Issue #2 80652 handshake IFC’s quarterly journal on public-private partnerships In this issue renewable energy: Wind & Solar | Lessons from an investor energy efficiency: Green buildings | Approaches for every market, climate & budget green finance: Infrastructure finance |  East Asia’s new investment era Climate Change PPPs in partnership with Australia • Austria • Brazil • Canada • Catalonia (Spain) • Flanders (Belgium) • France • Ireland • Italy • Japan • Kuwait • Netherlands • Norway • Sweden • Switzerland • United Kingdom • United States • Public-Private Infrastructure Advisory Facility (PPIAF) • Global Partnership for Output-Based Aid (GPOBA) • Private Infrastructure Development Group (PIDG) • African Development Bank • Asian Development Bank • Brazilian Development Bank (BNDES) • Caribbean Development Bank • Central American Bank for Economic Integration • European Investment Bank • European Bank for Reconstruction and Development • Inter-American Development Bank • Infrastructure Consortium for Africa • Islamic Development Bank Issue #2 - July 2011 IFC Advisory Services in Public-Private Partnerships 2121 Pennsylvania Avenue, NW • Washington, D.C. 20433, USA • +1 (202) 458 5326/7 • ifc.org/ppp Editorial Tanya Scobie Oliveira • Alison Buckholtz Art & Design Jeanine Delay • Victoria Adams-Kotsch Disclaimer This journal was commissioned by IFC, a member of the World Bank Group, through its Advisory Services in Public-Private Partnerships department, which helps governments improve access to basic public services through public-private partnerships in infrastructure, health and education. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. Cover photo © Darren Baker/istockphoto Letter from IFC Combating climate change requires innovative, transformative thinking—and public-private partnerships, at their best, present exactly the sort of solutions needed. Well-structured PPPs bring to the table the finest qualities of the public and private sec- tors, extracting innovation and efficiencies while providing the right regulatory support and apportioning risks. This issue of Handshake explores climate-related PPPs that address the challenges of mitigating and adapting to climate change. We offer many different snapshots of the landscape, reflecting the current diversity of views and approaches. With such a broad topic relevant to so many, there are sure to be significant differences in perspective. Handshake does not aim to reconcile these differences, or even mediate among them. The articles and columns here are discussions-in-progress, and we invite readers to eavesdrop on some of the more raucous debates of our time. On this, however, we can all agree: PPPs in the climate sector are smart business for the countries they serve, the sectors they impact, and indeed for the future health of the globe. Laurence Carter, Director Tanya Scobie Oliveira, Editor IFC Advisory Services in Public-Private Partnerships Features Energy efficiency Geothermal 19 wind & solar 24 Renewable energy Renewables: A closer look | 13 What’s the deal with geothermal? | 19 India’s solar roofs | 24 48 Wind & solar: Lessons from an investor | 29 Public lighting PPPs | 46 Pumped-storage hydropower plants | 34 Green buildings | 48 In this issue 2 | handshake, june 2011 Infrastructure & climate change | 10 Columns A champion for sustainability | 38 PERSPECTIVE Insights & opinions The business of climate | 45 Natural allies | 06 A waste-to-energy success story | 54 COMPASS Cleaning up Thilafushi | 57 Trends Infrastructure finance | 60 Renewable energy trends | 16 LEGALEASE 38 Promoting access Climate change & renewable energy resources | 33 MONEY TALKS Financing & funding PPPs Incentives for the private sector | 58 THE LAST WORD Low-carbon investment | 64 OPEN BOOK Books, magazines and more Recommended readings | 66 IFC | 3 Contributors Tanya Scobie Oliveira is Operations Officer in IFC’s Advisory Services in Public-Private Partnerships and the editor of Handshake. Henry Derwent is CEO of the United Kingdom-based Interna- 46 tional Emissions Trading Association. 34 64 Nico Saporiti is a water engineer and Investment Officer in IFC’s Advisory Services in Public-Private Partnerships, based in Belgrade. 4 | handshake, june 2011 Aldo Baietti Amar Qureshi is a Lead Infrastructure Specialist for the Infra- is a Director at Local Partnerships, a joint ven- structure Unit (East Asia and Pacific Region) ture between the Local Government Association at the World Bank. (LGA) and Partnerships UK (PUK); heads the Commercial Team for the Waste Infrastructure Katharine Baragona Delivery Programme at DEFRA, the U.K. is a Senior Infrastructure Finance Specialist in Department for Environment, Food and the Financial Solutions Unit at the World Bank. Rural Affairs. Vipul Bhagat Divya Singh is Chief Investment Officer and Manager in IFC’s is an Investment Analyst working in IFC’s Advisory Services in Public-Private Partnerships. Advisory Services in Public-Private Partnerships, Jeff Delmon based in New Delhi. is a Senior Infrastructure Specialist in the Finan- Ari Skromne cial Solutions Unit of the Finance, Economics is a Senior Investment Officer in IFC’s Advisory and Urban Department and the Global Expert Services in Public-Private Partnerships. Team on PPPs at the World Bank. Vladimir Stenek Victoria Delmon is a Climate Change Specialist in IFC’s Climate is a Senior Counsel in the World Bank Legal Business group. Vice Presidency. Jamie Fergusson is a Senior Investment Officer at IFC’s Power- Global Infrastructure department. SPECIAL THANKS TO Prashant Kapoor Jeremy Richardson guides IFC’s global green building investments Head of Climate Change and Policy at with a particular focus on financing low carbon URS Scott Wilson developments, ESCOs and green mortgages. Alan S. Miller Edouard Perard Principal Climate Change Specialist, is the Regional Coordinator for South Asia at Environment Department, IFC the Public-Private Infrastructure Advisory Facility (PPIAF) of the World Bank. IFC | 5 PERSPECTIVE Photo © webphotgrapheer/istockphoto allies the Government and the private sector need each other to advance the climate agenda. By Vipul Bhagat & Ari Skromne 6 | handshake, june 2011 During the last decade we have seen a dramatic transition in the climate change debate. The question has shifted from “Are these changes real, and are we to blame?” to “How can we avert further damage?” The first question has been discussed widely among re- searchers and scientists. Ultimately, society responded with a clear call for world leaders to take action. The second, more recent debate is much more difficult to resolve because it involves analyzing how and at what cost we can switch our fossil fuel dependency model to one that is renewable. The questions keep coming: who pays for renewables in a time when fossil fuel remains, in general terms, the most cost-efficient way to produce power? There are no easy answers. This is why we see specific, as the interview with the head of Gujarat countries experimenting with different models Solar makes clear; others may be widely applied, to incentivize renewable energy generation and but lack support for different reasons, as we see in consumption. Some of these include tax credits, the article on geothermal energy. minimum fixed tariff guarantees for renewable As a society, we are still in the early stages of power generation, or new regulations like “green” determining the scope of climate change, and buildings. This also explains the broad range of therefore the only way to seize upon solutions opinions on the role that corporations, regula- is to consider many different sound, reasonable tors, consumers, public entities, and development points of view. That is the objective of this issue, organizations ought to play in this process. and it is backed by the understanding that finding This issue of Handshake reflects the larger solutions for climate change mitigation (measures debate, presenting a diversity of views, propos- to reduce greenhouse gas [GHG] emissions) and als, and potential solutions to solve the problem adaptation (measures to reduce vulnerability to of climate change. Editors cast their net wide to climate impacts) will cost us. Therefore, innova- represent many different perspectives, showcas- tion, cost efficiency, and regulation will continue ing broad theories, specific financial approaches, playing a central role in the development of any case studies, and the individual views of leaders new models. and practitioners. Some approaches are culture- IFC | 7 Ready, Set, Go A symbiotic relationship Until a few years ago, businesses heard the word Climate-conscious PPPs make sense for several “climate” and considered it code for “What is reasons. Primarily, PPPs are an excellent vehicle to this going to cost me?” In developing countries, promote cost-effective projects that spur innova- the perception was even worse: introducing the tion. PPPs can contractually set minimum perfor- climate agenda was sometimes seen as an attempt mance standards that can result in lowering GHG to throttle economic growth. Fortunately, policy- emissions (for example, energy standards for makers and the public don’t look at climate that building or minimum loss reduction targets for way anymore; they know climate issues must be electricity distribution systems). A greater number addressed alongside economic growth. of PPPs than before are developing conditions There has been a parallel shift in how the pri- that can capture the private sector’s capacity to vate sector approaches the climate agenda. As innovate, and benefit the planet in the process. the debate has been reframed, climate-friendly This issue’s waste-to-energy success story shows building, for example, is now considered a smart how cost-efficiency and mitigation can coexist. business move. This evolving understanding of Other possibilities include solar or wind PPP the climate agenda has transformed the approach building contractual incentives, like access to a to infrastructure around the globe, underscoring Power Purchase Agreement or to concessional the importance and ongoing relevance of public- financing. This would encourage the construction private partnerships (PPPs). of a pump-storage hydropower plant that could Many of today’s climate-related infrastructure store water during off-peak demand periods (also projects are PPPs by definition, even if the described in this issue). Incentives are particularly partnership is not explicit. In fact, addressing important if we expect further technological climate issues from a business perspective is by innovation, as marginal cost-efficiency gains default a PPP, because there is almost always some will translate to additional marginal returns for kind of a regulatory connection. In many of the the project developer. The intrinsic competitive sectors that involve mitigation of greenhouse gas bidding feature of PPPs ensures that bidders will emissions—for example, renewable energy or maximize project cost efficiency, which will be energy efficiency—regulatory drivers initiate that reflected in the least-cost bid to the government, process. The government isn’t necessarily mandat- and ultimately to consumers. ing the approach, but the private sector needs incentives to make its investment profitable. A closer look The government needs the infusion of capital, PPPs are also important for climate initia- and the innovation and cost-effectiveness that tives because these partnerships can efficiently comes with it. organize, under a single project umbrella, the numerous and complex arrangements that make 8 | handshake, june 2011 a renewable energy (or any other climate-related) changing climate in its infrastructure. Adapta- project work. A good example is the innovative tion is gaining prominence as new funds are area of Concentrated Solar Power (CSP) genera- being negotiated to assist nations that need it tion, an appealing new technology for countries most—especially developing countries, which with abundant sunshine and interest in reducing see the impact of climate literally on the ground. fossil fuel dependency. Many of these governments feel that adaptation A long-term, financially sustainable CSP project is in their immediate interest because results can in the developing world will require a stable and help improve people’s lives right away. PPPs, with adequate regulatory framework for renewable possible 25-year (or longer) concessions, have