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Climate Action and the Power of the Private Sector

by internationalbanker

By Jürgen Rigterink, First Vice-President and Head of Client Services Group, European Bank for Reconstruction and Development (EBRD)

 

 

 

This article was originally published in the Autumn/November 2021 edition of International Banker

 

What can save the world from climate catastrophe? Governments, international organisations and multilateral institutions, such as the European Bank for Reconstruction and Development (EBRD), have been indispensable in the rescue and have already spent billions on the green transition. But they cannot carry this burden alone. To succeed, we need the private sector, which has the power to channel trillions into the green transition—not only because of its financial power but also its innovative genius and ability to find new and inventive solutions.

One figure illustrates the size of the task. Today’s energy mix is about 80 to 83 percent hydrocarbons. By 2050, we have to be at zero percent. This will involve an extraordinary rewiring of the economy; the speed and scale of this transition will be unparalleled in economic history.

Estimates show that US$90 trillion are needed between 2020 and 2050 to mitigate 830 gigatons (Gtons) of carbon dioxide (CO2)-equivalent and to bring the world onto a less than 1.5-Celsius (°C) global-warming trajectory.

Yet, the big challenge in emerging economies and developing countries is the shortage of bankable climate projects. Several factors have limited the supply of such projects, the most fundamental—as per the run-up to November’s global climate summit COP26 (2021 United Nations Climate Change Conference) in Glasgow, Scotland—being the lack of either an implicit or explicit carbon price. This means that many green investments have simply not been commercially viable vis-à-vis the fossil-fuel-based alternatives.

Some green projects, notably renewable electricity, are now competitive even without a carbon price, but, even in these cases, investments are still held back because of regulatory hurdles, inertia or non-financial market failures. But there are very large parts of economies—heating, heavy industry, agriculture, transport, to name a few—in which low-carbon alternatives are technically viable but not competitive. That is a fundamental barrier and one we will increasingly need to address. If a low-carbon product is three times as expensive as its high-carbon competitor, no amount of clever branding will make it economically viable. We must address this deep-seated problem if we want to see the systemic change we need. Introducing a carbon price or imposing a low-carbon mandate can help to create demand or reduce the competitiveness gap. In turn, more investment in technologies that are still relatively new will drive efficiencies and cost reductions. This has been the story of the renewable-energy sector; it needs to be replicated across the whole economy.

This is why multilateral development banks (MDBs) resolved to focus at COP26 on communicating their efforts to create new platforms, investment vehicles and blended-finance instruments to increase the levels of private capital mobilised in support of mitigation and adaptation investments. This complements developing work on private finance, including the Glasgow Financial Alliance for Net Zero (GFANZ). MDBs also support the development of robust taxonomies, reporting frameworks and other instruments crucial to developing successful capital markets for green assets, including Islamic finance.

The good news is that private-sector interest in green investments is growing sharply. There is an ever-increasing amount of private money keen to find a green home. And there are more and more viable projects, technologies and new developments in which to invest that can generate acceptable returns from genuinely competitive business models.

At the EBRD, we believe that the surest way to attract this investment is to create the right enabling environment. This is still missing in a lot of places. In fact, until we have a global carbon price set at a cost-reflective level, we will not be able to say that we have the best possible market structure to address the climate crisis. That ideal situation is very far off, which is why the EBRD, which aims to make a majority of its investments green by 2025 and to align with the goals of the Paris Agreement on climate change from the start of 2023, is stepping up its green policy engagement across its regions.

The EBRD currently works in 38 economies from North Africa to Eastern Europe, the Western Balkans, Turkey and Central Asia. For these countries, the transition to a net-zero world will be a necessity, not an option. The faster countries manage this transition, the more competitive they will remain and the fewer disruptions—social and economic—they will experience.

Two things are needed to attract private-sector investment. One is a reliable policy framework so that governments that have made climate commitments at the international level think through how to change their domestic policies sector by sector to send the right signals to investors. This is something that takes time and expertise. The EBRD is working closely with governments of countries where we engage to promote these policies.

The second is catalytic finance to de-risk the investment—the kind of finance that the EBRD provides.

The results of combining these two approaches can be transformative, as the EBRD’s engagement in developing solar power in Egypt1 shows:

A 2012 crisis in the Egyptian energy sector prompted the government to make more use of its abundant solar and wind resources. Egyptian officials initiated a feed-in tariff scheme for solar power and concentrated it all on one very big site in southern Egypt. Then they came to the EBRD for advice on how to make the scheme attractive to private investors.

Two years of work on bankability later, and with strong support from the Green Climate Fund (GCF) amongst others, the 37-square-kilometre (km2), 1.5-gigawatt (GW) Benban Solar Park2 attracted strong investor interest, with 80 private-sector candidates shortlisted and about 20 selected to set up projects. The EBRD was the biggest lender. Benban was completed in 2019.

The message Benban sent to investors was, “You can come to this country; you can find the technical expertise you need; you are going to be treated fairly by the government; and you have a viable long-term project.” That gave investors confidence.

With an enthusiastic pool of investors now in place, Egypt has moved to a still more market-friendly approach—competitive auctions rather than fixed-rate, feed-in tariffs, bringing prices lower still. The electricity price at Kom Ombo3, the next big solar project to be financed by the EBRD and the Green Climate Fund in Egypt early in 2021, is less than a third of the price of Benban per megawatt-hour (MWh) because it was awarded competitively in a market in which the maturity is now well established.

Separately, Egypt has decided not to invest in coal—partly a climate decision but also a pragmatic economic decision. If clean solar is cheaper, why pay more for dirty coal?

A similar trajectory is being followed in other economies in which the EBRD invests that are also seeing high-quality international investors appear in the energy sector and beyond.

