A Private Sector Perspective

on the Green Climate FundGori Olusina Daniel | PPP Practice Lead, Africa PPP AdvisorySeptember 2016

FACILITATOR BIO

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Gori Olusina Daniel Infrastructure & Capital Projects

PPP Practice Lead

M:+44 (0) 788 909 8103

T: +44 (0) 1322 27 9292

E: gori.olusinadaniel@apppadvisory.com

Gori is a senior Infrastructure and Capital

Projects Commercial Specialist and Project

Leader with over ten years’ experience of

commercial and financial due diligence, PPP

policy and contract management.

He has worked on large-scale public sector

infrastructure and concession projects, such

as the London Oyster smartcard and

Crossrail, and on a range of Transport and

Energy PPP, and Human Capacity

Development projects in Africa.

He also advises on joint ventures, mergers

and acquisitions, business development and

internationalisation strategies, investment

promotion and facilitation, public financial

management, business planning, strategy,

performance management, delivery and

change management.

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OVERVIEW OF THE GREEN CLIMATE FUND

BARRIERS TO CLIMATE PROJECT INVESTMENT

OPPORTUNITIES FOR LEVERAGING PRIVATE SECTOR FINANCE

CRITICAL ISSUES FOR CHANNELING CLIMATE FINANCE THROUGH THE PRIVATE SECTOR

TOOLS FOR MITIGATING RISK TO CATALYZE THE PRIVATE SECTOR

CONTENTS

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“KEY OBJECTIVES

Introduces the Green Climate Fund, describesits focus, highlights the mechanism foraccessing it, and distinguishes it from otherclimate funds

This presentation:

Provides an overview of the GCF Private SectorFacility

Considers the critical issues for channelingclimate finance via the private sector

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“INTRODUCTION

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“INTRODUCTION

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Source: Wilson Center’s Environmental Change and Security Program 2014

CLIMATE CHANGE HOTSPOTS

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INTRODUCTION

KEY QUESTIONS

How do we deal with a problem

whose effects are not equally suffered by those who cause

it?

How can the global community converge on a common policy

to preserve the earth for generations

yet unborn?

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“BACKGROUND

The GCF is a fund within the

framework of the United

National Framework

Convention on Climate

Change (UNFCC), and was

founded as a financial

mechanism to assist

developing countries in

adaptation and mitigation

practices to counter climate

change

MISSION

The GCF exists to expand

collective human action to

respond to climate change

and aims to mobilise

unprecedented levels of

funding to invest in low-

emission and climate

resilient development on our

home planet

The Green Climate

Fund is an important

response to some of the

most critical questions

facing our generation

and exists to:

Promote the paradigm

shift towards low-

emission and climate

resilient development

pathways

Maximise the impact of

its funding for

adaptation and

mitigation

OVERVIEW OF THE GCF

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OVERVIEW OF THE GCF

The GCF raises funds from state, regional, and city governments on an ongoing basis

Current resources in pledges from 43 countries amount to $10.3 billion of which $9.9 billion has been signed

By 2020 the GCF aims to raise $100 billion a year globally, from public and private sources

Only 19 of the 43 countries that have pledged to the fund have fully disbursed their signed pledges

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OVERVIEW OF THE GCF

Country Pledge in USD (millions) % Disbursed

1 USA 3,000 17%

2 Japan 1,500 25%

3 United Kingdom 1,211 33%

4 France 1,037 13%

5 Germany 1,003 25%

Table 1: Top 5 Contributors to the GCF

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Source: GCF Resource Mobilization Status Update ( as at September 10, 2016). Available at http://www.greenclimate.fund/partners/contributors/resource-mobilization

THE PRIVATE SECTOR FACILITY

Public sources for meeting the considerable levels of investment required for adaptation and mitigation efforts is limited

The GCF Private Sector Facility has been established to allow direct and indirect financing by the GCF for private sector activities

Climate Change poses a threat, but also creates commercial opportunities for the private sector

The private sector seek channels that can manage risk and support capital intensive projects through which to direct their climate finance investments

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PRIVATE SECTOR CLIMATE FINANCE

The potential for private investment is substantial,

but to unlock these flows, a range of existing country and project barriers will need to

be overcome

Prospective investments are expected to cover the full

costs of the project, including the cost of capital, and

achieve a return commensurate with the risks

Private firms make investment decisions based on a project’s commercial

viability

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CRITICAL ISSUES

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STRUCTURAL

Network Effects: Many technologies rely on networks to happen Fragmentation and Transactional costs: Many low carbon investments are small scale which

makes them difficult to deliver and typically leads to higher transaction costs. Agency problem: In energy efficiency, the person paying for the investment is often not the

one reaping the benefit Status Quo bias: Like with most changes, there is a bias in society for the status quo

FINANCIAL Revenue: Many fossil fuels still subsidized and carbon externality not yet consistently priced Higher Initial Capital Requirement: Low carbon technologies require high upfront cost

relative to high carbon technologies. However operating costs are relatively lower O&M Costs: O&M costs for solar and wind are low and this is primarily due to zero fuel costs.

