Unlocking climate finance for decentralised energy access

Unlocking climate finance for decentralised energy accessIIED and HIVOS Working Paper, June 2016

Note: Climate finance figures are based analysis of the Climate Funds Update (CFU) database, which covers public finance for all major international climate funds

Climate finance allocation for energy

Decentralised energy access: finance needs vs allocation

The estimate of USD 23 billion is from World Energy Outlook, IEA 2011

INVESTMENT NEEDS (USD BILLION/YEAR)

Total needs 48

Current (in 2009) 9.1

Business-as-usual projections 14

Additional financing needed 34

Electricity

On-grid 11

Mini-grid 12.2

Off-grid 7.4

Cooking

LPG 0.9

Biogas systems 1.8

Advanced biomass cookstoves 0.8

Total additional financing needed for decentralised energy (electricity and cooking)

23

Additional financing needs for grid-based and decentralised energy

Source: IEA 2011

Who needs finance and for what?

• Energy userse.g. to pay for products, equipment, maintenance

• Energy providerse.g. R&D, feasibility analysis, piloting, buying inventory, business growth

• Financial institutionse.g. concessional finance to channel to providers, risk guarantees

• Governmentse.g. policy, regulatory and market development, capacity-building

Status of climate finance (CFU database): Of 35.3 bn USD bn pledged, 14.1 bn has been approved

Mitigation: focus on middle income countries via loans

Clean Technology Fund channels largest share of mitigation finance

Status of 5.6 bn climate finance allocated to energy…

40% of climate finance flowing toward energy projects

Distribution of energy finance: preference for loans to utility-scale projects in middle-income countries

Utility-scale solar, wind & geothermal receive largest share

Distribution of grid-based and decentralised energy supply projects in low-income countries

Key barriers to flow of international public climate finance to decentralised energy access

General barriers

• High risks (perceived, actual)

• Investor returns and short-termism

• Investment size and transaction costs

• Policy and regulatory environment

• Shortage of business models or quality plans

Climate finance barriers

Preference for loans versus grants

Approaches of financial intermediaries

Priorities of funds’ results frameworks

Innovation on the ground: lessons from Bangladesh and Nepal

• High-level policy enablers

• Special agencies to aggregate and channel funds to small-scale (eg IDCOL, AEPC)

• Holistic, market-building approach

• Mix of financing instruments for users, providers & financial intermediaries

• Regulatory push by central banks

Recommendations

1. Improve targeting of Climate Funds to decentralised energy access in low-income countries

• Map funding priorities versus needs

• Earmark funds for decentralised energy

• Adjust design features – investment criteria, risk appetite, results framework

• Get the right balance of loan and grant funding

• Channel finance through entities with capacity to fund small-scale eg special agencies

Recommendations

2. Strengthen national enabling environment

• Use climate finance to support policy and regulatory reforms

• Strengthen institutions for managing climate finance in low-income countries

3. Fill knowledge gaps

• Research and communication for stakeholders to understand finance gaps, needs and sources

• Lesson-sharing between countries on innovative mechanisms and enablers

Neha Rai, IIEDneha.rai@iied.org

Sarah Best, IIED sarah.best@iied.org

Eco Matser, Hivos eco.matser@hivos.org

Contacts

References

Rai, N, Best, S and Soanes, M (2016) Unlocking climate finance for decentralised energy access. IIED, London.http://pubs.iied.org/16621IIED.html?c=energy