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Analysisofbarrierstocrowding‐inandmaximizingtheengagementoftheprivatesector,includingPrivateSectorAdvisoryGrouprecommendations
GCF/B.17/03
21June2017
MeetingoftheBoard5‐6July2017Songdo,Incheon,RepublicofKoreaProvisionalagendaitem12
Summary
Thispaperoutlinesthebarrierstoprivatesectorinvestmentandengagement,andtocapitalmobilization,intoclimatemitigationandadaptationrelatedsectorsandprojectsindevelopingcountries.Basedonananalysisofbarriersbysectorsandcountries,andsupportedbyexamples,thepaperproposesgeneralstrategicelementsforinterventionsbytheGreenClimateFund’sPrivateSectorFacility(PSF)wherethereisevidenceofamarketgap.ThefinalpartofthepapercomprisesrecommendationstotheBoardfromPrivateSectorAdvisoryGroup(PSAG)onovercomingthesebarriers,basedupontheirdiscussionoftheSecretariat’sanalysis.
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TableofContents
I. Introduction 1
II. BarrierstoPrivateSectorInvestmentandCapitalMobilisation 1
PolicyandRegulatoryBarriers 2
AccesstoClimateFinanceandLocalMarketBarriers 5
AffordabilityandTechnologyBarriers 10
KnowledgeandEducationBarriers 12
RegionandCountry‐relatedBarriersandRisks 12
III. RecommendationsbyPrivateSectorAdvisoryGroup 14
PolicyandRegulatoryBarriers 14
AccesstoClimateFinanceandLocalMarketBarriers 14
AffordabilityandTechnologyBarriers 15
KnowledgeandEducationBarriers 16
RegionandCountry‐relatedBarriersandRisks 17
AnnexI:Glossary 21
AnnexII:References 22
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I. Introduction
TheGreenClimateFund’sBoardhasrequestedtheSecretariattoundertakeananalysisofbarrierstocrowding‐inandmaximizingtheengagementoftheprivatesectortopresenttotheBoardnolaterthanitsfifteenthsession,andhasrequestedthePrivateSectorAdvisoryGroup(PSAG)topresentrecommendationsforconsiderationbytheBoardnolaterthanitssixteenthsession(decisionB.13/05).
Thispaperoutlinesthebarrierstoprivatesectorinvestmentandengagement,andtocapitalmobilization,intoclimatemitigationandadaptationrelatedsectorsandprojectsindevelopingcountries.Basedonananalysisofbarriersbysectorsandcountries,andsupportedbyexamples,thepaperproposesgeneralstrategicelementsforinterventionsbytheGreenClimateFund’sPrivateSectorFacility(PSF)wherethereisevidenceofamarketgap.Thepaperproposesa“buildingblocks”approachtotacklethecomplexityofthebarriersindevelopingcountries.ThefinalpartofthepapercomprisesrecommendationstotheBoardfromPSAGonovercomingthesebarriers,basedupontheirdiscussionoftheSecretariat’sanalysis.
Thispaperacknowledgesthatpublicfundingchannelledthroughgovernmentsinsupportofprivatesectorinvestmentinclimatemitigationandadaptationprogramsexiststhroughprovisionsofloans,guaranteesandgrants,andthroughsupportaimedatcreatinganenablingenvironmentforsuchinvestments.However,itisrecognizedthatthereisasignificantmarketgapandanunmetdemandforinnovativeapproachesandfinancialinstrumentsthatcouldfurtherovercomemarketbarriersandmitigaterisks.
Barrierstoprivatesectorinvestmentarecomplexandintertwined.Inthispaper,wedividethesebarriersintofivecategories:
(a) Policyandregulatorybarriers;
(b) Accesstoclimatefinanceandlocalmarketsbarriers;
(c) Affordabilityandtechnologybarriers;
(d) Knowledgeandeducationbarriers;and
(e) Regionandcountry‐relatedbarriers.
II. BarrierstoPrivateSectorInvestmentandCapitalMobilisation
Anoverviewofglobalclimatefinanceflowsattheendof2014showsthatprivatesectorinvestmentsreachedUSD241billion,whilstpublicfinancereachedanaverageofUSD151billion.1Inthecontextofconstrainedpublicbudgets,significantadditionalprivatesectorfinancewillberequiredtoreachthetargetssetinCOP21,puttingdevelopingcountriesonlow‐carbonandclimate‐resilientdevelopmentpathways.
ItisestimatedthatdevelopingcountrieswillrequireUSD349billionayeartoimplementtheirNationallyDeterminedContributions(NDCs)forthenext15years.2Againstthisbackdrop,andgiventhelimitationsonpublic,bilateral,andmultilateralfundingsources,itbecomesimperativefordevelopingcountriestoconsiderhowtoattractandleveragedifferenttypesofclimatechangeinvestment,includingfromprivateandinstitutionalinvestors.
1UNFCCC,“BiennialAssessmentandOverviewofClimateFinanceFlows”,January2017.ThesenumberswerebasedonanestimatebytheClimatePolicyInitiative,whichwasslightlyconservativeasper“GlobalLandscapeofClimateFinance2015,at:http://climatepolicyinitiative.org/wp‐content/uploads/2015/11/Global‐Landscape‐of‐Climate‐Finance‐2015.pdf.Thisisduetodifficultyoftrackingprivateinvestmentvolumeandflowsindevelopingcountries.2Germanwatch,“InvestinginAmbition:Analysisofthefinancialaspectsin(Intended)NationallyDeterminedContributions”,May2016.
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PublicfinancialflowsintoadaptationwereestimatedataboutUSD25billionin2015,representingabout19percentoftotalUSD128billionclimatefinanceintomitigationandadaptationinjectedbypublicfinancesourcesintodevelopingcountries.Thissmallamountofpublicsectoradaptationinvestmenthasseenlimitedprivatesectorinvolvementandlittletonoleverageofprivatesectorfinance3.
PolicyandRegulatoryBarriers
Policyrelatedbarriersaregenerallyassociatedwith:
(a) Thelackofanappropriatestrategicandregulatoryframework;
(b) Inconsistentpolicysupport,suchasshiftofdirectionandinterruptionofregulatoryincentives;and
(c) Lackoflong‐termcommitmentbygovernmenttosupportclimate‐relatedindustriesandmarket.
LackofanAppropriateStrategicandRegulatoryFramework
Theabsenceofacomprehensiveandadequatepolicyandregulatoryframeworkformitigationandadaptationonanationallevelthataddressesboththedemandandsupplysidesisamajordeficiencyandarisksourceforprivatesectorinvestmentsinagivencountry.Examplesofinadequatepolicyandregulatoryframeworkinclude:
(a) Amonopolyofonepublicutilitycompany,makingitdifficultforsmallproducerstosellanddistributetoathirdparty,oreventothepublicutilitycompanyitselfunlessunderad‐hoccircumstanceslackingconsistencyandatransparentplatform;
(b) Independentandsmallpowerproducers(IPP)lackalegalframework.Legalsupportisoftengrantedonad‐hocbasisandgenerallynotadvertisedinatransparentmanner;
(c) LackofaclearframeworkandinstitutionalarrangementsforhandlingofPowerPurchaseAgreements(PPA)orFeed‐in‐Tariffs(FiT)4,connectiontogrid,permitsandprocedurestosetuppowergenerationcompanies,andothers;
(d) Lackofclimateresilienceandadaptationregulatoryframework,includingforexample,fordisclosureofclimatechangerisksassociatedwithprivateinvestments;
(e) Ingrainedrelianceonsubsidizedfossilfuelsandlackofrenewablepurchaseobligationonconsumers/utilities;
(f) Ingrainedrelianceontheuseofsubsidizedfossilfuels,forwhichassociatednegativeexternalitiesarenotadequatelypriced,andlackofrenewablepurchaseobligationplacedonconsumers/utilities;and
(g) Tradebarriersthatlimittheuseofmostefficienttechnologiesatlowercosttoconsumers.
KenyaandEthiopiaaretwoexamplesofcountrieswho,motivatedbytheeconomicopportunityanduniquelocalpotentialinrenewableenergy,tookadvantageoftheavailabilityofinternationalfundingtoenhanceprivatesectorcapacity.Bothcountriesenhancedadvisoryservicesandmadeimprovementstoappropriatepoliciesandagencystructures,alongsidethepromotionoffundingwindowsforprivatesectorplayers.Theybothusedtwoparallelpaths.
3ClimatePolicyInitiative,TheGlobalLandscapeofClimateFinance2015,November2016.4AFiTguaranteesthatforacertainterm,renewableelectricitygeneratedbyaqualifyingfacilitymustbepurchasedatacertainfixedprice,whichprovidesafixedreturntotheproducer.
