Private sector consultation - Washington

Private sector consultation, 8 November 2011 Washington DC

 

On behalf of the Energy+ Partnership, Garten Rothkopf organized a consultation with the US private sector to understand key incentives and barriers to investments in developing country renewable energy projects. This pilot consultation, hosted at the WWF headquarters, drew more than fifty high-level participants from both the public and private sectors.

Wireless polling devices were used throughout the day to gauge the opinions of the private sector on various topics pertaining to investment and project development opportunities. Private sector participants, ranging from investors to industry and SME project developers, opened the day by sharing success stories and identifying the challenges of investing in complex and risky developing countries. The second session identified the most attractive conditions and incentives for investment and financing models that private sector considered to be effective.

In the final session, participants gave suggestions for the ways in which Energy+ could structure its initiative to attract private sector participation. While the range of incentives discussed was broad, a few were identified as critical, including a well developed long-term national energy plan in the host country, stable financial arrangements, and the potential for achieving commercial scale success. However, there were also a number of common challenges highlighted, including an unstable regulatory and legal environment, ineffective financing models, and a high risk-return ratio for entering these developing markets. Based on the discussions and ideas exchanged, it is clear that there is a real opportunity for Energy+ to address these challenges and catalyze private sector investment in order to meet the twin goals of expanding energy access and reducing carbon emissions. 

Session 1: Success Stories and Challenges

“If clean energy development is to be sustainable, it also has to be profitable. If it is to be transformative, it has to be based on renewable energy”   Ambassador Ole Andreas Lindeman, Norwegian Ministry of Foreign Affairs

Ambassador Ole Andreas Lindeman opened the session with brief remarks on the broad aims of Energy+. He pointed to the tremendous need for new investment to provide electricity to the 1.3 billion people who currently lack access to it. But in doing so, he stressed that there should be no trade off between expanding energy access and reducing carbon emissions. Ambassador Lindeman underscored the importance of the private sector in driving the development of the energy sector, noting that, for clean energy development to be sustainable, it has to be profitable. Energy+ will allocate public money to leverage private sector capital and make investments in developing countries around the world. Amb. Lindeman outlined some of the criteria that the GoN used to identify the pilot countries of Energy+, emphasizing political stability and reasonable expected return on investment. 

He then stated that the goal of the private sector consultation was to figure out how the Government of Norway could shape the Energy+ initiative to attract private sector investors. His remarks were followed by a short intervention by David Sandalow, Assistant Secretary for Policy and International Affairs at the US Department of Energy, who spoke briefly on the role of innovation in the energy sector, and the importance of leveraging private capital with public sector funding in order to push new technologies forward. 

Featured speakers Christine Eibs-Singer of E+Co, Paul Zorner of Godavari Biorefineries, Jeffrey Leonard of the Global Environment Fund and Bill Bivins of One World Clean Energy then kicked off the first session with success stories and challenges from investing in and developing renewables projects in developing countries, providing a useful framing for the more in depth discussions that took place throughout the consultation. 

Key Components of Success

“You can do great things if there’s a stimulus program, but if there’s not a regulatory regime and a long-term focus on power and renewable energy after the stimulus program, you leave a wasteland behind”   Jeffrey Leonard, Founder/CEO, Global Environment Fund

Although there was a paucity of stories of achieving commercial scale success, the speakers identified several factors as critical to success – the most notable being strong market demand and a stable policy regime. All participants were in agreement about the importance of economic engagement with the local community and having local partners throughout every stage of the project cycle. Paul Zorner of Godavari Biorefineries attributed project successes to a long-term focus on sustainability, achieved by integrating the community into every step of the project cycle.

Projects that were successful, he said, “built careers, not just jobs.” Good feasibility studies done prior to project implementation were also identified as critical to attracting investment – as Bivins observed, “a good feasibility study will put steel in the ground” – and ensuring successful project outcomes.  Some participants noted that new models are emerging that could transform energy access distribution, financing or payment, including the following: mobile payment technologies, remittance payments for energy access, community financing schemes and reverse seed money investments.

