Energy access Energy Renewable efficiency energy Prepared by Finance Committee Report 2015 SE4All Advisory Board’s Finance Committee Report on Scaling Up Finance for Sustainable Energy Investments 4 July 2015 P repared by i Table of Contents Cover Note iii 3. Sources of Capital and Financing Instruments 51 Foreword by Mr. Ban Ki-moon, iv Risks and Investors United Nations Secretary-General Identifying New Pools of Capital 53 Foreword by Dr. Jim Yong Kim, v World Bank Group President Prioritising Risks and Structures 60 Preface vi Thematic Areas Introduction 1 Overview 66 Executive Summary 3 Scaling Up Green Bonds 68 DFIs and Risk-Sharing Structures 73 1. Characterising the Market Opportunities 7 Energy Access 10 Enabling New Insurance Solutions 85 Renewable Energy 14 Aggregating Smaller Opportunities 90 Energy Efficiency 18 Analysis of Reference Countries 21 4. Recommendations 99 Selection 22 Access to Finance 24 Benchmarking 26 Annexes: Supporting Material 106 Model Assumptions for Energy Access 107 2. Increasing the Deal-flow 28 Project Appraisal Criteria 108 Enabling Environment 30 Menu of Project finance de-risking approaches 109 Project Preparation 36 Green Bond Principles 113 SE4All Finance Committee Members 114 3 Finance Committee Report 2015 Cover Note The Advisory Board constituted four committees, one each on Access, Renewables, Energy Efficiency, and Finance. Each committee is co-chaired by Advisory Board members and is supported by a member of the GFT. The Finance Committee is supported by Mr. Mohinder Gulati, Chief Operating Officer ([email protected]). Most committees also invited non-Advisory Board members to participate on a thematic basis to draw on expertise and experiences that could enrich the debate and analysis on the topic area under discussion. The Access Committee has focused on the decentralized, off-grid, mini-grid and clean cooking elements of the access challenge. Its deliberations include policies, business models and financing of on mini- /off-grids, as well as enterprise-based solutions for energy services provision. The Committee will continue to provide advice and recommendations to support the goal of achieving universal energy access focusing on diverse approaches to decentralized energy, energy enterprise development and financing models that can be used by governments, entrepreneurs, social enterprises, NGOs or other local organizations. Key messages from the Access Committee are to promote Country Action Agendas as coordination and implementation tool for SE4All objective and proposed SDG7; support financial innovation to attract private sector to mini-grids and decentralized solutions; support gender-sensitive energy solutions; and encourage governments to strengthen policy and regulatory environment. The Renewable Energy committee has focused on developing recommendations to achieve the objective by 2030, and initiating a set of game-changing initiatives/instruments in support of the renewable objective. The Committee set out three priority areas: knowledge management, policy and regulation, and public support. IRENA’s REmap 2030 is a roadmap to double the share of renewable energy by 2030. REmap 2030 is the first global study to provide renewable energy options based on a bottom-up analysis of national resources. The Energy Efficiency Committee has organized a series of dialogues on Energy Efficiency resulting in establishment of a global energy efficiency platform with a number of ‘accelerators’ in a selected number of sectors (i) buildings, (ii) lighting, (iii) motors, (iv) appliances, (v) district energy, (vi) industrial energy efficiency (large industry, small and medium size enterprises, and energy sector itself), and (vii) transportation. A working group is responsible for work program of each accelerator. The Finance Committee’s focus is on (i) defining the market opportunity i.e. countries, sub-sectors of energy, typology of projects and the size of financing-deficit to be addressed for the developing countries; (ii) sources of capital and financing instruments: to prepare a review of investors, transaction structures, financing instruments, and optimization of risk; (iii) preparation and implementation of bankable projects: to identify typical project sponsors in the energy sector. The Finance Committee co- chaired by Dr. Luciano Coutinho, President of the Brazilian National Development Bank (BNDES) and Mr. Purna Saggurti, Chairman of Global Corporate and Investment Banking, Bank of America Merrill Lynch prepared a draft report that was presented to the Advisory Board in June 2014. Since then the report was circulated for review and comments. The Committee gratefully acknowledges very insightful and constructive comments received from members of other three Committees, ADB, Brazilian Ministry of Energy, Carbon War Room, EIB, GEF, Korea Eximbank. This report presents conclusions and recommendations of the Finance Committee and reflects comments received from reviewers. Key messages of this