the energy, conducive to long-term private invest- advantage of providing a structure for addressing ment. It will also require having a built-in power medium- and longer-term issues. One particularly agreement with creditworthy off-takers, assur- relevant article in this issue describes how a port ance of interconnection to a transmission line concessionaire in Cartagena, Colombia invested when the project is completed, and a functioning in adaptation measures following a climate impact regulatory framework for power export. Availabil- risk analysis, and this assessment applies equally ity of concessional financing and other types of to PPPs. multilateral support, like political risk guarantees, Continued progress in the climate arena and the will most likely be necessary as well. The best way maturing of climate-related regulatory frame- to handle all the pieces of this complex puzzle is works will eventually change the way PPPs are through a PPP. constructed. This happened in the telecom indus- There is an additional value associated with try, when the private sector matured and broke climate-related PPPs: in countries with little away from its dependence on government. But in experience in renewables, a PPP arrangement these early days, governments must collectively can become the “pilot” for future projects, and provide the support mechanisms through funding simultaneously contribute to the preparation of or regulatory incentives. Today we need a public the applicable regulation, ensuring consistency sector that is engaged and can provide an enabling between the legal framework and its actual environment, funds that can catalyze progress, implementation. and a private sector committed to innovation and cost efficiency. Most important, the private sector must prioritize working with governments Adaptation to continue building sustainable PPPs. From the Lastly, it is critical to consider the role of PPPs symbolic embrace of government and the private in addressing adaptation to the effects of climate sector, the future generation of climate-conscious change. Adaptation initiatives, which would business emerges. partially accept or avoid the climate risk, can be implemented by designing projects that look forward, examining the potential impacts of a IFC | 9 Adaptation Infrastructure Climate Change Evaluating risk options & By Vladimir Stenek & Ari Skromne The impact of climate change on infrastructure Depending on their nature as well as local is receiving more focused attention from project conditions, projects and their components will planners, sponsors, and financiers. The expecta- have specific sets of climate “variables” associated tion of increase or decline in precipitation levels, with climate risk. As the variables exceed critical increase in wind speeds, variations in tempera- threshold limits, there will be materialization of ture, and rising sea levels raises the question of direct and indirect risks and impacts. whether, and by how much, new or existing infrastructure should be weatherproofed in First, the analysis response to actual or expected climate change. The first question for the project planner analyz- This is particularly relevant for PPPs, for which ing this challenge is whether there is a need to the useful lifetime of the infrastructure asset is respond to actual or potential changes in climate. usually long and spans several decades between Examining how a discrete asset will perform in design and the end of operational life. During a future climate scenario, when the threshold that period, the climate may go through consider- levels will be exceeded, and the potential financial able changes. Therefore, the assets, if their design and other consequences, is important for invest- is based only on historic records, may underper- ment and design planning. This planning process form on several levels as the years go by. should take into account the consequences of Planning Construction Facility Life Project Concept Design & Engineering Increasing Severity of Climate Impacts 3-5 yrs 1-3 yrs 1-5 yrs 30+ yrs 10 | handshake, june 2011 potential climate scenarios, which could include • Avoiding the risk, where the planner seeks loss of functionality and revenue (such as lower to elude the anticipated risk (for example, generation capacity of a hydropower plant due redefining the project site to avoid vulner- to decline in precipitation levels) or greater costs ability to flooding). (such as increased maintenance or rehabilitation costs and greater insurance premiums in the case The evaluation of options comes with a review of a port facing a rise in sea level). of their cost effectiveness. From a cost angle, it will be expected that resisting will usually bring Tools and data for climate risk analysis are increased costs, while accepting or avoiding risk becoming increasingly available as stakeholders may or may not. The risk of not evaluating the recognize the need for their use. Planners now impact of climate risk and measuring its potential have the advantage of accessible, user-friendly in- consequences is not only locking in an inadequate formation about climate variables, like the World design but also increasing the probability of Bank’s climate portal. They also benefit from the having to pay higher insurance, performance refinement of spatial and temporal resolution of guarantee premiums, and financing costs. climate models and projections. Nevertheless, it is important to consider that many climate variables A third relevant question is whether adaptation have a marked region-specific character and need should also involve limiting the climate-related to be scrutinized in the context of a specific loca- risks beyond the immediate scope of the proj- tion and applied to a project’s (or sector’s) vulner- ect. The options may include reducing negative abilities and needs. impacts arising from the interaction of climate and infrastructure, like including storage within Once the actual or expected climate risks are infrastructure drainage systems to reduce the risk identified, planners must ask which adaptation of causing flooding. Another option is protect- option (or combination) should be considered ing against negative impacts arising from climate from among the following choices: change, like designing a road so that it can also serve as a refuge in case of flooding. In addition, • Resisting the risk, which entails designing special climateproofing infrastructure like coastal to resist an expected climate condition (for defenses can protect a very specific piece of example, stronger winds) so the infrastruc- infrastructure (a sea in a port) or be extended to ture does not lose its functionality. benefit a larger area (such as the Thames • Accepting the risk, where the design takes Barrier). into account an expectation of temporary loss of functionality (for example, accept- ing temporary flooding). IFC | 11 Adaptation Proper planning is key Spring tide levels provide information needed to calculate the costs of business interruption due IFC’s most recent Climate Risk Case Study, to flooding inside the port, and financial analyses Climate Risk and Business: Ports, shows how of investments that would climateproof it, thus climate risk can be evaluated for proper plan- preventing the flood in the first place. In this ning and investment. The report first assessed the particular project, the cost and benefit analysis risks and opportunities that seaports’ operations showed that such investments would be justified in general may be exposed to due to changing from the financial point of view. climate variables (such as berthing, navigation, transport inside and outside of the ports, insur- The key initial decision is to take climate risk into ance, and social and environmental issues). consideration. In the case of ports, a recent survey of world’s seaports (Becker et al. 2011) shows that Next, changes in key climatic variables – as most of the planned infrastructure is built taking they relate to the identified risks and the port’s into account only historic records, potentially ex- location– were analyzed in the context of fore- posing the new assets to severe and frequent im- casted climate scenarios. Such an analysis pro- pacts. This is not the case in Muelles del Bosque, vided a thorough understanding of impacts that as the climate risk analysis was instrumental in allowed for a financial cost and benefit analysis the concessionaire’s decision to invest $10 million of adaptation options. This analysis can include in areas subject to flooding. visualization examples like the following ones that show the highest spring tides in 2050 and The exact change in frequency or intensity of 2100 for this project: events such as the storm tide for another port will be specific to the location and project character- istics, requiring analyses of vulnerabilities and adaptation options in that context. Although each location is unique in its needs, they all deserve careful consideration based on the most up- to-date research and tools available. 12 | handshake, june 2011 renewable Energy energy Generation RENEWABLES A closer look By Jamie Fergusson Renewable energy technologies such as hydro, including fixed long-term elevated “feed-in” wind, biomass, geothermal and solar power of- tariffs, auctions for specific amounts of new fer the potential of increased energy security, renewable energy capacity, and requirements limited local and global environmental impact, for utilities to source specific percentages (or and reduced exposure to fuel price volatility. “portfolio standards”) from renewable sources. Many of them are also experiencing rapid cost Each approach has its supporters but none reductions as the technologies improve and has proven a panacea: all have their strengths the industries grow to scale. However, except and weaknesses and often their success comes in areas of particularly good natural resource down to the details of implementation. Feed- or in countries that are otherwise dependent in tariffs were once the darling of many as on expensive imported diesel, renewable en- Europe’s schemes encouraged rapid scaling ergy is yet to be cost competitive with tradi- of wind and solar power. The shine has come tional sources of power such as coal and gas. off these schemes more recently with painful Increasing the contribution of renewable en- retroactive reductions of tariffs threatened in ergy within a county’s energy mix often faces Spain and the Czech Republic. As regulators other challenges such as perceived higher risk and markets learn from mistakes, many hy- by investors, unsuitable contractual or regula- brid approaches are being designed that opti- tory frameworks, and existing infrastructure mize benefits of different approaches. IFC has and subsidies that weight decisions in favor of financed renewable energy projects under a traditional thermal power. In response, many variety of regulatory support systems and the countries are implementing specific regula- table below provides a comparative analysis of tory support systems to encourage renewable the four broad categories of regulatory support energies. Multiple different approaches exist, based on IFC’s experience. Photo © Tor Lindqvist/istockphoto IFC | 13 The principal support mechanisms, which can also be used in combination, are PORTFOLIO STANDARDS outlined below. A government required % of all power generated to be sourced from RE, often twinned with a TAX INCENTIVES credit or tradable certificate system Accelerated tax depreciation, transfer- by which suppliers demonstrate able tax credits (which can be used compliance to raise capital), and other tax-based investment incentives STRENGTH can drive competition among RE technologies, delivering STRENGTH can accelerate pay down the government target at the lowest of capital cost | regulatory reliance is cost | can achieve an exact volume not long-term | public “subsidy” is target if measured against metered delivered upfront so regulatory output | cost efficient (depends on reliance and public liability floor price of certificate) are not long-term WEAKNESS low TLC* | price volatil- WEAKNESS burden is ity | disadvantages some RE techs so directly on government finances likely to only support the single lowest with reduced tax income | can lead cost technology for that country | com- to stop/start markets if support is only plexity | bureaucracy in administering approved on an annual basis (such as and managing the RE credit scheme | in the U.S.) or with economic cycles setting right % can be a challenge in affecting the availability of profits to understanding the cost implications shelter from taxes | operating incen- on the sector(this can be mitigated tives can lead to less well-run genera- by setting a suitable safety valve or tion assets | may disadvantage some penalty price above which the credits RE technologies cannot go) 14 | handshake, june 2011 FEED IN TARIFF (“FiT”) A FiT gives a guaranteed fixed price or premium per kWh to the generator for AUCTIONS all projects of a technology (renewable Government or utility energy) type for a fixed period of time run competitive tendering of fixed amounts of capacity STRENGTH TLC | “pull” incentive for specified renewable energy on the market | separate FiTs can technologies allow multiple technologies to be supported and deliver STRENGTH combination of market diversification efficiency with the auction and the TLC $ of a guaranteed price | greatest regula- WEAKNESS getting the price tory control on expansion of RE in the right is hard, as equipment and system | separate auctions can allow financing prices are dynamic. A FiT multiple technologies to be supported that is too low will result in no invest- and deliver diversification ment and a FiT that is too high will give away excess returns and add to public WEAKNESS high transaction costs costs | A FiT alone is not enough to and long lead times associated with run- spur the market – also need access to ning the auctions | risk of non-delivery grid, bankable PPAs, etc | FiTs create if auction entry requirements and bid long-term liability– suitable caps on the scrutiny are inadequate | setting suitable amounts of RE supported are needed, so bid deposit/guarantees is essential to sustainability depends on who is paying– successful outcomes | harder to achieve are the tariffs passed through to consum- success in context of volatility in capital ers or subsidized by government funds– costs and/or costs of capital, particularly and how much is committed to? related to currency markets (bids may become quickly unviable) *TLC=Transparency, Longevity, Certainty IFC | 15 compass Renewable energy trends: Low- & middle-income countries By Edouard Perard Private sector investment in medium and large energy projects with private sector participation scale renewable energy projects in low- and reached financial closure during 2005-2009, 2.5 middle-income countries has increased strongly times more than in 2000-2004. In 2009 (the during the past five years. Investment commit- last year of available data), private activity in ments to new renewable energy projects with renewable energy reached a record high of 60 private sector participation during 2005-2009 new projects for a total investment greater than totaled $60 billion, approximately four times the $24 billion. In comparison, during that year level of investments during the previous five years. traditional energy generation totaled 52 projects In terms of number of projects, 253 renewable representing $30 billion. Renewable energy projects with private sector participation in low- and middle-income countries reaching financial closure 2009 US$ billion Nr. of projects 30 70 60 25 50 20 40 15 30 10 20 5 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 16 | handshake, june 2011 In general, the total installed capacity of medium Not all renewable energy technologies have devel- and large scale renewable energy projects with oped at the same pace. Hydropower remains the private sector participation is becoming quite most commonly used technology, numbering 129 sizeable. More than 72GW of renewable energy projects and $45 billion in investment in 2005- were installed through projects with private 2009. Wind power is increasing, with 85 projects sector investment over the last decade; most and $11 billion in 2005-2009. In the third place were installed during the last five years (49GW) in terms of energy mix, biomass accounted for 31 and 21GW during 2009 alone. With progress projects and $1.7 billion in 2005-2009. Medium in technology driving down the relative cost of and large scale private renewable energy projects renewable energy, and with the increase of energy based on other technologies, such as solar, are cur- prices during the last years, renewable energy has rently less developed in low- and middle-income become more competitive and represents now a countries. The choice of the energy technology substantive share of energy generation projects. is directly linked to the associated generation During 2005-2009, renewable energy represented cost and the natural conditions, hydropower and about 25 percent of medium and large scale wind being less costly and more exploitable. Solar energy generation projects’ total capacity in low- power generation remains in general more expen- and middle-income countries. sive, and is usually less developed through private medium and large scale projects. Cumulative capacity of renewable energy projects with private sector participation in low-and middle-income countries reaching financial closure GW 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 IFC | 17 compass Brazil, India, and China are the most active countries in terms of private investment in medium and large scale renewable energy projects. The size of these economies, their important energy needs, natural conditions, and fiscal and financial incentives explain why these three countries are ahead in the development of private renewable energy projects. From 2005-2009, the three countries implemented 57 percent of all private renewable energy projects in low- and middle-income countries, representing 68 percent of total investment commitments and 69 percent of renewable energy capacity installed. In Brazil, where $26 billion was invested in 73 projects of a total capacity of 14GW, most projects were large hydropower plants (41), followed by biomass (21) and wind (11). In India, where $9.8 billion was invested in 27 projects of a total capacity of 12GW, most projects were also hydropower plants (21), followed by wind (five) and biomass (one). In China, $5.5 billion was invested in 46 projects of a total capacity of 7GW. Wind power was the predomi- nant technology used (31 projects), followed by hydropower (10) and biomass (5). These figures certainly underestimate the real scope of private sec- tor participation in renewable energy in low- and middle-income countries, as many renewable energy projects are small scale and remain difficult to track. As the relative cost of renewable energy keeps declining, it is expected that private sector participation in renewable energy projects will continue developing strongly: wind, hydropower and small hydro projects in the short term, and solar in the medium term with the decrease of associated costs and the development of incentive programs. Brazil, India, and China are expected to remain the first destination for renewable energy proj- ects in low-and middle-income countries for quite some time. All calculations are based on data from the PPI Database (World Bank and PPIAF). http://ppi.worldbank.org/ Data from the PPI Database on energy projects with private participation include primarily medium and large scale projects as reported by the media and other pub- lic sources. Small-scale projects are usually not included because of lack of public information. 18 | handshake, june 2011 renewable energy “Renewable” is the battle cry of environ- mentalists and climate change activists. Yet, across the spectrum of renewables, some resources seem more “green” than others. By Katharine Baragona What’s the deal with IFC | 19 Photo © Rob Broek/istockphoto Controversy swirls around what Field of really promotes economic growth, development, and sustainability. What’s holding back investments for Focusing on benefits can boost this conventional source of reliable and stable energy? Some experts say investment, attracting financiers it’s the upfront drilling costs and with a feel-good factor along with resource base risk; some point to competition with similar resource profits. Yet, across the spectrum of types; some blame lack of project financing. Other culprits: renewables, some resources seem Cost: Geothermal plants have no fuel costs but more “green” than others. Everyone upfront costs are high. Verifying a site can take knows something about solar and a long time, making financing difficult. Expenses are front-loaded in research, development and sees it as a plus. drilling and costs can vary widely depending on location, temperature, and drilling depth, among other things. Typically, drilling costs increase exponentially with depth. The most economically Geothermal 101 viable projects are those that exploit high tem- peratures at shallow depths. Geothermal energy is a renewable resource derived from the Earth’s heat. By mass, 99.9 Resource Base Risk: The last major geother- percent of the Earth is hotter than 100⁰ C. The mal exploration effort was about 30 years ago, during the 1970 energy price spikes, with no Earth’s available heat is estimated at equivalent significant geothermal exploration since. Much to 42 million megawatts of power and doesn’t resource base knowledge is grounded on older deplete like an oil or natural gas deposit, ensuring data, gathered with older instrumentation. Indus- an inexhaustible supply of energy. try and governments need to address resource risk if geothermal is to gain a larger fan base. As a power source, geothermal is unsurpassed. What happened to that portion of Google.org Plants are capable of running 24/7, providing and the U.S. Department of Energy’s investment steady base load power with high capacity fac- in AltaRock’s EGS project going toward geother- mal resource mapping? Did the research baby get tors. It’s clean and sustainable with virtually zero thrown out with the injection waters? carbon. Facilities have a small surface footprint; Perceived risks also affect investment. Recently, there are no vast installations of unsightly, noisy PPIAF supported a study evaluating resource risks wind turbines or immense arrays of mirrors or associated with developing geothermal power in solar cells. Indonesia. Investors claim to need specialized mit- igation interventions to overcome the excessive Most geothermal power is conventional, exploit- ing naturally occurring pockets of steam or hot water close to the Earth’s surface. Heat from 20 | handshake, june 2011 The same goes for wind, which produces clean energy from majestic white turbines. But dreams ask people about conventional geothermal resource risks found in Indonesia. The study concluded Indonesia’s geothermal resource geothermal energy versus risks, given its vast potential and attractive pros- engineered geothermal systems pects, are likely to be similar to or less than other countries. (EGS), and enthusiasm for Competitive Opportunity: Government renewables gives way to blank sponsored incentive programs help level the play- stares. Geothermal projects struggle ing field. A typical American geothermal plant, using conventional technology, produces electric- for attention and vie for finance ity at around $0.10/kWh. Producing electricity from coal or gas also costs around $0.10/kWh. with little or limited success. Add financial incentives such as production tax credits, and geothermal power becomes com- petitive with many other technologies. Chile offers grants to geothermal companies water is used to boil fluid and drive a steam capable of exploring Chile’s largely untapped turbine connected to a generator. Conventional geothermal potential, a lesson others can learn geothermal power plants are located in rift zones from. Similarly, Australia launched a Geothermal or volcanically active parts of the world such as Drilling Program to help develop its geothermal Iceland, along the Pacific’s “Ring of Fire,” Indone- industry. California’s Geothermal Program awards annual grants and loans to develop new geother- sia, Philippines, and on America’s west coast. mal technologies for low-temperature use and A newcomer is engineered geothermal systems. generation while protecting the environment. This approach, based on related principles, is Lack of Financing: There are numerous proj- designed to work in non-volcanic areas by drilling ects being financed. These multiple structures are thousands of feet underground. Wells are bored in various stages