Critical Barriers to Success

“There’s a technology dump in third world countries… us start-ups that go out and try and sell behind that, it’s a really hard act to follow”   Bill Bivins, CEO/Founder, One World Clean Energy

In addition to outlining some key variables in project success, all participants pointed to the existence of significant remaining barriers to investment in renewable energy and energy access projects in developing countries. In addition to the overarching issue of a lack of policy stability, regulatory and markets structures inhospitable to independent power producers and a lack of technical capacity were pointed to as nearly insurmountable barriers from the perspective of a project developer.

In addition, a breakdown in communication between the public and private sector, competition between commercial energy projects and grant funded energy projects distorting markets, and a lack of quality assurance of renewables technologies creating consumer confidence hurdles were outlined as areas where coordination could yield significant progress. 

 

Session 2: Direct and Indirect Incentives

Opening Remarks 
Following the first session, the Norwegian Minister of Petroleum and Energy, Ole Borton Moe, spoke about the interdependent challenges of energy poverty and climate change and the role of Energy+ in addressing them. He stressed the importance of assisting developing countries in choosing a path of energy development that is less energy intensive, and the crucial role of the private sector in achieving this goal. He then touched on the incentives that would need to be in place, including political stability, supportive regulatory schemes, results based financing, and reasonable returns on investment. He finished by answering a series of questions from participants, addressing issues including the importance of free and open energy markets and the initial metrics for success for Energy+, which he defined as the development of reliable and diverse plans for energy sectors in countries that have been identified as initial examples.

“You can’t invest in a transaction based on subsidies. You want to give me a subsidy, I’ll take it, but I’ve already done all the math to figure out what happens when it goes away” Joan Larrea, Managing Partner,Global Environment Fund

Featured speakers Joan Larrea of Global Environmental Fund, Michael Philipp of Reykjavik Geothermal, Dr. Alex Papalexopoulos of ECCO International, Richard Hansen of Soluz USA, Andy Kruse of Southwest Windpower and Stephen Cashin of Pan African Capital Group then kicked off the second session, outlining the direct and indirect incentives and conditions for investment that were essential for making a market attractive to private investors.

One of the most notable incentives identified as critical to attracting private sector investment in developing countries was a long-term, well defined energy plan. Subsidies were deemed as largely ineffective, with participants overwhelmingly favoring more stable, long-term, financial arrangements including standardized PPAs and innovative models that address concerns over terms of loans and unsustainably high interest rates. Funding for feasibility studies, technical training, supporting infrastructure, and local innovation were also noted as valuable.

 

Coherent & Long-Term National Energy Plan
The existence of a well developed, long-term energy plan as a critical incentive was raised again in the second session and reiterated throughout the conference. Investors are looking for countries that have a clear sense of priorities and a timetable to develop new sources of electricity. Participants pointed to instances where they had identified developing countries with a number of attractive conditions in place – including large-scale financing, technical expertise and credit worthy off-takers – but were still reluctant to invest due to the lack of strategic direction in government policy and uncertainty over the stability of existing policies. Jeffrey Leonard of the Global Environment Fund gave two examples of small-scale solar and wind investments in developing countries that were ruined only a few years after the initial investments were made because governments switched priorities. 

Long-Term Contracts and Access to Finance Favored over Subsidies
There was near unanimous consent that direct subsidies were an ineffective mechanism for incentivizing investment and that more stable, long-term power purchase agreements (PPAs) were a more effective tool. Participants emphasized that the short-term, unreliable quality of subsidies was

“I don’t believe in subsidies, I think things like long-term contracts… that’s a very monetizable contract, and it works remarkably effectively”    Paul Zorner, Board Member, Godavari Biorefineries

not compatible with the long-term structure of most energy investments. Joan Larrea of GEF stated “You can’t invest in a transaction based on subsidies. You want to give me a subsidy, I’ll take it, but I’ve already done all the math to figure out what happens when it goes away.” Instead of subsidies, participants spoke enthusiastically about the appeal of long-term PPAs and the game-changing effect that a standardization of these agreements would have. They also highlighted the critical need to dedicate public funds to developing and supporting access to finance on appropriate size, terms and rates along the supply chain – including innovative public sector tools that reduce the cost of capital and extend maturities.

