NB Financial Health
Clearing the Way for Clean Energy Investment in Emerging Markets
Last year, Bloomberg’s Climatescope report showed that investment in renewables in emerging markets grew by 16 percent from 2014 to 2015 to reach $154 billion. Financial institutions based in OECD countries are playing a larger role in financing these projects. An important factor attracting investment into emerging markets has been the combination of high energy demand along with declining prices. This has created strong opportunities for private investors, lenders and development finance institutions. But, despite the growth opportunities, investors, institutions and companies looking to invest in clean energy projects are faced with financial and logistical challenges.
In June 2016, the International Renewable Energy Agency (IRENA)’s Unlocking Renewable Energy Investment report highlighted that there is limited availability of local debt finance, along with currency volatility and devaluation. These are key obstacles to renewable energy investments in emerging markets.
Maggie Young, senior communications specialist at the Climate Policy Initiative (CPI), is part of a team of analysts and advisors monitoring international climate finance flows. She noted in an interview that in markets with limited access to local debt financing, often the only viable option is through foreign investment. However, such measures tend to be prone to currency exchange risk for investors.
“With underdeveloped domestic capital markets, often the only viable financing option for projects is a foreign currency investment,” Young said. “But project revenues are often in the local currency, creating a risk around unexpected and volatile fluctuations in the currency exchange rate.” She points out that the Global Innovation Lab for Climate Finance, which CPI manages, looks to incubate and accelerate investment vehicles that address barriers to clean energy finance, including currency and interest rate risk.
“One Global Lab instrument, Long-Term Foreign Exchange Risk Management, provides tools to address currency and interest rate risk for climate-relevant projects in developing countries, by locking in long-term finance in local currencies,” she says. The impact of this instrument has been positive. For example, it has been able to support a group connecting 500 homes to solar power each day by lowering the costs of currency hedging and attracting large-scale foreign institutional investment in sub-Saharan Africa.
Governments can influence private investment
The IRENA report also suggested that governments can play an important role in encouraging private investment into their country by increasing the use of existing guarantees. Moreover, they can develop new, targeted risk mitigation instruments to address power buyer (or offtaker), currency and liquidity risks.
Stephen Mullennix is CFO at SolarReserve, a company developing solar thermal technology projects with integrated energy storage in more than 20 countries. He agrees that government policies that support power purchasing agreements would facilitate project development and appeal to equity investors.
‘’One of the most important ways a government can facilitate the deployment of renewable energy is through market structures that support long-term power purchase agreements with creditworthy offtakers,” Mullennix said. “These critical market signals and structures comprise the most important criterion to render a power generation project bankable and appealing to equity investors. If the offtake contract is based in, or indexed to, the U.S. dollar, the price of financing will be lower, which lowers the cost of electricity to the end user.’’
Although capital risk is a key constraint in project financing, often conventional clean energy projects can become a stranded asset, which can add an element of risk as investments can be spread over a life cycle of 20 years or more. Will Rayward-Smith, general manager at SunSHIFT, a company developing moveable solar farm solutions for large-scale on-grid and off-grid electricity generations, mentions that making solar projects recoverable can help reduce some of these financing challenges. As a result, SunSHIFT has been able to reduce some of the risk associated with solar projects, and offer short-term Power Purchase Agreements (PPAs) to customers.
“Developing countries have a set of financing challenges including land ownership uncertainty, offtaker creditworthiness, and sovereign and currency risks,” said Rayward-Smith. “Conventional solar struggles with these challenges as it can become a stranded asset. By making solar recoverable, SunSHIFT reduces these financing challenges by eliminating stranded-asset risk. Solar power can then be offered on short-term Power Purchase Agreements.” Rayward-Smith received the Fire Award at the Bloomberg New Energy Finance Future of Energy Summit in April 2017.
Other important components to risk management are partnerships and joint ventures. These types of collaborations can bring local expertise and share the risk of the project. Samir Ibrahim, CEO of SunCulture, a solar-powered irrigation solutions startup, highlights that partnerships can be the best way to navigate financial, political and logistical risks in emerging markets.
“When it comes to risks, some are easier than others to predict and mitigate. We think the best way to mitigate financial, political and logistical risks is to find strong partners,” Ibrahim said. “We have found financial partners that understand currency risk. We have advisors who help us mitigate political challenges. And we have local logistics partners that help us navigate the challenges associated with moving goods.” Ibrahim sees partnerships as an important piece in SunCulture’s expansion strategy.
“Partnerships are an important piece of our expansion strategy, as we rely on partners for local distribution, understanding political climate and helping us adapt our solution for the context of the country we are working in,” Ibrahim adds.
Partnerships bring power to villages
Partnerships and joint ventures can not only facilitate companies to manage financial, political and logistical risks, but also assist in developing and localizing production. In India, ABB has been working with local companies and leveraging partnerships along the value chain to develop microgrid solutions for village electrification. This works for industrial and commercial users as well. Last year, ABB and the Indian Institute of Technology Madras signed a memorandum of understanding to build microgrids as well as undertake joint R&D in the field of rural electrification. This includes the utilization of natural non-fossil resources, battery energy storage and their connection to loads and the main grid.
Maxine Ghavi, group senior vice president and program director for microgrids at ABB, mentioned in an interview that joint ventures and strong collaboration are an important part of their business in developing microgrids for Indian consumers.
“We are working with local companies and leveraging partnerships along the value chain to deploy microgrid solutions and help build the ecosystem,” Ghavi said. “In addition, we continue to work with local government agencies to help them understand how microgrid technology can be deployed and benefit local residents and industries.” Ghavi highlights that by leveraging local partnerships for the past decades, ABB has been able to grow its presence in India and meet needs of the local market.
“We have invested in the Indian market and we’re focused on having our R&D and commercial centres to localize production,” Ghavi added. “This has worked well. ABB has a market share of 40 percent of the solar inverter market in India, and we continue to advance our presence in this growing economy.”