UN must make the most out of clean energy investments

On Thursday, the UN’s High Level Advisory Group on Climate Change Financing is due to report back after eight months of deliberations on this thorniest of issues within the international negotiations.

Our guest writer is David Nash, a researcher at the Institute for Public Policy Research (ippr), Secretariat of the Global Climate Network (GCN)

On Thursday, the UN’s High Level Advisory Group on Climate Change Financing is due to report back after eight months of deliberations on this thorniest of issues within the international negotiations.

If the leak that emerged the week before last is anything to go by, the usual, intractable questions remain unanswered, including: how much of the $100 billion yearly sum pledged at Copenhagen – and promised to poor countries by 2020 – should go towards mitigation (versus adaptation), how much should be sourced from the purse of developed country governments, and how much should flow from the private sector?

New research released today by the Global Climate Network (GCN) – a prestigious alliance of think tanks in eight countries, including the UK, US, China, and India (which ippr runs) – offers new insights into how public funds pledged by rich nations could be made to work harder and leverage in significant amounts of private capital for clean energy projects in developing countries.

The report, ‘Investing in Clean Energy’, finds that investment in sectors such as solar, wind and hydro power must grow from $34 billion in 2009 to an average of $63.6 billion each year between 2010 and 2020 if the climate and energy supply targets of four major developing countries are to be met.

Based on new research by GCN members in China, India, South Africa and Nigeria, the report calculates the costs of meeting existing plans – as specified by their respective governments – to roll out priority clean and low-carbon energy technologies.

It finds that aside from China, where investment in wind power in 2009 alone exceeded estimated average costs for 2010-20, there is a financing gap of approximately $15.73 billion of investment per annum. India, South Africa and Nigeria are currently only investing $0.2 billion, a tiny fraction of what is required each year ($15.93 billion) to fulfil existing ambitions.

The sectors analysed in the report are: hydro, solar and wind power in China, solar in India, gas and small-scale hydro in Nigeria and solar and wind in South Africa.

One of the main problems facing project developers and would-be investors is that clean energy technologies, while relatively inexpensive to run, are costly to install. Added to this, many developing countries have uncertain and often poorly-understood energy, let alone clean energy, markets. One way of bringing down capital costs and mitigating risk then is for developed countries to provide up front finance and guarantees so that private investors feel it both safe and profitable to invest.

In the report, the GCN proposes a number of publicly-funded debt and equity-based mechanisms – including loan guarantees, insurance to cover policy risk and credit facilities to cover currency exchange fluctuations – which could attract significant levels of private funding and in turn reduce the cost gap between clean and conventional power sources. Collectively, the proposed mechanisms could leverage up to $10 in private sector funds for every $1 of public finance invested.

The ‘Green Climate Fund’, proposed in the Copenhagen Accord, may have a critical role to play here. Backed by a small proportion of the $100 billion pledged by developed countries at Copenhagen, the proposed tools could form a central part of a new investment partnership with the private sector under the auspices of the ‘Fund’.

Perhaps more ambitiously, countries with relatively high credit ratings – including China which awarded itself an AA+ rating earlier this year – could together allocate capital to a clean energy instrument under the ‘Fund’ or a new ‘global clean energy bank’. This would not only stimulate greater confidence among investors and hence help bring down the cost of capital for clean energy technologies quicker, it would also be important politically.

Bringing China, the US, Europe and other major economies together in a practical clean energy investment partnership could recover some of the political goodwill that has seeped out of the UNFCCC process and help rebuild trust ahead of the next round of talks in Cancun.

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