Ahead of the Global Wind Energy Council's (GWEC) inaugural London Energy Transition Dinner on 16 September 2020, we are tackling some of the big issues that must be addressed to accelerate the global energy transition and keep global warming under 1.5°C. Leaders across the energy, finance and corporate sectors were invited their thoughts in GWEC's Energy Transition Talks.
For this series, PFAN's Peter du Pont, Ph.D, Asia Regional Coordinator, discusses the role the finance sector can play in driving renewable energy growth across the world.
As we begin a new decade, there is renewed urgency among policymakers around the world to deliver and speed up the energy transition. Deployment of renewable energy will be a critical component of the energy transition, but requires significant financing – for instance, IRENA estimates that global renewable energy investment must double in size to about USD 750 billion annually to 2030. What is PFAN’s view of the financing gap facing clean energy, and what are the specific areas where investment is needed?
All estimates of the financing needed in order to maintain the global temperature increase to 2° C agree that the vast majority of the climate and clean energy investments must come from the private sector. It turns out that mobilizing this private sector investment, and linking it to national climate objectives, is a very challenging task.
PFAN’s niche is working with small and medium-sized project developers who are seeking investment in the range of US$1 million to US$50 million. We link these companies with equity and debt investors to help them realize their dreams. We work across a broad range of sectors, from clean energy to climate adaptation and resilience. In the area of energy efficiency and renewable energy, PFAN is sector agnostic, and we respond to the market demand. Since PFAN was initiated in 2006, we have coached more than 600 projects and have helped more than 160 of these projects of them secure a total of US$1.7 billion of investment. The range of projects supported includes solar, biomass, biogas, waste energy, small hydropower, and energy efficiency and demand reduction.
What is the role of the private sector in channelling capital into renewable energy? Where does PFAN add value in this space?
The private sector is typically the key investor in renewable energy projects. Governments often set the conditions that enable the investment, such as clear rules and regulations for interconnections, feed-in tariffs or competitive procurement approaches, and in some cases concessional financing and/or credit guarantees. But in the end, the deals hinge on the ability of innovative and committed project developers to attract a significant amount of equity investment into the project. Once the equity is committed, it is possible to line up debt financing for the balance of the investment, and in some cases other government and development financing mechanisms that can support the investment in a minority role.
PFAN is hosted jointly by UNIDO and REEEP, and is based in Vienna. Our funding comes from a range of national donors, including Sweden, Norway, Australia, Austria, the United States and Japan. The funding is used to support a network of nearly 200 international network members who provide coaching and design events and activities to help link projects with investment.
PFAN adds value in two ways: First, we scour the globe for promising projects that are fairly well-developed, but need assistance in refining their business models and plans, evaluating and selecting technologies, reviewing and improving their financial models, and developing investment pitches. Our network of experts have deep expertise in project finance, clean energy, and climate related investments, and draw on this experience in their coaching. Second, we are also building out a network of investors globally, with focal nodes in each of our main regions—Asia, Africa and Latin America and the Caribbean—and we match the projects with investors, based on the interests and appetites of the investors.
Developing countries around the world have committed to long-term transformation of their energy systems, in order to power relatively high economic growth with clean energy. But this is a difficult line to walk, given the investment volume and political will required to push fossil fuels off the grid with minimal disruption. What are the greatest risks and barriers in mobilising investment into renewable energy in developing countries? What are the opportunities?
You rightly point out the significant barriers caused by the existing energy and power infrastructure, as well as the utilities that have built and financed this infrastructure. This battle between clean energy project developers and advocates on the one hand, and governments, utilities and large energy companies on the other hand, has been playing out across several continents over the past couple of decades.
Fortunately, just as we are reaching a peak of concern about the ever-escalating impacts of climate change, the economics of the situation have reversed. It is now becoming widely accepted among senior government officials, and even utility executives, that renewable energy, distributed energy storage, and energy efficiency can be implemented quickly and effectively, and at a cost is typically less than the cost of fossil fuel power plants. Evidence of this acceptance can be found in the fact that many countries across Asia have switched from fixed feed-in tariffs for renewable energy to competitive procurement, because they see that prices are declining and want to take advantage of price competition among suppliers.
There are huge investment opportunities in the area of decentralized renewable energy, utility-scale and facility-scale energy storage, energy efficiency and demand-response technologies, software systems and solutions to manage the technologies, and the whole area of electric mobility, and the benefits of the decentralized energy storage that electric vehicles can provide when they are parked.
Many developing countries around the world are more vulnerable to climatic risks, due to a lack of disaster-resilient infrastructure, low-lying coastal zones and economic dependency on agriculture. What kind of climate change adaptation projects have been supported by PFAN in these markets?
PFAN expanded from our initial focus on purely clean energy projects, to consider adaptation projects in a background paper that we developed in 2011. That was followed by a pilot project in sub-Saharan Africa the following year, and then a three-year program supported by USAID and IDRC with a research component. We organized a series of annual adaptation investment forums in Africa, and at the time it was widely perceived in the development field that adaptation projects did not provide profits, and therefore had to be primarily supported by the public sector. We found that emphatically to not be the case, and in 2016 we started mainstreaming adaptation into our regular pipeline development along with mitigation projects in the clean energy sustainable landscape sectors.
We define adaptation projects as projects that help reduce the vulnerability of populations, infrastructure, ecosystems and human or natural systems to the current and future impacts of climate change and climate -related risks. Adaptation project should also increase the adaptive capacity and resilience in the targeted regions of populations.
We interpret adaptation quite broadly, and the call for adaptation proposals on our website identifies 10 adaptation-related business areas including agriculture, ecosystem services, forestry, urban development, health, energy access, water, waste, microfinance/insurance and tourism.
What trend, innovation or solution has the potential to be a major game-changer in financing the energy transition, and why?
I generally don’t subscribe to the silver bullet theory of solutions for complex problems. I guess the biggest and most promising trend that I see is that it is increasingly possible to build modular and scalable renewable energy systems that can provide reliable, clean energy at a cost less than the traditional top-down mega plants. And I am excited to see a future where these decentralized, flexible, and scalable clean energy solutions become even more affordable, and can actually democratize the way that energy systems are conceived, planned and implemented across the world.
This is one of the things that excites me most about PFAN—that every day we are dealing with exciting new companies led by entrepreneurs who are seeking investment for innovative projects that can change their communities, cities and countries. We focus on supporting projects that are not just profitable, but also innovative and scalable, and can provide significant social, gender and environmental benefits.