Will 2016 mark the first step to delivering on the ambition of 2015’s Paris agreement?  One thing’s for certain - the private sector will be crucial in providing much of the financing needed to help developing countries meet the climate goals set in the French capital.

How to achieve these investment volumes is much more uncertain. In many developing and emerging markets, investors and project developers are often unwilling and unable to invest in climate mitigation and adaptation projects. They often feel it is safer to invest money elsewhere, leaving many developing countries without the investment needed to move towards a low-carbon economy.

For the past eight years, the Climate Investment Funds (CIF) have been meeting this challenge head-on. To date, the CIF has allocated more financing to private sector mitigation, forestry and adaptation investments than any other multilateral climate fund.

The CIF model is unique in the climate finance space: we provide five multilateral development banks (MDBs) with concessional funds to help support some of their most innovative private and public sector low carbon projects in 72 countries.   

One of the key components of the CIF’s MDB-driven business model is our ability to address upstream political and regulatory challenges that can directly influence investor-willingness to invest in a country. By working directly with governments on these issues, MDBs are often able to improve the enabling environment and lower investment barriers to help facilitate capital inflows for first-of-their-kind climate projects.

For example, $3.1 million in Clean Technology Fund (CTF) grant financing enabled the European Bank for Reconstruction and Development (EBRD) to help the government of Kazakhstan make critical adjustments to its renewable energy law, which was previously unsuccessful in attracting private investments at scale.[1] The successful development of these regulatory reforms - such as the creation of feed-in tariffs and rules for land allocation for renewable energy generators - enabled EBRD to use CIF funds alongside its own to support Kazakhstan’s first privately-owned utility-scale solar PV project. The unique ability of the CIF to support both the regulatory and investment sides of the equation has helped de-risk the sector for other investors looking to enter the market.

The Burnoye Solar Plant, Kazakhstan (Photo: EBRD)

Another key component of the CIF is our ability to provide projects with an array of financial tools (including debt, equity, guarantees, local currency lending) at an appropriate risk level.  These instruments do more than simply provide liquidity; rather, CIF funds are able to shoulder risks that MDBs are not able to take on their own.  This ultimately helps MDBs support projects that may not happen otherwise and directly unlocks additional sources of private sector financing.

For example, the International Finance Corporation (IFC)  blended $4 million of CTF funds alongside $8 million of its own funds into two of Thailand’s first utility-scale solar PV plants via long term debt, which was unavailable in the market at the time. The successful financing of these early projects helped send positive signals to the local market and demonstrated to investors that solar PV could make good business sense in Thailand. This paved the way for the developer to subsequently raise over $800 million of investment in just a few years, while also helping accelerate the development of Thailand’s nascent solar PV sector. 

Woman-owned Solar Power Company Group, a model for attracting private investment in Thailand’s clean energy sector  (Photo: IFC)

We have also learned that market realities can change rapidly, so the CIF model is designed to be agile. Our private sector approach is continuously refined to adjust to changing circumstances.  

For instance, in 2013, CTF launched a Dedicated Private Sector Program (DPSP) that has since allocated over $450 million to ramp-up innovative investments in technologies such as geothermal, solar PV, and mini-grids. The DPSP has already generated successes, and the program has been found to be “particularly well-suited to fostering the piloting of first-of-a-kind approaches and business models.”[2]

We are now developing strategies to raise funds in the capital markets to help finance the next generation of CTF investments and provide resources at scale through the tried and tested MDB-driven business model. These strategies could open the door for new investments in frontier areas - such as energy storage and distributed generation - and potentially enable investors to take part in the CIF portfolio.

There are other exciting developments on the way from the CIF’s private sector work over the next 6-12 months. Stay tuned.

 

FOOTNOTES

[1] Coal powers over 80% of the electric grid in Kazakhstan

[2] CPI gap analysis - https://www.climateinvestmentfunds.org/sites/default/files/meeting-docum...

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