UK, Nordic countries, Spain and Portugal.

A version of this blog appeared on EurActiv. Click here to read it.

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