Additional information and useful links

Climate Policy Initiative (CPI) provides comprehensive data and analysis of global climate finance flows, including sources, intermediaries, financial instruments, activities and sectors financed

https://www.climatepolicyinitiative.org/climate-finance-tracking/

https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-a-decade-of-data/

https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2023/

International Renewable Energy Agency (IRENA) is a source of in-depth knowledge and reports (https://www.irena.org/Publications) on recent trends in renewable energy policies, technologies, resources and financing. Relevant examples of such reports are:

IRENA (2023), Low-cost finance for the energy transition

https://www.irena.org/Publications/2023/May/Low-cost-finance-for-the-energy-transition

IRENA and CPI (2023), Global landscape of renewable energy finance

https://www.irena.org/Publications/2023/Feb/Global-landscape-of-renewable-energy-finance-2023

Policy Learning Platform managed by Interreg Europe serves as support information and knowledge hub for RE and EE policy solutions in EU

https://www.interregeurope.eu/policy-solutions

Policies and Measures Database of International Energy Agency (IEA) provides access to information on past, existing or planned government policies and measures to improve energy efficiency, support the development and deployment of renewables and other clean energy technologies

https://www.iea.org/policies

Useful overview, descriptions and lists of international sources and institutions for financing of RE and EE projects could be found in:

Accessing International Financing for Climate Change Mitigation – A Guidebook for Developing Countries

https://www.uncclearn.org/resources/library/accessing-international-financing-for-climate-change-mitigation-a-guidebook-for-developing-countries/

Energy Efficiency Financial Institutions Group’s (EEFIG) Underwriting Toolkit is a valuable resource on financing of EE projects, extensively covering such topics as the types and nature of EE investments, their financing mechanisms, structures and contracts, EE project development and execution cycle, appraisal of risks and benefits of EE investments

https://valueandrisk.eefig.eu/introduction

De-risking Energy Efficiency Platform (DEEP) is the Europe’s largest energy efficiency project database, containing details on over 37,000 EE projects in buildings and industry

https://deep.ec.europa.eu/

The SECCA Project aims and expected outcomes

The SECCA Project aims to:

• Provide assistance in the development of regional and country-specific EE and RE policies
• Furnish technical assistance to the Central Asia countries for the development of replicable pilot EE and RE investment projects.

Expected outcomes:

• Strengthened public capacities for governance, strategy development, gender inclusive policy design and regulatory framework for EE and RE deployment
• Enhanced identification and accessibility of EE and RE investment projects, and the most appropriate technologies and innovative financing mechanisms
• In collaboration with the stakeholders and IFIs, bankable RE and EE investment projects identified and developed
• Business models for the small-scale RE projects developed
• Financing schemes and tailor-made financial products for the implementation of specific priority RE and EE projects developed.

Blended finance is a structuring approach where concessional financing is used together with private finance in projects that were initially considered too novel and risky for private finance alone. The “blending” of concessional and commercial financing improves risk-return characteristics of investments and attracts private sector investors into RE and EE projects. Blended finance therefore offers a financial structure in which different investors with different investment priorities can participate.

Acceptable risk-return profile of the projects is achieved by:

• De-risking instruments, which may include (partial) risk guarantees, first-loss arrangements, grants, technical assistance, subordinated debt or junior equity, or
• Return enhancement, which can be created by giving investors priority rights to cash flows generated.

Many energy transition investments are more capital intensive than traditional infrastructure. For example, a renewable energy project may have a higher upfront cost but lower operating costs than a coal plant of equal size. This high capital requirement relative to non-climate-friendly infrastructure means that energy transition projects are disproportionately impacted by high costs of capital: small changes in interest rates have compounding effects on project costs over time, and lowering financing costs can, therefore, have significant price benefits for projects’ end beneficiaries (electricity consumers).

The issue of high costs of capital is the most pronounced in developing countries with high vulnerability to climate, non-financial and economic shocks. Blended finance offers the potential to create financing vehicles on a national or sub-regional level to break the persistent negative feedback loop between high perceived and actual risk, high cost of capital and limited investment in energy transition projects in developing countries.

Blended finance and concessional funding are therefore considered as key strategic tools for addressing market imbalances and mobilising private funding for energy transition investments in developing countries.

International financing of energy transition in developing countries

Governments and international donors play major roles in enabling investments in RE and EE, especially in developing countries, where actual or perceived risks contribute to the high cost of financing and prevent projects from seeing the light of day.

Figure 8 below provides the breakdown of public financial flows to RE sub-sectors of developing countries in 2000-2021.

Most international public flows to RE of developing countries since 2000 have come from China, followed closely by Germany, the International Finance Corporation (IFC), EU institutions, the International Bank for Reconstruction and Development (IBRD), the United States, Japan, the Asian Development Bank, and France. Together, these nine donors account for three-fourths of all funding.

Debt instruments (including market-rate loans, concessional loans, bonds, and other debt securities) have been the primary financial instrument accounting for 85% of total flows. Debt finance is common, because RE and EE investments tend to be capital-intensive, with a fixed element in the cost and revenue structure of the underlying asset. RE and EE projects require high initial capital expenditure and are often underpinned by long-term power purchase contracts, savings-sharing agreements or regulated remuneration.

