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Clean Energy Ministerial 5 (CEM5)

12–13 May 2014, Seoul, Korea

Facilitating Access to Low-Cost Finance to Scale Up Renewables

Overview

Renewable energy (RE) financing is supported through multiple avenues within the broader landscape of finance efforts that include climate financing, “green” funds and bonds, as well as more targeted efforts through development bank support and other public and private credit enhancement structures. Although many of these funding streams have grown in recent years, far more can be done to facilitate market acceptance and institutional investment in clean energy. Further, current project development and performance tracking protocols appear insufficient to drive the necessary scale-up in global renewable energy investment.

Most RE projects (e.g., wind, solar, geothermal) are initially capital intensive with low operating costs and zero fuel costs thereafter. The upfront cost of capital is therefore critical to the economic competitiveness of RE relative to traditional generating technologies. However, ongoing cost reductions and performance advancements of RE technologies are lowering the upfront capital costs. To fully take advantage of these developments and expand RE projects at the scale needed to transition to a global clean energy economy, broad access to low-cost capital is required.

Traditionally, RE investment has been limited to project finance structures or bank debt that greatly limits the supply and raises the overall cost of capital, and requires time-consuming due diligence processes. Importantly, only a small subset of global capital is available for project-level finance due to the complexities of the deal structures and the lack of liquidity and transparency of the investment. Instead, the majority of global capital – managed by pension funds, insurance companies, and other institutional investors – is invested in debt and equity securities that are priced by the market, easily traded, and highly liquid.

To access this far greater source of capital and increase the flow of institutional investment into renewable energy projects, RE investments must be developed within a framework that facilitates broader capital market participation, including: (i) pooling of project cash flows into tradable and highly liquid securities and (ii) due diligence research by rating agencies and investors which is necessary to build market confidence in the asset class. A number of activities can support these goals, including:

  1. Standardize contracts and other documentation
  2. Develop best-practices for installation and maintenance to minimize risk and lower transaction costs
  3. Improve publicly available data for technology and customer credit risks
  4. Educate investors and credit rating agencies and build financial institution capacity
  5. Address investor and rating agency risk concerns through new the financial structures and industry protocols

The proposed roundtable is designed to initiate a process to support the transition from project-level finance to capital market investment in order to scale up financing for RE projects. This process would bring together policymakers, financiers, renewable energy developers, and others key stakeholders who are critical to this transition. The roundtable will explore specific activities that are designed to facilitate the pooling of project cash flows, comprehend investor risk perspectives, and build investor confidence. These activities include standardized contracts, best practices and protocols, critical datasets to assess risk, and mock securities of international portfolios. Follow-up to this roundtable may also include creating a working group to further develop these activities and exploring how they can be utilized to initiate the development and procurement of renewable energy securities.

View the pre-read presentation.

Discussion Topics

  • What existing contracts or protocols could be further developed that facilitate lower cost development and the pooling of cash flows from RE projects into trade-able securities for capital market investment? What new contracts or protocols are needed?
  • Can CEM countries develop best practices – for example in system installation and operations and maintenance – to improve investor confidence, reduce risk, and produce the expected project cash flows?
  • Can CEM countries develop robust databases of system and customer credit performance to allow for thorough market evaluation and improve investor confidence?
  • How can we learn from rating agencies and investors about their risk perceptions and mitigate those risks through tested legal and financial solutions?
  • What role can public sector credit enhancements play, and what best practices can be applied to induce market investment (at minimal cost to taxpayers)?
  • How can these activities support securitization in developing countries? What are the unique challenges? Are there other activities that should be explored?