From playing a key role in facilitating the scaling of the solar sector, to opening new markets and enabling grid and energy storage technologies, multilateral financial institutions have been an important part of the ongoing global energy transition. And as Felicia Jackson writes from London, with the expansion of “green banks” and clean-energy lending, the role of these institutions is only set to expand.
Solar PV is leading the low-carbon energy revolution. Innovation, corporate commitments, and policies and regulations to address climate risk and consumer concerns mean that the sector is positioned for more growth, despite a decade of acceleration.
The technology has the potential to transform the lives of those without access to electricity – about 350 million people in the Asia-Pacific region (many living in remote areas or islands) and more than 600 million in Africa. The cascading effects on health, agriculture and gender have made it a focal point for development banks. At the same time, utility-scale solar plays an important role in the transformation of established energy markets, playing an increasingly dominant role in the annual growth of installed capacity.
Development banks
While solar’s progress has been driven by a combination of policy incentives around the world such as feed-in-tariffs, tax credits, and renewable energy purchase obligations, development banks have played an important role in achieving this by enabling economies of scale. Often this has been through their ability to provide long-term, low-cost financing, as energy investment requires long-term finance to recover costs over the lifecycles of assets, and that can be a challenge for purely commercial institutions. Direct investments can tackle investor concerns about risk in a way that policy and country-dependent subsidies cannot.
Green finance
Development and “green banks” are only one part of the rapidly emerging field of sustainable finance. Throughout Q2 2020, pv magazine will be examining the entire landscape in more depth and what it means for solar industry players as a part of its UP initiative. Stay tuned and get involved!
The role of development banks is often one of risk mitigation and finding new ways of crowding-in private funds, whether this is through blended finance, letters of credit, risk guarantees, development bank recourse, or other tools. But Harry Boyd-Carpenter, director of energy for EMEA at the European Bank for Reconstruction and Development (EBRD), believes that the real power of development banks lies in policy dialogue – explaining to governments why and how renewable energy can provide solutions to long-term economic challenges. “The one thing we’re not short of is financial innovation,” he says. But solar PV needs to be part of long-term energy solutions that are available, affordable, and sustainable in developing countries.
Yongping Zhai, chief of the energy sector group (sustainable development and climate change department) for the Asia Development Bank (ADB), agrees. “Development banks can help these countries put in place needed policies and regulatory frameworks by sharing the best practices of other countries,” explains Zhai. “People often talk about the challenge of solar intermittency, but policy intermittency is actually the biggest challenge for solar PV deployment.”
It is a truism that there is a sea of capital looking for “green investment,” but many institutions are required to invest in markets with certain risk ratings. While markets like Abu Dhabi and Saudi Arabia can build large-scale solar at very cheap rates, markets such as Egypt can prove more difficult. Despite having similar technologies and climates, much private debt needed for project finance can’t enter the market because of the perception of country risk. Daniel Schroth, acting director for renewable energy and efficiency at the African Development Bank (AfDB), says that the role of development banks is unlocking markets and de-risking investment through a combination of financial intervention and policy dialogue. “The role of DFIs is in getting more projects to the level of attracting private capital,” he says.
Zhai points to the ADB-supported Solar Park Project in Cambodia as “a good example.” ADB launched a transparent, competitive tender for private solar generation, while providing public sector loans for the common park facilities and transmission interconnection to de-risk the project. “ADB’s private sector lending department is exploring financing for private PV generation within the park. Through this approach, the auction of 60 MW solar PV capacity has resulted in the lowest price in Southeast Asia,” Zhai says.
The ways in which the rollouts are designed are critical to success. “We’re good at policy dialogue because we know what investors want, what risks can be transferred,” Boyd-Carpenter says. He believes that the role of development banks is “creating an enabling framework and then investing in that framework, providing comfort to commercial investors.” And what interests him is scale. He argues that it is ineffective to design a structure for solar that’s not replicable and scalable to gigawatts of power. “[What’s important is] understanding the flow of funds in the sector, from consumer to product,” he says. “It is understanding what economic benefit it brings and where it stands in the merit order.”
One area in which most investors seem to be in agreement is that the long-term driver of solar growth will be that it’s cheaper than the alternatives. The technology is now so cheap that there are few places where it’s not cheaper to generate 1 kWh of solar than burning gas. That doesn’t mean that the market is clear for growth, however.
Intermittency and the ability of existing grids to manage new power sources remain issues. This is important both in terms of location (whether there are transmission lines) and systemically, where there are potentially large volumes of power at times that don’t match peak demand. That creates market challenges in addressing asynchronous generation and negative pricing. As Claudio Alatorre Frenk, lead climate change specialist at the Inter-American Development Bank (IDB) says, “the main objective should always be to move the market beyond the need for our help.”
Enabling investments
Today it’s the enabling environments that should be the focus of intervention, whether that’s enabling storage technologies, transmission, or market design. Zhai agrees, saying there are now three goals for multilateral development banks: policy support, concessional finance, and “more funding for electricity grid systems in developing countries in order to integrate a rapidly growing share of solar and other renewable energy sources.”
This is particularly important in the African context, where large-scale investment is necessary in domestic grids and interconnections. The AfDB has approved the first solar IPP in Chad, but even at 30 MW, the capacity is bringing the grid to saturation. Schroth says the importance of regional markets – and regionally, the importance of an interconnection between Chad and Cameroon, which has complementary hydropower.
