Financial de-risking to unlock Africa's renewable energy potential

Sweerts, Bart; Longa, F. Dalla; Zwaan, Bob van der

doi:10.1016/j.rser.2018.11.039

Cited by 108 publications

(55 citation statements)

References 32 publications

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“…These measures are not necessarily limited to countries receiving investments, and multilateral organizations, such as development banks, employ them equally. The UNFCCC Green Climate Fund (GCF) with a target value of US $100 billion/yr by 2020 is expected to play an important role in financial de-risking and delivering the required investment levels for the large-scale renewable energy projects in developing countries in line with the Paris Agreement [24].…”

Section: Addressing Green Investment Risks Via De-riskingmentioning

confidence: 99%

Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects

2020

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The lack of long-term financing, the low rate of return, the existence of various risks, and the lack of capacity of market players are major challenges for the development of green energy projects. This paper aimed to highlight the challenges of green financing and investment in renewable energy projects and to provide practical solutions for filling the green financing gap. Practical solutions include increasing the role of public financial institutions and non-banking financial institutions (pension funds and insurance companies) in long-term green investments, utilizing the spillover tax to increase the rate of return of green projects, developing green credit guarantee schemes to reduce the credit risk, establishing community-based trust funds, and addressing green investment risks via financial and policy de-risking. The paper also provides a practical example of the implementation of the proposed tools.Energies 2020, 13, 788 2 of 18 technological progress and cost reduction. Thanks to the technological progress, costs of renewable energy technologies reduced drastically. For example, solar PV module prices have reduced by around 80% since the end of 2009 and wind turbine prices have dropped by 30-40%. Although this is good news on one side, it prompts investors to pause to see how much the prices will drop on the other side.All in all, it is important to take the necessary steps for mitigating the risks of green financing to unlock the participation of financial institutions in these projects [4]. One solution is to incentivize non-banking financial institutions (NBFIs), such as pension funds or insurance companies, to engage in green energy projects. The advantages of pension funds and insurance companies over banks are that these institutions pursue asset-liability matching and their resources are long-term (10, 20, or 40 years). Insurance companies or pension funds can finance infrastructure projects, including large green energy projects such as large hydropower, as they are long-term projects (10-20 years). Therefore, it is very important to develop pension funds and insurance companies in developing countries to fill the financing gap of infrastructure projects, including energy and green energy projects [4].A good example of the role of non-banking financial institutions in unlocking green investment comes from Australia. The Powering Australian Renewables Fund (PARF) is a financing initiative that AGL Energy of Australia created and has $2-3 billion funds targeting to unlock the investments in large-scale renewable energy projects by diversifying the risks and reducing the financing costs. A partnership with the Queensland Investment Corporation (QIC) established the fund in 2016 on behalf of its clients, the Future Fund and those investing in the QIC Global Infrastructure Fund. The target is to accelerate Australia's transition to a low-carbon economy with the potential to meet 10% of the Federal Government's Renewable Energy Target (RET).One point that is important to consider is that public fina...

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Section: Addressing Green Investment Risks Via De-riskingmentioning

confidence: 99%

Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects

2020

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“…Capital market imperfections and distinct sovereign risk perceptions impact the weighted average cost of capital (WACC) 4 . It also limits the public capacity to de-risk activities with high 4 The WACC for renewable energy projects in Africa varies from 8% to 32% in a sample of 46 countries (Sweerts et al, 2019). For better rated European countries ( Figure B.1, Appendix B), the capital cost in 2017 varies from 1.43% (France) to 4.53% (Greece).…”

Section: The Role Of the Public Sector In Climate Financementioning

confidence: 99%

“…There is often uncertainty on environmental costs of projects which provides incentives for reducing the risk premia through public investment (Arrow & Fisher, 1974). This is also true for the implementation of renewable energies, especially in developing countries: the higher fixed and upfront costs vis-a-vis fossil fuel projects demand a de-risking effort for green investments (Ondraczek et al, 2015;Sweerts et al, 2019;Waissbein et al, 2013).…”

Section: Introductionmentioning

confidence: 99%

De-risking of Green Investments through a Green Bond Market: Empirics and a Dynamic Model

