Investments for Sustainable Development: Can Sustainability Make Business Sense? Dr. Satyajit Bose

June 13, 2013 ISES Panel

What sectors comprise Green Investments ?

Innovative technologies designed to optimize the use of natural resources and reduce environmental impact:

Cleantech

• Power generation: solar, wind, hydro, geothermal, biomass

• Energy storage: batteries, hydro, flywheels

Resource Management

• Water infrastructure

• Green buildings

• Energy efficiency, demand management

Transportation Infrastructure

• Bus rapid transit, railways, bike sharing

Green Investment Challenges

Why is clean energy so difficult to finance?

This portfolio of innovative technologies requires:

• Significant upfront capital: $46 trillion in incremental investment by 2050 (Source: IEA)

• Some technologies early in the heuristic learning process

• Challenging cash flow profiles

• Numerous, complex and sometimes unstable incentives

• Regulatory uncertainty on monetization of carbon externality

Recent Decline in Investment

Oil Price Context

$-

$20

$40

$60

$80

$100

$120

$140

$160

jan

-20

04

mai

-20

04

sep

-20

04

jan

-20

05

mai

-20

05

sep

-20

05

jan

-20

06

mai

-20

06

sep

-20

06

jan

-20

07

mai

-20

07

sep

-20

07

jan

-20

08

mai

-20

08

sep

-20

08

jan

-20

09

mai

-20

09

sep

-20

09

jan

-20

10

mai

-20

10

sep

-20

10

jan

-20

11

mai

-20

11

sep

-20

11

jan

-20

12

mai

-20

12

sep

-20

12

jan

-20

13

Forms of Financing

Project Financing

• Off-balance sheet funding for large infrastructure and pooled small distributed capacity

• Predictable cash flows

• $228bn (85%) of new investment in 2012 (Source: BNEF)

• Up 7% year on year

Balance Sheet Financing

• Venture capital, private equity and R&D funding for prototypes and demonstration technologies

• Small scale, with minimal and highly uncertain cash flows

• $40bn (15%) of new investment in 2012 (Source: BNEF)

• Down 15% year on year

Investor Funding for Innovation Drying Up

New Investment in Clean Energy

($ in billions)

2011 2012 Change

Venture Capital 6$ 4$ -33%

Corporate R&D 13$ 15$ 15%

Government R&D 13$ 15$ 15%

Private Equity 3$ 1$ -67%

Public markets new equity 12$ 5$ -58%

47$ 40$ -15%

Asset finance 146$ 149$ 2%

Small Distributed Capacity 74$ 80$ 8%

Reinvested (6)$ (1)$ -83%

214$ 228$ 7%

261$ 268$ 3%

Source: Bloomberg New Energy Finance

Investment Drivers for Corporate Sustainability Green Consumers

• Form of product differentiation, price discrimination and consumer loyalty

Strategic Over-compliance

• Pre-empt regulation

• Shape regulation to raise rivals’ costs

Green as a Signal

• Employee recruitment and retention

• Investor relations and lowered cost of capital

Government failure

• Territoriality of jurisdiction

• Capture by interest groups

Investment Appraisal

Standard Methods:

• Payback

• Return on Investment

• Net Present Value/Internal Rate of Return

• EROEI

Enhanced Methods:

• Monetization of uncertain or intangible benefits

• Real option analysis

• Strategic leadership potential

The Value of Options

Real Option Analysis:

Option values in alternative energy generation

• Dual sourcing

• Demand management

• Energy storage

• Interconnection of grids

Government and Multilateral Assistance

• Renewable portfolio standards and/or feed-in-tariffs

• Innovation grants

• Subsidies

• Clean energy funds with loans and mezzanine financing

• Carbon pricing

Promising Developments

Crowdsourcing

• JOBS Act in USA

Open Data Initiatives

• Green Button Initiative in USA

Small Distributed Capacity Business Models

• Turnkey retail solar installations

Demand Management

• Internet of things, Efficient peak use pricing