of development, in all regions Photo © Sergio Boccardo/istockphoto and pathways created inside hot rocks, into which and sectors. The difficulty is not lack of financ- ing, but rather a lack of well-structured, well-pre- cold water is injected. The water heats up as it pared bankable projects where enough time and circulates and is then brought back to the surface, money has been invested to establish technical, where heat is extracted to generate electricity. economic, and financial viability. Governments must build the investment case with preparatory In 2008 it appeared geothermal energy had finally fieldwork before investors will come. Only then hit the big time. Google.org, the philanthropic will geothermal be the next “field of dreams.” arm of Google, and private equity heavyweights Kleiner Perkins Caufield & Byers and Khosla Ventures announced investments in EGS. Fund- IFC | 21 ing was also supposed to go toward geothermal Conventional resource mapping, information tools, and a geo- thermal energy policy agenda. What happened? Geothermal Which brings us back to conventional geother- Earthquakes mal: the resource not far below our feet with the power to boil unlimited water and generate clean, EGS technology has a propensity to cause notice- renewable energy with proven safe technology. able earth rumblings. It’s a sign the technology Conventional geothermal energy supplies more is working, propping open or enlarging existing than 10,000MW to 24 countries worldwide, cracks and fractures, where injected, high-pressure meeting the electricity needs of 60 million people. water causes small tremors. Although man-made The United States boasts the largest geothermal earthquakes are not unique to EGS—they occur market, with about 3,000MW of installed capac- with oil-and-gas drilling, and damming and min- ity. The Philippines, the world’s second biggest ing operations – the shaking unsettles peoples’ producer, generates 23 percent of its electricity nerves. Opponents of EGS seize upon that fear, from geothermal energy. Geothermal energy has highlighting unknown geological risks, potential also helped Indonesia, Philippines, Guatemala, damage, and high costs. Proponents tell us oppo- Costa Rica, and Mexico. Iceland derives 17 nents are hysterical, tremors are manageable, and percent of electricity and 87 percent of its EGS will greatly reduce the cost and availability heating needs from geothermal energy. of geothermal power. As these figures demonstrate, an operational Either way, the sci-fi nature of the geological geothermal power plant is quite reliable, offer- risk is enough to keep most investors’ wallets ing continuously available base-load power closed for now. More work needs to be done to with historic reliabilities in excess of 90 percent. understand the true geological risks. Those risks Compare this to wind-generated power, with 25 then need to be rationally balanced against the to 40 percent reliability (the wind doesn’t always drawbacks of other energy technologies, such as blow when needed), or solar-generated power, fossil fuels. The real question, in the end, is what with 22-35 percent reliability (the sun sets each people are willing to tolerate in return for a secure night). Despite its lower profile, geothermal energy supply. power has staying power. In this particular popularity contest, it may yet be voted “Most Likely to Succeed.” 22 | handshake, june 2011 renewable energy HOT ENHANCED SEDIMENTARY GEOTHERMAL AQUIFER SYSTEM Depth (km) 0 1 INSULATING INSULATING SEDIMENTS SEDIMENTS 2 3 UNDERGROUND WATER RESERVOIR 4 CLOSED SYSTEM 5 SANDSTONE OR CARBONATES HOT FRACTURED GRANITE HEAT SOURCE GEOTHERMAL HOT ROCK IFC | 23 partner spotlight India’s solar roofs How Gujarat will set up 500MW of distributed solar systems by 2014. Mr. D.J. Pandian spoke to Handshake about an IFC project that involves installation of 5MW distributed rooftop solar PV systems in Gandhinagar, the capital of Gujarat, by a third-party developer on a PPP model. The developer would be selling the energy to the local distribution grid at a preferential tariff to be determined during the bid process. The pilot project will demonstrate the techno-commercial viability of the plan, which would help firm up policy and legal frameworks for PPPs for the larger distributed rooftop solar program in the state. 24 | handshake, june 2011 Mr. D.J. Pandian is a senior official in the Indian Administrative Services, and his experience spans 30 years. Prior to being the Principal Secretary in the Energy and Petrochemical Department for the government of Gujarat, Mr. Pandian worked with the Gujarat State Petroleum Corporation Ltd. He was also on deputation with the World Bank in Washington, D.C., and served as Director, External Commercial Borrowing, for 1995 India’s Ministry of Finance from IFC | 25to 1997. How did your interest in climate It had political support at the highest levels, change evolve? which helped our plan proceed quickly. We also had support from the Clinton Climate Founda- tion. They told us how they can help so that over I was posted to [India’s] Department of Energy time the cost of solar power can come down. two years ago; before that, I did a stint in a That motivated us. We signed power purchase corporation mostly dealing with distribution of agreements for 100MW, but the process took a gas to cities and towns. We wanted people in the lot of time. Since this government is so forward- area to stop cutting down trees in the woods. I looking, we looked to them to fix the tariff, which set up a pipeline network to the kitchens of area they did. Now, anyone who has the capacity of villages, which made people very happy because financing our technology can come forward and they had fuel available with no smoke and no pol- submit an application to the government of Guja- lution. Even the children were happy because they rat to set up solar powered generating units. now spend more time with their mothers, since women no longer need to collect firewood. As the The government of Gujarat assured us that they project was successful, the chief minister asked me will buy net power at the rate fixed by the state’s to do this for the whole of Gujarat. So although it regulatory commission, and very few people started as a charity, it became a corporate respon- disagree with these numbers. They’re reasonable sibility and now reaches almost 700,000 people. numbers. So that led to the creation of our first public-private partnership. Was pollution a serious problem in Gujarat? How does the system work? Oh yes. Gujarat is highly industrialized, so we We set up the generating unit. Anyone who agrees needed a long-term policy to reduce its carbon to supply power at the rate of $.32 is ready to footprint. There are a lot of small and medium go. The ease of the process has created a lot of industries, like the ceramics industry, which use enthusiasm. I can assign 965MW of solar power. coal. With natural gas, we reduced the pollution By December 2011, 300MW may be commis- level tremendously. The chief minister himself sioned. This will be the highest in south Asia. asked me to reduce the pollution next to his The project’s potential attracts private investment house. He lived next to a coal-based thermal which will ultimately help cut back the carbon power station, and he said, “Ash is falling on footprint. my house, how will you stop it?” Once you realized you could How did your idea of using use the rooftops of government rooftops to generate solar energy building for solar power, how did take off so fast? you flesh out the idea? 26 | handshake, june 2011 I approached IFC for that. They enabled us to them, “If not today, then tomorrow we will have bring the best practices to the project, as well as to face this situation.” We also showed them the the best technology partner. The proposal from concrete effects of climate change. In Gujarat, IFC attracted tremendous response. Because we the monsoons start at the end of June. Climate went with the best practices, within six months change here is very perceptible, because we used to a year we saw that rooftops across the city were to get only five inches of rain, and now we get full of solar panels. That’s our dream. Now we are 10 inches. Also, each year the sea comes closer passionate to see this project spread further in the and closer to the coast. We are sinking. Climate big cities. The carbon footprint can be completely change is visible and we are experiencing it. When reduced, and we can see climate change effects cut you explain it to people with actual examples, back. then they understand. Climate change here is very perceptible, because we used to get only five inches of rain, and now we get 10 inches. Also, each year the sea comes closer and closer to the coast. We are sinking. Climate change can be very So you communicated directly with controversial. Did you have to the residents themselves. address this during the project? Yes. We are the most industrialized state in India, In the beginning, people thought our plan was and also the most sickly. Our women and chil- too costly, and asked, “Why are you bothering the dren are getting unknown diseases because of the common man? The common man is not bothered pollution created by the chemical industry. There by pollution, he only wants affordable energy, is a correlation between the industries here and and your energy is very costly.” Others told us the residents’ life cycle. When it comes to that, that pollution is a problem created by Western- then who are the stakeholders? The people who ers and foreigners. “Pollution is created by them, are going to buy this power. now they want us to pay,” we heard over and over again. We listened very patiently and said to IFC | 27 partner spotlight And how did you convince government officials? I explained that if they don’t spend the money today, they will spend it later, on disaster relief and healthcare costs. That was the best way I could convince the government finance depart- ment. And once we proved the project is viable, the political will was there. When private inves- tors come and look, they see that here is the place for developed land at an affordable cost, and they can set up their solar situation in Gujarat. Where do you see Gujarat Solar in five to seven years? We need to set up at least 10,000MW solar, since our objective is to have at least 30 percent of the electricity available through renewables. We have a population of 60 million, which equates to almost 12 million households. We need 30 per- cent coverage out of that number. To do that we have to work out a strategy to pin down the cost of generation in a phased environment – perhaps through the Clean Technology Fund. It is a win- win situation, but somebody has to start the cycle. Someone has to kick off the ball. 28 | handshake, june 2011 renewable energy Renewable energy has gained recognition in international climate change negotiations as well as from private sector investors. However, there are still barriers to investment, such as cost, experience and expertise. Translation? Countries should be focused on implementing an appropriate low carbon energy mix rather than immediately banking on the latest technology. Clara Alvarez, a Senior Infrastructure Finance Specialist at the World Bank, consults with governments on issues in solar and wind power. Handshake asked Clara what lessons she would share with a newly-appointed minister on how to best achieve climate- friendly milestones. Wind & Solar Lessons from an investor IFC | 29 Invest for the right Reasons There are sensible reasons for choosing renewables, and they’re not all related to climate change. First, your country should actually need the additional capacity, or be able to export it to a neighboring country. In many cases, managing demand (for example, by offering power at reduced rates during off- peak hours) is good enough and doesn’t require massive investment. Second, the market should be big enough and stable enough for renewables to come online smoothly. The capital investment is high, so you need the scale to justify it. Third, the infrastructure needed to connect renewable energy to the existing system should be in place or reasonably easy to set up. Finally, you have to be able to pay for it, including maintenance and transmission. If the business reasons are right, then renewables can bring real advantages. Reduced air emissions are a big plus. But grid stability, greater employment, and energy independence are also important benefits. As renewable energy technology matures, many utilities and large energy companies will use them to hedge against increas- ing and fluctuating prices in fossil fuels. Pursue only if backed by As well as the practical reasons for choosing the above renew- able solutions, it is also true that everyone likes the idea of clean, renewable energy. Governments often come under a lot of pressure—both at home and abroad—to jump on the wind and solar bandwagon. But trends aren’t always good business. Take the case of Colombia, which mainly uses hydropower. It also has large reserves of natural gas. Is there a good business case for shifting away from these and investing in wind or solar? Perhaps not. Solar and wind are more expensive than hydro or gas, and require a large upfront investment. 