1. Taking stock of clean energy policy and private sector investment
Robert Gross and Becky Mawhood
Centre for Energy Policy and Technology
Imperial College London
Imperial College Energy Futures Lab

2. Outline
Context – the decarbonisation challenge and growth in green energy
The policy map
The investment challenges
What’s policy been doing and what does policy need to do?
Conclusions

3. The scale of the climate challenge
NOTES - NOT IEA 2010 AS PER FIG pics aren’t so good!
IEA WEO 2012 New Policies scenario: (existing policies maintained and already-announced policy plans, inc those yet to be adopted, implemented cautiously)
RE = 31% generation by 2035
Investment in RE of $6.4 trillion over % on power sector, remainder biofuels. 48% of investment is OECD (focuses mainly wind/PV), non OECD focuses hydro and wind.
RE subsidies were $88 billion in 2011 (24% higher than 2010), will need to be nearly $240 billion in 2035.
IEA WEO scenario (50% probability limit to 3.6C increase, 6% prob limit to 2C increase)
Half emissions savinbs by energy efficiency, RE 21% savings, CCS 12%, nuke 8%
$22.4 trillion by 2035
IEA, 2010 “Energy Technology Perspectives: Scenarios & Strategies to 2050”

4. Increasing demand from developing countries
Share non OECD energy demand rises from 55% 2010 to 65% China largest - 60% 2035, Indian second (more than doubles), middle east third. OECD rises just 3% higher than 2010.
Source: IEA WEO 2012 Presentation to Press

5. Investment flows Ren 21 Global Status Report 2012
Global new investment in renewable energy increased 17% in 2011, to a new record of USD 257 billion. This was more than six times the figure for 2004, and 94% more than the total in 2007, the last year before the acute phase of the recent global financial crisis.
Ren 21 Global Status Report 2012

6. A growing fraction of investment

7. Proportion of investment in developing countries
From FrankfurtUNEP/BNEF report (as per figures):
The main issue holding back investment last year was instability in the policy regime for renewable energy in important developed-economy markets. Future investment is likely to coalesce in countries that can offer policies that command investor confidence, plus the need for extra generating capacity and strong renewable power resources.
The highlight of 2012 was a further shift in activity from developed, to developing, economies. Total investment in developed economies in 2012 was down 29% at $132 billion while that in developing economies was up 19% at $112 billion, the highest ever.
After being neck-and-neck with the US in 2011, China was the dominant country in 2012 for investment in renewable energy, its commitments rising 22% to $67 billion, thanks to a jump in solar investment. But there were also sharp increases in investment for several other emerging economies, including South Africa, Morocco, Mexico, Chile and Kenya.
Activity trends were downbeat in many, but not all, developed economies. Policy uncertainty took a heavy toll of investment in the US – down 34% at $36 billion – and also in former renewable energy early-movers such as Italy and Spain.
From separate report – World Economic Forum Green Investment Report (2013):
Cross-border and domestic investment (in green investment - not just RE) originating from non-OECD countries grew 15-fold between 2004 and 2011 at a rate of 47% per year (compared with 27% per year for OECD-originating investment), albeit from a low base.
Clean-energy asset financing originating from developing countries in 2012 is on track for the first time to exceed those originating from developed countries. [This investment is due in part to the creation of green growth strategies by a number of developing country governments—to advance water resources, sustainable agriculture, and clean energy. ]
Source: Frankfurt School-UNEP Centre/BNEF (2013). Global Trends in Renewable Energy Investment

8. Increasing policy interest
138 countries have targets
127 countries have support policies
Two-thirds of these are emerging economies
Source: REN21(2013) Global Status Report

9. Diverse targets and policies
Location
Targets
Policies & fiscal incentives
Germany
18% of final energy consumption by 2020; 60% by 2050
35% of electricity production by 2020; 80% by 2050
14% renewables in total heat supply by 2020
FIT/premium payment
Biofuels obligation/mandate
Heat obligation/mandate
Capital subsidy
Tax credits/reduction
Production payment
India
10% of electricity production by 2012
3.5 GW new renewables over
9 GW wind by 2012
20 GW grid-connected solar by 2022
2 GW off-grid solar by 2020
20 million solar lighting systems by 2022
14 GWth solar thermal by 2022
Utility quota obligation
Net metering
Biofuels obligation
Heat obligation (State)
Tradable certificates
Guatemala
80% of final energy consumption by 2026
60% of electricity production by 2022
Senegal
15% of primary energy by 2025
60% rural electrification by 2017 (not exclusively renewables)
Source: REN21 (2013) Global Status Report

10. BUT all is not entirely well….
Swinging FiT cuts in some countries
Dissatisfaction and reaction against price impacts amongst some publics
The ‘solar bubble’ and trade war
The ‘shale gas effect’ – cheaper coal, changed perception of scarcity, rewards to FF innovation
Climate scepticism (or boredom?)

