A Private Sector Perspective
on the Green Climate FundGori Olusina Daniel | PPP Practice Lead, Africa PPP AdvisorySeptember 2016
FACILITATOR BIO
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Gori Olusina Daniel Infrastructure & Capital Projects
PPP Practice Lead
M:+44 (0) 788 909 8103
T: +44 (0) 1322 27 9292
Gori is a senior Infrastructure and Capital
Projects Commercial Specialist and Project
Leader with over ten years’ experience of
commercial and financial due diligence, PPP
policy and contract management.
He has worked on large-scale public sector
infrastructure and concession projects, such
as the London Oyster smartcard and
Crossrail, and on a range of Transport and
Energy PPP, and Human Capacity
Development projects in Africa.
He also advises on joint ventures, mergers
and acquisitions, business development and
internationalisation strategies, investment
promotion and facilitation, public financial
management, business planning, strategy,
performance management, delivery and
change management.
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OVERVIEW OF THE GREEN CLIMATE FUND
BARRIERS TO CLIMATE PROJECT INVESTMENT
OPPORTUNITIES FOR LEVERAGING PRIVATE SECTOR FINANCE
CRITICAL ISSUES FOR CHANNELING CLIMATE FINANCE THROUGH THE PRIVATE SECTOR
TOOLS FOR MITIGATING RISK TO CATALYZE THE PRIVATE SECTOR
CONTENTS
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“KEY OBJECTIVES
Introduces the Green Climate Fund, describesits focus, highlights the mechanism foraccessing it, and distinguishes it from otherclimate funds
This presentation:
Provides an overview of the GCF Private SectorFacility
Considers the critical issues for channelingclimate finance via the private sector
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“INTRODUCTION
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“INTRODUCTION
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Source: Wilson Center’s Environmental Change and Security Program 2014
CLIMATE CHANGE HOTSPOTS
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INTRODUCTION
KEY QUESTIONS
How do we deal with a problem
whose effects are not equally suffered by those who cause
it?
How can the global community converge on a common policy
to preserve the earth for generations
yet unborn?
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“BACKGROUND
The GCF is a fund within the
framework of the United
National Framework
Convention on Climate
Change (UNFCC), and was
founded as a financial
mechanism to assist
developing countries in
adaptation and mitigation
practices to counter climate
change
MISSION
The GCF exists to expand
collective human action to
respond to climate change
and aims to mobilise
unprecedented levels of
funding to invest in low-
emission and climate
resilient development on our
home planet
The Green Climate
Fund is an important
response to some of the
most critical questions
facing our generation
and exists to:
Promote the paradigm
shift towards low-
emission and climate
resilient development
pathways
Maximise the impact of
its funding for
adaptation and
mitigation
OVERVIEW OF THE GCF
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OVERVIEW OF THE GCF
The GCF raises funds from state, regional, and city governments on an ongoing basis
Current resources in pledges from 43 countries amount to $10.3 billion of which $9.9 billion has been signed
By 2020 the GCF aims to raise $100 billion a year globally, from public and private sources
Only 19 of the 43 countries that have pledged to the fund have fully disbursed their signed pledges
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OVERVIEW OF THE GCF
Country Pledge in USD (millions) % Disbursed
1 USA 3,000 17%
2 Japan 1,500 25%
3 United Kingdom 1,211 33%
4 France 1,037 13%
5 Germany 1,003 25%
Table 1: Top 5 Contributors to the GCF
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Source: GCF Resource Mobilization Status Update ( as at September 10, 2016). Available at http://www.greenclimate.fund/partners/contributors/resource-mobilization
THE PRIVATE SECTOR FACILITY
Public sources for meeting the considerable levels of investment required for adaptation and mitigation efforts is limited
The GCF Private Sector Facility has been established to allow direct and indirect financing by the GCF for private sector activities
Climate Change poses a threat, but also creates commercial opportunities for the private sector
The private sector seek channels that can manage risk and support capital intensive projects through which to direct their climate finance investments
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PRIVATE SECTOR CLIMATE FINANCE
The potential for private investment is substantial,
but to unlock these flows, a range of existing country and project barriers will need to
be overcome
Prospective investments are expected to cover the full
costs of the project, including the cost of capital, and
achieve a return commensurate with the risks
Private firms make investment decisions based on a project’s commercial
viability
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CRITICAL ISSUES
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STRUCTURAL
Network Effects: Many technologies rely on networks to happen Fragmentation and Transactional costs: Many low carbon investments are small scale which
makes them difficult to deliver and typically leads to higher transaction costs. Agency problem: In energy efficiency, the person paying for the investment is often not the
one reaping the benefit Status Quo bias: Like with most changes, there is a bias in society for the status quo
FINANCIAL Revenue: Many fossil fuels still subsidized and carbon externality not yet consistently priced Higher Initial Capital Requirement: Low carbon technologies require high upfront cost
relative to high carbon technologies. However operating costs are relatively lower O&M Costs: O&M costs for solar and wind are low and this is primarily due to zero fuel costs.