Of course solar PV is not simply an emerging-markets opportunity. National development banks have driven growth in developed markets, especially when mandated for mission-driven innovation, fostering capital markets, and developing new industries. According to Richard Abel, managing director of UK Climate Investments (UKCI), this helped “to crowd-in the private sector by giving investors the confidence they need to get comfortable with new markets or technologies.” In Germany, for example, the KfW development bank backed the early solar market by providing cheap, long-term secondary debt to commercial banks to encourage their backing of the Energiewende, the German energy transition. In emerging markets, as Frenk points out, “We work with national banks to build out markets.”
‘Green banks’
It is creation of the specifically “green bank” that could really mainstream solar PV, with a focus on enabling environments and infrastructure equal to that of the multilateral development banks, but focused on green finance. In Australia, the Australian Renewable Energy Authority has a mandate to provide funding to initiatives in the “renewable energy” sector, which includes hybrid and other related technologies, such as energy storage. It delivered crucial momentum to the large-scale solar sector through an initial grant program that exceeded all cost and performance forecasts.
However, the role of Australia Clean Energy Finance Corp. (CEFC), through the provision of long-term debt, continues to stimulate the growth of the country’s utility-scale solar segment, at a time when fully commercial investors remain nervous about the potential risks involved in backing a fairly new technology.
The world’s first green bank was established by the UK government in 2012. As Gavin Templeton, head of sustainable finance for Green Investment Group explains, “over its first five years, the bank committed £3.4 billion ($4.4 billion) to 100 green infrastructure projects in the UK worth a total of £12 billion and proved that the model of being both green and profitable is possible. Now, as part of the Macquarie Group, the renamed Green Investment Group (GIG) works globally in pursuit of its mission to accelerate the transition to a greener global economy and continues to share its experience to promote the further uptake of green finance institutions.”
What matters here is that green banks have a specific mission in mind. In 2019, 22 emerging markets convened to compare progress and seek partnerships with existing green banks, private banks, and multilateral funders as they work to set up variations on a national green bank. “They are a diverse group, including fast-growing Asian economies like China, Indonesia and India, sub-Saharan African countries like South Africa, Rwanda, and Nigeria, and Latin American nations including Peru, Chile, and Brazil,” says Templeton.
Rapid expansion
What’s striking is the speed at which these countries are looking to gear up, with 11 countries saying they plan to have a green bank operational within two years, focused on leveraging investment in areas like residential and commercial energy efficiency, residential and utility-scale solar, forestry and land use, and transportation.
Solar has shown such rapid growth that continuing to accelerate to scale may look challenging, especially with regards to the complexity of grid management. But with the prices of batteries falling, the alleviation of intermittency is already on its way to being solved.
Schroth calls batteries a “game changer” and says that if prices follow the solar industry, driven by increasing EV uptake, the problem is already on the way to being solved.
There are an increasing number of growth drivers: the economic argument, the global shift toward low-carbon generation through the Paris Agreement, the technological potential of hybrid hydrogen/solar projects, floating solar, perovskite PV, and BIPV. While solar grows, multilateral development banks and national green banks are picking up the mantle. Where there is a combined understanding of how policy and finance can be used to achieve common goals, the future looks bright.
By Felicia Jackson
Existing ‘green banks’ and funds
| Clean Energy Finance Corporation (CEFC) | Australia |
| Malaysia Green Technology Corporation | Malaysia |
| Green Finance Organisation | Japan |
| Green Investment Group | United Kingdom |
| Tata Cleantech Capital Limited | India |
| Energy Efficient and Renewable Sources Fund (EERSF) of Bulgaria | Bulgaria |
| NZ Green Investment Finance | New Zealand |
| Nysnø | Norway |
| Danish Green Investment Fund | Denmark |
| Green Technology Bank | China |
| China South-South Cooperation Fund | China |
| CORFO | Chile |
| Banobras Sustainable Bank | Mexico |
| Green Finance Corporation | Mongolia |
| MRCB Green Commercial Bank | China |
| Masdar | UAE |
| Alternative Bank Switzerland | Switzerland |
U.S. ‘green banks’
| Name | Date of incorporation |
| Connecticut Green Bank | 2011 |
| NY Green Bank | 2014 |
| California Lending for Energy and Environmental Needs | 2014 |
| Rhode Island Infrastructure Bank | 2015* |
| Montgomery Country Green Bank (Maryland) | 2015 |
| Hawaii Green Energy Market Securitization | 2018 |
| *Mandate expanded to energy | |
Offgrid applications and minigrid development can be facilitated by development bank lending, as more traditional lenders tend to be more wary of the space.
Proposed ‘green’ finance frameworks
| Development Bank of South Africa (DBSA) and the Green Climate Fund (GCF) | South Africa |
| Rwanda Green Bank (Catalytic Green Investment Fund) | Rwanda |
| United States National Climate Bank | United States |
| Findeter | Colombia |
| Green Finance Catalyzing Facility (GFCF) | Indonesia |
| GreenBank | Nigeria |
| Green Finance Platform | Peru |
| Green Finance Platform | Chile |
| Brazil Green Finance Initiative (BGFI) | Brazil |
| Green Bank | Vietnam |
| Green Window at IREDA | India |
| Green Banking Guidelines | Pakistan |
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