30 | handshake, june 2011 build it right Building and managing renewable energy systems is complicated and it’s easy to underestimate the effort needed. Governments need to make sure they get the players on board with the right experience through a transparent bidding process. Price should not be the main driver in picking partners. The bidding cri- teria should focus on the technical experience first. Look for companies with a solid track record for construction, management, and quality. Examine closely how you want to approach the issue of the financial sup- ports and subsidies that are always required for renewables. Should you do it at the initial/capital investment level or at the output level? If this is your first large-scale project which you want to use as the foundation for a comprehensive program, you will be better served applying subsidies at the capital investment level. In this way, you demonstrate to the markets that you are fully committed to the program, and also create a solid base for it. Consider an external advisor to work on the transaction process. In parallel with the transaction itself, there may be other important consid- erations, such as legislative issues, public awareness efforts, education, and training. sound business objectives Before committing to solar or wind power, officials need to ask: • Will it bring real business benefits to my country? • Can we afford the cost of the technology? • Who will pay for it? • Is this the best use of public funds? —for • Are there better alternatives for clean energy­ example, increasing energy efficiency or developing small-scale energy sources? IFC | 31 don’t forget transmission & maintenance With so much focus on the power-generating asset, it’s easy to forget about trans- mission and maintenance. Sometimes the asset is in a remote location, far from where the energy is needed. Pay close attention to the equipment supply contract. Suppliers should have a good track record for honoring performance obligations if you want your new asset to be reliable. Engage the private sector The chances for success are much better if you involve the private sector, since these companies are looking for business results, not political ones. Public-private partnerships make sense in this space because they push risk (and therefore cost) to private providers. They have strong incentives to be efficient, thorough, and cost-effective. This reduces the financial and managerial burden on governments, and ultimately delivers power to consumers at a lower cost. Sometimes, govern- ments may need to buy down the first in a series of interventions to set a market benchmark, but if the program is well-designed and strongly implemented, the benefits will be worth it. 32 | handshake, june 2011 legalease Climate change & renewable-energy legal and regulatory resources By Victoria Delmon The Public-Private Partnership in Infrastruc- able Energy Resources and associated PPAs issued ture Resource Center (PPPIRC)’s new Climate by PacifiCorp, a large investor-owned utility in Change/Renewable Energy Page (CC/REP) taps the western United States. You can also access a a wealth of legal materials on clean energy project sample PPA for wind power facilities issued by the development in two significant energy markets: United States Department of Energy. Brazil and the United States. The new version of the CC/REP also provides For example, as the Brazilian Electricity Regu- access to valuable information on clean energy latory Agency (ANEEL) gears up for a July public-private partnerships in other parts of the 2011 auction for renewable energy generation world. Are you searching for the relevant legal resources, the CC/REP provides the original texts documents regarding project development and and annotated summaries of the generic ANEEL financing for a large-scale desalination plant? Power Purchase Agreements (PPAs) used as part On the CC/REP you can access documents for of the 2010 auction for small hydro, wind, and a reverse osmosis desalination project in Mel- biomass generation resources. The 2010 auction bourne, Australia, using clean solar energy and resulted in PPAs with 89 projects representing other clean energy features. 2.9GW of potential installed capacity. Wondering about the PPA provisions that seek Sharing Good Practices to ensure that these projects will be developed The Climate Change/Renewable Energy Page and brought online in three years? On the CC/ is an open source tool designed as a go-to refer- REP you can download and print a PDF file of ence and resource on clean energy PPP projects. the PPAs in Portuguese or browse the annotated It is populated with materials that address the summary in English. challenges and opportunities in developing and deploying clean energy PPP projects around the If you’re looking for ways that utility procurement world. Materials on carbon capture and sequestra- efforts can push investments in renewable energy tion will be added soon. generation projects—one that can meet renewable The Climate Change/Renewable Energy Page is supported by energy needs as well as protect the interests of funds from the Public-Private Infrastructure Advisory Facility ratepayers—the CC/REP has your answer. There (PPIAF), the Norwegian Trust Fund for Private Sector and you can access a Request for Proposals for Renew- Infrastructure (NTF-PSI), and IFC. IFC | 33 PUMPED-STORAGE catalysts for renewable energy generation By Nico Saporiti With so much talk about the hydrogen economy, it is no surprise that the largest “rechargeable bat- teries” in the world are made of water — and are capable of storing the equivalent of a few months of a nation’s electricity consumption. I am referring to pumped-storage hydropower plants (PSHPs), a relatively old type of technology which has been reinvented for today’s needs. PSHP stores energy in the form of water, pumped from a lower elevation reservoir to a higher elevation reservoir. Low-cost, off- peak electric power is used to pump water, typically during the night. During periods of high electrical demand, the stored water is then released from the higher elevation reservoir and flushed through the turbines to generate electricity. 34 | handshake, june 2011 renewable energy Two types of PSHP plants exist: one with separate generation in the 1970s and 1980s. Nuclear pump and turbine units, and one with a single power plants can only produce energy at a con- reversible unit which can pump or turbine water stant rate and cannot follow the variable electric- by changing its direction of rotation. The first ity demand pattern during the different hours of type offers higher generation efficiencies, faster the day. This is also a problem for reaction times, and lower maintenance coal-fired plants. costs at higher capital costs. Stable electricity transmission grids require that production must be equal to consumption at all RPT = Reversible pump turbine Generator/Motor Turbine Generator/Motor Pump RPT MATCHING VARIABLE DEMAND times. Therefore, electricity generation plants WITH CONSTANT SUPPLY must be capable of providing a fast response to load changes. With their very fast ramp-up rates, While the first use of pumped-storage dates conventional hydropower plants have typically back more than a century (the first plants were been able to provide this type of response. developed in the 1890s in Italy and Switzerland), However, even in relatively mountainous and the first big wave of development is commonly wet countries, hydropower plants suffer from associated with the emergence of nuclear power seasonal hydrological variability, and there is a IFC | 35 limited potential for development of new plants. and the ability to generate over long periods of The conversion of existing conventional plants lack of wind or sun. to PSHPs offers the possibility to increase the installed capacity of hydropower plants and to However, the efficiency of PSHPs is only 70 to mitigate the impact of highly seasonal hydrologi- 85 percent because energy is lost in the pumping cal availability. The conversion of the existing process, through water evaporation and infiltra- plants also prompts limited environmental and tion in the upper reservoir, through hydraulic social problems, because it makes use of existing losses, and through the turbine and genera- large dams and reservoirs, and requires the tor. PSHPs are thus net consumers of off-peak building of small compensation reservoirs. energy. INTEGRATING VARIABLE RENEWABLE ENERGY SUPPLY The second large development is associated with the relatively new use of pumped-storage plants to level the fluctuating output of intermittent power sources, such as solar and wind plants. It is expected that by 2020, one-fifth of all energy production in Europe will come from renew- able energy sources, with an installed capacity of 150,000MW for wind power based on the development of large offshore wind farms. Problems arise because it is difficult to predict Additionally, because of the increased reliance production from wind. In addition, product- on nuclear, wind and solar sources, and in the ion from solar panels can fall to next to zero in absence of sufficient capacity for flexibly stor- a matter of seconds with a passing cloud. New ing and generating energy at a short notice, in technologies are allowing PSHPs to switch from certain markets electricity prices have occasion- turbine to pump mode in a matter of minutes, ally been close to zero and even negative (Den- providing the flexibility required to balance the mark, Ontario). This indicates that there is more grid. PSHPs are the catalyst that make possible generation than load available to absorb it, and the relative increase of solar and wind sources that for some period of time, generators had to in the total generation mix. This happens by pay consumers of energy to use energy. providing a response to sudden load changes, 36 | handshake, june 2011 THE BUSINESS CASE FOR PSHPs • Where there are well-functioning institutional and organizational arrangements for the The technical value of PSHPs is undisputed: they efficient and transparent pricing of electricity. offer the largest capacity energy storage system currently available, they match electricity de- An unbundled market is also required to mon- mand and production from nuclear and thermal etize the ancillary services provided by the PSHPs. sources, they shift the excess production of renew- In a competitive power market, the responsibility able energy sources to provide the peaks, and they of upholding the balance and frequency in the firm renewable energy generation to compensate power system rests with the transmission system for non-predicted power variation. operator, which should create a market for balanc- ing power and pay a competitive price for these They also suppress peaks from intermittent services. renewable energy production sources and smooth demand peaks, providing frequency control Across the world, electricity markets vary in (primary regulation), capacity reserve (secondary terms of their degree of market opening and regulation and minute reserve), reactive power how advanced the markets are. Traditionally production, and Black start capability. They they have in most cases been vertically integrated provide ancillary system services that are essential monopolies. In Europe, public ownership of a for the stability and functioning of an electricity national utility has been common, although this transmission grid. has not been the only solution. This type of struc- ture still dominates in many parts of the world, The value of PSHPs can be monetized