As the biggest public funder of projects related to climate change, the Global Environment Facility (GEF) has played a crucial role in removing market barriers to investment in clean energy worldwide.
Policy de-risking, investment aggregation mechanisms, and capacity building for banks and governments are key areas where the GEF has worked to increase the flow of financing. It has also launched a global initiative to accelerate the next generation of cleantech entrepreneurs in developing countries such as India, South Africa, and Turkey.
The GEF started out as a pilot program of the World Bank. It has since grown to operate independently in 183 countries with 18 implementing partners including the Asian Development Bank (ADB), United Nations Development Programme (UNDP), United Nations Environment Programme (UNEP), and United Nations Industrial Development Organization (UNIDO).
Since 1992, the GEF has provided $14.5 billion in grants and mobilized $75 billion in additional financing to address global environmental issues. $1 billion in project funding was mobilized in 2015 alone.
Key Barriers and Risks
At the COP21 climate talks in Paris, the GEF announced that it will provide $2 million USD in initial funding to launch the Climate Aggregation Platform (CAP) in 2016. CAP will be jointly implemented by the UNDP and Climate Bonds Initiative (CBI).
David Rodgers, coordinator for climate change mitigation at GEF, said that the CAP’s goal is to create more viable projects for big investors interested in green assets.
“We [at the GEF] hear over and over again that there aren’t enough bankable projects,” Rodgers said. He said that while institutions like CalPERS and CitiBank have a robust appetite for clean energy assets, the current pipeline is inadequate to satisfy their preference for $100M+ investments. By bundling together smaller loans and assets, the GEF hopes to create products that meet this necessary scale.
Rodgers said that a critical part of his organization’s work is to standardize the origination process for renewable-energy and energy-efficiency loans in countries like India and China. Training banks in measurement and verification methods for cleantech projects will also be crucial to the CAP’s success.
“We heard in Paris from the Organization for Economic Cooperation and Development (OECD) and from major pension funds that [they] require more diligence, more scrutiny, and more standardized techniques for validating green investments. This is an important trend that needs to strengthen,” Rodgers said. While securitization of clean energy assets in developing economies is still at least five years away, Rodgers said that the GEF’s efforts are laying the groundwork for improved market efficiency and scale.
Building expertise and capacity on the investor side is only one side of the coin. Rodgers said that the GEF is equally focused on creating capacity for government regulatory agencies. Without entities similar to the United States’ Energy Information Administration (EIA) or International Energy Agency (IEA), developing countries may lack the necessary data to design policies that support investment in their burgeoning cleantech sectors.
For example, in India, most utilities are required by law to sell electricity at a discounted rate. This makes it difficult for them to cover costs and leads to a cycle of indebtedness. Rodgers said that when an independent renewable energy producer sells to an Indian utility, they might not get paid for months or even years. As a result, the project developer can’t pay the loan and investors look for opportunities elsewhere.
Rodgers said that the GEF is also taking lessons learned in the United States and European renewables sectors and applying them abroad. For example, Spain’s reliance on feed-in-tariffs (FITs) as a primary subsidy for wind and solar generators proved disastrous during the European financial crisis. The government’s inability to pay producers led to a “tariff deficit” of almost €30bn and a crisis of confidence for investors. Rodgers said that GEF partner countries like Brazil, India and China are shifting to reverse auctions instead of FITS, which protect against this kind of policy risk.
Rodgers said, “At the GEF, we get excited about being able to fund projects across the whole spectrum and help partner agencies fine-tune their business models for attacking these barriers. We’re very fortunate to be able to get help from the donors that recognize that these are critical issues that deserve funding.”
Innovation and Entrepreneurship
Innovation in energy efficiency financing is also accelerating, Rodgers said. In India, a company called Energy Efficiency Services Limited (EESL) has partnered with the GEF and the Indian government to create a pool of investment funding for on-bill financing of energy-efficient light bulbs.
GEF is helping EESL to expand this program to other types of energy-efficient equipment such as ceiling fans, distribution transformers, and LED street lamps. Asian Development Bank has also stepped in to create a revolving loan fund mechanism to allow municipalities to upgrade water pump motors.
Fostering innovation through entrepreneurship is also central to the GEF’s strategy. Its Global Cleantech Innovation Programme (GCIP) for small and medium-sized enterprises (SMEs) sponsors competitions in developing countries and connects entrepreneurs to potential investors, customers and partners. GCIP is partnered with the Cleantech Open, the world’s largest accelerator for cleantech startups.
Rodgers said the goal is to take the enthusiasm of cleantech hotspots like California’s Silicon Valley and create similar innovation ecosystems abroad. So far GEF has launched GCIP in South Africa, Malaysia, Armenia, India, Turkey and Pakistan.
Rodgers said that in Pakistan, the 2015 GCIP drew more than 200 applications from small and medium-sized enterprises. Of the 50 finalists, more than half were woman-owned businesses. Categories include renewable energy, water efficiency, energy efficiency, and waste-to-energy technology. Participating countries receive $1M to $2M in funding from the GEF plus $2M to $6M+ in co-financing from in-country public- and private-sector partners.
GEF CEO and Chairperson Naoko Ishi said, “We are creating an innovative, global program supporting small and medium-sized enterprises by leveraging the Cleantech Open’s global platform with UNIDO’s international network and resources.”