report are: to generate a healthy pipeline of bankable projects support project development funds; encourage governments to improve legal, policy, regulatory environment and institutional capacity; systematically deploy de-risking instruments to attract private sector investments; DFIs should consider leveraging at project, portfolio and balance-sheet level; improve governance of power utilities to rapidly increase access through grid and equally importantly facilitate decentralized solutions, improve operational and financial efficiency, and scale up investments in renewables; support robust aggregation mechanisms for base-of-pyramid investments. iii Finance Committee Report 2015 Foreword by Mr. BAN Ki-moon, United Nations Secretary-General 2015 is the year for global action for people and the planet. The international community has agreed on an inspiring new 2030 Agenda aimed at ending poverty and building lives of dignity for all. Sustainable Development Goal 7 – one of 17 that will guide our work – calls on Governments and all their partners to work together to “ensure access to affordable, reliable, sustainable and modern energy for all”. Governments are also committed to reaching a universal and meaningful agreement at the climate change conference in Paris in December. Energy is at the heart of this effort, too, as we strive to seize the great opportunities of renewable energy and a low-carbon pathway. Turning these agreements into reality will depend crucially on mobilizing resources. This timely report from the Finance Committee of Sustainable Energy for All’s (SE4All) Advisory Board points the way towards solutions. It describes four financial instruments with a combined potential to raise an additional $120 billion in annual investments by 2020. I thank the Finance Committee for its work, and in particular the Brazilian Development Bank, Bank of America, the World Bank and the Sustainable Energy for All Global Facilitation Team, which led the drafting. Sustainable energy is the thread that links economic growth, increased social equity and a healthy environment. I hope the recommendations in this report reach a wide global audience and help us to take the steps we need in this decisive year. Finance Committee Report 2015 Foreword by Dr. Jim Yong Kim, World Bank Group President Bringing modern energy services to the world’s poor while transitioning toward a more sustainable future is a defining challenge of our time. Achieving SE4All’s three goals by 2030—universal energy access, doubling the share of renewable energy in the global energy mix, and doubling the rate of improvement in energy efficiency—will require innovation and increased investments in clean energy technology. Official development assistance and concessional financing are cornerstones of this effort, particularly for increasing energy access in developing countries. The global need, however, far outstrips what public resources can provide. It is our responsibility to use public funds to attract private sector funding and investments of all kinds. Ultimately, the private sector will be a critical piece in achieving our energy goals. To achieve these three goals, clean energy inves tments need to nearly triple from the current $400 billion a year, to more than $1 trillion a year. This report points to some of the potential solutions: green-bond issuances; de-risking investments through insurance products and other instruments; and improved structuring and bundling of small-scale energy projects. At the same time, countries can improve their investment climates by strengthening sustainable energy policies, removing trade barriers, improving the performance of utilities, and ending fossil fuel subsidies. The good news is that the world is acting on these fronts—countries and businesses are testing new policies and financial approaches; we’re seeing advancements in clean technologies; modern energy services are increasingly reaching poor and remote communities; and investments in renewable energy and energy efficiency are growing. With this momentum and collective action, we can put in place the solutions and recommendations of this report. This pivotal year presents opportunities to make energy available to the hundreds of millions who need it, and we stand ready to support countries with their reform and investment agendas. Together, we can end energy poverty in our lifetime. Dr. Jim Yong Kim The President of the World Bank Group, Co-chair of the SE4All Advisory Board v Finance Committee Report 2015 Preface Energy has become the central theme in discussions on alleviating poverty, promoting economic development and improving quality of life of people. The ambitious goals that the international community is setting to achieve sustainable development and address climate change require creative collaborations and finding new and innovative solutions. The UN’s Sustainable Energy for All (SE4All) initiative, a multi-stakeholder partnership, has encouraged