At the Sustainable Innovation Forum in Marrakesh on 14 November 2016, Henning Wuester, director of the knowledge, policy and finance centre of the International Renewable Energy Agency (IRENA), spoke to Jack Aldane about what, in his view, had been achieved at COP22; whether it had successfully established priorities for public and private actors in the development space, and how IRENA, an intergovernmental organisation fostering sustainable energy around the world, plans to take clean-energy projects to scale in 2017.
How, if at all, has COP22 affected your sense of the achievability of the Paris Agreement?
I have engaged a lot with colleagues from the energy sector, where there’s a strong interest to advance and an impatience to reach the stage of implementation. Unfortunately, there’s not much of a dialogue between the energy sector players and the climate negotiators. But there’s a sense the Paris Agreement has mobilised political will, which is absolutely instrumental. The climate change process does not, however, map out the way forward, and that is what is needed. Many of the Nationally Determined Contributions (NDCs) are vague and set general targets, without describing how those targets translate into policy and investment plans that would actually help to bring in private investors. From the renewables perspective, investors from the private sector are ready to enter the sector. They realise that prices have come down so far that this is a competitive proposition. We’ve just come from a session on efforts in Dubai, and they’ve managed to bring the cost of solar PV electricity to below three cents per kilowatt-hour. They recognise that is much cheaper than the offer they have got for a coal plant, which is 4.5 cents per kilowatt-hour. Here in Morocco, you get power from wind for three cents per kilowatt-hour. So these are extremely competitive propositions. This provides a foundation for scaling up. But that’s not yet happening for a number of reasons, and that’s where we see impatience from energy sectors that watch climate negotiations, which are being approached in a relatively bureaucratic manner.
How is IRENA tackling the issue of how to scale up clean-energy projects?
Scalability is a central issue. There are two others, one being a lack of a strong project pipeline, due to lack of capacity to put these projects together. This is linked to the third set issue: a lack of local financing capacity to set them in motion efforts to create that pipeline and make a link between the small project and the large project portfolios. We are working on the problem of scale with the Terrawatt Initiative, developing a set of standardised contract templates for solar PV projects. Solar PV as a technology is standardised, but every country, every financial institution, uses a different project set-up, and that makes it much more cumbersome than necessary for investors to go into this sector. We’ve called for participation by international law firms and were surprised that 15 firms offered their services pro bono. So they are now engaged. We now have eight working groups in which these law firms are collaborating to standardise different project documents. And we have over 20 financial institutions that have offered to act as reviewers of the document templates ones drafted. If picked up, this will simplify the process of due diligence, cut transaction costs and speed up processes in the project market. Once you have standardised projects, you can start bundling them into larger portfolios, from solar projects of around US$5 to US$50 million to the minimum US$300 million deal that institutional investors are interested in.
Could bundling together projects and instruments with varying degrees of risk attached lead to a bubble in capital markets?
That’s of course a critical concern, and that will be the success or failure of this moving forward. The first element of clarifying the risk allocation is the set of standardised documents I mentioned, because they are constructed based on an assumption of how risks are allocated. Linked to that you need adequate government regulation that provides the framework for these documents to work. The third element needed is some form of guarantee. At the moment this relies often on national governments and not all governments can offer guarantees that satisfy investors. What we are proposing is to create a global renewable energy guarantee scheme that would be run by a multilateral institution, would have a triple A-rating, and be tailored to renewable energy to allow for simple access. This could dramatically change the dynamics. It would be the missing piece to actually more to scale. Without such a scheme progress would be limited to those countries where governments are in a position to give guarantees that satisfy investors. And there are good examples that this is feasible. Bundling has already worked in Jordan, for instance, where seven standardised solar projects were put together into a portfolio. The IFC played an important role to make this happen, and the Jordanian government was fully supportive. Together this helped to reduce the cost of capital and in the end reduced the cost of the solar power that was created. So, it is possible, but at the moment this wouldn’t work in all developing countries, some of which have a lot of solar potential.
What is IRENA doing to work with urban leaders seeking to implement clean energy and energy efficiency programmes in developing cities?
What is quite critical is to have a national framework that actually enables cities to take actions. In some cases, they are not empowered to do this at all. In others, they have some autonomy to run a utility, to run district heating schemes, or to set up urban transport schemes. These opportunities are quite interesting, because renewables have made huge strides in the electricity sector, but the heat and transport sectors are not advancing quite so quickly. Having district heating systems based on renewables is a way of getting the heat sector de-carbonised. There, cities can play a major role. Then you have transport, where you also do not yet see a high share of renewables. With urban transport systems, that can change, and we’ve seen some examples. When looking at cities, efforts to advance renewables are closely linked to energy efficiency. IRENA is working with cities, and exploring the experience of interesting models that can show a direction for other cities. This includes cities in developed countries, such as Vancouver (Canada), Malmoe (Sweden), Freiburg (Germany) and Sydney (Australia), which aim for 100 percent renewables in the foreseeable future. But it also includes many cities in countries within Africa, Asia and Latin America, including some mid-sized cities, such as Kasese in Uganda, Curitiba in Brazil, and the island of Jeju in the Republic of Korea.
We’ve started asking people in the private sphere whether they believe there needs to be more openness among development finance institutions (DFIs) about what they can do for private players seeking collaboration. Would you agree that there is such a need?
IRENA has done a study on risk mitigation instruments, which many of the large MDBs offer, whether they are regional development banks, or the World Bank through MIGA, or otherwise. These instruments are, however, only used to very limited extent, because in most cases, the complexity of using them is far too high and this does not make them very interesting for project developers. Often it takes some five years to go through the necessary procedures to access these instruments. What we’ve found is that there is no strong incentive structure in place that will get DFIs to offer risk mitigation instruments for renewables projects, especially smaller ones. That is why we believe a dedicated facility can actually make a difference, because it can use standardised documentation and greatly simplify the process. That is an area where we believe a better collaboration between public and private finance institutions could help. For now though, loans and grants still make up the largest share of public finance in renewables – often aimed at large-scale projects. This is of course not the best way of inviting private investors into the sector. Given the limited public funds available for renewable energy investment, it would be good to maximise the amount that is used for guarantees or other risk mitigation instruments so that then you pull in the larger funds from the private sector that are out there and eager to go into renewable energy assets that have a long and stable return.
What will be your top priority, given everything you’ve learned here in Marrakesh this year, after this COP is over, and once you are firmly back in the saddle at IRENA?
Well, I’m talking here to a lot of actors about a global renewable energy guarantee scheme. What I’m getting is a lot of support and interest, but also questions and suggestions about how to structure that scheme. We have already the collaboration of the law firms on the project documentation, and we have the interest from financial institutions and developers. It will be a priority, then, to take this effort forward and see how we can bring these actors together to that we can turn the guarantee scheme from a broad concept into a concrete facility.
Dr Henning Wuester manages IRENA’s centre for knowledge, policy and finance, which takes in the agency’s work on producing renewable energy data and information, as well as analysis to identify best practice in renewable energy policies and finance. He has worked at IRENA for two years, and began as a senior programme officer for renewable energy finance, before taking up his current role.