2020

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A substantial increase of green investments is still required to reach the Paris Agreement's emission targets. Yet, capital markets to expedite green investments are generically constrained. Literature has shown that governments could de-risk such investments. Empirical beta pricing and yield estimates reveal some public involvement in the green bonds market, especially for long maturity bonds. We provide empirical evidence that Governments and Multilateral organizations can de-risk green investments by supporting the issuance of green bonds in contrast to private green bonds-that show higher yields, volatility and beta prices-and conventional energy bonds, that are more volatile due to oil price variations. Since lower betas also mean lower capital costs, we use those empirical results and run a dynamic model with two types of firms, modeling the economic behavior of innovators (renewable energy firms) and incumbents (fossil fuel firms). The simulations of our model show that de-risked interest rates help to phase in renewable energy firms in the market and avoid a sharp debt increase. However, when the new entrants carry negative pay-offs for a longer time, it might not be sufficient to keep the debt low and to avoid a shake-out in the market. Subsidies and carbon taxation can complement the role of the de-risked interest rates and expedite the energy transition. Beside deterministic model variants, we also explore a stochastic version of the model.

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“…A lack of access to electricity and modern energy services is often cited as a factor that perpetuates poverty and inequality in the Global South (Urban 2018;McCollum 2018). SSA with an electrification rate of 35% is arguably the least electrified region in the World (Sweerts et al 2019;Newell, Bulkeley 2016) and also the region with the most number of LDCs. SSA's energy deficit is so dire and retrogressive to the extent that the current low rates of electrification in many African countries is considered as the most pressing obstacle to economic growth, more important than access to finance, red tape or corruption (IEA 2016).…”

Section: Sdg 7 Implementation In the Global Southmentioning

confidence: 99%

“…Outside the scope of these countries it might therefore be argued that more efforts will need to go into building strong institutions and favourable policy environments so as to improve the financing and technology transfer of renewable energy technologies. This follows that the two critical obstacles for the deployment of renewable energy technologies in Africa include the difficulty of attracting sufficient and affordable finance (Sweerts et al 2019), and developing business models that can promote renewable energy technology transfers. Since the costs of various renewable energy technologies are drastically decreasing, it also means that the cost-competitiveness of renewables with fossil fuel alternatives will keep on improving (Tonkonogy et al 2018).…”

Section: Accelerating Rural Electrification Through Ndcs and Climate mentioning

confidence: 99%

The Emerging Threats and Opportunities for Implementing Nationally Determined Contributions (NDCs) and Sustainable Development Goal 7: Policy Insights from sub-Saharan Africa and Malawi

Chirambo¹

2020

CEREM

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Aim: Despite the implementation of the Sustainable Development Goals (SDGs) and Nationally Determined Contributions (NDCs) to reduce climate change vulnerability and inequality particularly in the Global South, it is probable that the SDGs and NDCs might not achieve their objectives. The aim of this article is to identify how countries in Sub-Saharan Africa (SSA) can address their climate change governance and cross-sector coordination challenges in order to reduce climate change vulnerability and augment SDG 7 (universal energy access) implementation. Design / Research methods: A qualitative content analysis was undertaken using research articles, project reports, a case study and policy briefs exploring the nexus of climate change governance, SDG 7 implementation and SDG 13 implementation in the context of SSA and Malawi. Conclusions / findings: The study suggests that climate change governance and attaining SDG 7 in the Global South might be improved by harmonising NDC activities so that NDC activities can be aggregated and monitored from a regional perspective similar to the case of the Clean Development Mechanism (CDM) Programmes of Activities (PoAs). Originality / value of the article: The paper is of value to global policy makers as it shows that increasing climate change ambitions and ratcheting-up in the context of SSA should include increasing the deployment of renewable energy technologies as well as initiating new international institutional arrangements for climate change governance through South-South Climate Change Cooperation modalities. Keywords: Clean Development Mechanism (CDM), climate finance, renewable energy, South-South Climate Change Cooperation, Sustainable Development, Malawi. JEL: G38, O13, O55, Q01, Q28, Q54, Q56.

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Financial de-risking to unlock Africa's renewable energy potential

Cited by 108 publications

References 32 publications

Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects

Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects

De-risking of Green Investments through a Green Bond Market: Empirics and a Dynamic Model

The Emerging Threats and Opportunities for Implementing Nationally Determined Contributions (NDCs) and Sustainable Development Goal 7: Policy Insights from sub-Saharan Africa and Malawi

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