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Thefirstonefocusedoninternalcapacitybuildingandpolicyreform(regulationsspecifictorenewableenergy,permits,FiT,taxation).Thesecondpathwastofacilitateaccessoftheprivatesectortoinformationthroughthecreationofa“onestopshop”dedicatedtoprivatesectorrenewableenergyinvestment,providingdeveloperswithexplicitrequirementsforpermitting,authorization,accesstofinance,technologyadvice,andavailablefinancingwindows.
Inanotherexampleofprogressbeingmadeontheregulatoryside,theFrenchgovernmentpassedtheEnergyTransitionlaw,in2015.Article173ofthelawwillrequirecompliancebyinstitutionalinvestorstodisclosethetransition,physicalandliabilityrisksofclimatechangeintheirinvestmentsbyJuly2017.Similarly,theG20launchedtheTaskForceonClimate‐RelatedDisclosure(TCFD)tofocusonvoluntaryapproachestodisclosureofclimaterisk.
Mexicoprovidesanotherpositiveexampleofovercomingsuchbarriers.ItsGeneralClimateChangeLaw(GLCC),issuedin2012,definedplanningandpolicyinstruments,institutionalarrangements,andprovidedgeneralguidancefortheimplementationofclimatepolicy.ItalsomandatedthatCO2emissionsbereducedby30percentfrombusiness‐as‐usuallevelsby2020,andby50percentby2050.Inits2016ClimateChangeMid‐CenturyStrategy,Mexicohasgonefurtherbysettingsectoraltargets.Givenemissionsfromtransportation(on‐roadandnon‐roadmobile)representedabout26percentoftotalnationalemissionsin2013(correspondingto174,156.53GgofCO2)5,twoemissionsreductionorientedactionsinthetransportsectorwereincludedinthestrategy6.ThesepolicieshavetriggeredmultiplesustainabletransportprojectsincludingaUSD150millioncommitmentbytheCityofMexicoin2015toinvestinBusRapidTransit(BRT)thatwasco‐fundedbymultilateraldevelopmentbanks7.
India’sNationalSolarMissionundertheinitiativesoftheNationalActionPlanonClimateChangehasshowntremendousachievementsofover12,000MWsofsolarpowergenerationinamatteroffewyearsanddrivingsolarpowerpriceslowerthanthatoffossilfuels.Theintroductionofarenewablepurchaseobligationlawunderthecountry’selectricityactstimulateddistributioncompaniestocreateacompetitiveauctionprocessforsolarprocurement.Further,thecreationofSolarParksbytheGovernmentofIndiastreamlinedthelandprocurement,permittingandpowerevacuationcomplexitiesandcoupledwithfallingpricesofsolarpanelsledtohistoriclowpricingofpowerthroughrenewablesyearsaheadofforecasts.
InconsistencyofPolicySupportandLong‐TermCommitmentbyGovernment
Experienceinmanycountriesdemonstratesthatconsistentandlong‐termplanningandgovernmentcommitmentarekeyforsuccessfulrenewableenergyprojects.8Suchprojectstendtohavelong‐termprofithorizons,whichmakethemintoleranttoconstantpolicyshiftsandchangeofdirection.Inconsistencycouldalsoresultfromcontradictoryregulationsandlackofcoordinationamongvariousgovernmentdepartments,givingconflictingsignalsandinconsistentsupportlevels.
5ClimateChangeMid‐CenturyStrategy,at:https://unfccc.int/files/focus/long‐term_strategies/application/pdf/mexico_mcs_final_cop22nov16_red.pdf.
6Amongotheractions:(i)Toencouragetheevolutiontowardssafe,clean,low‐emission,accessible,andcomfortablepublictransportationsystems,and(ii)topromoteefficientandlow‐emissiontransportationsystems,andtomodifytheregulatoryandpricingframeworkinordertofosterreinvestmentandcontinuousimprovement.
7WRI,$150MilliontoTransformSustainableTransportinMexicoCityhttp://www.wri.org/blog/2015/03/150‐million‐transform‐sustainable‐transport‐mexico‐city.
8PowerforAll,DecentralizedRenewables,FromPromisetoProgress,March2017,at:https://static1.squarespace.com/static/532f79fae4b07e365baf1c64/t/58e3f73ce4fcb5a3a0989855/1491334979777/Decentralized‐Renewables‐From‐Promise‐to‐Progress‐March‐2017.pdf.
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Forexample,in2016,overallrenewableenergyinvestmentfellby30percentindevelopingcountries(fromUSD167billionin2015toUSD116.6billionin2016).WhilethisisattributedtomultiplefactorsincludingthestrongUSD(lowerdollar‐denominatedcapexcostspermegawatt)andfallsintechnologycost(about17percentacrossalltechnologies),someofthedecreaseisattributedtoalackofpolicysupportincountrieswhereprojectsweredelayed,suchasSouthAfrica,Mexico,andBrazil.9
TherenewableenergysectorinSouthernEuropeancountries(PortugalandSpain)alsosufferedamajorsetbackasaresultofinconsistentpolicysupportfollowingthe2008financialcrisis.Legislatorschosetoreduceorretroactivelywithdrawsubsidiesgrantedtorenewableenergyproducers.Thisresultedinmanygloballeadingproducersofinnovativeandprofitabletechnologiesbeingforcedtocontractcommerciallyandfinancially.
TheU.S.solarmarketsufferedthesameconsequencesasaresultofalackoflong‐termcommitmentbygovernmentastofiscalincentives‐ProductionTaxCredit(PTC)‐toconsumersandproducersofenergy(figure1).
Figure1.ImpactofProductionTaxCreditExpirationandExtensiononU.S.AnnualInstalledWindCapacity
Sources:CompiledbyUnionofConcernedScientists(UCS)basedondatafromU.S.DepartmentofEnergy(DOE)2013andAmericanWindEnergyAssociation(AWEA)2014
AbsenceofExplicitIncentiveSystems
Incentivesrangefromfiscalandfinancialincentivestolandrights,governmentguarantees,R&Dbudget,powerpurchaseagreementsandfeed‐in‐tariffs.Typically,themoreexplicitandhighertheincentives,thehighertheengagementoftheprivatesectorandtheinvestors’appetiteforrisk.Incentivescanbetailoredtoaddressbothsidesofdemandandsupply,projectdevelopersandutilitycompaniesaswellasconsumers.TheGermanandCalifornian(InvestmentTaxCredit)modelsprovedtobesuccessfulinmainstreamingrenewablesinmarketandconsumerbehavior.Innovativeconsumerfinancingsolutionsandtaxincentivescreatedadominoeffectandallowedstimulationoffurthertechnologicalinnovation,whichhasdrivenpricesdown.
Insummary,certainty,transparency,andlongevityarekeyparameterstoaddresspolicybarriersandassociatedrisks.
9UNEnvironmentandBloombergNewEnergyFinance’“GlobalTrendsinRenewableEnergyInvestment2017,”
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AccesstoClimateFinanceandLocalMarketBarriers
CapitalMarketCapabilitiesonaNationalLevel
Inmanydevelopingcountriescapitalmarketsarenascent,creditandequitymarketsareshallow,andliquidityisthin(particularlyinLICsandLDCs).10Thedegreeofdevelopmentofthecapitalmarketsinacountryhasadirectimpactoninvestors’confidence.Thisisespeciallytrueinclimate‐relatedprojectsasthesearenewsectors,manyofwhicharepre‐commercial.Appropriateandtransparentcapitalmarketinfrastructure,clearbankingregulations,clearforeigninvestmentandrepatriationlaws,adequateinstitutionalarrangements,andefficienttreasurysupporttogethercanbenefitthedevelopmentofclimatemitigationandadaptationprojectsandprogramsonanationallevel.Conversely,alackofdevelopedcapitalmarketreflectsontherangeofoptionsintermsoffinancialinstrumentsandproductsofferedlocally.
Theabovebarriershavepracticalimplicationsontheappetiteofinvestorsandfinancierstoinvestindevelopingcountriesthathaveaweakfinancialsector.Forexample,localcurrencylendingiskeyfortheviabilityofclimatefinancedealsindevelopingcountries;howevermanylow‐incomeandsomemiddle‐incomecountriesdonothaveaswapmarketorappropriatefinancialmechanismandrulesallowingtheuseoflocalcurrencyriskhedginginstruments.Sovereignguaranteesofthelocalcurrencydebtcomponentmightbeanoptionifsovereigncreditratingisacceptabletoinvestors,whichisoftennotthecaseparticularlyinLDCs.
