Energy companies should initiate public-private partnerships for renewable energy projects in developing countries ahead of a substantial source of new funding.

The Green Climate Fund will catalyse renewable energy projects in developing countries.

By 2020, the Green Climate Fund will channel US$100 billion a year from developed countries to developing countries. The design of the Fund has been completed and was approved at COP 17 in Durban, South Africa (28 November to 9 December 2011)¹. The Fund will become operational in 2013 and finance mitigation (eg renewable energy, energy efficiency, REDD+², carbon capture and storage) together with adaptation and capacity building in developing countries.

There has been much discussion about whether US$100 billion a year is a realistic target, but a number of funding sources have already been identified, including US$40 billion a year from a carbon tax on international transport (eg shipping and flights) and US$30 billion a year from the European Union³. Evidently, realising these funding sources will be a considerable challenge, particularly in the current economic climate, but key developed countries are committed to the Green Climate Fund, having already pledged US$30 billion to the Fund through the Fast Start initiative.

Whilst US$100 billion a year is considerable, this amount of climate finance already flows from developed countries to developing countries, with US$93 billion going to mitigation projects in 2010. This is important because the Copenhagen Accord commits the Green Climate Fund to “new and additional” funding, ie the Green Climate Fund will be in addition to existing sources of climate finance.

Developed countries provided US$93 billion for mitigation projects in developing countries in 2010⁴

		Mitigation US$B	Adaptation US$B
Private finance		54.6	-
Bilateral		19.1	3.6
Multilateral		13.9	0.5
Funds		2.4	0.1
Offsets		2.3	-
Philanthropy		0.2	0.2
Total		92.5	4.4

The Green Climate Fund shares many of the same design elements as the Climate Investment Funds which were established in 2009 and have similar objectives, structure and governance arrangements, including the World Bank as Trustee. The Climate Investment Funds comprise the Strategic Climate Fund (US$1.9 billion) and the Clean Technology Fund (CTF), the latter providing US$4.4 billion of grants and concessional loans for the demonstration, deployment and transfer of low carbon technologies in middle-income developing countries. Whilst the CTF ‘s focus is the power, industrial, building and transport sectors, over 80 per cent of funding for approved projects is for renewable power generation and the more efficient use of electrical energy. Importantly, the CTF has leveraged substantial funds from other sources, namely multilateral development banks, together with government entities and private sector firms in developing countries. For every dollar from the CTF for renewable energy projects, other sources have contributed six dollars. If the Green Climate Fund achieved the same leverage ratio, this would result in US$700 billion per annum of additional climate finance by 2020. Finally, CTF applications from the transport sector have focused on bus rapid transit systems, but have not addressed issues related to the more efficient use of energy (eg electric vehicles) or liquid fuels produced from renewable sources (eg biofuels). The Green Climate Fund is likely to encourage such applications.

In summary, the Green Climate Fund will catalyse substantial renewable energy investments in developing countries both directly (eg covering upfront risk for specific projects and in doing so, encouraging private sector finance) and indirectly (eg improving the enabling environment for projects through clearer and more cohesive policies such as feed-in tariffs).

The Green Climate Fund will promote the use of public-private partnerships⁵

The Green Climate Fund is open to criticism on several issues relating to private sector involvement, including:

• Efforts to design the Fund could have been better directed to maintaining and expanding the Clean Development Mechanism regarded by many as an effective means of involving the private sector in mitigation projects. 
• The Transitional Committee designing the Fund comprised representatives of national governments, only a few of which had considerable private sector experience⁶. 
• The Fund design suggests that a separate private sector facility would be established rather than adopting a private sector approach across the Fund. 
• The Fund is likely to be primarily a grant-based mechanism, and as such, will continue the aid dependency of some countries and in doing so, not bring about the required transformation in the energy sector.

The Clean Technology Fund has similarly been criticised for its lack of private sector involvement and focus. For example, the great majority of applications to the CTF do not provide a robust case for how funding would make the project viable even though this is one of the CTF’s six investment criteria⁷. In addition, the average size of CTF private sector projects (US$25 million) is smaller than that for public sector projects (US$99 million). At the same time, 20 of the 32 approved CTF projects are classified as private sector projects (ie implementation is through the private sector arms of multilateral development banks) with a number of these being described as public-private partnerships.