However skill levels of local technicians may also be low, making repair and maintenance costartificially high.

Risk: Poor credit rating and unreliable equity betas (volatility of returns) of renewable energycompanies makes financiers rate risk as high. This is naturally exacerbated by new technologyrisk which has accounted for the notable failures of firms such as Solyndra.

TECHNICAL CAPABILITY

Immaturity: Markets are evolving and capacity needs to be built across the value chain includingin the financial community.

Awareness and education: Lack of awareness of opportunity and understanding of the technicalsolutions available as well as their financial benefits.

Inability to price risk: Inability to calculate an appropriate premium on risk due to limitedhistorical data; cross industry linkages make risk assessment more challenging

Technical solutions: Products are inferior or perceived to be inferior on some usage dimensions(e.g. the case for energy efficient light bulbs)

MITIGATING RISK TO STIMULATE PRIVATE

INVESTMENT

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Letters of credit

InsuranceProducts

LoanGuarantees

PolicydialogueandTechnicalAssistance

Credit Enhancement with Concessional Finance

PowerPurchaseAgreements

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REQUIREMENTS FOR CATALYZING THE

PRIVATE SECTOR

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REGULATION

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Should emphasize Renewable Portfolio Obligations (RPOS) -mandatory share of renewables in electricity mix. Both at national and sub national levels.

Power purchase agreements between off-takers and generators regulated to ensure fair pricing etc

POLICY

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Takes the form of a

policy that creates

an incentive to

directly increase

return on

investment, such as

feed-in-tariffs and

policy actions in the

financial sector can

play important

complementary role

to increase

investment at large

scale and required

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R&D INITIATIVE

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Stimulate primary

research and fund

valley of death

technologies to

commercialization

(see examples in US

Sunshot and ARPA-

E, Germany's Sixth

Federal Energy

Research

Programme and

China's 973 Program

CAPITAL INCENTIVES

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Capital incentives

help reduce

exposure to high

capital investment

(e.g. China's Golden

Sun, US ARRA,

SolarCity Buffalo

project etc)

FUNCTIONAL CARBON MARKETS

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Carbon markets with

adequate carbon

pricing mechanism

can provide a

significant revenue

source that can help

improve the returns

for private sector

projects in climate-

related areas.

In mature financial

markets, financing

can, in principle, be

raised against future

carbon revenues.

OPPORTUNITIES FOR LEVERAGING

PRIVATE SECTOR FINANCE

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YIELDCOS:

Yieldcos aim to exploit the predictable and low-risk nature of operational renewable projects toprovide high dividends to investors, often on a quarterly basis, making them attractive to manyinvestors. By establishing yieldcos, the original project developers and utilities can re-invest theproceeds to renewable project development activities.

GREEN BONDS:

Green bonds are themed bonds focused exclusively on low carbon investments. It offers anattractive way to access institutional investor capital as the risk and returns of the bonds aretypically determined by the issuer’s full balance sheet, not just green assets.

CONCESSIONAL FINANCE:

There is an increasing critical role for concessional finance to absorb the gap in risk-returnexpectation of the market for climate investment. Taking a small but adverse risk return positionin the financing of a program or a project than the private sector, enables the project to moveforward. Such structures hold the promise to unlock large private flows to low carbon investmentin developing countries for relatively small amounts of public funds

CONCLUSION

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Despite being one of the lowest carbon emitters; studies by the United NationsEnvironmental Programme (UNEP) suggest that damage from Climate Change, relativeto population and GDP, will be higher in Africa than in any region.

The GCF was established in 2010 to reduce greenhouse gas emissions in developingcountries, and help vulnerable societies adapt to the impacts of Climate Change.

The GCF includes a Private Sector Facility, which serves to ensure that private sectorinterests are aligned with national climate policies.

The private sector currently contributes the bulk of the investment in Green Climatefinance (World Bank, 2014); but the potential to unlock more of the investmentrequired to effect a paradigm shift from fossil fuels to more sustainable sources ofenergy requires a range of policy and market incentives to level the playing field bycorrectly pricing fossil fuel energy, and addressing the significant barriers that plagueinvestment in renewable energy and energy efficient projects.

As an Accredited Entity of the GCF, the AfDB can and should play a key role ininfluencing the policy of Regional Member Countries, and proactively address thebarriers to private sector investments through the provision of concessionaryfinancing, insurance products, loan guarantees, and other credit enhancementinstruments that improve the commercial viability of Renewable Energy and EnergyEfficierncy projects across the continent.

NOTES

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Africa PPP Advisory is a trading style of Adams & Moore’s Africa Practice and a subsidiary of AME Trade Ltd - organisers of the Africa PPP Conference and Showcase. For general enquiries or to see how we can assist you, please contact:

E: enquiries@apppadvisory.com T: +44 (0) 1322 27 9292 F: +44 (0)1322 27 83 83 W: www.africappp.com