Robust Feasibility Studies, Technical Training Capacity, and R&D Investment

There was a tremendous amount of support for more feasibility studies and efforts to address technical training capacity and R&D needs in developing countries. While feasibility studies were frequently mentioned as vital, participants agreed that the high risk of this initial investment produced a lack of activity or inadequately funded studies that as a result, as Bill Bivins of One World Clean Energy opined, “are worthless.” The technical capacity of local partners was also frequently brought up, with participants mentioning the presence of technical expertise in the country as being critical to ensure both the operational success of the project and the ability to make projects bankable and achieve scale. Lastly, investment in piloting new technologies and supporting local innovation was seen as important in order help bring new technologies to market. 

“One of the things that the government of Norway could do is, first of all, help the [developing country] governments develop a long-term energy policy, that could be one of the best things that they could do” - Michael Philipp, Chairman, Reykjavik Geothermal

Session 3: Role of Energy+

The first two sessions of the event focused on identifying the incentives and conditions that are most attractive for private sector investors in renewable energy projects in developing countries. Drawing on these ideas, the third session identified ways in which Energy+ could address market barriers and develop appropriate incentives to attract private sector participation. Based on the ideas exchanged in this session, suggestions for Energy+’s involvement could be grouped into 4 main areas: supporting the development of national energy plans, providing accurate data-driven information on the investment climate for renewables in the chosen countries, encouraging regulatory reform and standardized contract structures, and increasing access to appropriate finance

 

Private sector participants suggested that an important role for Energy+ would be in helping in the development of a national energy strategy. Based on this feedback, Energy + could:

• Provide data to facilitate mapping of opportunities and risks

• Encourage the formulation of national energy plans with a results-based financing approach
• Provide technical support and assistance in the planning and drafting of a plan that has clearly defined goals and policy levers, such as a RPS standard
• Share expertise and international best practices regarding policies that will incentivize the use of renewables

 

Participants emphasized that Energy+ could play an important role in gathering and disseminating information necessary to make investment decisions and design successful projects. Given the critical role and dearth of accurate information from which to make investment decisions, Energy+ could:

• Invest in co-financing pilot projects or demos and disseminate information on project successes to facilitate the learning process and enable modest replication

• Develop a climate registry with a function that matches financing and technical needs with public and private resources

• “The key issue is… mechanisms to reduce the bureaucratic obstacles, uncertainties and time delays. There are places where from the minute you make an application to the minute you start construction, it can take 3-4 years. This is totally unacceptable.” - Dr. Alexander Papalexopoulos, President and CEO, ECCO International

  Establish a database for tracking the flows of public money in order to figure out what works, what doesn’t, and where the gaps are

 

Participants also observed that Energy+ could support the development of a regulatory framework for investments and contracts. Energy+ could pursue this through:

• Providing technical assistance to set up a one stop shop or fast tracking for project approval, permits, licensing and land leasing
• Encouraging unbundling of the power sector to level the playing field and create a competitive market
• Facilitating the development and implementation of standardized PPAs
• Encouraging rules and mechanisms of contract compliance to support public private partnerships

• Sharing of expertise on developing a legal framework with compliance mechanisms

 

Participants stressed the need to explore innovative and alternative financing models that are better

able to address the risks associated with energy investments in developing countries. Specific models

suggested that Energy+ could explore include:

• Zero-interest loans, which allow private developers to only pay the principal on loans they take out for renewable projects
• Extended maturity loans, which give private sector investors the option to transfer a loan after a shorter-term if they desire
• Reverse seed investments, which finance feasibility studies and are required to be paid back only if a project is successful

 

This session closed with remarks from Amb. Carlos Pascual, recently appointed Special Envoy and Coordinator for International Energy Affairs for the Department of State. He spoke briefly about his new role and the greater emphasis that the State Department is now placing on energy security and development. He also touched on some key considerations to keep in mind when developing renewables projects, one of which was the issue of commercial viability in addition to environmental sustainability.