These criticisms of the CTF and the Green Climate Fund have resonated with developed country governments, particularly in the light of the current economic situation and the need to demonstrate the benefits of diverting domestic public budgets to developing countries. As a result, many policy makers in both developed country governments and the UNFCCC are urging greater engagement with the private sector, particularly the use of public-private partnerships. This can be perceived as tokenism given that such partnerships are relatively common for many infrastructure types (particularly power generation) and that mitigation projects are intrinsically based on such partnerships, given the private sector’s involvement to address a public good, ie atmospheric greenhouse gas concentrations. However, public-private partnerships provide the means for catalysing renewable energy projects at scale to the extent that such partnerships allocate risk to the party that controls them and deliver both investment outcomes (eg adequate return on investment, expanded investment prospects) and development outcomes (eg reliable, competitively priced power).

The Green Climate Fund will result in a transfer of substantial funding from developed countries to developing countries, but will be ineffective if funds are used by public sector organisations which generally lack the technology and resources to identify and commercialise renewable energy projects in an efficient and replicable manner. Hence, public organisations and private firms are likely to form partnerships to access the Green Climate Fund.

Next steps for energy companies

1. Track the development of the Green Climate Fund. Consider engaging in the detailed design of the Fund to ensure private sector involvement and focus on mitigation projects that will make substantive and cost effective emission reductions. 
2. Review mitigation prospects in developing countries (particularly renewable energy, including those previously considered not feasible) and ask how these could be commercialised using the Green Climate Fund. 
3. Systematically identify associated project risks (technological, environmental, economic, political, legal and social). Consider which party is best placed to manage risk and the most appropriate mechanism for doing so including performance payments for public sector organisations. 
4. Engage public sector organisations at an early stage to conceptualise projects collaboratively. 
5. Develop public-private partnerships for selected opportunities and approach the Green Climate Fund for support.

¹ Report of the Transitional Committee for the Design of the Green Climate Fund for the 17th Session of the Conference of the Parties (October 2011). COP: Conference of the Parties is the annual meeting for parties to the United Nations Framework Convention on Climate Change (UNFCCC).

² REDD: Reducing Emissions from Deforestation and Forest Degradation. REDD+ includes the role of conversation, sustainable management of forests and enhancement of carbon stocks.

³ The most comprehensive overview is provided by Report of the Secretary-General’s High-Level Advisory Group on Climate Change Financing (November 2010) which concluded “that raising US$100 billion per year is challenging but feasible.”

⁴ The Landscape of Climate Finance (Climate Policy Initiative, October 2011). The report also notes that carbon finance plays only a small role in climate finance amounting to approximately US$2 billion in 2010. In the table, carbon finance is included under Offsets.

⁵ Public-private partnership (PPP) is a generic term for the relationships formed between public organizations and private firms with the aim of introducing private sector expertise and resources to provide and deliver public sector assets and services. Detailed definitions of the term vary by organization and geography with the World Bank’s PPP in Infrastructure Resource Centre for Contracts, Law and Regulation providing a comprehensive overview including a detailed discussion of different PPP models (Management & Operating Contracts; Leases / Affermage; Concessions / Build Operate Transfer / Design Build Operate; and Joint Ventures / Partial Divestitures of Public Assets).

⁶ The Green Climate Fund and the Future of Environmental Governance (Abbott and Gartner, 2011). The report also states that the Climate Investment Funds would be more effective if they adopted the model of a new generation of global health institutions and integrated the capacities of a wide range of stakeholders (including the private sector) through direct participation and governance.

⁷ The ‘Additional costs and risk premium’ investment criteria states that “CTF financing will provide a grant element tailored to cover the identifiable additional cost of an investment, or the risk premium required, in order to make the investment viable.” Clean Technology Fund – Investment Criteria for Public Sector Operations (09 February 2009). One application that does make a robust case for viability is the Investment Plan for Concentrating Solar Power in the Middle East and North Africa.

© Sinclair Knight Merz
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