by arbi- although a rapid change is taking place. For traging among large price differences. Since the example, day-head markets have been intro- plants consume at low prices and produce (sell) at duced in parts of India and in Southern Africa. high prices, they profit from the electricity price differential between peak and non-peak times, Any long-term strategy to meet the growing which should be sufficiently high to compensate global electricity demand with renewable en- for the above-mentioned energy losses and for the ergy sources will require an increased reliance operating and capital costs. Such price differen- on PSHPs. Wind and solar’s attractiveness and tials, however, can only be observed in certain competitiveness can be expanded if developed circumstances: jointly with a PHSP. Private sector investment can be leveraged to finance, develop, and operate • Unbundled electricity markets in which ener- these plants under the condition that national and gy generation is open to competition, and a regional electricity markets are sufficiently devel- large number of energy users can buy from oped to allow private sector investors to monetize different suppliers of electricity at non- the full value provided by these plants. regulated power prices, and IFC | 37 profile Rachel Kyte’s commitment to environmental sustainability stems from her earliest memories of playing on the salt marshes of her native England. Her activism grew as a college student involved in pan- European environmental initiatives around the same time that the cloud of Chernobyl crept across the continent. With a dawning understanding of the threats to the environment, she steered her career toward exploring and implementing sustainable solutions. She spoke to Handshake about how the rhetoric of climate change gets in the way of answers, IFC’s climate agenda, and how PPPs can make a difference. A Champion for Sustainability Rachel Kyte is IFC’s Vice President for Business Advisory Services; she manages environmental, social and corporate governance risk for the cor- poration. She was responsible for intro- ducting new sustainability performance standards and disclosure policies at IFC, showing how environmental and social performance can improve finan- cial results in emerging markets. These standards then became the Equator Principles, a global benchmark. 38 | handshake, june 2011 IFC | 39 Your interest in environmental issues is well-documented. When did you realize you wanted to pursue environmental policy professionally? I went to high school on the east coast of England in the 1980s, and when you hit your teenage years, you start to become aware of the world. At that time there was a curtain down the middle of Europe. One of the main concerns among young people was the issue of mutually- assured destruction, and it seemed it was going to happen right in our backyard. Literally. We had cruise missiles at the U.S. Air Force base behind us, and as we sat at the salt marshes and the planes flew so low that we could see the pilots inside the cockpit. This is around the same time we became aware of acid rain. Later came Chernobyl, when I was in college, and we watched that poisonous cloud move across Europe. In Wales, where my family is originally from, the sheep farmers were paid not to sell their sheep, because of fears of how the cloud hovering over them affected them. Because I spent so much time outside, and because these issues came along while I was developing a political consciousness, the way I saw world politics and the environment changing around me became part of my identity. How did this influence your own activism? For my generation, the environment was central to ideas about the Europe we wanted to build. It inspired us. I became active in pan-European discussions, and in 1989 I hosted the first ever pan-European youth conference on the environment, which was held in Norway. The Soviet youth movements were there, along with the emerging democratic movement of the eastern bloc. Photo © Lee Bailey 40 | handshake, june 2011 profile As secretary general of the Council of European Youth. I was institutionally responsible for youth cooperation, and the cooperation we sought came out of talking about the environment. The climate change piece has always been there for me, because I was always working on sustainable development, and climate change poses the greatest chal- lenge to sustainable development. What’s been interesting for me more recently is to more deeply understand, “What do we do about this?” What gets in the way of answering that question? The problem with the climate change rhetoric is that it seems such a big problem that we can’t do anything about it. In order to arrest temperature rises around the world, to stop the temperature from rising more than 2 degrees, which is what we have to do by 2050, we have to be at a concentration of CO2 equivalent in the atmosphere of 350 parts per million. 450 ppm would be good. Current estimates show us at 650 ppm. We are not going to slow Climate change is down climate change enough, or arrest the temperature not an environment increase. We have to work on answers to how people around the world deal with this problem. issue. It’s a business issue, it’s a financial Does it mean different things in different places? issue, it’s a risk issue, it’s a future-of- Absolutely. In the developed world, it means we need to seek high carbon efficiencies in the economy. Over the last humanity issue, and 150 years, we have become 10 times more efficient in our use of labor than we were at the beginning of the industrial it is the future of revolution. Change is possible. This is the scale of carbon development. efficiency we need today. The developed world should be of one mind on the use of carbon. People say it’s impos- sible to change habits, but for the developing world the IFC | 41 challenge is meeting the needs of the people by to need aid to build the capacity to plan in a way going greener. Everybody can start somewhere. that’s going to be climate resilient. The important thing is to start, take that first step. Leveraging the 10 into 100 is where IFC has more experience than any other institution of What is IFC’s role in this? blending public and private, either through PPPs or mobilization and syndication or finding other IFC is there to help the private sector in middle partners who have different risk appetites and can income countries become efficient across all blend approaches. One issue is that the public sectors of the economy, and to help the banking funds are accountable to public decision making. sector, shocked by 2008, into understanding it So the governments putting 10 billion in need to has a role in society: to bank sustainable growth. know the money is being used in a good way. It’s We aim to help the banking system understand a difficult proposition to sell, that that money is the risks of exposure to a commodity which is going to be subordinated to the private investors’ going to be a difficult thing to manage in your contribution. Donors ask, “Why can’t the private portfolio, i.e. carbon. sector do this alone?” For low-income countries, IFC’s role is to help create scalable green innovations that will help What is the origin of this mistrust? poor people move sustainably out of poverty. This can include off-grid, mini grid, renewable energy Many people, including government leaders, solutions, and new water technology. We need crave hard evidence of results. They understand to help the poorest countries follow a different they need to leverage the private sector. That aid path. All of this requires large amounts of private should be spent on encouraging private invest- investment. ment is not the easiest message to communicate. With the Climate Investment Funds, which are What will it take to see this managed by the World Bank Group, we’re already happen? taking some of this public climate finance and leveraging the private money. We’re working with The financial calculation is that $100 billion Mexico in wind, working in geothermal and solar a year is needed for the mitigation agenda, to in Turkey. But a lot of what’s needed is infrastruc- decrease the parts per million in the atmosphere. ture that is less reliant upon a fossil fuel economy. In some respects, $100 billion a year is chump Infrastructure risks include long lead times, the change compared with security targets. But every- need to create public-private partnerships, and one is cutting back on their ODA, so it’s difficult. electoral politics which don’t mesh with the proj- However if you can find $10 billion, and leverage ect timeline. To green an infrastructure pipeline that with $90 billion in private investment, it’s in the developing world adds an extra level of dif- eminently doable. The poorest countries are going ficulty. Building that pipeline of investable, green, 42 | handshake, june 2011 profile cleaner infrastructure projects is going to be one that does to your wharves. The same is true for of the key challenges for IFC in the next 10 years. an agriculture investment, because we need to examine what is the resilience of the crop in the Is that at the heart of the creation face of temperature or precipitation change. This is about the whole of IFC looking at what it of IFC’s new Climate Business does through the context of climate change. That Group? requires data, evidence, tools, and analysis, which this group will produce for the whole corporation Development is taking place in the context of so that everyone can factor this into their service climate change; it isn’t a question of climate and their strategy. change or development. Therefore, it’s everybody in IFC’s business. If you’re investing in a port, Climate change is not an environment issue. It’s a the port needs to be factoring in climate analysis business issue, it’s a financial issue, it’s a risk issue, so it knows what the changing water patterns it’s a future-of-humanity issue, and it is the future are going to be, where the dredging needs to be, of development. what happens when the sea level rises, and what To stop the temperature from rising more than 2 degrees, which is what we have to do by 2050, we have to be at a concentration of CO2 equivalent in the atmosphere of 350 parts per million. Current estimates show us at 650 ppm. Photo © Fuphan Chou IFC | 43 profile What is the role of PPPs in climate change? The private sector can help many countries think through their investable infrastructure proposition within the next 30 years. Most of the countries we work with aren’t aware of what technology can offer them. We can fuse the public-private discussion, creating bankable partnerships. There are theoretical arguments to be made, but you always come back to real-world examples in your talks about climate change. Is this because it’s such a controversial issue? IFC is a mirror image of the world in terms of nationality, religion, and spiritual disposition. So within IFC we have the same debates they have at the UN. But climate change isn’t a polemi- cal debate, it’s happening now. I was recently in Colombia, which is experiencing floods that have washed out a large part of the infrastructure in the country. Colombia’s social inclusion agenda may have been set back years. The country is now focused on how to become more resilient. If you understand what climate change is doing to the path of development, you will want to be a part of altering the trajectory. At the end of the day, that’s what our clients need. 44 | handshake, june 2011 Photo © Robert Churchill/istockphoto The business of climate Climate-consciousness is becoming good busi- tion, business process innovation, and—to me ness: a way to demonstrate corporate responsi- the most important—financial innovation.” bility, stay relevant, and plan for profitability. Just as the information revolution transformed With a focus on innovation, the centrality the way the world works, the climate agenda of PPPs becomes clear. PPPs that prioritize may now potentially shift the status quo. climate change transfer innovation from the Recognizing this, IFC has positioned climate private sector to the public. At the same time, as a strategic priority, proactively engaging the public sector involvement through the PPP al- private sector via the new Climate Business lows the private sector to engage in areas that, Group. Its naming was deliberate. Climate without public support, would present