Public Finance and Private Investment Eric Usher, Manager Seed Capital Programmes, Energy Branch United Nations Environment Programme

GLOBAL INVESTMENT IN RENEWABLE ENERGY: DEVELOPED VS. DEVELOPING, 2004 – 11($BN) Source: BNEF, UNEP Note: New investment volume adjusts for re-invested equity. Total values include estimates for undisclosed deals. Developed volumes are based on OECD countries excluding Mexico, Chile, and Turkey.

GLOBAL NEW INVESTMENT IN RENEWABLE ENERGY BY REGION, ($BN) Source: BNEF, UNEP Note: New investment volume adjusts for re-invested equity. Total values include estimates for undisclosed deals. This comparison does not include small-scale projects. Global Trends in Renewable Energy Investment 2012

Performance of Public Stocks

RE POWER GENERATION AND CAPACITY AS A PROPORTION OF GLOBAL POWER, (%) Source: Bloomberg New Energy Finance, EIA, IEA, UNEP Note: Renewable power excludes large hydro. Renewable capacity figures based on Bloomberg New Energy Finance global totals. As of 2011, 9% of global installed power capacity was from renewables, not including large hydro. In terms of new power plants built in 2011, the share of renewables is much higher, with 44% of new plant capacity and 31% of the actual power generation increase.

1.GOVERNMENTS GETTING SERIOUS IPCC Special Report on Renewable Energy Sources Three Reasons Renewables Are Ready for Uptake Today in Developing Countries

2. SUCCESSES TO LEARN FROM 29/11/2011 Land Area Under Cane in Mauritius and Electricity Output from Sugar Industry Source: AFREPREN Today sugar accounts for 51% of Mauritius electricity generation Source: Bloomberg New Energy Finance

. 3. COST COMPETITIVENESS Diesel Costs in Africa Large Hydro Three Reasons Renewables Are Ready for Uptake Today in Developing Countries

4 THREE HURDLESMANY RESPONSES Large scale 1. Immature project pipeline 2. Non-investment grade - policies - off-takers - legal jurisdictions 3. Limited access to capital Small scale Private Hurdles – Public Responses Public/private support for project development. -> Seed Capital Assistance Facility Policy support Performance payments / Credit enhancements Risk mitigation approaches Public/private equity funds Public/private lending Risk mitigation approaches Policy support Engaging local banks Removing subsidy distortions -> Prosol Tunisian solar water heating programme

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Source: UNEP, Aequero Project Development Lifecycle Corporate & Compliance Investors (15-20%) Funding Source (and Indicative Return Requirements) Sponsor / Developer (30-40+%) Early-stageMid-stageLate-stage DevelopmentConstruction CommissioningOperation Financing Financial Close Private Equity & Infrastructure Funds (18-25+%) Capital Markets (generally driven by P/E and other comparables rather than return) Mezzanine Capital (12-15%, somewhere between debt and equity return) Carbon Finance (20-25+%) Debt Finance (Project Finance) (Indicatively, e.g., 7-8% in US$; 11-13% in INR) Early Stage Financing Gap Development/Transaction Costs Where are the financiers along the project cycle ? Why is it hard to get capital into this space ? ‘First mover’ low carbon projects have higher development costs. In addition to costs, development cycles are typically 2 – 3 times longer.  Different risk/return paradigm is a mismatch with conventional developers.  More of a VC risk profile than infrastructure development finance. Catalysing Early Stage Investment 4

SCAF Cooperating Fund Agreement (CFA) CONCEPT 7

Contracted Fund Managers Asia Africa FUNDS PE Funds VC/PE Hybrid Funds 9

PROJECTS Africa Name, Country Tech.Size (MW) Stage Kouga South Africa Wind80Financial closing Mapembasi Tanzania Small hydro 10Financial closing Kinangop Kenya Wind50Financial closing Akiira KenyaGeo.35Feasibility Baringo KenyaBiomass12Feasibility DSI RwandaPV20Feasibility Lubilia Uganda Small hydro 5.4Feasibility SITI I/II Uganda Small hydro 22Feasibility KVTC Tanzania Biomass4Pre- feasibility SL2 SL1 Asia Name, CountryTech.Size (MW) Stage PhilippinesWind48Financial closing PhilippinesSmall hydro25Financial closing PhilippinesBiomass30Feasibility PhilippinesSmall hydro24Feasibility IndiaSmall hydro13Feasibility IndiaSmall hydro48Feasibility IndiaWind farm230Feasibility SL2 SL1 11