11. OECD issues – financing the transition e. g
OECD issues – financing the transition e.g. Britain’s investment challenge - scale
What do we need?
£75b required for new gen capacity *
£30b alone for offshore wind ?**
Current big 6 spend around £5b/year
Dash for gas was about £11b total
Total market value of all existing UK generation plant is c. £50b***
Huge plans for economic infrastructure at UK, EU and global level
UK policy/investment environment attractive vs peers?
Offshore wind investment
DECC roadmap central range is 11-18GW by 2020.
CCC advise that UK offshore wind ambition should be limited to 13GW by 2020 unless there is clear eveidence of cost reduction (ref’d in DECC roadmap, chapter 3)
Global Infrastructure plans
Citi - 938bn by Euro utilities to 2020
IPCC RE report - $ tr globally to 2020
EY - $25 tr on infrastructure to 2035
Why can’t the big 6 deliver?
Utilities are unlikely to be able to raise substantial additional capital from debt or equity issuances, will be limited in the amount of off-balance sheet financing they can utilise and will need to ensure that asset sales do not materially affect the overall risk profile of the company. Investment will therefore need to come from cash reserves and retained profit (after dividends) subject to utilities meeting revenue expectations.
SSE - currently planned combined UK capex of £5bn would need to increase 3fold to meet targets
Historically high investment - Dash for gas cost £11b (Climate Change Capital estimate quoted in 'Unlocking investment to deliver Britain’s low carbon future: report by the Green Investment Bank Commission. June 2010).
All 6 companies have capital expenditure plans for the UK, including the development of renewable energy generation capacity. They are currently investing around £5bn a year in the energy sector (not just renewable energy) which is significantly above the level of capital expenditure during the 1990s and 2000s (SSE, 2011, p. 34).
EMR WP, Chapter 2 ** DECC Roadmap (at current prices) *** SSE, An Energy White Paper

12. Africa’s is scale too – but also source
Capital investment in Sub Saharan Africa’s electricity sector by source
Progress in RE investment indequate – investment in FF remains higher, climate change. Need to green existing infrastructure as well as to invest in new infrastructure.
Public sector dominates electricity investment in developing countries (illustrated left for Sub Saharan Africa).
But global economic crisis –> limits potential increase in investment from public sources. Widely held view (IEA, WB, WEF) that we need to increase private investment. Figure right shows BNEF estimates of investment gap for green investment (including RE).
Particular difficulties in developing countries:
(For energy access) customer base is often widely dispersed, difficult to access and has low demand, increasing relative costs whilst reducing the potential revenues (as compared with urban areas). Poorest communities may be unable to pay for consumption.
Political and regulatory risks,
Currently many private investors in energy access motivated on CSR – value of this will decrease as projects become more widespread
Public sector will inevitably remain the primary investor (for energy access) until commercial conditions improve.
Potential to increase private sector investment by using public funds as a leveraging tool: “Experience demonstrates the potential for closing the green investment gap by mobilizing private finance through the smart use of limited public finance. Evidence from climate-specific investment illustrates that the targeted use of public finance can scale up private financial flows into green investment through measures such as guarantees, insurance products and incentives, combined with the right policy support. While leverage ratios are difficult to compare across projects, countries and instruments, ratios of 1:5 and above are not uncommon, and there are some cases of instruments—such as grants—delivering much higher ratios. There is strong potential for increased lending, advancing and rolling out de-risking instruments, using carbon credit revenues, and targeting grant money combined with technical assistance to attract much greater private investment. The green investment gap can be addressed through the use of such instruments. If public-sector investment can be increased to US$ 130 billion and be more effectively targeted, it could mobilize private capital in the range of US$ 570 billion. This would come close to achieving the US$ 0.7 trillion of incremental investment required to move the world onto a green growth pathway. However, greening the remaining US$ 5 trillion in infrastructure investment will remain a major challenge requiring policy reform and a stronger push toward investment-grade policy.” (From WEF - similar views have been expressed by WB and IEA).
Source data: AFD/WB (2010). Africa’s Infrastructure – A Time for Transformation

