Innovative climate finance mechanisms are trying to lure private-sector investment into the developing world

One of the biggest barriers to achieving the Paris Agreement’s ambition to limit climate change to 2C, and ideally 1.5C, is how renewable energy projects will be funded in developing countries.

The International Energy Agency estimated in 2015 that between 2015 and 2030 $2.7tr, or $180bn annually, would need to be invested in energy efficiency and low-carbon technologies in non-OECD countries to meet their individual goals for climate action, known as nationally determined contributions (NDCs). This estimate was made ahead of the climate conference, before all countries had made their climate pledges. Yet tracked renewable energy finance in developing countries in 2014 amounted to only about $135bn annually, according to Climate Policy Initiative.

Dario Abramskiehn, a climate finance analyst at CPI, points out: “Even interpreting developing countries’ NDC clean energy investment needs very conservatively at US$180 billion per year, it is clear that there is a significant shortfall between NDC needs and current tracked clean energy financing in developing countries.”

He says there are a number of barriers to increasing climate finance. Lack of availability of appropriate financing for renewables projects may be among the most prominent factors. However, this may result from larger challenges. These may include countries’ institutional environments (such as a lack of legal or property rights for foreign investors), limited availability of project finance, shortcomings in renewable energy policies (eg lack of power-purchase agreements), and political and economic instability.

In addition, certain developing countries are missing the grid infrastructure needed to expand clean energy capacities, and may not have the established value chains and human capital locally that are needed to develop projects.

Having an awareness of these potential risks without any detailed knowledge can also act as a deterrent to new investors from the private sector. “In lots of climate-friendly sectors there is a lack of private sector familiarity and comfort,” says independent climate finance expert Rick Nogueira. “It is important to get them to put their toes in the water and see that it’s safe. This usually involves making use of existing finance tools and adapting them to new sectors.”

Independent climate finance expert Rick Nogueira

Multilateral development banks (MDBs) can play a major role in breaking down these risks and presenting investors with clearer risk and return propositions. According to Nogueira, MDBs can create particular impact by supporting projects at early stages that aren’t attractive for private capital. “Private capital often complains about the lack of deal flow. Support of early stage development helps address this. Look at ACEF [African Clean Energy Facility] and the like.”

Among the MDBs, the European Investment Bank (EIB) has been at the vanguard in channelling investment into emerging market climate projects. EIB is among the world’s largest financiers of climate-related projects but it recognises the need to act as a catalyst for further investment, particularly from the private sector. “International financial institutions alone cannot tackle the enormous investment challenges posed by climate change,” says EIB’s Mónica Arévalo. Arévalo is senior investment manager in the EIB-advised Global Energy Efficiency and Renewable Energy Fund (GEEREF).

GEEREF, Arévalo explains, is an innovative financing vehicle, structured as a fund-of-funds, the aim of which is to finance the development, construction and operation of renewable energy and energy efficiency projects across developing and emerging countries. As a fund-of-funds, GEEREF principally invests through other specialised investment funds, or investment vehicles, into which it commits equity. These specialised funds, in turn, invest equity and work alongside local developers in the early-stage development and construction of the projects. GEEREF has successfully unlocked new private investment for clean energy and energy efficiency projects across Africa, Asia, Latin America and the Middle East.

Monica Arevalo, senior investment manager for GEEREF

Launched in 2008 with €112m in funding from the EU, Germany and Norway, GEEREF in 2015 successfully concluded its fundraising from private-sector investors, which brought the total funds under management to €222 million. To date, says Arévalo, GEEREF has invested in 13 funds, developing more than 85 projects in more than 20 developing and emerging countries.

“It is expected that GEEREF will be fully allocated by the end of 2017 and that, once all its investee funds have fully deployed their own capital, more than 150 projects across more than 25 developing and emerging countries will have seen the light thanks to its initial investment,” she explains.

GEEREF’s participation in the DI Frontier Market Energy & Carbon Fund and its successor fund, Frontier II, provides a good illustration of how the investment vehicle works. Both funds are managed by Denmark’s Frontier Investment Management, which only invests in “greenfield” projects (ie projects that are built from scratch) in the African renewable energy sector. GEEREF invested €10m in the original fund in 2011, giving other investors the confidence to follow and enabling the fund to raise a total of €61m. As the first projects from this partnership are coming to fruition, GEEREF has invested $21m of the successor fund’s $220m target, at its first close.

In April this year Siti 1, a 5MW run-of-the river hydropower plant in Uganda, commenced operations. The plant was developed by a company majority-owned by the Frontier fund and is the first of six in the country that will eventually have a generation capacity of 50MW of clean power.

It is difficult for clean energy projects to compete when countries subsidise fossil fuels (credit: Chris Kruge/Shutterstock)

Geothermal in Ethiopia

Another groundbreaking project in which GEEREF has invested is the Corbetti geothermal plant, Ethiopia’s first independent power project. The Corbetti volcanic caldera, 250 km south of Addis Ababa, is part of the Ethiopian Rift. Water travels through subterranean fissures in the earth, is heated by the surrounding volcanic activity, and turns into steam. Berkeley Energy, the fund manager of the Africa Renewable Energy Fund into which GEEREF invested in 2015, is harnessing the steam to create electricity. Within six years, the Corbetti plant is expected to have a capacity of 500 MW (approximately one quarter of the country’s total electricity usage) and enough to supply 10 million Ethiopians.

The real power of a fund like GEEREF is its ability to create an environment that gives others the confidence to invest: for every euro invested by GEEREF, it is expected that up to €50 will be deployed on the ground, including the equity and debt required for the development and construction of the projects. In the case of the Siti 1 development, the equity investment from the Frontier fund was able to raise further finance in the form of loan finance from FMO, the Dutch development bank.

While reducing risk for private investors is always desirable, there are a number of ways in which instruments such as GEEREF can improve the chance of success for projects as a whole.

“GEEREF was designed to not only catalyse private sector capital, but also to build capacity at the local level and contribute to the necessary transfer of knowledge and technology, to support the evolution of the commercial environments and enabling ecosystems for clean energy in these countries,” explains Arévalo.

“Indeed, the importance of involving the private sector in the development of renewable energy infrastructure goes beyond a simple provision of finance. Private investors ensure that beneficiary projects are run efficiently and contracts are designed properly, as they have incentives to keep their investments as safe and profitable as possible.”

A geothermal project in Kenya funded by African Development Bank (Frank Van Der Vleuten/Flickr)

‘No panacea’

Although funds like GEEREF clearly have great potential to connect emerging-market climate projects with private capital, they are not a panacea for the funding gap. More can be done on the part of developing country governments to attract investment.

According to CPI’s Abramskiehn, actions should include: creating stability in energy markets and procurement through vehicles like power-purchase agreements and feed-in tariffs; fostering institutional environments that facilitate foreign investment and allow developers to easily import equipment from abroad; making renewable development permitting and procurement processes simple and transparent; investing in modern grid infrastructure that will facilitate renewable energy project development; and phasing out counterproductive subsidies for fossil fuels; and expanding financial vehicles that are tailored to the needs of renewables.

Some areas will always struggle to appeal to the private sector and may remain beyond its reach. “Least developed countries and many small island developing states are a tough nut to crack and some may never make much private sector sense,” says Nogueira.

This article is part of a briefing on the renewable energy revolution. See also:

We need to move faster on renewables

Biomass a burning question for climate

Spotlight falls on energy storage


IEA  Climate Policy Initiative  EIB  GEEREF  geothermal  Frontier Investment Management 

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