Grants are the second-largest instrument. Although they make up less than 10% of flows, they play a key role in both funding projects and helping attract private capital. Going forward, grants, concessional debt financing (denominated in local currencies) and other innovative, non-debt funding mechanisms can help meet the financing needs of developing countries while ensuring that these flows do not increase their debt burden.

Figure 8: International public flows to RE of developing countries by donor, financial instrument, technology and recipient region, 2000-2021 (sizes of the channels are proportional to the flow amounts, shown as values in 2020 USD billions)

Source: IRENA and OECD

However, the international flow of public finance directed to RE globally is clearly insufficient:

• Multilateral and bilateral DFIs together provided less than 3% of total RE investments in 2020
• Grants and concessional loans amounted to just 1% of total RE financing.

In recognising the above, IRENA (International Renewable Energy Agency) and CPI (Climate Policy Initiative) propose to prioritise the following:

• Stronger role for public and concessional financing in energy transition investments is necessary
• To meet the needs, the ratio of public-to-private investment must further grow
• Substantial increase in financial flows to the developing countries – from the Global North to the Global South – is required
• More funds need to flow to less mature technologies and to sectors beyond power (e.g. energy efficiency, heating and cooling, transport and system integration)
• Financial institutions and mechanisms which provide lending to developing nations must be expanded and reformed to reduce the cost of capital and ensure private capital mobilisation for RE and EE projects
• Greater use of concessional guarantees, local currency lending and hedging instruments, bankable project development and bundling facilities, blended finance solutions is needed.

Sources of financing

The four basic sources of funding are:

• Public
• Private
• Domestic (national)
• International

The detailed breakdown of financing sources globally is shown in Figure 5.

Figure 5: Sources of public and private climate finance (USD billion)

Source: Climate Policy Initiative

DFIs = Development finance institutions; FIs = Financial institutions; SOEs = State-owned entities

The strategic use of public finance is essential as it helps create an enabling environment for private investors, by developing infrastructure and addressing the risks and barriers that deter private capital. Public funding also facilitates capacity-building, education and retraining, which are important components of energy transition.

In RE space, the private sector provides around 2/3 of financing for RE investments. The share of public versus private investments varies by technology (see Figure 6). Typically, lower shares of public finance are devoted to RE technologies that are commercially viable and highly competitive, which makes them more attractive for private investors. In 2020, 60-83% of solar, bioenergy and wind investments were financed by private sector. While geothermal and hydropower received the largest shares of public finance in 2020.

Figure 6: Share of public/private investments by RE technology, 2020

Source: IRENA

The order in which different sources of energy transition finance are leveraged in developing countries is important. It is recommended that the public sector should come first, in order to inspire private sector investment. The national public sector usually starts finance raising, by presenting its policy ideas and potential budget funding commitments to international donors, before it starts securing financing from domestic and then from international private players. This proposed order of finance leveraging is illustrated with arrows in Figure 7 below.

Figure 7: The order of finance raising for energy transition investments

Financing of EE projects

Most of EE investments are required in the buildings sector (60%), followed by transport (30%) and then the corporate/industrial sector (10%).

Depending on the sector and its segment (for example, commercial/residential/public segments of buildings or large/energy-intensive companies/SMEs among corporates), EE investment needs and project characteristics may vary significantly. This diversity adds complexity to the development of bankable EE projects, standardisation, aggregation and up-scaling of their financing volumes.

Primary financial instruments and support tools used in financing of EE projects are:

• Dedicated credit line is a line of credit (a commitment to fund specific assets), issued by a financial institution to be disbursed as a set of individual loans for a defined use – in this case EE – usually in a specific sector (e.g. residential buildings, SMEs etc).
• Energy performance contracts and ESCOs. Energy performance contracting is a practice whereby a counterparty (often an energy service company (ESCO)) commits through an energy performance contract (EPC) to install necessary equipment and guarantees its specific energy savings performance. In addition, EPC establishes the terms of any upfront or ongoing payments, which are intended to be less than the financial savings realised by the project, to ensure that the project host is making net savings from day one. The two most common types of EPCs are referred to as a (1) shared (between ESCO and its client) savings model or (2) guaranteed savings model (ESCO guarantees certain savings).
• Energy efficiency investment funds are specific investment vehicles created to invest only in EE projects targeting both buildings and industry segments usually seeking a return based on savings achieved.

Other emerging, innovative and scalable instruments to finance EE investments are:

• On-tax financing involves a specific tax being a repayment vehicle. Property Assessed Clean Energy (PACE) is EE on-tax financing program which provides loans for EE home improvements through specific contractors and is treated as tax assessment against the property, secured by property tax lien.
• Green (or EE) mortgage aims to incentivise borrowers to improve the EE of their buildings and/or acquiring highly energy efficient properties. The incentives for borrowers may be favourable mortgage financing conditions and/or increased loan amount for financing of EE improvement of the property and enhancing its energy performance level.
• On-bill repayment is a method of financing EE using utility bill as the repayment vehicle. Within this arrangement, borrowers pay back the cost of efficiency improvements on their utility bill which is both convenient and familiar and reduces credit risks and collection issues.