a far Business, as opposed to the more ubiquitous more challenging business proposition. “climate change,” turns the climate agenda into a value proposition—and this demon- “For our countries and governments, it’s about strates to private sector clients the real busi- inclusive and sustainable economic and social ness benefits of investing green. development, and for our corporate and busi- ness clients it’s about sustainable and long- Much-needed innovation comes from involv- term competitiveness,” Khalil said. “Ultimate- ing the private sector, according to Mohsen ly, pursuing the climate agenda is a common Khalil, the head of IFC’s Climate Business good as well as an individual good.” group. “Innovation is central to our climate agenda because it’s the only way we can make a difference,” he said. “So we focus on three categories of innovation: technology innova- IFC | 45 Energy Efficiency Public Lighting PPPs Energy efficiency improves lives By Tanya Scobie Oliviera Picture a crowded urban avenue at night. politician, it is in many cases self-financing. Movie theaters release swarms of pedestrians, Technological upgrades reduce energy usage who gather for coffee and dessert at street ca- (and therefore cost), and those savings can fes. Those returning home late from work buy cover the cost of the installation and mainte- fruit at the corner market. Mothers desper- nance of the new equipment. This depends on ate to get their babies to sleep push carriages the starting price of energy: in markets where around and around the neighborhood. energy is highly subsidized, the same benefits may not apply. Now picture that same block at night without street lights. Dark, abandoned, and menac- For this reason, PPPs are a critical piece of the ing, few venture out. Modern public lighting decision-making process. Through a public systems improve nighttime visibility, result lighting PPP, government can purchase a in decreased criminal activity, and improve service from a private operator—light—as the sense of security among citizens. This opposed to an asset—the luminaire itself. The increased visibility also ushers in increases in government will receive a lighting service of productivity, due to a rise in legitimate activity pre-agreed quality standard at all times during after dusk, and a longer workday that allows the contractual period. people to travel safely at later times. The contract with the private operator simpli- Politicians benefit, too. Public lighting by fies the process and allocates appropriate risk nature is a highly visible indicator of progress, to the operator. It bundles together the deci- and can therefore be a very effective tool for sion of the most appropriate technology, the municipal governments to show commitment purchase and installation of the efficient lamps to their constituents. Even better for the and bracket, and the routine and unscheduled 46 | handshake, june 2011 2011 Photo © Nicolas Vigier 12M 10M 8M Energy-Efficient Street 6M Lighting in Quezon City Energy efficient street lighting is expected to be operational in Quezon City in the Philippines in the first quarter of 2012. The street lighting project is a result of a series Public lighting service can be measured through the intensity of the light and its coverage on the ground of workshops in which city officials beneath the lamp. agreed on a Coordinating and Manag- ing Entity to launch and manage the maintenance of the lamps and guarantee of the project. In addition to the cost sav- quality of that service. ings, better street lighting will im- prove the area’s safety and the security This last benefit is especially valuable because the of city drivers and pedestrians. contract requires preventative maintenance, thus avoiding the typical reactive maintenance habits Many street lamps available today of governments, which can be costly in the long are more energy-efficient than their run. Preventative maintenance requires keeping the predecessors. Quezon City plans to lamps clean and ensuring they aren’t encumbered replace existing 184-Watt High Pres- by foliage —a simple yet highly effective way to sure Sodium luminaries with new guarantee that the infrastructure will be functional energy-efficient lamps such as 80-Watt for its full expected life. Effectively managing main- light-emitting diodes. As a result, the tenance of a public lighting system also requires up- city will save around 20,000MWh per to-date systems, like a full GIS for identifying and year. This translates to cost savings of managing assets, and well-designed processes, like $4.5 million. public call centers, to ensure efficiency. The contract checks off these boxes as well – all so a few hungry theatergoers can ask the waitress for the check as they wrap up their night on the town. IFC | 47 Buildings and their operations consume tremendous resources and emit many varieties of pollution. To reduce carbon emissions, it’s critical to address the long-term environmental sustainability of the construction industry, and the manner in which buildings are occupied. Green Buildings Approaches for every market, climate & budget By Prashant Kapoor 48 | handshake, june 2011 Photo © Wally Gobetz energy efficiency More than half of all resources consumed glob- In the EU, stricter government regulation is likely ally are used in construction and almost half of to drive the de facto standard for new and reno- all energy generated across the world is used to vated buildings in the next decade. The transfor- cool, light, and ventilate our buildings. Green mation of the building sector will soon follow. In buildings—those which reduce environmental fact, building codes and regulations have already impact—answer the need for sustainable solutions tightened. In Europe, national governments and in the coming century. This approach is adaptable the EU have mandated higher efficiency standards to every market, climate, and budget; even the for new construction and renovations within the smallest changes can yield quantifiable results. But EU Energy Performance of Buildings Directive builders don’t need to reach for reclaimed timber of 2002. The follow-up directive of 2010 is likely or grab at green roofs. Changing a set of light to make “near-zero” energy buildings mandatory bulbs or adding smart meters can put buildings by 2021. The emerging markets will follow close on a path toward compliance – and profit. behind. Fixes that pay for Market-specific standards themselves A bike rack might make sense in San Francisco or Oslo, but in Cairo riding one’s bike to work Savings from going green can repay costs in the indicates a death wish. So green building stan- first decade of operation. Buildings offer the dards vary depending on the climate, culture, single largest global opportunity to make deep economy, and other demands of the market. emission cuts at low, no, and even negative cost. Climate-specific solutions might include fixes for Green building also reduces energy costs in tropical climates, where temperatures vary only heating, lighting, and cooling. Energy savings for within a small range; arid climates, with hot sum- green buildings average 30 percent over conven- mers and cool winters; temperate climates, where tional buildings, and green buildings also use less the need for winter home heating is greater than water and offer lower maintenance costs. the need for summer cooling; and cold climates, Growing tenant demand due to these lower which require insulation over the entire building, operating costs, higher worker productivity, and including the foundation. reputational issues will eventually force the real Under a PPP contract, the government can estate sector to require, rather than request, effi- require that private operators meet certain green cient building techniques. The emerging markets building standards. But because needs change represent the greatest opportunity for reductions, based on location, these standards may depend underscoring the need for an international effort on the country sponsoring the building. to rapidly enhance sustainable building practices in such countries and to capitalize on emission Indeed, the number of certification systems reduction potential. around the world has surged. But most of the green building certification systems have inher- IFC | 49 video: energy efficiency in hungary This short film is based on an external evaluation of IFC’s Commercializing Energy Efficiency Program in Hungary. It focuses particularly on block house renovation efforts. Photo © GY Gabor ent problems. Some cover wide requirements for ing standards, it may be wise to advise them green buildings and therefore lack focus on key to pay more attention to the key criteria with issues like climate change and resource efficiency. these systems to insure that they get genuine Others do not suggest efficient technology green buildings rather than “greenwash.” Simple options and related cost savings. At times, these energy efficiency measures and practices can save standards rely on complex simulation models to more than one-third of any typical building’s predict energy use. Finally, the assessment process consumption. is lengthy and expensive, especially for clients in So why aren’t we already doing this? The common developing countries. culprits are: The real estate industry needs a universal defini- • Misalignment of incentives between the pro- tion of what constitutes a green building, as well viders of buildings and occupiers of buildings. as consistent data sources and metrics on green buildings. These deficits make an assessment of • Difficulty accessing financing for energy ef- the profitability of green building investments ficiencient upgrades due to low awareness of difficult and therefore hold back stronger investor energy efficiency in the banking sectors and interest. very few ESCOs with financial products. Under a PPP contract, if the government requires • Disincentives from government policies, such that private operators meet certain green build- as minimal energy codes and artificially low 50 | handshake, june 2011 energy efficiency what measures make immediate sense? Where? Sensitivity analysis of energy efficiency options for Jakarta shows that energy savings of more than 30-50% can be achieved from simple measures. High impact Office Retail Hotel Hospital Apt. School Measures Photoelectric controls 4% 3% NA 8% NA 3% To maximize daylight Solar shading 10% 5% 10% 9% 5% 2% Horizontal & vertical devices Glass performance 7% 3% 9% 8% 7% 4% Solar & thermal properties Efficient chillers 11% 8% 6% 7% 9% 12% Higher chiller COP Variable speed drives 2% 1% 2% 1% 0% 0% Variable drives on pumps Glazing percentage Window-to-wall ratio on 8% 4% 9% 7% 2% 0% façade Low-energy lights 7% 8% 7% 16% 6% 5% Limiting power density Thermostant mgmt. 2% 3% 3% 7% 6% 11% Limiting minimum temp. Heat recovery 2% 5% 3% 8% 0% 0% Adding unit to fresh air inlet * Note: the above values must not be aggregated as they reflect only the potential of making each individual measure. The total energy savings potential will be smaller than the sum of individual measure. IFC | 51 energy pricing, negatively impacting energy- Each country must also consider where green efficiency investment. buildings make the most sense. Buildings that • Weak leadership from the government and are in use around the clock, like schools, can professional institutions, miscommunicating see immediate results, as can owner-occupied the economic benefits of sustainable design buildings like hospitals, hotels, and schools. and construction. Brand-sensitive clients, like supermarkets and housing developers, also benefit soon after • Difficulty in capitalizing additional cost of implementation. green building investments. For example, home buyers aren’t necessarily willing to pay In parts of the world with high energy tariffs, like more for green buildings. the Caribbean, West Africa, and the Philippines, green buildings are a no-brainer because they pay • Lack of clear benchmarks for energy use, their own way. Similarly, in countries where CO2 technology choices and demonstration from electricity generation is high – South Africa, projects. Indonesia, India, China, and states in the Middle • Lack in supply chain of energy-efficient tech- East and North Africa region – it’s easy to track nologies and low-carbon building materials. fast results. Overall, countries with the highest energy costs are likely to have the biggest demand for energy efficiency in buildings. Photo © Foster + Partners public-private partnerships turn buildings green Mexico hospitals IFC’s contract to build two new hospitals in Mexico State is structured to be environmentally responsible. Silver LEED certification requirements will be met for the construction and operation of both hospitals. This will result in energy savings of at least 20 percent, compared to a traditional hospital in Mexico. These buildings and hospital operations are the first elements of a “green” social infrastructure in Mexico, creating a model for future development. The hospitals are expected to contribute to emissions reductions by about 10 tons of CO2 equivalent per year. Malé Airport Malé International Airport required immediate physical infrastructure improvements to sustain tourism. The tourism sector is a major contributor to the country’s economic sustenance and improvements planned at the airport were critical to its continued growth – but growth could not come at the cost of the local ecosystem, which was already in jeopardy. With IFC’s help, the airport and new terminal will be eco-friendly, with an anticipated LEED Silver accredi- tation. This is a major milestone in a country that is among the most vulnerable to the effects of climate change. 