Similarly,certainclimateresilienceprojectsrequire“patientcapital”giventhelong‐termhorizonofpositivecashflowsinsomesectors,andrenewableenergyprojectsoftenrequireearlyequitytomakeprojectsbankableandothersneedgrowthcapital.However,certaincountries’legislationlimitsequityandquasiequityinvestments,forlackofaframeworksupportingexitsandput/calloptions,whichinturnlimitsinvestors’exitstrategyoptionsanddiscouragesthemfrominvestinginthesemarkets.Also,bankingregulationsinsomedevelopingcountriesrestrictrepatriationoffunds.
Demand‐Supplymismatch
Thedemand‐supplymismatchextendsacrossthevaluechainofeachofthemandisdrivenbythefinancialoffering(financialinstrumentandterms,andexecutioncost),lackofknowledgeandtrainingonbothsidesofdemandandsupply,andanoverallinappropriateenablingenvironment.
Onthedemandside:
(a) Absenceofaconsumerbase:Theabsenceofconsumerawarenessandknowledge,lackoffiscalincentivesandfinancialschemestoencourageandenableconsumers(householdsandcorporates)topurchaserenewableenergycanforexampledelaytheformationofalocalrenewableenergydemand.Asreferredtoinparagraph10above,theCalifornianandGermanincentivemodelstriggeredapositiveeffectoncreatingdemandlocallythatsupportedprojectdevelopersandincentivizedbothproducersandconsumers.Thesameappliestopotentialclimateresilienceprojectsthatcandevelopinagriculturalcommunities,butthefactthatsignificantpartofpopulationsindevelopingcountriesliveinruralareas,thereisaknowledgebarrier,whichwouldrequirenewtypesof
10BasedonEaseofDoingBusinessrankings(www.doingbusiness.org/rankings),themajorityofLDCsrepresentedfallinthebottomfifthofrankingsworldwide.Thus,theabsenceofanenablingenvironmentforbusinessestodevelopstandsasamajorimpedimenttothedevelopmentofenergysectorinmostoftheLDCs.
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partnershipstobuildupknowledgeandleveragingexistinglocallytrustedorganizations(NGOs/CSOs)toundertakethiswork;
(b) Lackofsophisticatedprojectdevelopers:Indevelopingcountries,renewableenergyprojectdevelopersexperiencefragmentationandinefficiencies.Manyprojectdeveloperslackfinancialstrength,experience,creditworthiness,orcollateraltoborrowlocally;
(c) Lackofsizeablepipelineofclimateadaptationprojects:Inthecaseofclimateadaptationandresilienceprojects,businessesandparticularlySMEs,havedifficultiesarticulatingthebusinesscasetoinvestorsandfinanciersduetolackofadequatetrainingtoassessreturnsoninvestment(ROI)andtomeasuretherisksandtheirimplicationsonthebusiness;
(d) Theimplicitnatureofbenefitsfromenergyefficiencyandresourcemaximization:Giventhatthebenefitsofenergyefficiencyandresourcemaximizationarenotexplicitanddon’tcontributeexplicitlytopositivecashflowprojections,manufacturerstendtofocusmoreonproductionexpansionandsalesgrowthandlessonimprovingenergyefficiencyandoperatingcost,whichwouldusuallyrequiresomecapitalexpenditureinefficiencyimprovements.Consequently,comparedtoarenewableenergyproject,thereturnoninvestment(ROI)iscalculatedasasavedcostandnotasaprofit/return;and
(e) UnsupportivebusinessenvironmentforSMEsandwomen‐ownedbusinesses:Inlow‐andmiddle‐incomecountriesmostofcleanenergyandclimateresilienceindustriesaredrivenbySMEsthatreceivelittlesupportfromthelocalbanks,insurancecompanies,andregulators.Communitydrivenbusinessesandcooperativeswithviablebusinessproposalsreceiveverylittleattentionfromlocalbanksandevenmicrofinanceinstitutionsparticularlywhentheirproposalsareclimaterelated.Thislackofsupporthaspreventedtheindustryfrommaturing.Similarly,accesstofinancebywomenentrepreneursindevelopingcountriesingeneralandintheseindustriesinparticularpresentsadoublechallenge.ThenecessarycapacitybuildingandbusinesssupportbywomendedicatedgovernmentprogramsislackingparticularlyinSMEsintheareaofclimateresilience(e.g.agribusinesssupplychains).
(f) Lackofprofessionalandtechnicalskills:Manyprojectdevelopersindevelopingcountrieslacktechnicalexpertiseandsufficientfinancialskillstosubmitcompetitiveproposalsbasedonbestindustrystandards.
Onthesupplyside:
(a) Knowledgeofthesectorbyfinanciersandinvestors:Localbanksandinvestorslackknowledgeofclimate‐relatedbusinessesandsectorsandarereluctanttohireanin‐housetechnicalteamtoundertakeduediligenceandriskassessmenttoapprovefundingrequestsoflocalprojectdevelopers.
(b) Uncertaintyassociatedwiththephysicalriskassessmentofadaptationprojects:Projectdevelopersandinvestorsreportreluctanceinmakingclimateadaptationandresilienceinvestmentsbecauseoflackofclarityaboutthelocation,magnitude,potentialtimingandconsequencesofclimaterisksandthechallengesofincorporatingscientificclimatechangedataintoshorterterm,location‐specificpracticalinvestments.11
(c) Absenceoflong‐termdebtmaturities:Thelackoflong‐termfinancingincertaindevelopingcountriesandhighfinancingcostarebarrierstofinancingclimate‐relatedprojects.Thelong‐termcontractsofrenewableandforestryprojects,forexample,requirelong‐termtenors,whichisdifficulttosecurelocally.
11 GlobalAdaptationandResilienceInvestmentWorkGroup,BridgingtheAdaptationGap
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(d) Financialinstitutionshurdle:Manyfinancialinstitutionshesitatetodeveloprenewableenergyandenergyefficiencyfinancingbusinesslinesgiventhecostinvolvedinthelearningcurveandnewprocedurestobeadoptedwhensomeofthetechnologieshavenotrackrecordofrevenuegeneration.Asfordevelopingclimateresilienceinvestmentsbycommercialbanksindevelopingcountries,theissuescanverymuchbeassociatedwithlackofawarenessofrisksandopportunitiesofclimatechangeand/orinabilitytoevaluateandincorporateclimatechangerisksintoinvestmentorfinancingdecision‐making.
(e) PrivateEquity(PE)andVentureCapital(VC)Funds:Ingeneral,inlow‐incomecountries,therenewableenergyindustryhasnotbenefitedfromthepresenceoflocalearly(venture)andlate(growth)equityplayers.Theseareriskierinvestmentstypicallyofferedbyventureandprivateequitygroups.Barrierstoprivateequityandventureinvestmentindevelopingcountriesincludethedifficultyoffundraisingdomestically.Inmiddle‐incomecountries,thereismoderatePEandVCinvestmentactivitiesincleantechnologiesbutnotinrenewableenergyorclimateresilience.Mostoftherenewableenergyprojectsinthesecountriesarebeingfinancedthroughassetfinancelending(includingbalancesheetfinanceandbonds).In2016,forexample,PE/VCinvestmentinrenewableenergyreachedUSD3.3billion12ofwhichUSD2.3billionwascommittedintheUSA,USD0.5billioninEurope,andtherestwasspreadamongChina,BrazilandIndia(figure2).
Figure2:VC/PENEWINVESTMENTINRENEWABLEENERGYBYREGION,2004‐2016,USDBN
Source:UNEnvironment,BloombergNewEnergyFinance
12FrankfurtSchool–UNEPCollaborationCenter,UnEnvironment,BloombergNewEnergyFinance,“GlobalTrendsinRenewableEnergyInvestment2017”,April2017
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(f) InstitutionalInvestors:Institutionalinvestors13presentthelargestpotentialsourceoffundingwithsizableportfolios,sophisticatedstrategies,andappetiteforlong‐terminvestmenthorizons.GlobalinstitutionalinvestorsmanagenearlyUSD70trillioninassets.
Institutionalinvestorsoperatewithincertainconstraintsthataredrivenbytheirinvestmentstrategies,localauthorities’regulations(somecanonlyinvestinrenewablethroughPE/VCgroups)andcriteriasuchasathresholdonhigh‐riskinvestments,shareholderspreferenceintermsofgeographyortheme(gender,education,climate)impactarea.Thesebarrierspreventthemfrominvestinginclimate‐relatedsectorsandprojectsindevelopingcountries.Theirinvestmentdecisionsaredrivenbyparametersofliquidity,diversificationandriskexposure,scaleoftransactions,andcosteffectivenessfromtransactionandportfoliomanagementstandpoints.
