The Year of Climate Finance: 2017 Outlook

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In the year following the signing of the Paris Agreement in 2015, there was an increased interest in building a broad spectrum of financial solutions that can both deliver on commitments to reduce global greenhouse gas emissions and deliver in the unique markets of disparate countries.

If those solutions are going to fulfill the needs of the commitments made under the Paris Agreement, then they have a lot of work to do. Data behind the climate change economy are staggering.

A November 2016 paper, Green & Resilience Banks, said $13 trillion in investments is required just to meet the pledges made by countries supporting the Paris Agreement. The paper added that, for a complete “low-carbon, climate-resilient economic transformation,” the world must invest $6 trillion per year by 2030. Green & Resilience Banks was developed by Coalition for Green Capital (CGC), Natural Resources Defense Council (NRDC), and Climate Finance Advisors, with financial support from ClimateWorks.

The paper highlights one solution to climate finance — the green investment bank — which has been steadily gaining traction for several years.

Jeffrey Schub, executive director of CGC, said that “we’re at a point now where a lot of people are interested in the idea of a green bank, but they still don’t know exactly what it is and how you create it.”

CGC is a nonprofit founded in 2009 to develop and aggregate know-how around green banks and help policy makers and other key stakeholders understand the concept of green banks. CGC and NRDC are co-administrators of the Green Bank Network, which was founded by green banks as a hub of information about this unique financial institution. The six founding members of the Green Bank Network closed transactions worth $22 billion as of November 2016, according to Green & Resilience Banks.

CGC also has been collaborating with the Organization for Economic Co-operation and Development (OECD), based in Paris, for a number of years on the topic of green banks.

So What is a Green Bank?

A green investment bank is a public entity established specifically to facilitate private investment in domestic low-carbon, resilient infrastructure. Currently, there are 13 green banks around the world, according to the OECD. Seven of the 13 are located in the U.S., and there is one each in the UK, Switzerland, Japan, Malaysia, Australia and the United Arab Emirates.

Schub said that, in the U.S., we will see more state green banks coming online this year, and we will see more innovation in the model of the institution itself.

The green banks in New York and Connecticut, for example, “are purpose-built, public or quasi-public entities that are heavily funded by state government,” he said. “I wouldn’t be surprised if we start seeing green banks that are private, nonprofit organizations that are funded by state governments but also funded by foundations.”

He said that creative applications will arise in the U.S. in an attempt to move more quickly and to make the institutions better-suited to draw on different capital sources.

Schub also said that the CGC, through the Green Bank Network, has had conversations with individual nations and development banks that are interested in understanding how green banks could be implemented in their markets. He said that, in 2017, those conversations are going to mature.

Substantial progress already has been made in India to develop a green bank, and Schub said it is likely that one will be formally established there this year. CGC, in cooperation with its partner, NRDC, has been developing the green bank opportunity in India. Schub said that an existing entity, called the Indian Renewable Energy Development Agency, is creating a green bank wing of the organization that will engage in innovative public-private partnership structure financing that is designed to leverage private investment with public dollars and take on more creative risk mitigation structure.

“India, as the third largest emitter in the world, would send a really powerful signal to have an institution like that,” Schub said.

Green Banks in Action

Green banks have the opportunity to focus funding on gaps in local investment by using a wide range of tools and approaches to attract and deploy capital, according to Green & Resilience Banks.

The paper provided the following tools as examples:

  • Co-investment through debt and equity; co-investments involve direct green bank investment in a project alongside a private investor
  • Risk mitigation and credit enhancements; green banks use a range of credit enhancements, such as loan loss reserves, loan guarantees and risk sharing mechanisms
  • Aggregation, warehousing and securitization; these solutions are critical to supporting small, disaggregated projects
  • While developed nations are making strong progress in green bank creation, identifying whether the above – or other – financial products can work in emerging markets is key to accelerating the green bank concept globally.

It is important to ask what market challenges exist in emerging markets that are not an issue in developed regions, Schub said.

Marchlyn Mawr reservoir, the high level water source for Dinorwig power station, a closed-loop pumped storage hydro facility in north Wales. Credit: Hefin Owen, Flickr.

We have to look at “matters like currency risk for foreign investments, or the fact that in many markets, utilities are not creditworthy offtakers. Having a PPA (power purchase agreement) with the utilities doesn’t make a project bankable in some countries,” he said.

Other Financing Trends

Corporate power purchase agreements (PPA) have become an important segment of the financial solutions advancing renewable energy development. They are increasingly used by global corporations — many U.S.-based — wherever they have assets.

Roberto Rodriguez Labastida, senior research analyst—energy, for Navigant, says the use of PPAs likely will grow, but we will see a ceiling in the segment soon.

“Corporate PPAs will flatten,” he said. “Most of the corporates have put their green targets in place, and most of those targets were put in place thinking that energy costs would continue to rise, and that perception now has changed.”

He said that corporations didn’t realize there were strong trends in cost reductions for renewables.

“I think now those trends are well-understood within corporate energy groups, so they will not rush to put products in place; they will go for the right structure for the right time to do it,” he said.

In the U.S., solar financing firm Open Energy is helping the commercial and industrial sector increase its use of low-cost solar power by standardizing loan processes for applicants.

The company has built an online financing center to make funding more accessible for borrowers, according to Open Energy Founder Graham Smith.

Open Energy’s customers are solar developers, who build and own solar installations at universities, schools, hospitals, or industrial companies, and establish PPAs with the project host.

“Because they make that [PPA] commitment, it allows groups like [Open Energy] to finance that commitment,” Smith said. “We can provide a loan and know that it’s going to be paid back throughout that period.”

Open Energy’s online portal stores and collates information that was traditionally handled manually, through repetitive paperwork processes, according to Smith. The portal makes the application process “cheaper and easier” for the borrower, he said.

Across the spectrum of those financial mechanisms that have driven renewable energy growth to date, the figures trend upward.

In a 2016 report on global trends in renewable energy investment, the Frankfurt School — UNEP Collaborating Center for Climate & Sustainable Energy Finance said that global investment in renewables for 2015 rose 5 percent to a record $285.9 billion.

In 2015, compared to the previous year, venture capital investments increased 36 percent; private equity expansion capital increased 32 percent; asset finance of utility-scale projects, such as wind farms and solar parks, increased 6 percent; and spending on local and rooftop solar projects less than 1 MW increased 12 percent.

Renewable energy finance is balancing out around the world, Navigant’s Labastida said. Latin America is growing well, with successful tenders for clean energy, and the solar market is booming in Africa and India. Meanwhile, regions that were traditionally leading in energy finance — especially Europe — “are going to be flat,” he said, noting that Germany already put its tender system in place and is very strict about how much new capacity it will allow.

The UK, he added, “is in disarray at the moment. Whatever is in the pipeline will happen, but we’ll have to wait to see what comes afterward.”

In the U.S., he said, it’s difficult to say what will happen under a new administration.

“Analysts say the PTC/ITC will continue, but the Clean Power Plan will probably not continue,” he said. “That is a constraint; I don’t see investment falling, but it will not be growing.”

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