This article was originally published by Asian Development Blog and is republished with permission.
As countries in developing Asia work to meet their Nationally Determined Contributions (NDCs) under the 2015 Paris Agreement on climate change, governments must figure out how to come up with the money to fund their commitments.
The region needs to spend at least $1.7 trillion annually until 2030 to meet its infrastructure investment needs. The power sector will require more than half of this total to go to cleaner power generation and transmission, specifically investments in renewable energy, smart grids, and energy efficiency.
These efforts will certainly increase the demand for renewable energy as a key strategy. Half of ADB’s developing member countries have committed to specific targets to use more than 20% renewable energy by 2030 in their NDCs. Six countries in the Pacific have even set targets of 100% renewable generation.
If those targets are achieved, renewable energy will contribute more than twice as much new capacity compared to fossil fuels in developing Asia, from about 1,750 terawatt-hours (TWh) in 2014 to nearly 4,500 TWh in 2030. As a result, the NDCs will drive up the share of renewables, and reduce the share of non-renewables overall.
For the above scenario to play out, stakeholders must make significant progress in six key areas.
1. Create the supportive ecosystem to grow renewable energy generation. This means investing heavily in advanced smart grid technologies, decentralized solutions, and enhanced grid connectivity. These actions can reduce the problems with intermittent renewable sources, build robust and efficient distribution systems, and ensure sustainability.
2. Improve energy efficiency. Huge savings are possible on the demand side – particularly in industry, buildings, and transport, even as economies continue to grow.
3. Enable low-carbon technology transfer. Learning from successes elsewhere can help developing countries design their strategies and programs to deploy clean energy.
4. Increase access to finance. Innovative financing can build markets particularly where risks are uncertain. Global climate finance, green bonds, and better leverage of institutional investment are essential to scale renewable energy investment.
5. Curb the use of coal and manage its impact on the climate and environment. We can do this by diversifying the energy mix, raising the efficiency of existing thermal generation, and scaling up carbon capture, utilization, and storage.
6. Support markets through adequate regulatory and policy frameworks. Pricing carbon, removing fossil fuel subsidies, promoting power sector reforms to integrate renewable energy generation, and creating risk sharing and capacity markets will open the possibilities for private finance.
Where will the money come from to pay for all of this?
Clearly there is a need to substantially increase the sources of public and private sector funding. We assume that the public sector is likely to continue its funding as a proportion of GDP roughly at current levels.
This means we need to engage much better with private sector funding sources. They represent the greatest concentration of untapped funding.
The task is large. Private funding will need to increase by about 300% of current levels to close the gap. The funding is there, potentially. Institutional investors worldwide hold an estimated $80 trillion in assets. But an OECD survey found on average they invest only 1% in infrastructure.
In the long term, the inflation resistant and non-cyclical characteristics of infrastructure cashflows are an ideal “asset class”. However, to date this source of funding has yet to be fully tapped.
This is because infrastructure projects usually involve complex financing structures that can be relatively illiquid. Institutional investors prefer mature assets rather than accept construction or ramp up risks. They may also be reluctant to invest in developing economies where a currency mismatch exists.
Multilateral development banks like ADB can help. We can proactively crowd in the private sector in a number of ways, such as assisting host governments to establish appropriate legal and regulatory frameworks.
MDBs can also finance individual or portfolio project developments, provide credit enhancement through guarantees and insurance and generate funding through local currency capital markets. We are also able to pioneer alternative financing techniques such as green bonds, as well as mobilize funding by linking private and public sectors with international partners.
ADB provides this full suite of services through finance, knowledge and partnerships. Our sovereign lending to the energy sector is over $5 billion a year, with $2 billion of that for climate mitigation. Our private sector lending is 40% of the total clean energy portfolio.
Asia’s clean energy needs are large and pressing. Filling them will help economies to grow without degrading the natural environment, nor compromising their climate commitments. Through innovative financing tools as well as standard debt and equity, MDBs can play an important role in delivering an era of clean growth to the region.