What does concessional finance look like in practice?
Let’s make this tangible with an example from the Clean Technology Fund of the Climate Investment Funds.
At a conference in 2021, the Minister of Energy of Kazakhstan said that over the past 5 years, the installed capacity of renewable energy in the country has increased sixfold from 240 MW in 2015 to 1634.7 MW in 2020. In March 2021, Kazakhstan had 115. renewable energy projects, and had created 1310 permanent jobs and 3000 temporary jobs each year. Importantly, the conference marked the announcement of increased ambition for the renewable energy sector in what was a region historically fossil fuel-friendly and renewable energy skeptical.
In just a few short years, an entire country had taken a leap forward in its renewable energy capacity, its interest in private sector developers and, most importantly, its national contribution to a low carbon transition.
So what happened?
Notably, the change did not start with private capital. The $ 8 billion climate investment funds, backed by development funds from the UK, US, Japan, Germany, Canada, France, Spain, Sweden and Australia, make it one of the largest climate investment funds in the world. However, CIF knew that deploying concessional finance alone would not solve the problem. Targeted and collaborative technical support and preparation, with a view to sector-wide transformation, could do this.
As early as 2009, the CIF had already engaged with the government of Kazakhstan, alongside the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), which is part of the World Bank Group. , to raise awareness and develop the region’s own energy policies. This preparatory technical assistance began in 2009 and continued until 2016, leading to a law on renewable energies, feed-in tariffs for renewable energy projects and purchase obligations for energy projects. renewable for the next 15 years.
During these 7 years, concessional finance has not been deployed at all in the form of specific project loans, but in the form of grants to finance vital capacity building and political work. These activities are what might be called the development of the law. favorable conditions in order to launch a renewable energy market in the region and improve the chances of success of any future commercial renewable energy project. However, while these actions provided a more solid foundation, several economic factors continued to hold back progress. These factors were related to the health of the economy and the maturity of the financial system itself. They have emerged as financial barriers for potential investors and developers in the region in the form of low liquidity, chronic lack of access to infrastructure-wide capital, limited loan terms of 4 at 5 years not very conducive to renewable energy projects, inflation and currency fluctuations, and soaring interest rates.
This is where the role of concessional project-based finance could really make a difference. Through CIF’s Clean Technology Fund (CTF), flexible, below-market capital was provided to support each of these challenges as they arose on the ground. To support liquidity, CTF provided concessional finance to developers and blended it with capital from MDB development banks. To cope with the longer repayment periods associated with new renewable energy projects, the CTF proposed loan terms of 15 to 20 years, which made it possible to inform other local players that renewable energies were not available. necessarily higher risk, but just longer-term return prospects. To tackle domestic interest rates, CTF provided core capital at low interest rates between 1% and 2%, knowing that this could later be absorbed by private sector rates of 10-12%. % to generate a commercially viable overall blended interest rate. Finally, by providing funds in multiple currencies – USD and EUR – CTF was able to help the country manage some of the currency risks.
In addition to the specific concessions that enabled the market, the CTF also selected projects that would have a transformative effect on the region. Since then, these projects have become the symbol of the first projects that demonstrated the viability of the renewable energy sector in the region. Concretely, the CTF supported the financing of the first large-scale solar photovoltaic project (Burnoye-1) and the country’s first wind project (Ereymentau-1).
In total, CTF has invested around $ 55.5 million in concessional financing in Kazakhstan’s clean energy sector. As a direct result of this funding, approximately $ 200 million in additional MDB funding was leveraged, along with an additional $ 412 million in follow-on funding, representing an attractive leverage ratio of around 11: 1. As a result, the total installed renewable energy capacity across the country increased to 542 MW for solar PV and 284 MW for onshore wind by the end of 2019.
Elsewhere, policies put in place to revive the sector, such as the feed-in tariff implemented in 2013, have attracted $ 1 billion in clean energy investment in the region alone. And additional technical support provided through CTF funds has enabled the country to build capacity in clean energy bidding to improve competitiveness and generate more interest from developers and investments in the region.
Targeted support like this has enabled Kazakhstan to meet its Nationally Determined Contributions (NDCs) in support of the Paris Agreement. By 2020, the country has pledged to derive 3% of its energy capacity from renewable energies. At the end of 2019, Kazakhstan produced around 2.3% of the country’s electricity from photovoltaic, onshore and small hydropower solar panels, while large hydropower generated an additional 9%.
However, to achieve Kazakhstan’s NDC, the energy intensity of the economy must also be reduced by 30% by 2030 and 50% by 2050; With nearly 70% of electricity currently coming from coal-fired power plants, renewables can help Kazakhstan accelerate its progress.
Achieving these goals and attracting new investments in renewable energy to Kazakhstan will require tackling another major obstacle: the efficiency of the electricity grid. Much of Kazakhstan’s grid is old, contributing to the loss of around 13% of the annual electricity produced.. Infrastructure and grid capacity must be a major focus in the years to come, as many investments in renewables and green technologies for end users, such as electric vehicles, depend on it. CIF and EBRD are already stepping up efforts – EBRD and partners invest $ 30 million to help major utility and grid operator in western Kazakhstan modernize existing substations and distribution , and install new power lines, as well as data and automatic control systems. Elsewhere, the CIF Technical Assistance Mechanism helps the Kazakhstan Electricity Grid Operator (KEGOC) integrate renewable energy through improved tools and procedures and modernization of grid infrastructure.
As Kazakhstan strives to achieve its nationally determined contributions over the coming years, organizations such as the CIF, EBRD and IFC will continue to play an important role in enabling and empowering the country to meet the gap between projects ready to invest and fully transform their energy mix. .
What does the experience of Kazakhstan say about the role of concessional finance?
; it can scale up high priority projects that impact global collective climate and development goals. Concessional finance works best when used alongside long-term strategic engagement and technical assistance with a country; and, when done right, it can create game-changing and industry-transforming results.
What is the potential of concessional financing to accelerate the energy transition?
In order to meet the net zero goals, it is estimated that the world needs to invest around $ 1.2 trillion per year in the transition. By 2030, an additional $ 300 billion per year will be needed to continue building global resilience to climate change.
In the Climate Policy Initiative’s latest State of Climate Finance report, climate finance was estimated to be between $ 608 billion and $ 622 billion in 2019. During the same period, total assets under management in the private sector reached 6 500 billion dollars.
Public funding alone will not be able to fill this gap. The world urgently needs more innovative financial programs and mechanisms such as those used by, and in conjunction with, concessional financing mechanisms that can bridge the gap between public funds and larger-scale private sector capital.
However, to achieve this, the role of concessional finance itself will also need to evolve. To date, concessional finance in climate finance has rarely been viewed as a source of income for a distribution fund. However, as long-term projects begin to mature, there is now demonstrable evidence of how funds can consider structuring and leveraging their inflows to fund more strategic programs and priorities.
Finally, after more than a decade of practice at the project and program level, the role of concessional finance is now being explored at the fund level. This has particular growth potential for climate finance, as a fund that distributes billions of dollars at a time can mobilize private sector capital more effectively and efficiently than multi-million dollar projects and programs. in the field.