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 Climate Change

Finance
Published on: Feb. 14, 2020, 7:56 p.m.
Financing energy transition in growing economies
  • Flows from the north to south

By Kanika Chawla. The author is Director, Centre for Energy Finance

An energy revolution is underway. Globally, investments in renewables-based electricity capacity have beaten fossil fuels consecutively for the past three years. In India too, renewables have dominated power sector investments since 2015. For the past four years, much of the power sector investment in India and around the world has been in renewable energy. Yet, many investors remain wary of investing in renewable energy. This is particularly evident in developing countries, which have the largest potential for solar power and substantial potential for wind energy but are perceived as untenable markets for conservative investors. Why do clean energy investments remain risky, despite the trends?

The simple response is risk. Renewable energy projects in emerging economies face several risks. Some are unique to the sector itself, such as technology risk, integration of a variable source of supply, etc., while others are rampant across sectors in emerging economies, such as currency risk, counterparty risk, political risk, etc. However, there is a third risk category that is playing spoilsport for clean energy markets in the emerging economies and that is the perception of risk. As in several new investment sectors, there is a delta between the perception of risk and real risks. This could be prohibitive, especially for certain investor categories, to invest in sectors perceived to be ‘risky’. It is further exacerbated by the paucity of sensible data and lack of coherence between actors. 

In order to respond to this growing need to bridge the information asymmetry in clean energy markets, not just with improved data, but also with clear and comprehensible communication between the energy and finance communities, CEEW (Council on Energy, Environment and Water) has initiated Centre for Energy Finance (CEEW-CEF). Energy and finance are the driving fuels of any economy, but there is a need for the two to intersect to enable an efficient energy transition. The CEEW-CEF is one of South Asia’s leading think tanks in this field.

CEEW-CEF acts as a non-partisan market observer and driver; monitors, develops, tests, and deploys financial solutions to advance the energy transition. It aims to help deepen markets, increase transparency, and attract capital in clean energy sectors in emerging economies. It achieves this by comprehensively tracking, interpreting, and responding to developments in the energy markets while also bridging gaps between governments, industry, and financiers.

The need for enabling an efficient and timely energy transition is growing in emerging economies. In response, CEEW-CEF focuses on developing fit-for-purpose market-responsive financial products. A robust energy transition requires deep markets, which need continuous monitoring, support, and course correction. By designing financial solutions and providing near-real-time analysis of current and emerging clean energy markets, CEEW-CEF builds confidence and coherence among key actors, reduces information asymmetry, and bridges the financial gap.

 

Financing energy transition in emerging economies: The clean energy transition is gaining momentum across the world with cumulative renewable energy installation crossing 1,000 gw in 2018. Several emerging markets see robust renewable energy markets. However, these markets are young and prone to challenges that could inhibit or reverse recent advances. Emerging economies lack well-functioning markets. That makes investment in clean technologies risky and prevents capital from flowing from where it is in surplus to regions where it is most needed. CEEW-CEF addresses the urgent need for increasing the flow and affordability of private capital into clean energy markets in emerging economies.

CEEW-CEF’s focus – analysis and solutions: CEEW-CEF has a twin focus on markets and solutions. Its market analysis covers energy transition-related sectors on both the supply side (solar, wind, energy storage) and demand-side (electric vehicles, distributed renewable energy applications). It creates open-source data sets, salient and timely analysis and market trend studies. CEEW-CEF’s solution-focused work will enable the flow of new and more affordable capital into clean energy sectors. These solutions will be designed to address specific market risks that block capital flows. These will include designing, implementation support, and evaluation of policy instruments, insurance products, and incubation funds.

The CEEW-CEF is an effort to bridge the gap between the supply of capital in the Global North, and the demand for capital in the Global South. The promise of climate funds has been largely under-delivered thus far. Without market readiness, investors will remain wary and public funds will struggle to leverage private capital. Both the urgent need for climate action as well as the policy push and momentum for clean energy deployment in developing economies need capital to flow into viable projects in countries around the world as the norm, rather than the exception.


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