RE & poverty reduction - financing issues Bonn, 12 September 2006 Kirsty Hamilton

Renewables & financing zContext: developing countries & energy – oil prices exacerbating economic damage zFinancing: some background relevant to role of public and private finance zInternational situation: public financing, new models of finance, carbon finance

Context: energy & oil price zWider energy debate – driven by oil prices above $60-70 for sustained period z “The adverse economic impact of higher oil prices on oil-importing developing countries is generally even more severe than for OECD countries. …their economies are more dependent on imported oil and more energy-intensive, and because energy is used less efficiently. On average, oil-importing developing countries use more than twice as much oil to produce a unit of economic output as do OECD countries.” IEA, 2004

Wealth transfer “Oil Price Shocks Mean Historic Wealth Transfer” Tues 26 Oct 2004, from Press Association Jeffrey D. Lewis, manager of international finance research,World Bank: …without emergency funding, much of the [World Bank’s] 2.5 billion dollars aid to struggling nations this year [2004] will have to be reallocated to fuel purchases by local governments, leaving health and education programs grossly underfunded or scrapped altogether.

Vulnerability to oil price ESMAP [World Bank] study; contains survey of 131 countries to assess impact of oil shocks –  Of the group of 47 countries whose per capita income is less than US$2 a day, 9 were self sufficient [in oil production] ….and 25 were entirely import dependent. The Impact of Higher Oil Prices on Low Income Countries and on the Poor.

IMF – alternative energy zMonetary and Financial Committee of the Board of Governors: April 2005 z…recognizes the impact of higher oil prices especially on poorer communities. In this context, the Committee calls for efforts to remove disincentives to investment in oil production and refining capacity, and to promote energy sustainability and efficiency, including through new technologies and removing barriers to the development of alternative fuels.

Scale of Financing Challenge - BAU zGlobal - $17 trillion out to 2030 for energy supply and infrastructure (IEA) z“Emerging markets” - $120 billion per year power sector (WB) This investment will be key to CO 2 trajectory zChina RE goal - $49 billion needed z$10 billion/yr for existing Bonn ‘plan of action’ agreements – ‘big challenge’.

RE: Int’l dimensions z2001: G8 Renewable Energy Task Force – feasibility and actions to supply 1 billion people (800 million in developing countries, ) with renewable energy in a decade z2002: WSSD – Brasil analysis showing feasibility; JREC and start of the EU ‘Patient Capital Initiative’ z2004: Bonn RE conference – Finance key theme z2005: UNFCCC topic - innovative financing for technology transfer

Financing – private money zFinance focused on risk and return: reduce risk, increase return zEnergy related risks include ‘those of a geological, technical, geopolitical, market, fiscal and regulatory nature, vary by fuel, by the stage of the fuel chain in question, and by region….’ WEIO, zC Finance (at present): ‘compounding risk – combining risky sectors with risky markets with a risky commodity’ zEnergy policy, more broadly, has key role: should be ‘Long, Loud and Legal’

Financing – public money zKey place for public money to play a role: “The challenge of supplying rural energy services is NOT a lack of technology, business models, capital or the ability to pay; it is the MISMATCH between the needs of the enterprise and the types of financing available.” E&Co z zAlternatives to pure grant-based approach, is to use public money or guarantees (low cost) to attract in larger quantities of private money. Lower risk of money not being paid back. Local banks and local government have key role to play in delivery.

Approaches zSmall business enterprise development: 60,0000 small enterprises needed - E&Co - focus on Rural Energy Enterprise Development. Financing need is for seed and patient capital - ie low cost debt at small scale. Also the focus of EU ‘Patient Capital Initiative’. (E&Co = zEnd-user focus: eg through local bank credit facilities. Public financing institutions can work with local banking networks to enable this. Eg UNEP + two of India’s largest banking groups - interest rate subsidy to build solar financing loan scheme - 2,000 branches and seven regional Grameen banking networks.

What the financiers say zSouthern Africa RE Financiers Network: how do they need to work together to ‘increase deal flow’ in renewable energy - the need for a larger number of bankable projects. Work with entrepreneurs, project developers, financial institutions; and need for right policy conditions. zIFIs: need to institutionalise approaches, explicity to address ‘access’ and RE: EBRD starting to do this on energy efficiency when it comes to infrastructure and industrial projects; World Bank - clean energy investment framework - now has ‘access’ as a theme but not well integrated at all.

Carbon finance zUsing the additional value created through mechanisms like ‘CDM’ (CERs - tradeable carbon certificates) to increase returns on investments. Not as yet having much impact on RE - good additional revenue stream ‘icing on cake’, but not a significant driver. zCDM Starting to shift towards ‘programmatic’ form, but not rapid progress – yenergy efficiency in CapeTown; ysolar cookers in Indonesia; ybiogas in Nepal; ysmall hydro in Sri Lanka.

Where next zPublic financing frameworks = very important to lower risk; requires demand from developing countries as well as donor support. zSet ‘access’ issue within broader energy context: institutional rather than ghetto approach, maximise integration zTap into range of private financiers interested in this area - what they need more of, how to enable them to channel money at the right level of returns. zSouth-south cooperation on policy and finance - is this a new area - China in Africa, more opportunities than oil?