Inadaptation,theprimarychallengeforinstitutionalinvestorsistwofold:theuncertaintyresultingfromtheirlackofabilitytoassessphysicalrisks,andtoquantifythemforlackofwelldevelopedoradoptedtoolsforevaluatingtheriskandreturnofinvestmentsinadaptationandresilience.
Inmitigation,institutionalinvestorshavethecapabilitytoprovidedirectfundingtorenewableenergyprojectsorpooledinvestmentvehiclesinsuchprojects.Forindividualprojects,scaleiskeysincetransactioncostsaresimilarforallprojectsizes.Manyinstitutionalinvestorslackthecapacityormandatetoformanin‐houseinvestmentteamtoperformtheduediligence,structuringandnegotiationsthatarerequiredforgoodprojectselection.Forpooledrenewableenergyinvestmentvehicles,therearecurrentlylimitedoptionsbeyondgreenbonds,whichtendtobeboughtbyEuropeanandNorthAmericanpensionfundsandinsurancecompaniestoallocatefundswithrelativelylowriskexposureandlowtransactioncost.
Thereisaneedtodesignpooledinvestmentvehiclesthat:i)aligntheinterestofinstitutionalinvestorswiththoseofspecificclimate‐relatedsectors;ii)createmechanismsofshort‐termliquidity;iii)allowadequatediversification,andiv)involvelowtransactioncostswhilemaintainingthelinktounderlyingcashflowsfromrenewableenergyprojects.
(g) Risk‐rewardprofileandinvestors’riskappetite:Financingriskandreturnsarederivedfrominvestors’riskperception.Oftenlocalfinancialinstitutionsandinstitutionalinvestorswhodonotfullyunderstandthelowandmoderatetechnologyriskofsometestedrenewabletechnologiesdemandhighreturnsoninvestments.Thismisperceptionofriskshaspreventedthelocalrenewableindustryfromdeveloping.
(h) Transactionsize/Costbarrier:Also,thehightransactioncostrelativetosmallsizeprojectsisafactortoconsiderbyinstitutionalinvestorsandfinancierswholookforefficientuseofresources.Thismakeslargeinvestorsandfinanciersfocusonlarge‐scaleprojects,discriminatingagainstamultitudeofsmalltomediumscalesandinnovativebusinessmodels,unlesssuchsmall‐scaleprojectscanbebundledtoenabletheengagementofinstitutionalinvestors.
MarketGap–Thelimitedofferingofarangeoffinancialinstruments
Concessionalfinancingbyinternationalinstitutionshasbeenprimarilyofferedtoclimate‐relatedprojectsintheformofconcessionalloans,risksharingfacilities(RSF),andgrants.Loanshavebeenmostusedamongallinstrumentsgiventhattheyareeasiertoexecute;
13Institutionalinvestorsincludepensionfunds,sovereignwealthfunds,insurancecompanies,foundationsandendowments.
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theyhavebeenofferedinsubordinatedtermsthroughlowerinterestrates,longermaturities,andsubordinatedsecurityarrangements.
Localcurrencyfinancing
Currencyfluctuationriskhasanimpactonprojectdevelopersasitaddstotheasset‐liabilitymismatch.Thishappensincasesofimportedtechnologyandequipment,foreigncurrencyloans,orexportofenergytoanothercountrywheretheproceedsofpaymentsareinhardcurrency.Asrevenuesareexpectedtobeinlocalcurrency,adeveloper’sbalancesheetisexposedtoaforeignexchangerisk.Withintheavailableschemesofinternationalconcessionalpublicfinancing,fundingflowsaredisbursedinUSDorEuro,whichpresentsabottleneckparticularlyfordevelopingcountrieswithhighcurrencyfluctuations.Thequestionthatremainsiswhobearsthecurrencyrisk:theendrecipientoffunding,theimplementingagency/entity,orthesourceoftheconcessionalfunds.Fromaprivatesectorstandpoint,thepositiveeffectofconcessionalfundingiswashedoutbythecurrencyriskandthecostofhedgingitintheSWAPmarket,assumingaSWAPmarketexistsinadevelopingcountry,whichisnotalwaysthecase.
Incasethehostgovernmentwouldprovideaguaranteeforthehardcurrencydebtfromforeignlenders,itexposesthegovernmenttoahigherdegreeofrisks(thanprovidingaguaranteeonlocalcurrencydebts).Onthesideoftheforeigninvestor,intermsofpurelycreditconsiderations,aspointedout,theforeigninvestorwouldbenefitfromthegovernmentguaranteeandwouldnotbearthecurrencyrisk.
Equityproducts
Equityproductsremainunderservedbybothprivateinvestorsandmajorpublicfinanceinstitutions.Equityinstrumentshavebeenusedtoaverylimitedextentduetotwofactors.First,thelackofprivateequityandventurecapitalindustryinmanydevelopingcountriesandparticularlyinLICsandLDCs.Second,thelowriskappetiteofbothprivateandpublicinstitutions,developmentbanksandtheirshareholderstoengageinriskierfinancialinstrumentssuchasequityandquasiequities/convertiblesandinnewsectors.
Equityproductsarerelevanttoarangeofclimate‐relatedprojects,includingfortheinnovativetechnologiesandstart‐upssegment,whichisstillunderfundedbybothprivateinvestorsandpublicfinanceinstitutions.Themajorityofinternationalpublicfundinggoestomatureandproventechnologies,asisthecaseforMDBs,bilateralsandpublicglobalfundsportfolios.Theresultisthatthedemandforfinancingbyawholesegmentofinnovativetechnologiesisnotbeingaddressed.Thisbecomesevenmorerelevantinthecontextofdevelopingcountries,giventheabsenceofamatureprivateequityandventurecapitalindustryinthesemarkets.
Guarantees
GuaranteeinstrumentshavebeenusedtoalargeextentintheformofRiskSharingFacilities(RSF)vialocalfinancialinstitutionstodeployfundingbymultilateraldevelopmentbanksandbilaterals,primarilyintoenergyefficiencyandrenewableenergy.However,directguaranteeshavebeenusedtoamuchlesserextent,althoughtheyarerelevantandcanmitigatevariousrisksincludingpoliticalandpolicy(forPPAsandFiT)andcreditrisk.ItisestimatedthatthreequartersofIFCinvestmentincleanenergyhasbeendeployedthroughRSFtolocal
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financialinstitutions.EBRD,forexample,reliesheavilyonRSFsasanefficientinstrumenttoscaleupinvestmentinlocalmarketsatalowertransactioncost.14
Insurance
Insuranceandreinsuranceproductsofferawiderangeofsolutionsthatcanenhanceclimateresiliencethroughmanagingandoffsettingclimaterelatedrisks,includinginfrastructureinsurance,creditinsurance,NaturalCatastropheProtectionofenergygaps,etc.Theincreasingseverityandfrequencyofweather‐relatedcatastropheshaveanenormouscost(humanandeconomic),whichrequiresuseofdiversityofinstrumentstoenhancecommunities’resilienceagainstclimaterisks.Also,privateinsuranceplayershavebeeninstrumentalininnovativeproductstailoredtoarangeofclimatechangerisksandhaveinvestedsignificantlyinclosing/coveringtherenewableenergyproductionshortfallgap,whichiskeytoenhancethefinancialviabilityofprojects.
AffordabilityandTechnologyBarriers
Inclimateadaptation,barrierstoprivatesectorinvestmentincludetechnologytransfertodevelopingcountries,andtheintegrationandtransferofknowledgeforadaptationinbusinesses,alongsidetheuncertainty,unfamiliarityandlimitedunderstandingofclimateadaptationrisksandconcreteinvestmentsthatcanbemadetoaddressthem.15
Inmitigation,whilethecostoftechnologyacrossclimate‐relatedsectorshasdroppedsignificantlyinthelastdecade,particularlyintherenewableenergysector,theupfrontcostofsettingupprojectsremainsakeybarrier.Asanexampleoftheincreasedcostcompetitivenessofrenewableenergytechnologies,figure3demonstratesthecostevolutionpertechnologyintheperiodbetween2009‐2016.16
14 Climate & Development Knowledge Network (CDKN), “Using blended finance to overcome barriers to climateinvestments”,January5,2017.
15UNEP’s2015AdaptationGapReport.16FrankfurtSchool–UNEPCollaborationCenter,UNEnvironment,BloombergNewEnergyFinance,“GlobalTrendsinRenewableEnergyInvesting2017”,levelisedcostsforPVwithouttrackingvariedgreatlybycountryandproject,butthecentralestimatewasUSD101perMWh,down17percentinjustoneyear.Onshorewind’scentrallevelisedcostestimatewasUSD68perMWhinH22016,down18percentinayear,whilethatforoffshorewindwasUSD126,down28percent.
