With an ambitious yet aspirational goal to keep global temperatures within 1.5 degree rise by 2100, a global shift to renewable energies is essential to achieving the Paris Agreement. Yet, undertaking such a monumental shift requires a combination of both public and private resources. This can be a challenge, especially for developing countries that may be deemed ‘risky’ by investors. However, these challenges are not insurmountable. Efforts can and should be taken to address perceived risks and to leverage both public and private resources.

Copyright: UNDP Tunisia
Copyright: UNDP Tunisia

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Seizing the ‘Energy Revolution’

The climate case for investing in renewables is well known. Both the Paris Agreement and the SDGs note the capacity for renewable energies to limit carbon emissions and tackle climate change. Increasingly clear, however, is the economic boost that renewables can offer to developing countries, especially those who currently lack access to affordable and clean energy. Local economic development, green jobs, innovation, and a shift away from fossil fuels imports are all on offer, and many countries are reaping the rewards of massive shifts towards renewable energies.

And this trend is only expected to grow. The International Renewable Energy Agency (IRENA) recently announced that capacity to generate renewable energy increased by 152 gigawatts (GW) or 8.3 percent during 2015, the highest annual growth rate on record. They also noted that the bulk of this was in developing countries. Latin America and the Caribbean grew at a rate of 14.5%, while Asia grew at a rate of 12.4%. This is compared to 5.2% and 6.3% in Europe and North America respectively.

A great deal of these advances can be attributed to innovation, increased political will, and rapidly declining technology costs. Yet, while many countries and regions are reaping the rewards of such a monumental shift, many developing countries are being left behind. The same report notes, for instance, that Africa grew by 6.3%, not an insignificant amount, but below potential. Aside from missing the economic benefits of sustainable energy, limited investment also restricts energy access and holds back progress to eradicate poverty or achieve SDGs.

Supporting developing countries to overcome barriers to investment and finance is a priority in the post-Paris context. Addressing this gap requires a targeted approach that helps countries create an environment conducive to investment. This means enhancing capacities of developing countries while effectively addressing the risk-concerns of private sector investors.

 

De-Risking Investments in Sustainable Energy

With technology costs having fallen, it’s increasingly clear that high financing costs are a key factor holding back investment in sustainable energy in developing countries. These current high financing costs reflect a range of technical, regulatory, financial and institutional barriers and their associated investment risks. While challenging, these barriers are not insurmountable and measures can be taken by governments – and supported by donors and UN agencies – to facilitate efforts towards that end.

For instance, policymakers seeking to promote renewable energy can assemble combinations of public measures to systematically address these underlying risks. UNDP’s research in this area, captured in its innovative “De-risking Renewable Energy Investment” (DREI) methodology, identifies three core types of public measures: policy derisking instruments, such as well-designed power market regulations, which reduce risk by removing the underlying barriers that create risk; financial derisking instruments, such as loan guarantees offered by development banks, which transfer risk from private to public sector; and financial incentives, such as direct subsidies for sustainable energy, which compensate investors for risk.

A key challenge for policymakers is how to identify the most cost-effective combination of public measures to implement. Most public measures typically come at a cost – to the tax payer, to industry or to consumers. Limited public funds need to be spent wisely. Moreover, a huge variety of possible public measures exist, and it can be difficult for policymakers to sort through the many options.

UNDP’s DREI methodology seeks to assist in this regard by quantitatively modelling investment risks and the public measures to address them. It has already been tested in pilot case studies in Kenya, Mongolia, Panama, and South Africa, and is now also being applied by governments in Belarus, Kazakhstan, Lebanon, Nigeria and Tunisia. Early results are demonstrating, in practice, how risks can be reduced, financing costs lowered, and private sector investment in affordable sustainable energy catalyzed by undertaking such an approach.

In Tunisia, for example, UNDP, with financing from the Global Environment Facility, is supporting the Government to implement de-risking measures that are predicted to leverage EUR 935 million in private sector investment, and to significantly lower the cost of solar power for consumers, from EUR 9.9 to EUR 7.7 cents per kWh. This is expected to be key to Tunisia’s objective of achieving 30% of its power generation from renewables by 2030, a core part of Tunisia’s INDC under the Paris Agreement.

 

An Ongoing Dialogue on How to Best Leverage Private Sector Investment

UNDP’s experience has shown that the opportunity to derisk investments holds particular promise to transform sustainable energy markets in developing countries. Nonetheless, a number of nuanced questions remain. One such question is how to balance policy and financial derisking measures, which reduce risk, and the subsidies, which increase financial returns. UNDP’s modelling clearly shows that, all things being equal, derisking is more cost-effective than providing subsidies, and therefore derisking should be prioritized. However, derisking measures can take time to implement. Can it therefore be justified to offer subsidies to achieve immediate investment? And if a generous subsidy scheme is put in place, does this now create a risk of policy reversal?

These and other questions come with complex trade-offs and are not straight-forward to answer. What is important is to have as transparent a policymaking process as possible, supported by rigorous and systematic methodologies, and where key inputs and findings are made explicit, to be debated and enriched in discussion.

All that said, it is clear that the opportunities are there; the technology exists and is ever more affordable, political will continues to grow, and resources – both public and private – are increasingly earmarked for sustainable energy. The long-term path to zero-carbon is clear, our challenge now is to find the best means to get everyone on that path and to ensure shared prosperity.

 

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