13. Increasing private investment?
Capital investment in Sub Saharan Africa’s electricity sector by source
Progress in RE investment indequate – investment in FF remains higher, climate change. Need to green existing infrastructure as well as to invest in new infrastructure.
Public sector dominates electricity investment in developing countries (illustrated left for Sub Saharan Africa).
But global economic crisis –> limits potential increase in investment from public sources. Widely held view (IEA, WB, WEF) that we need to increase private investment. Figure right shows BNEF estimates of investment gap for green investment (including RE).
Particular difficulties in developing countries:
(For energy access) customer base is often widely dispersed, difficult to access and has low demand, increasing relative costs whilst reducing the potential revenues (as compared with urban areas). Poorest communities may be unable to pay for consumption.
Political and regulatory risks,
Currently many private investors in energy access motivated on CSR – value of this will decrease as projects become more widespread
Public sector will inevitably remain the primary investor (for energy access) until commercial conditions improve.
Potential to increase private sector investment by using public funds as a leveraging tool: “Experience demonstrates the potential for closing the green investment gap by mobilizing private finance through the smart use of limited public finance. Evidence from climate-specific investment illustrates that the targeted use of public finance can scale up private financial flows into green investment through measures such as guarantees, insurance products and incentives, combined with the right policy support. While leverage ratios are difficult to compare across projects, countries and instruments, ratios of 1:5 and above are not uncommon, and there are some cases of instruments—such as grants—delivering much higher ratios. There is strong potential for increased lending, advancing and rolling out de-risking instruments, using carbon credit revenues, and targeting grant money combined with technical assistance to attract much greater private investment. The green investment gap can be addressed through the use of such instruments. If public-sector investment can be increased to US$ 130 billion and be more effectively targeted, it could mobilize private capital in the range of US$ 570 billion. This would come close to achieving the US$ 0.7 trillion of incremental investment required to move the world onto a green growth pathway. However, greening the remaining US$ 5 trillion in infrastructure investment will remain a major challenge requiring policy reform and a stronger push toward investment-grade policy.” (From WEF - similar views have been expressed by WB and IEA).
Source data: AFD/WB (2010). Africa’s Infrastructure – A Time for Transformation
Source: World Economic Forum (2013) .The Green Investment Report.

14. Looking ahead – what’s policy trying to achieve?

15. 1. Buy down costs IEA 2000, Learning curves report
Mott Macdonald and the CCC 2011
IEA 2000, Learning curves report

16. PV – policies and buy down….
Average module price reduction over time (left) versus annual PV cell/module production (right)
O'Rourke et al., 2009 in FITT Research Report. Deutsche Bank. May
EPIA and EU PV Technology Platform, Solar Europe Industry Initiative (SEII). Summary implementation plan , in EPIA Draft Report, April

17. 2. Create stability, meet investor needs
Net present value representation of the spread of returns arising from different CO2 and fuel price scenarios (taken from UK Energy Review ) (Working Paper by Will Blyth for UKERC 2006)
Spread in levelised costs arising from different CO2 and fuel price scenarios (taken from UK Energy Review ) (Working Paper by Will Blyth 2006)

18. Policies like the UK CfD FiTs transfer risk

19. But also 3. suit the context….
Institutional and political feasibility are key
E.g. Senegal ASER
conceptually strong, popular with donors, good leverage but… slow progress, turbulent management, ‘blocking’ by Senelec, etc…
Need to avoid tail wags dog – liberalised approach to suit donor beliefs not beneficiary needs
Affordability and believability also essential
Who does what, with what?
Incumbents/new entrants, large scale/small scale, new tech/old tech, government/companies, community/profit….

20. Conclusions/thoughts
Green growth is already a reality
Policy more contested, trade offs now central
Continuation is not a given, FF renaissance…?
Policy essential, we know (broadly) what works
What works is context specific – IF is key
Decades of experience
opportunity to learn from what works
Avoid pointless policy ‘innovation’ = ground hog day?
Interesting times…!