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Figure3:Levelisedcostofelectricityfromselectedrenewableenergysources,Q32009toQ22016USDperMWHSource:BloombergNewEnergyFinance17
Barrierstotechnologyandaffordabilitycanbeclassifiedunderthreethemes:
(a) Hightechnologyandupfrontcostofprojects:Takingtheexampleofarenewableenergyproject,forthesamecapitalinjection,arenewableenergyproject’sinstalledcapacityislowerthanoneusingconventionalenergy,thusinvestorsprefertoengageinthelatterasthecostofcapitalismorecompetitiveandproductivityishigher,andthisisdespitetheinvestmentgrowthtrendinrenewableenergywhichhassurpassedgrowthofinvestmentinconventionalenergy.Whilethecostofnewgenerationsoftechnologieshavedroppedsignificantly,andthecompetitivenessgapvis‐à‐visconventionaltechnologieshasbeengraduallyshrinking,thedemandforlowcostfinancingtosetupgenerationfacilitiesremainsunmetandwouldrequirefurtherblendedfinancesolutions;concessionalpublicsourcesthatwouldaddressthefinancialviabilitygapandsupportfuturecashflowsofprivatedevelopers.
(b) Highcostofcapital:Giventhemajorityofclimate‐relatedprojectsarefinancedthroughacombinationofdebtandequity(often70‐75percentto30‐25percentratio),theiroverallcostofcapitalisusuallyderivedfromaweightedaverageofallcapitalsources.18Asthecostofcapitalrepresentsahurdleratethatacompanyhastoovercomeinordertogeneratevalueandbecomeprofitable,itisusedasabarometertoassesswhetheraprojectshouldbefinancedornot.Thecostofcapitalvariesdependingonthecountry’sfinancialmarketandfactorssuchastheriskprofileofaproject,operatingcost,profitability,creditworthinessofsponsors,etc.Ingeneral,newermarketentrantswithalimitedoperatinghistorywillhavehighercostsofcapitalthanestablishedcompanieswithasolidtrackrecord,sincelendersandinvestorswilldemandahigherriskpremiumfortheformer.
(c) Accesstotechnology:ThemajorsuppliersoftechnologiesareconcentratedinChina,Europe,JapanandtheU.S.Projectdevelopersindevelopingcountriesexperiencebarrierstoacquiringtechnologiesandenteringintoturnkeycontractswith
17FrankfurtSchool–UNEPCollaborationCenter,UnEnvironment,BloombergNewEnergyFinance,“GlobalTrendsinRenewableEnergyInvesting2017”.
18Widelyknownastheweightedaveragecostofcapital(WACC).
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internationaltechnologyprovidersduetotheirlackofcredithistoryandcreditrating,andmostlytheveryexpensivecostofproprietarytechnologies.
KnowledgeandEducationBarriers
Despitethemajorprogressmadegloballyinraisingawarenessofclimatechangeimpactinrecentyears,thereisstillmuchworktobedoneparticularlyindevelopingcountriestohighlightthenegativeimpactofclimatechangeanditsimplications,alongsidethebenefitsofclimate‐relatedprojectsandprograms.
Thebarrierstoincreasedinvestmentandcapitalmobilizationbytheprivatesectorasaresultoflackofknowledgehavenegativelyimpactedclimatemitigationandadaptationactionsindevelopingcountries.Theimpactrangesfromcorporates,SMEs,governmentandpublicinstitutionstolocalbanksandcivilsociety.Lackofawarenessofrisksandopportunitiesandinabilitytoincorporateclimatechangerisksintoinvestmentdecisions,andthelackofpropertraininginclimatemitigationandadaptationandclimatefinanceisdelayingthedesignandimplementationofadequatesupportandstrategiestotheprivatesectortoengageandinvest.Thesameappliestolocalfinancialinstitutions’lackofcapacitytoevaluateclimate‐relatedprojectproposalsfromlocaldeveloperstoassesstheassociatedcreditrisks,andtostructuretermsheetsinmannersthatanticipateandmitigaterisks,whichisamajorbarrierforfundraisingbyprojectdevelopers.
Theotherimplicationoflackofcapacitybylocalfinancialinstitutions(FIs)isthatthecombinationoflackofknowledgeofclimate‐relatedsectorsandcomplicatedreportingrequirementswithtechnicaldetailscontributestotheincreasedcostforFIsandtheirportfolioclients.Giventhesebarriers,financingatmarketratesdoesnotprovidelocalFIswithsufficientincentivesandreturnstoventureintothislineofbusiness.
Giventhecomplexityassociatedwithclimateresilienceandtherangeofimpactedsectors,tacklingtheknowledgegapbygovernments,municipalities,SMEsandlocalbusinesseswouldrequireaselectiveassessmentofthemostneededinterventions,establishingframeworksfordecision‐making,andmethodstomeasurecost‐benefitratiosofinterventions.Suchanapproachwouldresultinhighercertaintybyinvestorsandfinanciersastothetrustworthinessofprocessesandguidanceputinplaceasaresultofappropriatetrainingandcapacitybuilding.Workundertakenbyinsuranceindustryactorsforexampleinsettingdecision‐makingframeworksisavaluabletoolforstakeholdersandlocalcommunitiestoassesstheiroptions.19
Investmentpackagesbundledwithcapacitybuildingthereforeplayafundamentalroletotransformclimate‐relatedindustries.Assuch,packagesconceivedbyinternationalclimateinvestmentfundsanddevelopmentbankstoprovidecapacitybuilding,technicalassistanceandtrainingtolocalFIs,governments,businesses,andcivilsocietyorganizationsarekeytoaddressingsuchbarriersofknowledgeandexperience.
RegionandCountry‐relatedBarriersandRisks
Addressingbarrierstoprivatesectorinvestmentinclimate‐relatedindustriesmusttakeintoconsiderationthelocalcontextofdevelopingcountries.Thelandscapeofbarriersisnot
19EconomicofClimateAdaptation(ECA)WorkingGroup,“ShapingClimateResilienceDevelopment–AframeworkforDecision‐Making”(http://media.swissre.com/documents/rethinking_shaping_climate_resilent_development_en.pdf)
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consistentacrosscountriesandregionsandclimatefinancesolutionshavetobetailoredtolocalconditions,inordertoattractprivatesectorinvestment.
Financingclimate‐relatedprojectsgivesrisetoasetofrisks,bothrealandperceived,thatactasbarrierstoprivatesectorinvestment.Whiledeployingcapitalindevelopingcountriescanpresentanattractivesourceofreturnsandportfoliodiversificationforprivatesectorinvestorsandfinanciers,privatesectoractorshavevaryingthresholdsofrisktoleranceindevelopingcountries,andmaybeseekingdifferentlevelsofreturnsdependingontheirspecificmandates.Forexample,theriskappetiteofapensionfundisnotthesameasaprivateequityfundspecializedinrenewableenergy.
Itshouldbenotedthatmostofthesebarriersarecommonchallengestoprivateinvestmentindevelopingcountriesandnotspecifictoclimate‐relatedinvestments.However,theymaybeexacerbatedasresultofthepromotionofnewclimatetechnologiesandinnovations,policyandregulatorybarriers,financialbarriers,thelackofawarenessamongstbusinessesandgovernmentsaboutthepotentialclimate‐relatedrisksandopportunities,aswellastechnicalorcapacity‐basedbarriershinderingclimate‐relatedinvestments.
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III. RecommendationsbyPrivateSectorAdvisoryGroup
ThissectionofthepaperproposesasetofrecommendationsfromPSAGmembersbasedontheirdiscussionandreviewofSectionsIandIIofthispaper.PSAG’sproposalfollowsthesamestructureoftheanalysisundertakenbyGCFPSFinthesectionsabove.
PSAGwouldliketoemphasizethesubstantialroletheprivatesectorplaysinclimatemitigation,adaptationandresilience,andthatengagementwiththevariousprivatesectoractorsandstakeholdersiscrucialtoscaleupinvestment,enhanceinnovation,andincreasefinancialleverage.Furthermore,consistentwithPSAG’srecommendationstotheGCFBoard(Inf.3–B.16,No.20),“PSAGstressesthat,whiletheprivatesectorisfundamentaltothesuccessoftheGCF,themandateoftheGCFincludesdeliveringinpre‐commercialcontextswheretheprivatesectoralonecannotprovideallthatisneeded.ThePSAGthereforerecommendstoensurebalanced,multi‐stakeholder,differentiated,andintegratedapproachestomarketactivationfordeliveringmitigationandadaptationoutcomes.”
