How Cleantech Finance Can Rise to the Occasion

“No matter what you (negotiators) do, do not forget the power of subnational governments. 70 percent of emissions can be controlled with state and local policies.”

—Arnold Schwarzenegger, addressing the negotiators at the UNFCCC Paris Climate Conference on December 7, 2015

The mood in cleantech investing is changing. Activities connected to COP21 are lending a helping hand, just like former California Governor Arnold Schwarzenegger’s statement: it implies that if nations don’t act, cities and states will. Similarly, on the private investor side, just over a week into their announcement, Bill Gates & friends’ Breakthrough Energy Coalition and Mission Innovation have already made investing in cleantech R&D “sexier.”

At scale, clean energy will have to compete with the price of fossil fuel. Seen that Brent crude oil closed at just $40 yesterday (with a one-year forecast of $45) the momentum is especially welcome news. In real terms, oil costs a mere $10.5 in 1973 dollars, thus higher than the $3 per barrel before the first oil shock, but lower than the $12 after the OPEC embargo forty years ago.

COP21 is mainly about the negotiations of the world’s governments to come up with a carbon deal. Notwithstanding, two exciting things are happening on the private sector side of things.

First, the business community convening around COP/CMP meetings has been growing steadily in recent years, in both numbers and ambitions. This was one of the takeaways from the World Climate Summit and the Sustainia Award Ceremony on December 6, a day-long private sector companion activity to COP21, which showcased public and private sector commitments to building a low-carbon economy, as well as celebrating promising new clean energy startups.

This dynamic is leading to creative cross-fertilization. At the summit, former European Commissioner for Climate Action, Connie Hedegaard called for new business ideas in resource and asset efficiency, reminding the participants that the average car sits idle 96% of the time, and also faces congestion as well as looking for parking part of the time when in use. In the private sector community that has come to COP21 in Paris this year, there is tremendous excitement about new business models to tackle pretty much everything—be it establishing waste collection schemes in sprawling mega cities such as Lagos or technology plays around micro algae.

Second, and perhaps just as important, renewed creativity is being injected into the question how to deal with the consequences of the fact that not everything scientists and entrepreneurs come up with will end up working and return capital to investors. Investing in new low-carbon infrastructure moreover costs serious money. Cleantech finance is one area of investing according to a risk-return-(environmental) impact metric. It holds the key to taking innovations from an idea and prototype to a successful commercial product, or installing capacity on a massive scale.

Corresponding to the ample space for new business models and technologies to improve resource efficiency and clean energy generation and storage, it’s now time for cleantech finance to transcend the silos in which it often operates. Two fresh reports on climate finance and scaling up, released on December 5 by R20 Regions of Climate Action—the solutions-focused green economy nonprofit established in 2010 by former Governor Arnold Schwarzenegger to help spread the learnings of successful climate policies in California—and the USC Schwarzenegger Institute for State and Global Policy, seek to help achieve just that.

With up to $9 trillion of investments required to get the energy transition done properly, we now need to ask how we can optimize the cleantech investing ecosystem. Only if we make full use of the financial instruments at our disposal to properly price risk and intelligently use subsidies to de-risk investments can we expect to expand the capital pool.

In some areas, this is not hard. Green finance can pay off fast. Take street lighting, a well-established example. Only about one percent of electricity is used to light streets in the US, and about 1.3 percent in the EU. But this ticket item can nevertheless command upwards of 60 percent of municipal electricity spending in some areas. Each year street lighting accounts for 159 TWh of electricity globally. That is more than the annual output of three-dozen 500MW power plants. Advanced LED lighting is a technology we understand. It can cut energy usage, maintenance costs and reduce emissions. This all while delivering better light quality for improved visibility and community or workplace safety. The costs of the LED lights can often be recovered from the savings in avoided electricity costs in 36 to 72 months.

Unfortunately, many other opportunities have much longer payback times, or are much riskier altogether. That’s where government needs to de-risk. As Sir David King, the UK Foreign Secretary’s permanent Special Representative for Climate Change, pointed out at the summit, smart state intervention is essential if we want to get the market mechanism to work on the supply side of clean energy, and thereby drive down the cost of generation, storage and transmission through next generation technologies. Next to clear and stable regulatory parameters, cleantech investments need mechanisms that bring transparency to the market by drawing together players that can aggregate demand on platforms where risk can be defined and priced, next to clear benchmarks of success to allow further injections of capital. Layered investment structures and public-private-charity partnerships are often a key to mobilizing new capital and achieving investment periods that are viable for investors.

Among the initiatives recognized, the City of Johannesburg received a Sustainia award on Sunday for issuing the first green city bond in 2014. The city raised roughly $143m (ZAR1.46bn) from fixed-income investors to fund dual-fuel buses, waste-to-energy projects, and solar water heating. A member of the 78 cities in the C40 Cities Climate Leadership Group (C40) —a network of the world’s megacities which seek to reduce greenhouse gas emissions—its ten-year bond issue shows how to raise private sector funds with ring-fenced proceeds to finance climate change mitigation. The return is only 185 basis points above government bonds though. The big challenge going forward for these kinds of municipal investments will be to identify pipelines of measures that raise the overall competitiveness of the city to point where they can provide attractive returns to investors.

Cleantech finance has the tools to rise to the occasion. Collateralized savings, green bonds, loan guarantee programs and public layered investments, Public-Private Partnerships (PPPs) and tax credits can all play a productive role in crowding in private capital into the different segments of the investment universe. Pricing externalities and valuing co-benefits are important viability drivers in many such cleantech investments. Notwithstanding, large scale, bankable projects that utilize green assets as in the case of Johannesburg could hardly be more different from investing in the clean energy startups and the R&D, which we need to fund to fill the pipeline of next generation solutions in the first place.

The current momentum is inspiring. As the second week of COP21 is unfolding, it seems that the formal goal to decarbonize the economy may well make it into the language of the final agreement. Rising to the occasion, we can expect the players in the ecosystem made up of different investment vehicles and asset classes to take an increasingly holistic view of the different tools to fund mitigation and adaptation. This will optimize the interplay of public and private sector funding. Exciting times, for s

 

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