Are Stars Aligning for Clean-Energy Financing?

Are Stars Aligning for Clean-Energy Financing?

photo: Maryland GovPics

How sovereign and hybrid funds may help address climate change 

One of the biggest bangs at the opening day of the Paris COP21 climate summit was without doubt the dual financing announcements by the Breakthrough Energy Coalition, led by Bill Gates and other high-net worth individuals, and the Mission Innovation, whose signatory governments have committed to doubling their allocations to clean-energy research. The two initiatives aim to increase financing for clean-energy innovation, from the basic research stage -funded by governments- to commercialization of promising new technologies -with venture financing provided by private investors.

In developing countries, where many households and companies have very limited access to energy, new clean-energy technologies will serve the dual purpose of expanding energy access and constraining carbon emissions. For this to happen, innovative thinking will be needed not only in the development of new technology, but also in financing the deployment of these technologies.

The two initiatives announced in Paris reflect the realization that carbon-dioxide emissions would continue to rise even if every commitment to cut carbon emissions were fulfilled. By 2035, the concentration of carbon in the atmosphere will already exceed the estimated levels required to maintain the internationally agreed 2 degrees Celsius limit. The development of new technologies will increase the options available to efficiently address climate change.

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Source: Global Apollo Program to Combat Climate Change

Leveraging to bridge the technology finance gap

Mission Innovation and the Breakthrough Energy Coalition aim to address the technology finance gap. Even if these initiatives turn out to be highly successful, the challenge still remains of substantially scaling up financing for the deployment of clean-energy technologies, including in developing countries. Pooling public funding and leveraging it with private sector capital could increase the uptake of existing and new clean-energy technologies.

Indeed a new trend is emerging in the deployment of public capital: an increasing number of governments are considering the use of investment structures that combine public and private capital, mainly for the purpose of infrastructure investment and venture financing for young firms. This trend has been underpinned by shrinking government budgets since the 2008 financial crisis, a persistent infrastructure financing gap, and a realization that the active involvement of private capital is critical for the achievement of national development goals.

Climate-smart sovereign and hybrid investors

Global public funds are a convenient way to pool individual countries’ resources for the common purpose of addressing climate change. But multilateral funds’ resources are insufficient to meet countries’ needs for clean-energy investment. Could national or regional government-owned strategic investment funds, or public-private “hybrid” funds also become important actors in financing the deployment of climate-smart energy?

Public-private” hybrid” funds could be another possible investment vehicle to support or fast-track the uptake of climate-smart energy infrastructure. These funds manage pools of combined public and private capital, and may offer a variety of investor return-enhancing mechanisms, including differential timing of investment draw-downs of public and private investors, leveraging the returns of private investors with publically provided debt, capping the profit entitlement of the public investor, and partial guarantee of compensation to the private investor for loss of invested capital.

A central issue for publically owned or capitalized funds is the independence of investment decisions from political pressures. In “hybrid” funds, investment decisions are left in the hands of a private general partner, with countries participating as limited partners. The capital of strategic investment funds and sovereign wealth funds may be managed internally and/or externally, subject to governance and transparency requirements, as well as market-based checks and balances including co-investment and partnership arrangements.

A new way to address climate change

Climate change has already generated a considerable amount of financial innovation, notably emissions trading and green bonds. Following the lead from Paris, this innovation must continue. Sovereign and hybrid funds may have a significant role to play in the provision of truly patient capital for clean-energy infrastructure.

 

The views expressed in this article are not necessarily those of the World Bank.

The authors are grateful to Nina Vucenik and Jacob J. Kloeper-Owens for editorial assistance

2 Responses to "Are Stars Aligning for Clean-Energy Financing?"

  1. grkumar   January 13, 2016 at 7:14 pm

    The idea of government funding young start ups and new ventures is not new not novel and not designed in any way to revive failing economies. Alternative energy solutions have been around for some time now. Wind and solar won't be the energy solutions for tomorrow. They are inefficient unless one covers half the planet with these ugly structures, then discover not only that they are only capable of supplying a fraction of the energy consumption of the world by then.

    The downward price spiral of oil is more of a politically engineered event than it is a function of the markets. Oil for energy is only about 20% of what crude oil (fossil fuel) produces in petroleum kerosene and other liquid fuels. The rest of the by products of crude oil we cannot reproduce with wind or solar. These are the chemical by products which is where demand really is and cannot be substituted as efficiently as crude oil refined can.

    The opening up of previously dormant or strictured economies did not end with the fall o the wall and the advent of Deng's "to be rich is glorious". There is yet a central Asian boom to come, Africa and Latin America and a resurgent resilient Asia. And to re tool to suit greenies and their eunuchs in government will be a costly exercise in futility.

  2. simsilla   January 14, 2016 at 7:48 am

    Hi, you mention hybrid funds. Are there any already?