PolicyandRegulatoryBarriers
Thesebarriersareusuallyrelatedtoinadequatepublicstrategicandregulatoryframeworksforseveralsectors(energy,agriculture,forestry,etc.),coupledwithasetofretrogradepoliciesthatprovideincentivesforfossilfuelsandcarbonintenseproductsandservices,andfinally,changesneedalong‐termcommitmentbygovernmentstosupportclimate‐relatedbusinessesandmarketdevelopment,whichintheendrequiresstrongpublicinstitutions.
Recommendation1:
Assistlocalgovernmentstoidentifythemostobviousandurgentregulatoryinitiativesthatcouldstrengthentheexistingframeworksorcreatenewones.Anassessmentofpriorityinitiativesthattargetspecificsectorsthataremorevulnerabletoclimatechangecouldbeledandcarriedoutbythegovernmentandregulatorsinconsultationwithstakeholdersfromtheprivatesectorandcivilsocietyorganizations,andcouldbebuiltaroundastrategicplanandamulti‐stakeholderengagementplanconsideringtheshort‐,mid‐,andlong‐termtimeframes.Barriersassociatedwithknowledgeandcapacitygapshouldbealsoidentifiedtocomplementtheregulatorystrengtheningeffort.
Itisproposedthattheassessmentandtheidentifiedshort‐termactionsbefundedbyGCFReadinessProgramasthisfitsitsmandateandscopeofwork.GCFcouldplayacatalyticroleinproposingatemplateforsuchacollaborativeprocess,whichcouldresultintransformativeshiftincertainsectors.
Aparticularconsiderationshouldbepaidtowhetherthepolicychangesrequiredcanbeachievedinphases(short‐tolong‐term)andwhethereachphasecanbemeasuredbyspecificdeliverables/resultsthatactuallyunlocksomeoftheidentifiedbarriers,preparingthegroundforthenextphase.Tobetsolelyonlong‐termpolicychangeswouldnotbeaneffectiveoptionastheparadigmshiftneedstohappensoonerandcaptureallmarketsegments.
AccesstoClimateFinanceandLocalMarketBarriers
Recommendation2:
PSAGwouldencourageinterventionsusingpublicclimatefinanceinmitigationandclimateresilienceincluding:
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(a) Public‐privateinitiativesthatcandevelopinnovativesolutionstopersistentinvestmentbarriers,includinginenergyefficiency,supplychainsriskmanagement,andwastetoenergy;
(b) ThecreationofaGreenBankcouldbeatransformativepublic‐privateinitiativewhichcanboostmarketadoptionandcrowd‐inmoreprivatesectorinvestments;
(c) Financialinstruments(includingESCOsschemes)toguaranteethepromisedsavingsfromenergyefficiencyinvestmentscanaddressviabilityandriskgapsbyassuringinvestorsoftheirreturns;
(d) Hedgingsolutionstooffloadvariousrisks,includinglocalcurrencyhedgingusingblendedfinancesolutionstohelpaddressforeignexchangerisk;
(e) Financialstructuresandbusinessmodelsthatfavorthelowcarboneconomythroughcreationofinnovativeandresponsivepublic‐privateinstrumentsthatincentivizede‐riskinginvestments,suchasguaranteeproducts,includingrisksharingfacilitieswhichallowscaleupofinvestmentinprivatesectoroperations;
(f) ExploreinstrumentsthatcanhelpsmallcommunitiessuchasguaranteesandFiT;
(g) Insuranceproductsinoffsettingrisksassociatedwithclimateresilienceandadaptationandinsomesegmentsofrenewableenergysupplygap;and
(h) Vehiclesthatfitwithinstitutionalinvestorsassetallocationpreferencesandallowscaleupapproachinsegmentsofthemarketwherethereisneedforscalefinancing.
AffordabilityandTechnologyBarriers
AsoutlinedinSectionII,theaffordabilityandaccesstotechnologyareclearbarrierstoprivatesectorimplementationofprojectsinclimatemitigationandadaptation.Also,inadditiontotechnologytransferchallenges,localinnovationandadaptationoftechnologytolocalconditionsarealsobarrierstobeaddressed20.
Furthermore,giventheinitialinvestmentcostofcleantechnologyishigherthantheconventional,buttheoperationalcostoflow‐carbonbasedtechnologyismuchlower(asisthecaseforsolartechnology).Thismeansrenewableenergyprojectsaremoreaffordabletolowincomepopulationsindevelopingcountries,aslongastheinitialcapitalinvestmentisavailablewithproperpublicsectorpartnership.
Technicalassistanceonaprogrammaticleveliskeytoaddressmacrobarriers;however,technicalassistancetoindividualprojectsremainskeytotheirsuccessandtoriskmitigationattheoutset.
Recommendation3:
SupportbyGCFtargetingtechnologyandaffordabilitybarrierscouldaddgreatvaluetodevelopingcountriesandcanstimulatemuchcollaborationsouth‐southandnorth‐south,toreducebarriers,whilecreatingthenecessaryenvironmentfornewandinnovativetechnologiestoemerge.
Examplesofhowtoovercomeaffordabilityandtechnologybarriersincludeapublic‐privateinitiative,underIndiaInnovationLabforGreenFinance,whichidentifies,develops,andacceleratesinnovativesolutionstofinancegreeninfrastructureforrenewable
20GlobalAdaptation&ResilienceInvestmentWorkingGroup,“AdaptationGapreport”,November,2016.
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energy(includingutilityscale,distributed,andoff‐grid),energyefficiency,urbanization,andotherchannelsforgreengrowth”21.
Instrumentsthatprovidesclimatefinancesolutionstoovercomeaffordabilityandtechnologybarriers,included:
(a) TheRooftopSolarPrivateSectorFinancingFacility,whichaimstodrivecapitalatalowercostoffinancingfordevelopersofrooftopsolarprojects,byprovidinglong‐termdebtfinancingandbundlingsmallprojectsthroughsecuritization;
(b) Loans4SMEisapeer‐to‐peerlendingplatformthatwouldincreaseaccesstodebtfinancingforsmallandmediumenterprises(SMEs)forrenewableenergyandenergyefficiencyinitiatives,byconnectingthemdirectlywithlenders22;
(c) TheFXHedgingFacilityaimstofacilitatelarge‐scaleforeigninvestmentintorenewableenergyinIndiabyprovidingacheapercurrencyhedgingsolution.
KnowledgeandEducationBarriers
Thereisaglobalconsensusthatifcurrentpublicpoliciesarefavorableforthe“businessasusual”models,thenclimateinvestmentthroughtheprivatesectorisunlikelytosufficientlyscaleuprenewableenergy,energyefficiency,buildupresilience,ordrivetransitiontoamoresustainablesupplychains.AddedtothatasmentionedinSectionIandIIabove,thisisespeciallytrueindevelopingcountrieswherelackofaccesstocapitalislargeandtheperceptionofriskcontinuestolimitprivatesectorandinvestors’engagement.
Thestatementinpara37above,“Lackofawareness…andpropertraininginclimatechangeandclimatefinanceisdelayingthedesignandimplementationofadequatesupportandstrategiestotheprivatesectortoengageandinvest”reflectsthecurrentsituationandshouldbetackledinordertohelpdevelopingcountriestoovercomesuchbarriers.
Alsoithasbeendemonstratedthat“Marketssometimeslagbehindinnovativebusinessmodelsevenwhentheyarecommerciallyviable”23.Showcasingsuccessfulprojectsandbusinessmodelsthroughinnovativeandtargetedmarketingeffortscan“openupnewopportunities,helpingtoaccelerateinvestmentandmakeuplostground24.”
Itisrecommendedthatlackofinstitutionalcapacityindevelopingcountriesshouldbeaddressedasanover‐archingthemebyGCFgiventhatmanydevelopingcountrieslacktheincountry(in‐house)expertisetodealwithalltherisksandbarrierstounlockprivatesectordevelopmentandfurtherinvestment.
GCFcouldplayacatalyticroleinprovidingfundingandguidancetodevelopingcountriesandparticularlytailoredprogramstoSIDSandLDCstoempowertheirpublicinstitutionsandhelpreducetheeducationbarrierintheareaofclimatemitigation,whichinthefuturewillbefundamentaltounlockaccesstoprivatesector.
21ClimatePolicyInitiative,“IndiaInnovationLabforGreenFinance:2015‐2016CycleInstrumentAnalysis”,October,2016.