governments, international organizations, private sector and civil society to take prompt actions to address these global issues and provided a unique platform for collaboration. With its three interlinked objectives—ensuring universal access to modern energy services, doubling the global rate of improvement in energy efficiency, and doubling the share of renewable energy in the world’s energy mix, all by 2030—it provides a road map for a better future in which progresses in other areas from health and education to job creation and gender equality are promoted by affordable, reliable and sustainable energy. However, none of this would be possible without scaling up investments in sustainable energy. Most recent estimates show that annual investments need to be increased by an additional US$650 billion over its current levels of US$350 billion. SE4All’s Advisory Board had set up four committees- one each for Access, Energy Efficiency, Renewables, and Finance. We are pleased to submit the Finance Committee Report. We examined opportunities for public and private investment that could help achieve these three SE4All goal of reliable, affordable, sustainable modern energy for all expected to be enshrined in the potential post-2015 Sustainable Development Goals. This Report brings together innovative ideas on scaling up finance for sustainable energy investments and makes concrete recommendations based on in-depth analysis and the latest research outcome of SE4All’s partner organizations. Annual investments of about $1 trillion are needed from both public and private sectors to reach the objectives of SE4All. To attract more private sector investment, this Report identifies four broad investment themes which have a potential of raising additional annual financing of $120 billion until 2020 for scaling up finance for sustainable energy both in developed economies and emerging markets. Building upon the success, the pace and scale of financing could be ramped up. This document is organized into four sections. The first section reviews the size of the financing challenge and segmenting of the market opportunity in both developing and developed economies. The second section provides an overview of some of the prerequisites to achieve a significant increase in sustainable energy infrastructure investment and on increasing the deal flow in emerging markets. The third section reviews various innovative approaches that are being developed to attract more private sector investment, with a particular focus on leveraging public sector funds and assets. In the last section, the Report provides key recommendations focusing on specific actions for each type of stakeholders over the short and long term to achieve the Sustainable Energy for All goal. Finally, the SE4All Advisory Board’s Finance Committee would like to express thanks to the task team from Bank of America Merrill Lynch, the Brazilian National Development Bank (BNDES), the World Bank Group and SE4All Global Facilitation Team for preparing analytical inputs, consultations, drafting and updating this Report. The Committee gratefully acknowledges very insightful and constructive comments received from members of other SE4All committees, Asian Development Bank, Brazilian Ministry of Energy, Carbon War Room, European Investment Bank, Global Environment Facility and Korea Eximbank. Mr. Purna Saggurti Dr. Luciano Coutinho Co-chair of SE4All Finance Committee, Co-chair of SE4All Finance Committee, Chairman of Global Corporate and Investment Banking President of the Brazilian National Development Bank Bank of America Merrill Lynch Finance Committee Report 2015 Introduction: SE4All established specific global energy goals along three pillars for 2030 • SE4All Finance Committee has developed this report to examine opportunities for public and private investment, in many cases necessitating the public and private sectors to work closely in tandem, that could help achieve these three goals. • It complements work being undertaken by SE4All’s other three committees which focus more deeply on specific issues pertaining to each of the three pillars: Energy Access, Renewable Energy, and Energy Efficiency. • Application of potential financial structures will vary country-by- country because of differing local circumstances. Improving energy access should not focus solely on providing the minimum energy to households but also on productive uses and enabling transformative socio-economic development. • We recognise that there may be investment trade-offs when The document is organized into four sections: considering the pathway for each country to meet the goals of all three pillars. For example, investments that are focused only on Section 1: A review of the size of the financing challenge and segmenting increasing energy access may be more carbon-intensive but often of the market opportunity in both developing and developed economies it is possible to provide energy access more cost-effectively through renewable energy