What can we learn from alternative channels and non-bank financing models for delivering green finance?

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Elfreda Jennings
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1 What can we learn from alternative channels and non-bank financing models for delivering green finance? Bruce Usher Columbia Business School KfW Financial Sector Development Symposium 2014 Berlin, 30 January 2014

2 Agenda 1 The Challenge of Green Finance 2 - Overview 3 - Structures 4 Opportunities in Developing Countries 5 Best Practices 2

3 The Potential? Developing countries Greenfield sites, better resources Source: EPIA 3

4 The Problem? Capital Many hurdles Restrict the availability of capital Renewable Energy and Energy Efficiency hurdles include: Cost of capital Absence of scale Perceived risk of new technologies Unstable regulatory environments Difficulty monetising environmental attributes In developing countries, all of the above, plus; Higher cost of capital Enforcement of long-term contracts Lack of political stability Construction, O&M, and grid reliability issues Illiquid financial markets Alternative channels are green finance structures designed to overcome these hurdles, without additional government subsidies. 4

5 for Delivering Green Finance Structure Application to Developing Countries Role of Financial Institutions Solar Leasing Implemented, increasing Equity capital, working capital PACE Untried, limited potential Loans to municipal governments ESCOs Implemented, but limited Loans to LFIs Green Bonds Implemented, increasing Underwriters and issuers Funds Implemented, increasing Underwriters and investors Securitisation Untried, tremendous potential Carbon Finance Implemented, but declining None Underwriters and investors 5

6 for Delivering Green Finance Structure Application to Developing Countries Role of Financial Institutions Solar Leasing Implemented, increasing Equity capital, working capital PACE Untried, limited potential Loans to municipal governments ESCOs Implemented, but limited Loans to LFIs Green Bonds Implemented, increasing Underwriters and issuers Funds Implemented, increasing Underwriters and investors Securitisation Untried, tremendous potential Carbon Finance Implemented, but declining None Underwriters and investors 6

7 for Delivering Green Finance Structure Application to Developing Countries Role of Financial Institutions Solar Leasing Implemented, increasing Equity capital, working capital PACE Untried, limited potential Loans to municipal governments ESCOs Implemented, but limited Loans to LFIs Green Bonds Implemented, increasing Underwriters and issuers Funds Implemented, increasing Underwriters and investors Securitisation Untried, tremendous potential Carbon Finance Implemented, but declining None Underwriters and investors 7

8 for Delivering Green Finance Structure Application to Developing Countries Role of Financial Institutions Solar Leasing Implemented, increasing Equity capital, working capital PACE Untried, limited potential Loans to municipal governments ESCOs Implemented, but limited Loans to LFIs Green Bonds Implemented, increasing Underwriters and issuers Funds Implemented, increasing Underwriters and investors Securitisation Untried, tremendous potential Carbon Finance Implemented, but declining None Underwriters and investors 8

9 for Delivering Green Finance Structure Application to Developing Countries Role of Financial Institutions Solar Leasing Implemented, increasing Equity capital, working capital PACE Untried, limited potential Loans to municipal governments ESCOs Implemented, but limited Loans to LFIs Green Bonds Implemented, increasing Underwriters and issuers Funds Implemented, increasing Underwriters and investors Securitisation Untried, tremendous potential Carbon Finance Implemented, but declining None Underwriters and investors 9

10 Solar Leasing Structure Utility Equipment Manufacturer Excess PV Output Electricity If needed Installer Project Host 20 year PPA for electricity Project Installation Solar Leasing Company Financing P + interest Investor 10

11 Solar Leasing in US Results in California Two roads diverged in a wood, and I, I took the one less traveled by, And that has made all the difference. The Road Not Taken Robert Frost, 1916 Source: U.S. Energy Information Administration 11

12 Solar Leasing in East Africa Results by M-Kopa 12

13 Green Bond Structure Underwriter eg SEB Green Bond Bond proceeds P + interest on bond issue Socially Responsible Investors Bond proceeds P + interest on bond issue Issuer Guarantee eg World Bank Project cost Project returns Green Project A Green Project Green B Project C 13

14 GCPF Fund Structure Renewable Energy and Energy Efficiency Projects Loans Local Financial Institutions Senior & Sub Debt Loans Global Climate Partnership Fund Investment Senior Tranche Return Investment Mezzanine Tranche Return Investors in A-Shares Investors in B-Shares Direct Equity + Debt Investment Junior Tranche Return Investors in C-shares 14

15 Securitisation Structure Originator Underwriter Green Project Green Asset Green Project A Project B C Acquires assets Project cash flows Special Purpose Vehicle Security proceeds Senior cash flows Mezzanine cash flows Junior cash flows Senior Tranche Investors Mezzanine Tranche Investors Junior Tranche Investors 15

16 Green Financing of the Future (US Example) 16

17 Green Financing of the Future (US Example) 17

18 Opportunities in Developing Countries Immediate Opportunities for Financial Institutions Solar Leasing equity and working capital financing ESCOs loans to local financial institutions Green Bonds low-cost issuance and on-lending Innovative Funds loans to local financial institutions Longer-term Opportunities PACE loans to local governments Securitisation underwriting and investing 18

19 Best Practices 1. Innovate through a process of continual improvement. 2. Recognize and manage all stakeholders. 3. Keep it simple. 4. Perfect is the enemy of the good. 19

20 Conclusion Renewable energy and energy efficiency projects are increasingly competitive and commercial. But, much more investment is needed to avoid catastrophic climate change. Alternative channels of financing are both necessary and possible. Overcome financing hurdles Are proven Create opportunities for DFIs and local finance institutions in developing countries. 20

21 What can we learn from alternative channels and non-bank financing models for delivering green finance? Bruce Usher Columbia Business School KfW Financial Sector Development Symposium 2014 Berlin, 30 January 2014

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