22AccordingtoCPI,“Byutilizingaresilientcreditriskassessmentmodulethatincorporatesawiderangeofdataelementsascomparedtotraditionalcreditscoringmechanisms,Loans4SMEwillfocusoncashflowsandtherepaymentcapabilitiesoftheprojectsinordertoincreaseinvestorconfidenceandoffertimelierfinancingwhencomparedtotraditionallending.”
23ClimatePolicyInitiative(CPI),“TheLessonsandInnovationstoSpurGreenInvestmentinDevelopingCountries”,April,2017.
24Ibid.
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Recommendation4:
Tosupportprivatesectorinvestmentinenergyefficiency,itissuggestedthatGCFsupportcountriestosetupandadoptareporting/monitoringsystemofenergyconsumptiononthelocalbusinessesandindustrialoperationstoprovideabaseonquantitativeassessmentoftheenergyuseandcost.Thisfirststepcouldbefollowedbyprovidingfinancialsupportto:
(a) Setupprivatepublicpartnershipswherebyexpertsfromdevelopedordevelopingcountriescanprovidetechnicalassistanceandbuildlocalcapacityoflocalindustriesandassistinapragmaticshift;and
(b) providefundinginstrumentsforlocalbusinessestoimplementnecessarycapitalexpendituresandinvestmentinenergyefficientoperations.
Recommendation5:
AClimateresiliencetargetedcapacitybuildingandawarenessprogramsupportedbyGCFcanhelpsupportcountriestoovercomebarrierstoprivateinvestmentinclimateresilienceandadaptationresultingfromtheknowledgegap:lackofknowledgeproduction,inadequateintegrationofknowledge,andlimitedtransferanduptake.GCFcouldalsoassistregionsandcountries,whichlackasystematicidentificationandanalysisoftheabovebarriers25.
Furthermore,theGCFcoulddesigninterventionstoinvestindemandgrowthactivities,suchastrainingonclimateresilience,insurance,productiveusesofenergy,supplychainsefficiencies,andothermeasurenecessarytobuilddemandforprivatesectorservices.
Recommendation6:
Sharinginformationacrosspublicbodiesandinstitutionsonhownationalgovernmentsanddevelopmentfinanceinstitutionscanleverageprivateinvestmentwillbecrucialfortheprivatesector,withemphasisonunderservedsegmentssuchasSMEdevelopment,womenaccesstofinance,andriskcapital/innovativestartups.
RegionandCountry‐relatedBarriersandRisks
Eachcountryhasitsownspecificbarriersandthusasinglesolutioncannotmeetalltherequirementstomitigaterisksandunlockprivatesectorclimateinvestment.However,governmentsanddevelopmentfinanceinstitutionscanworktogethertoleverageprivateinvestmentthroughnewapproachesandactionstoaddressfundamentalriskbarriersandunlockfinancethatwouldotherwisepreventprivatedevelopersfrominvestinginsomedevelopingcountries.
Recommendation7:
AreasthatGCFcouldsupportandthatcanaddresscrosscuttingissuesinclude:
(a) Well‐designedPowerPurchaseAgreementsinthecaseoftheenergysector,withgovernment‐backedguaranteesandassurance,whichcouldprovecrucialtounlockthelong‐termdebtfinanceneededtodeveloplargeprojects;26
(b) Well‐tailoredfiscalpoliciescouldencourageprivatesectorinvestment.Forinstance,inthecaseofagriculture,withaproposaltotaxtheproductionarearatherthanproductionvolumesorprofits,governmentscanincentivizeamoreproductivelanduse.
25GlobalAdaptation&ResilienceInvestmentWorkingGroup(GARI),“AdaptationGapreport”,November,2016.26ClimatePolicyInitiative“TheLessonsandInnovationstoSpurGreenInvestmentinDevelopingCountries”,April,2017.
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Thismayencourageadoptionofnewmethodsandmoresustainableandefficientagriculture,achievinghigherproductivity(yield)percultivatedarea;
(c) Giventheshortageofapipelineofviableinvestmentsforfinanciersandinvestors,oncepolicyandenablingenvironmentbarriersareaddressed,along‐termbusinessskillsbuildinglocallyisfundamentaltobuildinginvestorpipelines.GCFcanplaykeyrolebydesigningpragmaticapproachestolong‐termengagementinsupportingbuildingbusinessskillsindevelopingcountries.
(d) Introductionofsustainabilityindicators,linkingtaxratestosustainabledevelopmentcriteria,whichcouldalsorewardenvironmentallyfriendlybehaviour;and
(e) Sharinginformationacrosspublicbodiesandinstitutionsonhownationalgovernmentsanddevelopmentfinanceinstitutionscanleverageprivateinvestmentwillbecrucialfortheprivatesector,withemphasisonunderservedsegmentssuchasSMEdevelopment,womenaccesstofinance,andriskcapital/innovativestart‐ups.
Theserecommendationsarenotexhaustiveandmanyotheraspectsshouldbeconsidered,however,eachcountryneedstoidentifyitsownkeyprioritylistofbarriersandaddresstheminordertodrivegreeninvestmentbytheprivatesector.Furtherclaritybygovernmentsandregulatorswouldresultinaclearpathtoprivateinvestors;e.g.providinginsightsonhoweffectivefiscalpolicydesignis,toincentivizemoreproductiveandsustainableformsoflanduse,forinstance,orlowcarbontechnologydeploymentforbothmitigationandadaptation.
ItisnoteworthytomentionthatgiventhespecificchallengesfacingLDCsandSIDS,GCFPSFiscurrentlydevelopingaproposalforfinancialmodalitiestoenhanceprivatesectorinvestmentinthesecountries.
Table1:SummaryRecommendations
Barriers RecommendationsPolicyandRegulatoryBarriers
Recommendation1Assistlocalgovernmentstoidentifythemostobviousandurgentregulatoryinitiativesthatcouldstrengthentheexistingframeworksorcreatenewones.Anassessmentofpriorityinitiativesthattargetspecificsectorsthataremorevulnerabletoclimatechangecouldbeledandcarriedoutbythegovernmentandregulatorsinconsultationwithstakeholdersfromtheprivatesectorandcivilsocietyorganizations,andcouldbebuiltaroundastrategicplanandamulti‐stakeholderengagementplanconsideringtheshort‐,mid‐,andlong‐termtimeframes.Barriersassociatedwithknowledgeandcapacitygapshouldbealsoidentifiedtocomplementtheregulatorystrengtheningeffort.
AccesstoClimateFinanceandLocalMarketBarriers
Recommendation2Public‐private initiatives that can develop innovative solutions topersistent investmentbarriers, including inenergyefficiency, supplychainsriskmanagement,wastetoenergy,andforestry.ThecreationofaGreenBankcouldbeatransformativepublic‐privateinitiative,whichcanboostmarketadoptionandcrowd‐inmoreprivatesectorinvestments.Financial instruments (including ESCOs schemes) to guarantee thepromised savings from energy efficiency investments can addressviabilityandriskgapsbyassuringinvestorsoftheirreturns.
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Hedging solutions to offload various risks, including local currencyhedging solutions using blended finance solutions to help addressforeignexchangerisk.Financial structures and businessmodels that favor the low carboneconomythroughcreationofinnovativeandresponsivepublic‐privateinstrumentsthatincentivizede‐riskinginvestments,suchasguaranteeproducts,includingrisksharingfacilitieswhichallowscaleupofRE/EEinvestmentinprivatesectoroperations.ExploreinstrumentsthatcanhelpsmallcommunitiessuchasguaranteesandFiT.Insuranceandreinsuranceproductsofferawiderangeofproductsthatoffset risks associatedwith climate resilience and adaptation and insomesegmentsofrenewableenergysupplygap. Insuranceproductshelpprojectdevelopersandlendersintransferringrisksandleverageprivatesourcesoffundingtohigherriskprojects.Vehicles that fit with institutional investors asset allocationpreferencesandscaleupapproachinmarketsegmentsmarketwherethereisneedforscalefunding.Technicalassistanceonaprogrammaticleveliskeytoaddressmacrobarriers; however, technical assistance to individualprojects remainkeytotheirsuccessandtoriskmitigationattheoutset.
AffordabilityandTechnologyBarriers
Recommendation3SupportbyGCFtargetingtechnologyandaffordabilitybarrierscouldaddgreatvaluetodevelopingcountriesandcanstimulatemuchcollaborationsouth‐southandnorth‐south,toreducebarriers,whilecreatingthenecessaryenvironmentfornewandinnovativetechnologiestoemerge.