There is a significant investment gap in energy efficiency worldwide. EU experience shows that simple provision of capital is insufficient to build a well-functioning EE financing market and a range of de-risking tools, transaction enablers and mechanisms also have to be used. These include specific EE financing vehicles (such as ESCOs, Super ESCOs, local authority formed vehicles and funds), energy service contracts and procurement frameworks, combined with project development assistance, continuous education and technical assistance.

The value of energy savings is still the basis for evaluation of EE investments. However, increasingly project initiators, owners and financiers are paying greater attention to the multiple other benefits that EE brings beyond these energy-only returns:

• GHG emissions reductions
• increased energy security
• higher industrial productivity
• property value uplift
• increases in international competitiveness of countries
• new jobs
• reduction in energy poverty
• improvements in resilience, health and wellbeing of end-users.

Financing instruments

The regularly-used financial instruments are:

The selection of instruments depends on the viability of the technology being deployed and the market barriers and risks that need to be addressed:

• Concessional loans are generally used for energy transition investments that:
• have high costs for deployment
• cannot compete with existing technologies
• have limited operational experience
• face market and financing barriers that hinder large-scale implementation
• Risk guarantees are an effective mechanism when the commercial financing sources have a perception of high risk with respect to proposed investment. The guarantee reduces this risk perception and facilitates commercial financing
• Market-based loans are used when availability of funds (liquidity) is an issue but there is no need to subsidise the project with concessional financing. These loans help to overcome the liquidity barrier
• Grants are better suited for smaller and focused funding situations, such as financing novel technologies, project development, policy support, capacity building and education. Grant finance is essential for building a pipeline of bankable projects, helping projects reach a level of maturity that might attract investors, and launching pilot projects.

The use of financing instruments is as follows:

• Loans are the dominant instrument with around 60% of the global climate finance universe
• Within the debt financing segment, market-rate loans command over 90% of all loans provided
• Concessional finance (grants and concessional loans), which is the vital component of climate funding in the developing countries, comprise only 11% of total financing (see Figure 4)
• Scarce concessional finance – most often provided by governments and multilateral, bilateral or national DFIs – is not making its way to less mature markets, which means the energy transition is not able to advance in many developing countries.

Figure 4: Breakdown of global climate finance by instruments in 2022 (total of USD 1,415 billion)

Source: Climate Policy Initiative

Policy and support measures

Many of the barriers for RE and EE projects translate into higher costs or risk premiums compared to conventional energy solutions. Therefore, most promotion instruments are designed to improve the economic parameters of projects through financial incentives or other financial support mechanisms. The list of policies and measures for supporting RE and EE investments can be broadly grouped as follows:

Barriers for investments

Barriers for the deployment of RE and EE projects in developing countries can be political, economic, financial, legal, regulatory, technical, institutional and even cultural in nature.

There is enough liquidity in global financial markets, with institutional investors (global pension funds and insurance sector, sovereign wealth funds) collectively managing over USD 100 trillion of assets. However, the barriers faced in many emerging markets impede sustainable deployment of these funds. These barriers can be broadly categorised into the following groups:

To overcome the barriers the governments and DFIs are implementing favourable policies and offering incentives and financial support measures.

Renewable energy and energy efficiency are significant use areas of the climate finance (see sectors “Energy systems” for RE and “Building & Infrastructure” for EE, respectively, in Figure 1).

Figure 1: Global climate finance landscape in 2021/2022[1]

Climate finance is on the rise (as shown in Figure 2). Despite the recent growth, current global climate finance flows represent about only 1% of global GDP.

Figure 2: Global climate finance in 2011-2022, biennial averages

Source: Climate Policy Initiative

However, growth is not sufficient (see Figure 3), nor consistent across sectors and regions.

In 2021/2022, USD 209 billion, or just over 16% of global climate finance, flowed to least developed and developing countries (excluding China). While not responsible for high emissions historically, least developed and developing countries are disproportionately vulnerable to the impacts of climate change and face substantial related funding challenges.

Figure 3: Global climate finance and estimated annual needs through year 2050

Source: Climate Policy Initiative

Climate finance and energy transition investments are inherently complex, multifaceted and have to consider specific factors:

• Technology maturity: newer technologies may involve higher investment risks due to uncertainties in performance and cost
• Regulatory environment: government policies, incentives, and regulations significantly impact the feasibility and attractiveness of energy transition projects
• Project scale and risk profile: large-scale infrastructure projects have higher upfront costs and potentially longer timelines compared to smaller, distributed energy solutions
• Financing options: financing instruments used (loans, grants, guarantees) influence the cost of capital and project risk allocation between investors, project developers and end-users
• Social and environmental considerations: lack of awareness and skills, land use issues, community impacts and environmental regulations add complexity to project development.

These factors may create barriers and risks that hinder faster deployment and scaling up of RE and EE investments.

[1] Link to interactive infographic:

https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2023/#:~:text=Climate%20finance%20is%20on%20the,renewable%20energy%20and%20transport%20sectors.