Recommendations

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The Nordic asset owner members of the Climate Investment Coalition have outlined the following key recommendations to governments and their international development partners for focus areas where intensified action will help catalyse investment and private finance flows to emerging markets and developing economies.

These recommendations aim to act as a starting point for productive public-private sector dialogue on the tools to strengthen enabling environments for private climate finance.

Case studies have been collected from Climate Investment Coalition’s Nordic asset owner members, to exemplify, where possible, successful cases and practical examples of the recommendations in practice.

Within the financial sector, sound macroeconomic financial policies will help drive broad-based growth, manage inflation, and interest rates to provide investors and financiers with assurance of lower policy-risk and financial stability of private investments. This can include policy and currency stability, active engagement from the receiving government through its policy support, and clear rules and regulations to uphold these policies.

An example of a financial risk consideration for investors is exchange rate risk. Investors will either look for a historically stable exchange rate, income indexation to a hard currency, or a market that enables affordable hedging of foreign exchange risk. Therefore, the ability to designate project revenues in a hard currency is an important advantage, though partial conversion structures and hedging instruments can also help to develop the market.

In addition to the enabling policies and regulations for the financial sector, governments from developing countries can help scale clean energy investments through clean energy enabling policies, like improving the market for private clean energy offtake and enabling producers to charge cost-reflective energy tariffs. Stable, well-defined clean energy environments are critical to kicking off and then accelerating developing countries’ energy transitions. For renewables, these can include policy mechanisms explicitly to accelerate renewables deployment such as auctions, feed-in tariffs, tax incentives, or national targets. These can create signals from the developing governments to investors that the conditions to invest include higher quality and lower risk.

Governments from developed economies can offer recommendations and capacity building on the green energy transition such as The Toolbox – A Framework for Accelerating Investments for Clean Energy Transition” in support of the UN Climate Action Summit, the Nationally Determined Contributions and Sustainable Development Goal 7 created by the Danish Government in 2019. This toolbox was created for developing governments that seek to increase the level of investments in clean energy within their country, for international organisations and civil society to provide relevant expertise and support for these governments, and for the investor community – public and private – to help identify and overcome barriers while demonstrating willingness to scale up their investments. The Government of Denmark offers government-to-government cooperation through its Centre for Global Cooperation, part of the Danish Energy Agency. One existing country cooperation is with the Indian Ministry of New and Renewable Energy (MNRE), where the Danish Energy Agency is supporting to prepare the framework that can kick-off offshore wind and support India’s green transition

Danish Energy Agency

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Once these enabling environments are built, there are financial tools that are providing crucial support to the deployment of private capital towards clean energy investments in emerging markets. Power purchase agreements (PPAs) - which clearly define the output of the generating assets (such as a solar electric system) and the credit of its associated revenue streams, can be used by the PPA provider to raise non-recourse financing from a bank or other financing counterparty - is one tool that governments or public utilities use in countries that suffer from a negative risk perception, to support greater standardisation, help scale market development, and attract increasing investments over time. Other support may include partial or full guarantees, liquidity facilities, and laws that assure continued funding for the electricity sector. Stronger PPAs make it more likely that investors and lenders will accept anything less than a full sovereign guarantee; previously understood as a “one size fits all” solution that most financial institutions asked for in the past to deal with country risks.

Other examples of enabling environments through policy, regulation and planning include renewable power targets and streamlined permitting procedures, which may provide clarity on the process for investors as well as shorter project development time. To achieve this before 2030, international and internal technical and institutional support and capacity building for private investors must be significantly scaled-up and become better aligned.

To incentivise private capital, lower the costs of installation and make the most effective use of the available private equity and debt capital ready to be deployed, governments must seek to establish the necessary conditions to promote the creation of steady and sufficiently large pipelines of investable clean energy projects.

Public policies are at the centre of this process, by providing the necessary enabling conditions to safeguard the security of the investment and to create the conditions for more bankable projects. Governments in developing economies need to address existing roadblocks such as regulatory barriers, market fragmentation, information asymmetries, and lack of national capacity to deal with complex project financing models.

A focus from governments in emerging markets and developing economies on mitigating political and economic risks will allow investors to focus more prominently where their expertise is better versed; on minimising and managing risks to investments and financing. To exemplify this, the use of renewable energy auctions or making permitting procedures for renewable energy installation quicker, can be deployed. This has been used in the Thar Solar Project in India where a reverse auction backed by the federal agency Solar Energy Corporation of India (SECI) provided off-take certainty (See Investment Case Study).

Developing and developed countries can collaborate on prioritising the development of projects which stem from both public and private sources or a combination thereof, through national financial and energy sector plans.

Clarity on the direction of travel and the commitment by governments of emerging markets and developing economies to the energy transition are key to enhancing investor confidence in the availability of a continued flow of investment opportunities. This could be facilitated by introducing reputable developer entities or companies to develop the green projects. If the emerging and developing markets do not have any private entity to support bankable projects, having an intermediary or a developer from the developed markets can increase the scale and predictability of the pipelines. When backed by transparent market design and contracting terms of a high standard, private investors stand ready to make investments happen.

For a successful outcome, private investors would have to focus on capacity building and training for targeted risk expertise.

Innovative instruments and equity finance can help enhance risk-sharing through public-private partnerships and maximise the impact of scarce public funds. Investment vehicles that can channel finance at scale, relying both on capital markets and joint investment platforms between public financial institutions (FI’s) and private investors are key to incentivising more private capital for emerging markets and developing economies.

Multilateral development banks and international financial institutions, including development financial institutions such as Denmark’s IFU, Norway’s NORFUND, and Swedish SIDA, can provide support through blended financing structures to alter the risk-return profile for the climate transition in emerging economies. This blended financing mechanism was particularly important behind the Lake Turkana project in Kenya (See Investment Case Study). Multilateral development banks such as the World Bank, African Development Bank, Asian Development Bank, or the Inter-American Development Bank can play a crucial role in bringing the local expertise and overview of the recipient country to the investors.

These partnerships can provide standardised risk mitigation instruments available at scale with low transaction costs that address key risks such as guarantees against offtake risk for clean energy projects or currency risk coverage. By agreeing to be first to endure losses in green funding vehicles and securitisations, development banks can increase the expected risk-adjusted return for private investors.

In the cases when guarantees are missing, extensive collaboration between public and private bodies on blended finance mechanisms is required to deploy successful investment models that have better risk protection for the downside when the rate of return is close to zero, as well as the offside when the rate of return exceeds sustainable trajectories.

From private investors’ perspective, this step requires their active and targeted collaboration with multilateral development banks and international financial institutions, both in the country of origin, as well as in the receiving country.

While there are cases of successful investments (See examples of Investment Cases) in green projects in emerging markets and developing economies, there are remaining challenges and bottlenecks in increasing and scaling the deployment of private capital into these markets.

As stipulated in the above recommendations, the challenges remain threefold; The creation of enabling environments, scaling up and increase predictability of investments, and strengthening of the public-private cooperation.

In order to develop a new public-private partnership and multilateral climate finance models, greater collaboration across stakeholder networks is crucial. Private developers and companies, international organisations, development finance institutions (DFI’s), multilateral development banks, private investors, and governments from both developed as well as emerging markets and developing economies can only accelerate climate investments in emerging markets together.

The creation of a supportive interaction platform to analyse and promote capacity building to bridge the climate finance and investment gap can be a solution to strengthen such cross-sector collaboration, overcome barriers and unlock increased investments in emerging markets and developing economies.