Analysis of barriers to crowding‐in and maximizing the … · 2020-02-01 · Analysis of barriers to crowding‐in and maximizing the engagement of the private sector, including

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.


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.


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.


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.


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.


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.

GCF/B.17/03Page19

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.


Recommendation3SupportbyGCFtargetingtechnologyandaffordabilitybarrierscouldaddgreatvaluetodevelopingcountriesandcanstimulatemuchcollaborationsouth‐southandnorth‐south,toreducebarriers,whilecreatingthenecessaryenvironmentfornewandinnovativetechnologiestoemerge.


Recommendation4Tosupportprivatesectorinvestmentinenergyefficiency,itissuggestedthatGCFsupportcountriestosetupandadoptareporting/monitoringsystemofenergyconsumptiononthelocalbusinessesandindustrialoperationstoprovideabaseonquantitativeassessmentoftheenergyuseandcost.Thisfirststepcouldbefollowedbyprovidingfinancialsupportto:(i)setupprivatepublicpartnershipswherebyexpertsfromdevelopedordevelopingcountriescanprovidetechnicalassistanceandbuildlocalcapacityoflocalindustriesandassistinapragmaticshift,and(ii)providefundinginstrumentsforlocalbusinessestoimplementnecessarycapitalexpendituresandinvestmentinenergyefficientoperations.Recommendation5AClimateresiliencetargetedcapacitybuildingandawarenessprogramsupportedbyGCFcanhelpsupportcountriestoovercomebarrierstoprivateinvestmentinclimateresilienceandadaptationresultingfromtheknowledgegap:lackofknowledgeproduction,inadequateintegrationofknowledge,andlimitedtransferanduptake.GCFcouldalsoassistregionsandcountries,whichlackasystematicidentificationandanalysisoftheabovebarriers.

Furthermore,theGCFcoulddesigninterventionstoinvestindemandgrowthactivities,suchastrainingonclimateresilience,insurance,productiveusesofenergy,supplychainsefficiencies,andother

GCF/B.17/03Page20

measurenecessarytobuilddemandforprivatesectorservices.

Recommendation6Sharinginformationacrosspublicbodiesandinstitutionsonhownationalgovernmentsanddevelopmentfinanceinstitutionscanleverageprivateinvestmentwillbecrucialfortheprivatesector,withemphasisonunderservedsegmentssuchasSMEdevelopment,womenaccesstofinance,andriskcapital/innovativestartups.


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

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