However skill levels of local technicians may also be low, making repair and maintenance costartificially high.
Risk: Poor credit rating and unreliable equity betas (volatility of returns) of renewable energycompanies makes financiers rate risk as high. This is naturally exacerbated by new technologyrisk which has accounted for the notable failures of firms such as Solyndra.
TECHNICAL CAPABILITY
Immaturity: Markets are evolving and capacity needs to be built across the value chain includingin the financial community.
Awareness and education: Lack of awareness of opportunity and understanding of the technicalsolutions available as well as their financial benefits.
Inability to price risk: Inability to calculate an appropriate premium on risk due to limitedhistorical data; cross industry linkages make risk assessment more challenging
Technical solutions: Products are inferior or perceived to be inferior on some usage dimensions(e.g. the case for energy efficient light bulbs)
MITIGATING RISK TO STIMULATE PRIVATE
INVESTMENT
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Letters of credit
InsuranceProducts
LoanGuarantees
PolicydialogueandTechnicalAssistance
Credit Enhancement with Concessional Finance
PowerPurchaseAgreements
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REQUIREMENTS FOR CATALYZING THE
PRIVATE SECTOR
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REGULATION
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Should emphasize Renewable Portfolio Obligations (RPOS) -mandatory share of renewables in electricity mix. Both at national and sub national levels.
Power purchase agreements between off-takers and generators regulated to ensure fair pricing etc
POLICY
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Takes the form of a
policy that creates
an incentive to
directly increase
return on
investment, such as
feed-in-tariffs and
policy actions in the
financial sector can
play important
complementary role
to increase
investment at large
scale and required
pa
R&D INITIATIVE
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Stimulate primary
research and fund
valley of death
technologies to
commercialization
(see examples in US
Sunshot and ARPA-
E, Germany's Sixth
Federal Energy
Research
Programme and
China's 973 Program
CAPITAL INCENTIVES
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Capital incentives
help reduce
exposure to high
capital investment
(e.g. China's Golden
Sun, US ARRA,
SolarCity Buffalo
project etc)
FUNCTIONAL CARBON MARKETS
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Carbon markets with
adequate carbon
pricing mechanism
can provide a
significant revenue
source that can help
improve the returns
for private sector
projects in climate-
related areas.
In mature financial
markets, financing
can, in principle, be
raised against future
carbon revenues.
OPPORTUNITIES FOR LEVERAGING
PRIVATE SECTOR FINANCE
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YIELDCOS:
Yieldcos aim to exploit the predictable and low-risk nature of operational renewable projects toprovide high dividends to investors, often on a quarterly basis, making them attractive to manyinvestors. By establishing yieldcos, the original project developers and utilities can re-invest theproceeds to renewable project development activities.
GREEN BONDS:
Green bonds are themed bonds focused exclusively on low carbon investments. It offers anattractive way to access institutional investor capital as the risk and returns of the bonds aretypically determined by the issuer’s full balance sheet, not just green assets.
CONCESSIONAL FINANCE:
There is an increasing critical role for concessional finance to absorb the gap in risk-returnexpectation of the market for climate investment. Taking a small but adverse risk return positionin the financing of a program or a project than the private sector, enables the project to moveforward. Such structures hold the promise to unlock large private flows to low carbon investmentin developing countries for relatively small amounts of public funds
CONCLUSION
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Despite being one of the lowest carbon emitters; studies by the United NationsEnvironmental Programme (UNEP) suggest that damage from Climate Change, relativeto population and GDP, will be higher in Africa than in any region.
The GCF was established in 2010 to reduce greenhouse gas emissions in developingcountries, and help vulnerable societies adapt to the impacts of Climate Change.
The GCF includes a Private Sector Facility, which serves to ensure that private sectorinterests are aligned with national climate policies.
The private sector currently contributes the bulk of the investment in Green Climatefinance (World Bank, 2014); but the potential to unlock more of the investmentrequired to effect a paradigm shift from fossil fuels to more sustainable sources ofenergy requires a range of policy and market incentives to level the playing field bycorrectly pricing fossil fuel energy, and addressing the significant barriers that plagueinvestment in renewable energy and energy efficient projects.
As an Accredited Entity of the GCF, the AfDB can and should play a key role ininfluencing the policy of Regional Member Countries, and proactively address thebarriers to private sector investments through the provision of concessionaryfinancing, insurance products, loan guarantees, and other credit enhancementinstruments that improve the commercial viability of Renewable Energy and EnergyEfficierncy projects across the continent.
NOTES
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Africa PPP Advisory is a trading style of Adams & Moore’s Africa Practice and a subsidiary of AME Trade Ltd - organisers of the Africa PPP Conference and Showcase. For general enquiries or to see how we can assist you, please contact:
E: [email protected] T: +44 (0) 1322 27 9292 F: +44 (0)1322 27 83 83 W: www.africappp.com