Pre-requisites for green growth
Prerequisites for private-sector finance are required to support green growth
Public support is required for overarching policy support (renewable energy quotas, feed-in tariffs, eliminating fossil-fuel subsidies and other perverse incentives) and project level assistance. The latter includes grants, subsidies and technical assistance, all of which have been critical to the success of green infrastructure projects, as highlighted through case studies. Grants often achieve significant ‘leverage’ due to the relatively small initial tranche of funding needed for feasibility and commercial studies at project conception, while subsidies and incentives have been crucial to the success of many large renewable energy plants.
The Ouarzazate Concentrated Solar Power (CSP) Plant in Morocco (see Appendix 2) is an example of how policy support helped generate investment in a non-commercially viable technology. A substantial subsidy from the government of US$ 1.2 billion, in the form of a Power Purchase Agreement above grid price covering the 25-year lifetime of the project, enabled the development of the project. The government and other sponsors are betting on the project contributing to the development of a CSP market that will bring longer-term benefits and economic returns.
In the case of the Walney Offshore Windfarms, the £1.3 billion project would not have been possible if not for the benefits provided by tradable green-energy certificates. These are expected to provide 60% of total project revenues worth £1.3–1.5 billion (US$ 2.1–2.4 billion) over the lifetime of the project, paid by regional energy suppliers through the United Kingdom Government’s Renewable Obligation Certificate scheme.
‘Wheeling and banking’ is another support mechanism that has brought success in India for wind energy. ‘Wheeling’ (electricity transmission and distribution) charges can be reduced to provide incentives for excess power to be fed back into the grid. When plants deliver more output than required – during high winds, for example – excess generation can be ‘banked’ with the transmission and distribution company. During low-wind seasons, the excess units are then drawn on.
Another policy tool that has been useful in reducing public-sector costs is ‘reverse auction’, whereby bidders compete to supply a service (such as electricity generation) at the lowest rates. The lowest rate is chosen as the default rate, keeping incentive costs lower for the public sector.78
Grants are often combined with technical assistance to maximize the impact of early-stage investment and also knowledge transfer. The Global Environment Facility (GEF) is the world’s largest public funder for environmental projects. Since 1991, the GEF has provided US$ 10.5 billion in grants, which has mobilized a further US$ 51 billion in co-financing for more than 2,700 projects in more than 165 countries. Successful projects such as Mexico City’s Metrobus project, wind energy development in Uruguay and watershed protection in Ecuador and Columbia (see Appendix 2) used GEF grant funding for technical assistance and advisory support to help encourage private-sector investment by creating national policy frameworks for green growth.
Technical assistance (Box 5 below) combined with finance from development banks and other lenders have helped promote market awareness among consumers, build the capacity of local institutions and train local staff, and develop and manage local green and climate-policy development. In Uruguay, for example, a joint project between UNEP and the Global Environment Facility provided a US$ 1 million GEF grant for technical advisory support around policy de-risking measures to address multiple barriers in the wind-energy market. As a result 40 megawatts of wind energy is now installed, and based on the policies developed using the grant/technical assistance resources, a further 880 megawatts of wind contracts are in the pipeline.
In 2011, only US$ 10–16 billion was provided in grant funding for climate-related investment, or 3% of flows.79 Scaling up grant funding offers a big opportunity, given the high mobilization of co-financing possible and the policy development support that it can provide.
Research from the World Resources Institute has shown that pre-investment activities can create attractive investment conditions for scaling up investment for green growth. The Institute provides a framework80 for allocating public finance for pre-investment, highlighting that early actions are needed to address various barriers, improving the effectiveness of public finance to strengthen policy and institutional conditions, and industry and financial sector conditions.
Box 5: Combining technical support with lending for energy efficiency: highlights from the European Bank for Reconstruction and Development (EBRD)
The EBRD supports green growth through its Sustainable Energy Initiative (SEI), which was launched in 2006 with the aim of scaling up sustainable energy investments, improving the business environment for sustainable investments and working closely with donors to develop effective measures to address barriers to market development. To date, the EBRD has financed more than 550 SEI projects in 31 countries, amounting to an SEI volume of more than 10 billion euros (about US$ 13.2 billion) and a total project value of more than 50 billion euros (about US$ 66 billion). Emission reductions achieved though these projects are estimated at 50 million tonnes of CO2 per annum, higher than the annual emissions of Hungary in 2010 and equivalent to almost 1.4% of the total emissions of the EBRD region.
To achieve this, the EBRD has developed a unique business model to finance sustainable energy projects, combining investments with technical assistance and policy dialogue. Technical assistance, which has amounted to 187 million euros (about US$ 246 million) since 2006, includes various activities, ranging from market analysis and energy audits to training and raising awareness. As part of its policy dialogue activities, the SEI works with governments to help develop strong institutional and regulatory frameworks that provide incentives for sustainable energy investments. The combination of these three activities provides strong support for sustainable energy investments.
An industrial project financed by EBRD in Ukraine showed how US$ 150,000 of donor funding for energy audits at the client resulted in loan financing totalling US$ 55 million, of which US$ 27 million was dedicated to energy-efficiency measures identified in the audits. For energy efficiency finance only, the leverage on the donor funds was 1:187.
To enable projects such as these, the EBRD has established an in-house energy efficiency and climate change team consisting of more than 30 specialists, including engineers, finance specialists and policy experts. This team works directly on projects with bankers and clients, and manages technical assistance projects for capacity building, technical advice, project implementation support and improving the investment climate for energy efficiency and renewable energy through policy dialogue.