sources. Section 2: An overview of some of the prerequisites to achieve a significant increase in sustainable energy infrastructure investment, • The report has been prepared for multiple audiences. As particularly focusing on the deal flow of project development in described on the next page, we have used a tagging process to emerging markets help readers identify opportunities associated with specific Section 3: A review of some innovative approaches being developed to investment segments. attract more private sector investment, with a particular focus on leveraging public sector funds and assets Section 4: Recommendations focusing on specific actions that could be taken by different stakeholders over the short and long term to achieve the three goals of SE4All 1 Finance Committee Report 2015 Market opportunities and solutions are tagged throughout the report to enable quick navigation for readers with specific investment interests A R E A = Relevant for Energy Access R = Relevant for Renewable Energy E = Relevant for Energy Efficiency • The example “tag” included below indicates that the = = High Investment Grade: includes countries with opportunity or solution being described is focused primarily sovereign credit ratings of AAA, AA, and A. These indicate a on renewable energy projects and energy access in countries strong capacity to meet financial commitments. considered below-investment grade . = Low Investment Grade: includes countries with sovereign credit ratings of BBB, BBB- , indicating an adequate A R E ability to meet financial obligations but highly susceptible to adverse economic and political conditions. = Below Investment Grade: includes any countries at BB+ and below. Countries with ratings below investment grade are more vulnerable and dependent on favourable financial, economic, and political conditions to meet financial obligations. Finance Committee Report 2015 Executive Summary A range of approaches to scaling-up and attracting private sector investment is essential to achieve the three SE4All objectives. Detailed knowledge of where, and in what types of projects, more than $1 trillion of annual investment from both public and private sectors will be needed. Current estimates* show that for the period from 2010 to 2030: • Energy Access - $49.4 billion is required annually (current annual spending is $9 billion); focus should be in Sub-Saharan Africa, South Asia and East Asia & Pacific. • Renewable Energy - $442-650 billion is required annually from a current baseline of $258 billion to reach the goal. Except for Europe all regions need to increase investment to meet targets. The largest annual funding gap by far is in developing Asia. • Energy Efficiency - $560 billion is required annually to achieve the goal (current spending is $130 billion). Energy efficiency investment needs to increase by 4.3x relative to current levels, with the greatest opportunities in Europe, developing Asia and North America. In developing countries, particularly with energy supply and access deficits, investments in renewables and energy efficiency would also support access. The overriding challenges to delivering this investment relate to: • Developing the deal flow, the pipelines for projects – higher-level aggregation or blended finance structures cannot work without an ecosystem that promotes preparation and implementation of projects, including: – Regulatory framework, capacity to prepare and implement, transparent long-term pricing structures, clear Power Purchase Agreements – Need for national/local finance infrastructure able to support process – commercial banks, state-owned utilities, local investment pools • Deploying financing models and structures that will attract private finance to form a larger share of the capital mix – With notable exceptions such as facilities for long-term hedging of foreign-exchange risk for non-G20 currencies, tools required to de-risk investments do exist but need further development, and the partnerships, structures and commitment to support their rapid adoption need to expand – Developing markets represent the greatest challenge, given investors preference for investment-grade opportunities. There is a greater need for patient capital, blended capital structures and collaboration to accelerate de-risking of opportunities. • In most developing countries, the governments and power utilities need to improve governance and management of their energy sector to enhance its creditworthiness – Governments need to improve regulation, strengthen public governance to help power utilities reduce losses and increase bill collection, make subsidies better targeted and transparent, and enhance capacity of government agencies as well as increase the operational and financial efficiency of power utilities – Power utilities need to play an important role in scaling up and accelerating access and facilitating financing of small-scale projects * Global Tracking Framework 2015, World Bank Group 3 Finance Committee Report 2015