PROJECTS Example Seed Financed Projects Name, Country Tech.Size (MW) StageFinancingCo-finance Ratio; Leverage Ratio CO 2 (MT) Kouga South Africa Wind80Financial closing Total: R20mn dev.; R380mn equity; R800mn debt Fund: R10mn dev. (20%SCAF); R90mn equity 4x co-finance 50x fund; 600x total 6.1 Mapembasi Tanzania Small hydro 10Financial closing Total: $720K dev.; $8mn equity; $19mn debt Fund: $350K dev.(20%SCAF); $3.5mn equity 4x co-finance 55x fund; 400x total 0.6 Seed Financed Development Loan - soft quasi equity investment, interest free and convertible to equity at financial close $70K of SCAF Support For: - EIA and technical verification studies. - covers max 50% of any activity * Figures in italics are still to be realised 10

Tunisian PROSOL Solar Water Heating Programme 1. Mechanism to facilitate consumers access to credit  repayments made through electricity bills  interest rates initially softened  interest subsidy phased out after 18 months 1. Mechanism to facilitate consumers access to credit  repayments made through electricity bills  interest rates initially softened  interest subsidy phased out after 18 months 2. Subsidy equalized between SWH and LPG  20% subsidy on SWH capital cost to enhance competiveness of SWH vis a vis the existing gas subsidy (underwritten for a trial period by Italy)  After successful trial made permanent: legislation mandating a 20% capital cost subsidy for SWH in residential sector 2. Subsidy equalized between SWH and LPG  20% subsidy on SWH capital cost to enhance competiveness of SWH vis a vis the existing gas subsidy (underwritten for a trial period by Italy)  After successful trial made permanent: legislation mandating a 20% capital cost subsidy for SWH in residential sector BANK FINANCING through UTILITY BILL A loan mechanism over a 5-year term with repayment via the STEG bill Monthly payment = Energy savings SWH Size200 liters300 liters End-user down payment0%15% Govt subsidy 20%20% Loan (Attijari Bank) 80%65% Discounted Interest Rates: Initial average bank consumer loans: 12 – 13% With STEG’s involvement, banks lowered the interest rates by 5-6 points because the risk of nonpayment is low (less than 1%, Prosol I) UNEP further softened interest rates down to 0%, full benefit passed on to the customer.

PROSOL Results 435,350 m2 = 145,100 systems 112 million USD worth of local bank loans

Financial and Economic Analysis Investments – Who pays for what investment in the overall Program during has been estimated at approximately US$ 248 million The Public Sector provided 18%; 82% was provided by Private Capital (end-users and banks) 1 US$ of public resources Mobilized 5 US$ of private capital 37% 45% 18%

Financial and Economic Analysis Benefits for the Tunisian Government 101 million US$ expected savings achievable in 20 years ( ), of which 15.2 million US$ were achieved in the period Public finance returns under the BAU scenario and fossil fuel “phasing out” scenario

Financial and Economic Analysis Benefits for the Tunisian Government 251,000 toe of fuel savings are expected over 20 years CO 2 emission reductions of 715,000 tCO 2 over 20 years Second phase of PROSOL Residential registered as a Programmatic CDM with revenues reinvested to sustain the Programme itself.

GSWH Chile GSWH Mexico

Lessons 1.Policies are what mobilise sector wide investment. Public finance should be closely linked to policy developments. Policy-finance signals travel in both directions. Need to optimise feedback loops. 2.Public finance mechanisms can only fill gaps, mostly by rebalancing the risk-return profile of projects. But… When to engage ? How to align risks ? What size of projects to focus on ? 3.Public finance programmes can start small, but if linked to policy improvements can realise impacts at scale.

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