Looking at the EBRD’s work around Europe, Albania4 is diversifying energy sources to increase climate-change resilience and working with the EBRD on policies to make itself an attractive renewables-investment destination; the EBRD has also provided technical assistance and investment. Private investors have followed, and renewables projects are snowballing. In spring 2021, France’s Voltalia5 won the contract to construct and operate a 100-megawatt (MW) solar plant at Spitallë, Albania6, after winning an earlier competitive process at Karavasta, Albania,7 for a 140-MW solar plant. At Karavasta, the winning bid of €24.89 was less than half the price ceiling of €55—the lowest price for electricity in the Western Balkans. The EBRD is also supporting Albania8 in its first auction for utility-scale onshore wind-power plants.9

Beyond the energy sector, some exciting initiatives in Europe with innovative financing structures and technology solutions show the added value of private-sector ingenuity, nimbleness of foot and ability to innovate.

Corporates with well-designed commitments to net-zero or low-carbon pathways are beginning to fulfil their responsibilities to develop green financial products and attract institutional investors, building in more green layers as they go. These products range from sustainability-linked bonds or loans to green bonds, including green transition bonds—instruments that are linked to firm, externally verifiable decarbonisation targets and other sustainability goals.

For instance, last year, the EBRD invested in a bond issued by TAURON Polska Energia, one of Poland’s largest coal-based energy providers. The bond was developed to fund investment in construction and acquisition of renewables and distribution-grid investments on the back of a commitment from the company to close coal-fired plants, with finance costs rising if this was not fulfilled. Importantly, the project also has a social component to help ensure that it is a just transition in which no one is left behind.

All this underlines that different parts of the private sector recognise the importance of tackling climate change. Doing so benefits the companies as well as the environment, allowing them to reduce costs, streamline operations and increase efficiencies. The need for innovative solutions in climate-change mitigation and adaptation is an opportunity for companies to develop new products and services and serve new markets.

Businesses have been associated with environmental pollution and degradation, especially in countries where safeguards and environmental governance have needed strengthening. Yet, companies have also played an important role in driving green growth in developing countries. Multinational companies can promote greener behaviours across the supply chains that they manage, and businesses and entrepreneurs can provide the skills that lead to innovation in clean technologies and efficiency in resources.

The EBRD supports knowledge transfers that lead to greater sustainability and runs many programmes designed to promote improvements in the environmental performance of businesses in its countries of operations, all to bolster sustainable and inclusive growth. Small businesses face barriers in addressing climate change, including lack of capacity and access to the tools needed to “green” their businesses, poor access to finance for low-carbon technologies and inadequate awareness of the business case for improving resilience. EBRD programmes range from support in meeting energy-efficiency targets to help in financing and selecting low-carbon technologies for the workplace, all designed to foster the supportive environment in which the private sector’s innovative approaches can flourish.

Of course, we are aware of the anxieties and hesitations the transition towards a zero-carbon world may cause. This is particularly relevant for our countries as some rely on high carbon-emitting sectors, including coal. In fact, the EBRD regions have approximately 11 percent of global coal reserves, the majority of which are located in Ukraine, Poland and Kazakhstan.

We cannot close our eyes to the social and economic implications of the green transition, as they can impact local employment and livelihood. Dedicated approaches must be developed and implemented to support a just transition, which is why our approach to ensuring that just transition includes reskilling and entrepreneurship programmes.

Transforming the energy sector, which produces most emissions, is an enormous challenge. It requires significant investment, a restructuring of the energy market and support for those bearing the immediate costs. It will not be achieved without pain.

But it will also bring benefits beyond the immediate impact on the environment. According to the International Energy Agency (IEA), a surge in clean investments will create 14 million new jobs and add 4 percent to global gross domestic product (GDP) by 2030 compared to the “business as usual” scenario. It will also bring electricity to the nearly 800 million people currently lacking access; reducing air pollution will avoid two million premature deaths annually by 2050.

For the EBRD, our motto, “We invest in changing lives”, means listening to the needs of consumers and communities in our countries and working with public and private sectors to develop, finance and implement projects that are sustainable and improve their lives.

To limit global warming to 1.5°C, we need a radical transformation of economic systems. The green challenge we all face is that there is so much to do and so little time. If we are to limit climate change successfully, it will be by working in partnership—with governments, public actors and, crucially, the private sector—because the only way to do this successfully is by doing it together.

References

1 European Bank for Reconstruction and Development (EBRD): “The EBRD in Egypt.”
2 European Bank for Reconstruction and Development (EBRD): “Benban, Africa’s largest solar park, completed,” Jonathan Wells, October 24, 2019.
3 European Bank for Reconstruction and Development (EBRD): “Kom Ombo.”
4 European Bank for Reconstruction and Development (EBRD): “The EBRD in Albania.”
5 Voltalia
6 European Bank for Reconstruction and Development (EBRD): “EBRD-supported tender in Albania delivers competitive price for solar power,” Axel Reiserer, March 30, 2021.
7 European Bank for Reconstruction and Development (EBRD): “Albania’s solar tender generates competitive price,” Vanora Bennett, May 27, 2020.
8 European Bank for Reconstruction and Development (EBRD): “The EBRD in Albania.”
9 European Bank for Reconstruction and Development (EBRD): “Albania launches first tender for wind power,” Axel Reiserer, June 21, 2021.

 

ABOUT THE AUTHOR
Jürgen Rigterink is First Vice President and Head of Client Services Group at the European Bank for Reconstruction and Development (EBRD). Prior to joining the EBRD in 2018, Rigterink was the Chief Executive Officer and Chairman of the Management Board of FMO, the Dutch development bank.

 

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