KnowledgeandEducationBarriers
Recommendation4Tosupportprivatesectorinvestmentinenergyefficiency,itissuggestedthatGCFsupportcountriestosetupandadoptareporting/monitoringsystemofenergyconsumptiononthelocalbusinessesandindustrialoperationstoprovideabaseonquantitativeassessmentoftheenergyuseandcost.Thisfirststepcouldbefollowedbyprovidingfinancialsupportto:(i)setupprivatepublicpartnershipswherebyexpertsfromdevelopedordevelopingcountriescanprovidetechnicalassistanceandbuildlocalcapacityoflocalindustriesandassistinapragmaticshift,and(ii)providefundinginstrumentsforlocalbusinessestoimplementnecessarycapitalexpendituresandinvestmentinenergyefficientoperations.Recommendation5AClimateresiliencetargetedcapacitybuildingandawarenessprogramsupportedbyGCFcanhelpsupportcountriestoovercomebarrierstoprivateinvestmentinclimateresilienceandadaptationresultingfromtheknowledgegap:lackofknowledgeproduction,inadequateintegrationofknowledge,andlimitedtransferanduptake.GCFcouldalsoassistregionsandcountries,whichlackasystematicidentificationandanalysisoftheabovebarriers.
Furthermore,theGCFcoulddesigninterventionstoinvestindemandgrowthactivities,suchastrainingonclimateresilience,insurance,productiveusesofenergy,supplychainsefficiencies,andother
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measurenecessarytobuilddemandforprivatesectorservices.
Recommendation6Sharinginformationacrosspublicbodiesandinstitutionsonhownationalgovernmentsanddevelopmentfinanceinstitutionscanleverageprivateinvestmentwillbecrucialfortheprivatesector,withemphasisonunderservedsegmentssuchasSMEdevelopment,womenaccesstofinance,andriskcapital/innovativestartups.
RegionandCountry‐relatedBarriersandRisks
Recommendation7DesignPowerPurchaseAgreementsandotherperformancecontractstemplates,withgovernment‐backedguaranteesandassurance,whichcouldprovecrucialtounlockthelong‐termdebtfinanceneededtodeveloplargeprojectsandbundlesmallscaleones.Well‐tailoredfiscalpoliciescouldencourageprivatesectorinvestment.For instance, in the case of agriculture, with a proposal to tax theproduction area rather than production volumes or profits,governments can incentivize a more productive land use. This mayencourageadoptionofnewmethodsandmoresustainableandefficientagriculture,achievinghigherproductivity(yield)percultivatedarea.
Giventheshortageofapipelineofviableinvestmentsforfinanciersandinvestors,oncepolicyandenablingenvironmentbarriersareaddressed,along‐termbusinessskillsbuildinglocallyisfundamentaltobuildinginvestorpipelines.GCFcanplaykeyrolebydesigningpragmaticapproachestolong‐termengagementinsupportingbuildingbusinessskillsindevelopingcountries.Introductionofsustainabilityindicators,linkingtaxratestosustainabledevelopment criteria, which could also reward environmentallyfriendlybehavior.
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AnnexI:Glossary
ASSET FINANCE
All money invested in renewable energy generation projects, whether from internal company balance sheets, from debt finance, or from equity finance. It excludes refinancing. The project may or may not be commissioned in the same year.
CAPITAL EXPENDITURE Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. Some investment will translate into capacity in the following year.
FEED-IN TARIFF A premium rate paid for electricity fed back into the electricity grid from a designated renewable electricity generation source.
GREEN BOND A bond issued by a bank or company, the proceeds of which will go entirely into clean energy and other environmentally-friendly projects. The issuer will normally label it as a green bond.
INITIAL PUBLIC OFFERING (IPO) A company’s first offering of stock or shares for purchase via an exchange. Also referred to as “flotation”.
INVESTMENT TAX CREDIT (ITC) Allows investment in renewable energy in the US to be deducted from income tax.
LEVELISED COST OF ELECTRICITY (LCOE)
The all-in cost of generating each MWh of electricity from a power plant, including not just fuel used but also the cost of project development, construction, financing, operation and maintenance.
NON-RECOURSE PROJECT FINANCE
Debt and equity provided directly to projects rather than to the companies developing them.
ON-BALANCE-SHEET FINANCING Where a renewable energy project is financed entirely by a utility or developer, using money from their internal resources.
PRODUCTION TAX CREDIT (PTC) The support instrument for wind energy projects at federal level in the US.
PUBLIC MARKETS All money invested in the equity of publicly quoted companies developing renewable energy technology and generation.
VENTURE CAPITAL AND PRIVATE EQUITY (VC/PE)
All money invested by venture capital and private equity funds in the equity of companies developing renewable energy technology.
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AnnexII:References
AfricanDevelopmentBank(AfDB),AsianDevelopmentBank(ADB),EuropeanInvestmentBank(EIB),EuropeanBankforReconstructionandDevelopment(EBRD),Inter‐AmericanDevelopmentBank(IDB),InternationalFinanceCorporation(IFC),WorldBankGroup(WBG).2016.“2015JointreportonMultilateralDevelopmentBanks’climatefinance”.At:http://www.eib.org/attachments/documents/joint_mdb_report_on_climate_finance_2015.pdf
BloombergnewEnergyfinance,“Record$30bnyearforoffshorewindbutoverallinvestmentdown”,January12,2017.At:https://about.bnef.com/blog/record‐30bn‐year‐offshore‐wind‐overall‐investment/
Climate&DevelopmentKnowledgeNetwork(CDKN),“Usingblendedfinancetoovercomebarrierstoclimateinvestments”,ByVirginieFayolleandSerenaOdianoseofAcclimatise,withDarioAbramskiehnoftheClimatePolicyInitiative(CPI),January2017.At:https://cdkn.org/2017/01/feature‐using‐blended‐finance‐overcome‐barriers‐climate‐investments/?loclang=en_gb#_edn1
Climate&DevelopmentKnowledgeNetwork(CDKN),“AddressingtheBarrierstoClimateInvestment”,ByJohannesBerliner,ChristineGruning,KarolKempa,CarolaMenzelandUlfMoslenerFrankfurtSchool–UNEPCollaboratingCentreforClimate&SustainableEnergyFinance,November2013.At:http://fs‐unep‐centre.org/sites/default/files/publications/cdknguidefinancialinstrumentsfinalweb‐res3.pdf
ClimatePolicyInitiative,“BiennialAssessmentandOverviewofClimateFinanceFlows”,November7,2016.At:http://newsroom.unfccc.int/unfccc‐newsroom/biennial‐assessment‐and‐overview‐of‐climate‐finance‐flows/
ClimatePolicyInitiative,GlobalClimateFinance:AnUpdatedViewon2013&2014Flows,October2016.At:https://climatepolicyinitiative.org/wp‐content/uploads/2016/10/Global‐Climate‐Finance‐An‐Updated‐View‐on‐2013‐and‐2014‐Flows.pdf
EconomicofClimateAdaptation(ECA)WorkingGroup,“ShapingClimateResilienceDevelopment–AframeworkforDecision‐Making”At:http://media.swissre.com/documents/rethinking_shaping_climate_resilent_development_en.pdf
Germanwatch,ByLutzWeischer,LindeWarland,DavidEckstein,StephanHoch,AxelMichaelowa,MichelKoehlerandStefanWehner,“InvestinginAmbition:Analysisofthefinancialaspectsin(Intended)NationallyDeterminedContributions”,May2016.At:https://germanwatch.org/en/download/15226.pdf
GlobalAdaptationandResilienceInvestmentWorkGroup,BridgingtheAdaptationGap.At:https://garigroup.com
GovernmentofMexico,MexicoClimateChangeMid‐CenturyStrategy,November2016.At:https://unfccc.int/files/focus/long‐term_strategies/application/pdf/mexico_mcs_final_cop22nov16_red.pdf
IEA(2015)WorldEnergyOutlookspecialbriefingforCOP21.At:http://newsroom.unfccc.int/unfccc‐newsroom/iea‐says‐pledges‐for‐cop21‐slowenergy‐emissions‐growth‐dramatically/
InternationalRenewableEnergyAgency,UnlockingRenewableEnergyInvestment:TheRoleofRiskMitigationandStructuredFinance,2016.At:At:https://www.irena.org/DocumentDownloads/Publications/IRENA_Risk_Mitigation_and_Structured_Finance_2016.pdf
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UNEnvironment,theFrankfurtSchool‐UNEPCollaboratingCentre,andBloombergNewEnergyFinance,GlobalTrendsinRenewableEnergyInvestment2017,April2017.At:http://fs‐unep‐centre.org/publications/global‐trends‐renewable‐energy‐investment‐2017
UNFCCC,At:http://unfccc.int/cooperation_and_support/financial_mechanism/standing_committee/items/8034.php
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