How to spend $100 billion effectively?
Developing countries are most vulnerable to the devastating impacts of climate change. It is therefore of utmost importance to empower these countries to cope with the loss and damage already happening as a consequence of climate change. However, next to these necessary adaptation measures it is also important to mention, that the Global South can accelerate the economic development along a green trajectory while reducing poverty through the development of renewable energies. This has to be taken into account when discussing the design of newly emerging international funding mechanisms such as the Green Climate Fund (GCF) of the United Nations Framework Convention on Climate Change (UNFCCC).
Developments in both renewable energy and energy efficiency technologies have been very promising in the recent past. Over time, the costs for solar, wind and efficient biomass have been reduced significantly and in some areas have already reached the same price level as fossil resources. Sound national policies that spur the energy transition and the development of renewable energy are therefore absolutely key. And it is by no means the exclusive privilege of the industrialised countries to be using hugely effective policies such as renewable energy feed-in tariffs (REFITs).
Investing in Renewables today
According to a recent report of the World Resources Institute, between now and 2050 countries in the Global South will need an estimated $531 billion per year of additional investment into energy supply and demand technologies in order to limit global temperature rise to 2° C above pre-industrial levels. To achieve this scale of investment, governments and international public finance institutions need to deploy limited public finance in ways that leverage private sector investment. Comprehensive national policy frameworks combined with international climate finance mechanisms are crucial.
In light of the magnitude of this challenge, it is critical to ensure that investments are cost effective. As mentioned above, REFITs have proven internationally to be an effective means to rapidly increase the generation of renewable electricity. However, the availability of domestic finance is often a key barrier to rolling out REFITs in the Global South. The GCF must play a central role in overcoming this challenge.
The GCF aims to channel new, additional, adequate and predictable international climate finance resources to developing countries. Thematically, the GCF aims to achieve a resource allocation balance between adaptation and mitigation. On the mitigation side, it prioritises “supporting the development, transfer and deployment at scale of low-carbon power generation”. In order to achieve this and distribute its resources efficiently and fairly, the GCF needs to build partnerships with a wide range of institutions.
It is important that the GCF links its distribution mechanisms to national policies that meet the principles of results-based financing, long-term security and socio-economic development.
Results-based financing is one of the core features of REFIT policies. Payments will be made only against performance. Which leads us to the question:
How can the GCF finance REFITs in the Global South?
The World Future Council suggests that the GCF must be designed in such way that it is compatible with national REFIT schemes. This requires a REFIT facility within the GCF in combination with an international REFIT committee that oversees the evaluation and distribution of funding requests. This REFIT facility could be embedded within the GCF’s Private Sector Facility (PSF), which would seem to be the most logical home within the current GCF design. This is how the mechanism could work:
Even in a medium-sized country, a REFIT can trigger very large renewable energy investments on a gigawatt (GW) scale, and the cost differential to conventional energy could reach several hundred million US dollars per year. Therefore, it is crucial that the share of the cost differential to be covered by the GCF be differentiated according to country groups. For instance, Least Developed Countries (LDCs) could be entitled to coverage of the full differential, while the portion covered would decline for middle income countries and advanced developing countries, respectively. The institutional setting would have to enable a transparent, but rapid adjustment of the REFIT support payment for these different recipients.
Can we build on past experience?
There is already some global experience in implementing REFITs, using international climate finance to promote renewable electricity generation. In 2009, the World Future Council was among the first to propose a “Renewable Energy Policy Fund”, financed by a range of innovative sources including Special Drawing Rights of the International Monetary Fund (IMF), which could help to replicate in the Global South the positive experiences with REFITs elsewhere.
Building on this proposal, Deutsche Bank Climate Change Advisors proposed the GET FiT programme where grants and concessional loans would be given for FITs, combined with risk mitigation strategies through international guarantees and insurance, as well as technical assistance to address non-financial barriers.
In countries in which there are grid integration constraints or where technologies have a limited in-country track record, “lighthouse” power purchase agreements can pave the way for fully-fledged subsequent REFITs. Currently, GET FiT is piloting its concept in Uganda.
The WFC proposal shows that the Green Climate Fund has great potential to accelerate the uptake of renewable energy in developing countries on the condition that it is coherent with national policy frameworks. As the key principle of the GCF should be to provide funds only against performance, national feed-in tariffs are the ideal tool to complement the GCF.
(This text is based on the WFC policy paper ‘FIT for Renewables’ written by Axel Michaelowa and Stephan Hoch, perspectives. It can be downloaded here:
 World Resources Institute (2013), Mobilizing Climate Investment: The Role of International Climate Finance in Creating Readiness for Scaled-up, Low-carbon Energy, online at http://www.wri.org/publication/mobilizing-climate-investment .
Tuesday, November 12th, 2013