Bridging the Financing Gap for Renewable Energy

Anita Marangoly George

These are exciting times for those of us who closely watch trends in renewable energy supply and demand – especially seeing its uptake in developing regions where millions of people still live without access to modern energy.

Over the last 25 years, renewable energy technologies have matured and are now strongly established in the global energy supply. We now have an array of commercially viable renewable energy technologies and their costs continue to come down. With growing energy demand, higher fossil fuel prices, and the continually diminishing costs of key technologies like wind and solar, opportunities are growing by the day for renewables to provide affordable and sustainable options for electricity, heat, and transport.

We now have an array of commercially viable renewable energy technologies and their costs continue to come down.

Despite this exponential growth, the overall share of renewable energy in the global energy mix has barely moved from 16.4% in 1990 to 18.0% in 2010. This is because global energy consumption continues to rise steeply, and a large share of that consumption continues to be met from fossil fuels. Wind, solar, and geothermal energy account for only 1% of all renewable energy and hydro makes up a further 3%. The rest comes from the burning of biomass and other traditional fuels.

As a key partner of the Sustainable Energy for All initiative (SE4All) which World Bank Group President Jim Yong Kim co-chairs with UN Secretary General Ban Ki-moon, the Bank Group is keenly focused on the goal of doubling the share of renewable energy in the global energy mix by 2030. We see this as vital to tackling the climate change threat while also strengthening the future energy security of developing countries and addressing air quality concerns.

But to double the share of renewable energy in the mix, we have estimated that annual investments of $320 billion a year are needed – particularly in the deployment of solar, hydro and wind technologies. Currently, renewable energy investment is at around $154 billion a year – that’s an investment gap of $166 billion annually. It’s clear that we need to accelerate investments significantly in renewable energy technologies. But how?

The financing gap was the focus of considerable attention at the recent UN Climate Summit (September 23, 2014) in New York. Over several months running up to the Summit, Bank of America, Merrill Lynch, the Brazilian Development Bank (BNDES), and the World Bank worked together to identify innovative financial structures with the potential to be incubated or accelerated. We explored a range of de-risking structures and products in the public and private sectors, reviewed the current investor base, and identified potential sources of new funds required for the transition to achieve the goals of SE4All.

We concluded that to drive fresh capital into new sustainable energy investments, it’s critical to scale up the issuance of Green Bonds, which are tax efficient bonds directed toward sustainable projects. We also need to develop tailored lending structures that allow the private sector to co-lend with multilateral development banks (MDBs) and development finance institutions (DFIs) in emerging markets, as well as help to refinance existing sustainable energy loan portfolios of official lenders by attracting new investors.

World Bank Green Bonds raise funds from fixed income investors to support our lending for projects that aim to mitigate climate change or help affected people adapt to it.

At the same time, we must encourage new construction stage lending, supported by MDB/DFI subordinated debt credit enhancement instruments to improve the credit quality of projects, and enable institutional investor flows. Last but not least, there remains a need to develop aggregation structures by bundling projects for project developers, including those doing replicable small-scale projects in emerging markets for renewable energy and energy efficiency.

Besides working to support and develop new financing structures, the World Bank Group is also playing an important role in supporting countries in their efforts to move away from fossil fuel-based energy and towards cleaner, renewable technologies. World Bank Green Bonds raise funds from fixed income investors to support our lending for projects that aim to mitigate climate change or help affected people adapt to it. Fiscal year 2014 was a record year for World Bank Green Bond issuances, raising a total of almost $3 billion.

Also over the past fiscal year, we provided a record $3.6 billion in financing for renewable energy projects and demand, especially from low-income countries, which continues to grow. Much of the increase on our 2013 renewable energy lending was due to approval of a number of large-scale hydropower projects. It also represented strong continuing investment in solar, wind, and geothermal energy, especially from the International Finance Corporation (IFC), the Bank Group’s private sector arm. Included in our total lending, IFC’s renewable and energy efficiency lending went from $1 billion in 2013 to over $1.4 billion in 2014 – with a record 25% of this going to wind energy projects.

A considerable proportion of World Bank Group renewable energy financing also went towards building the policies and institutions that countries need to manage a sustainable electricity supply as well as the smart transmission and distribution systems that connect people and industry to energy.

A key aspect of our energy lending is that it brings in other financing sources. Last year, we mobilized a record amount of over $1 billion of private sector finance through guarantees that help to mitigate the risk for potential investors. The IFC and the Multilateral Investment Guarantee Agency each mobilized a further U.S. $1 billion from third party sources to complement their own investments.

But overall, developing countries themselves are driving the demand for greater investment. Many countries are setting targets for renewable energy, which help focus attention and attract private financing. For example:

  • China is expected to account for 40 percent of new capacity in renewables in the next five years.
  • The Philippines has set a target to double renewable energy from 4,500MW to 9,000 MW between 2010 and 2030 and offers renewable energy incentives like tax holidays, accelerated depreciation and net metering to allow consumers generating power to sell back to the grid.
  • Morocco aims to have 42 percent of its total electrical capacity in renewable energy – a mix of solar, wind and hydro power. Its renewable energy investment soared to $1.8 billion in 2013 from just under $300 million in 2012, due in part to reduced energy subsidies.
  • And Mexico, which has a target of 35 percent renewable energy and carbon tax, is starting to allow retail electricity consumers to connect their renewable facilities to the national grid for billing credit. Mexico’s policies have prompted Wal-mart, Coca-Cola and Grupo Bimbo to invest in renewable energy self-generation.

As the trend towards greater renewable investments continues and we work together with our partners – both public and private – to drive new sources of financing for clean energy development, the opportunities just grow and grow. These are exciting times indeed.

Anita Marangoly George is a Senior Director of the World Bank Group’s Global Practice on Energy and Extractive Industries

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