Renewables revolution still needs public funding push

The diffusion of clean technology such as wind and solar power requires accessible finance to build and sustain new markets, writes Green Climate Fund’s Simon Pollock.

Solar powered ger in Mongolia
A family in Tarialan in Mongolia uses a solar panel to generate power for their ger, a traditional Mongolian tent. Air pollution in the country is making the case for renewable energy more attractive. Image: United Nations Photo, CC BY-NC-ND 2.0

Attempts to meet rising energy demand without damaging the planet irreparably are not for the faint-hearted.

In its most recent estimate, the International Energy Agency (IEA) predicts we will need to provide energy for a rapidly urbanising world equivalent to adding another Shanghai every four months—stretching out to 2040.

This will require a 30 per cent expansion of current energy demand within only a little over 20 years from now, when we are already facing a major challenge in reducing energy-sourced greenhouse gas emissions.

While future predictions often crash in contact with reality, there is no doubt that if current rates of economic development, urbanisation and population growth (including a burgeoning middle class) continue, energy demand will spike upwards.

Renewable power can help provide a solution, and matches the UN Sustainable Development Goal of providing clean energy for all. But where will the huge investment needed come from?

There is a recognition that businesses will have to pitch in the trillions of dollars necessary to keep global warming well below 2 degrees Celsius, as governments have agreed. Will the private sector be able to fill the gap in renewables financing?

These are vital questions if we are serious about using sustainable energy to maintain the comfortable lives of the relatively well-off, while at the same time allowing poor people to improve their lives by enhancing their access to power.

recent report by the IEA offers encouraging news, showing renewables recorded the highest growth rate of any energy source in 2017, meeting a quarter of global energy demand growth.

Meanwhile, the International Renewable Energy Agency (IRENA) has found the private sector provided over 90 per cent of investment in renewable energy in 2016. And the price of solar and wind power continues to drop – 80 per cent for wind, and 30 to 40 per cent for solar since 2009.

While there are positive signs indicating the private sector is becoming the main dynamo driving a renewables revolution, it is also evident that concessional financing from public coffers is still required.

Investment assurance

The diffusion of paradigm-shifting technology such as wind and solar power still needs accessible finance to build and sustain new markets, especially in under-capitalised developing countries. And that is where global sources of public financing such as the Green Climate Fund (GCF) come in.

Set up in 2010 to provide equal amounts of funding for climate change mitigation and adaptation in developing countries, the GCF has a mandate to stimulate private-sector investment in climate finance.

The GCF has the potential to play an increasingly important part in reducing the risks for businesses considering investments in renewables in developing countries, believes Alexandra Boakes Tracy, a representative of the Climate Markets and Investment Association who provides regular advice to the GCF as its private sector active observer.

“New technology can be—often wrongly—seen as unacceptably risky, especially if local supply chains are not well-established. Add to that cross-border risks, which include the possibility of sizable interest rate fluctuations, and you have a strong need for outside funds to provide investment assurance,” she said.

And goodwill alone will not be enough to initiate these investments. While many investors want to make sustainable decisions, the private-sector imperative means businesses need to make profits, said Tracy, who is also the president of Hong Kong-based Hoi Ping Ventures.

For Rajeev Mahajan, who specialises in project finance at the GCF, private-sector investment is key to developing low-carbon energy in developing countries, which present an opportunity to avoid entrenching fossil fuel-based power production in industrial and infrastructure expansion.

“The rapid growth of populations and economies in many developing countries means we must act now to ensure that the establishment of new energy infrastructure is low-carbon,” said Mahajan. “GCF’s ability to take on higher levels of risk, and offer long-term concessional finance is key to unlocking new markets for renewables.”

He pointed to GCF collaborative projects in EgyptKazakhstan and Zambia as showing the private sector can be encouraged to invest, provided the conditions are right.

Public acceptance

In Egypt, the GCF’s investment with the European Bank for Reconstruction and Development (EBRD) is financing what is set to be the world’s largest array of solar power by leveraging debt financing.

In Kazakhstan, the GCF has just completed its largest disbursement to date of $86.7 million. Also joining with the EBRD, financing in this project encourages Kazakh business people to invest in renewables by offering concessional, long-tenor loans.

Meanwhile, the GCF is planning to work with the African Development Bank in Zambia to support the government’s renewable energy feed-in tariff to develop mostly solar power.

While there are positive signs indicating the private sector is becoming the main dynamo driving a renewables revolution, it is also evident that concessional financing from public coffers is still required.

While the strategic assistance of financial sources such as the GCF and development banks help reduce the risk of doing business in renewables, the provision of broader benefits is also often necessary to win public support beyond the profit incentive.

Two GCF-supported projects in Mongolia—one helping set up a solar power plant and the other making it easier to provide loans to smaller companies investing in renewables and energy efficiency—share a similar goal in helping the country leapfrog to 21st-century clean energy.

The president of XacBank, a leading lender in Mongolia partnering with the GCF in both projects, stresses how renewables will help transition the country from its reliance on coal power for 95 per cent of national energy needs, and address what Unicef terms Mongolia’s “air pollution crisis”.

“While half the population lives off the land as traditional herders, increasingly erratic weather is leading large numbers to move to the cities where many burn coal in open stoves,” explained XacBank President Amar Hanibal.

The GCF and XacBank’s collaboration in supporting Mongolia’s nascent low-carbon energy market is designed to change these polluting practices, as well as helping phase out Soviet-era coal power plants which feed the country’s main electricity grids. 

Profit may be the main motivator driving Mongolia’s new wave of low-carbon entrepreneurs, but the battle against air pollution will help win public support for a shift to renewables, Hanibal said.

This pattern of merging profits and public benefit is likely to be replicated in other developing countries searching for an escape from outmoded convergences of power and pollution, where emissions rise with energy demand.

Simon Pollock is Communications Officer at the Green Climate Fund. This story was published with permission from Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, women’s rights, corruption and climate change. Visit news.trust.org.

 

Like this content? Join our growing community.

Your support helps to strengthen independent journalism, which is critically needed to guide business and policy development for positive impact. Unlock unlimited access to our content and members-only perks.

Most popular

Featured Events

Publish your event
leaf background pattern

Transforming Innovation for Sustainability Join the Ecosystem →