52 | handshake, june 2011 energy efficiency 9 steps to sustainability For a ready-made path to compliance, follow this guide: 1. Review the site constraints and opportuni- ties. It’s important to understand building energy codes and conduct spatial site analysis 5. Select efficient lighting and appliances, and maximize natural lighting where associated solar heat gain is modest. and climatic analysis. 6. Consider a renewable & low carbon energy 2. Design a building core and façade to re- supply. Renewable energy technologies duce energy demand, utilizing thermal mass including solar panels, photovoltaic, wind as a tool to form part of a building energy turbines, and biomass heaters offer an alterna- strategy. tive to fossil fuels. 3. Create a low energy heating and cooling 7. Re-conceive water use, especially recycling strategy, utilizing variable speed drives for grey water for flushing toilets. fans and pumps. Consider alternative cooling 8. Monitor materials and waste. It is especially systems such as earth tubes, seawater cooling, important to monitor and report hazardous ground source heat pumps, desiccant and and non-hazardous waste from site activities, evaporative cooling. and recover demolition materials that are 4. Design efficient heating and hot water, and recyclable. consider cost-effective alternatives like pas- 9. Ensure biodiversity and efficient land use. sive heat recovery from the air conditioning Use only local flora and fauna, and confirm chiller, solar thermal systems, and grey water that the selected site is defined as land of heat recovery systems. inherently low ecological value. IFC | 53 Waste has a key role to play in reducing greenhouse gas emissions. Public-private partnerships can help speed up the adoption and implementation of the most transformative waste programs. By Amar Qureshi a Waste To Energy success story 54 | handshake, june 2011 energy from waste When organic matter decomposes without oxygen, the powerful greenhouse gas methane is produced. If methane can be captured and burned to produce energy, a potential negative can be turned into a positive. Or, if waste is incinerated, it can produce electricity from the heat generated. An appreciation of the science has in many countries resulted in a quiet revolution in the public’s relationship with its own waste, an shift from a “throw-away” culture to one that sees waste as a resource to be utilized either through recycling or recovering it to produce energy. Waste not, want not noise, and traffic means that the development of waste infrastructure stirs strong opposition from One shining example is England’s PPP program the public and special interest groups. This makes for waste, which during the last few years has had planning or land use permission potentially a dramatic effect on the development of the waste challenging. infrastructure. This accelerated development has been achieved by the Department for the Envi- The waste PPP program in England was launched ronment, Farming and Rural Affairs (DEFRA), in a context of a PPP program that embraced through its Waste Infrastructure Delivery Pro- a broad spectrum of infrastructure covering gram (WIDP), a partnership among DEFRA, schools, hospitals, transport, and streetlighting. Infrastructure UK, and Local Partnerships. It has therefore taken time for all parties, both DEFRA, through WIDP, is providing funding public and private, to become accustomed to the support to a program of residual waste treat- different issues and risks that waste projects pres- ment projects across the country. It also acts as ent, including volatility of income streams from an expert resource to the projects in the pipeline, electricity and capacity at the facility provided to aiming to make the public sector a stronger, more other parties. effective client. Despite the continuing debate relating to the The application of PPPs to waste infrastructure application of PPPs to waste, the issue of risk has not been without controversy. A common is key to the argument that the use of PPPs is concern relates to technology obsolescence, given appropriate and conducive to positive public the pace of technology development in this area. sector outcomes in the waste sector. PPPs are There is a presumption that technology will con- fundamentally about risk transfer. The nature of tinually progress, making it difficult to commit to residual waste treatment projects, given their use an investment decision based on technology. Fur- of process technology, means that they are inher- thermore, perceived concerns relating to health ently more risky than other PPP projects. and concerns around the management of odor, IFC | 55 The South Tyne and Wear Waste Partnership One particularly successful project within the WIDP program is the South Tyne and Wear waste PFI project, which closed in April 2011. The South Tyne and Wear project comprises a partnership of three U.K. Local Authorities (Gateshead, South Tyneside and Sunderland), covering 284,000 households across the South Tyne and Wear area. The objective of the three Councils and the project is to reduce the partner- ships’ reliance on landfill via the procurement of a residual waste facility, and to provide the public with a greener waste management service. The project will reduce the amount of biodegradable municipal waste sent to landfill from 169,000 tons in 2009-10 to around 12,000 tons by 2020. The waste solution comprises the development of an Energy-From-Waste (EFW) plant located in Teeside on a site adjacent to an existing EFW Waste PPPs are gaining traction in developing plant. The proposed facility will be enabled to countries, and the recent implementation of a produce Combined Heat and Power (CHP). waste PPP in the Maldives illustrates how far a The facility will offer a total capacity of 256,000 country can come in its relationship with rubbish. tons. The partnership will require initially around Since the 2008 election, the country has been in 190,000 tons, with the excess capacity available to the midst of a rapid social, political, and eco- treat additional third-party waste. The facility will nomic transformation. Officials and administra- open its doors in April 2014. tors aim to combat the developmental challenges of climate change, poverty reduction, private sector development, and economic restructuring, so urban infrastructure tops the priority list. slideshow: maldives The country is particularly vulnerable to climate change and rising sea levels. The threat of climate rubbish island turns change to the nation’s existence was highlighted paradise into dump by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) report, released in guardian.co.uk 56 | handshake, june 2011 energy from waste Cleaning up Thilafushi Making the Maldives carbon neutral By Divya Singh 2007, which forecasted a rise in sea levels by the nearly 12,000 tons of CO2 annually. The conces- end of the century. Because 80 percent of the sionaire cannot dispose more than five percent Maldives’ 1200 islands are about 1 to 1.5 meters of organic rejects, which are the primary cause of above sea level, the report suggested that the leachate generation at the landfill (causing con- country may become uninhabitable within 100 tamination of the surrounding environment). It years. In response, the president has set an ambi- is also prohibited from disposing more than 15 tious target of turning Maldives into a carbon- percent of the overall rejects into the landfill. neutral country by 2020. The concessionaire would also discontinue the To this end, the government decided to tackle current environmentally unfriendly system of the growing solid waste management issues in the open burning of waste at Thilafushi and use a country via private-sector participation. IFC, as treatment plant so that emissions are controlled lead transaction advisor, assisted the government and air quality is maintained. It would also in developing an integrated waste management be required to prepare an EIA report and an strategy and implementation plan (including Environment and Social Management Plan in primary and secondary collection, transportation, compliance with Maldivian Environmental Stan- storage and recycling, treatment and scientific dards, International Best Practice, and Equator disposal of waste) for the country’s prime waste Principle Standards. generation geography. This includes the capital When the project is completed, IFC will have island of Malé and the surrounding islands and helped the Maldives promote private sector resorts, which generate nearly 60 to 70 percent of investment in the solid waste management the waste in Maldives. sector by mobilizing capital worth $50 million; IFC also recently concluded the bid process for improved the solid waste management infra- the selection of a private concessionaire to under- structure and services in the catchment area for take the integrated waste management project. around 120,000 people; supported its goal to The winning bidder has proposed to set up a become carbon-neutral by 2020; and helped it 2.7MW waste-to-energy plant at the project comply with good global practices on scientific island of Thilafushi. This plant will have the treatment and disposal of solid waste. What potential to replace 100 percent of the diesel- was once known only as trash may yet based power generation on the island and save become treasure. IFC | 57 money talks Do the right thing: Incentives for the private sector By Jeff Delmon In the last issue of Handshake, this column as highly structured as PPP) is likely to implement outlined how to incentivize line ministries and climate-friendly technology or changes to business other contracting agencies to implement PPPs practices only if such actions are profitable. Thus, when appropriate. In line with the current focus where financial rewards are aligned, governments on climate change, I’d like to introduce another can exploit the private sector to achieve social contentious subject: how to incentivize the private sector to “do the right thing.” There has long been a debate about private involvement in infrastructure services, and Where financial rewards whether it is well suited to help achieve social are aligned, governments policy goals. Is the private sector just a greedy, commercial machine focused on profits for can exploit the private sec- management and shareholders, or does this robot have a heart? Is the nature of the private sector tor to achieve social policy fundamentally inconsistent with social policy objectives? policy. This is some of the logic behind output- Critics are often angry that private operators based aid – where grants or subsidies are paid out think first about the bottom line, rather than the only as and when key benefits are achieved, as interests of the poor and unconnected. This is with reductions in emissions. unfair to some extent, as private companies are often committed to charitable efforts (whether This is only the beginning of the challenge. The truly altruistic or for marketing opportunities). bestowal of this beneficence can be expensive for But generally, the private sector will do what you the one doing it, but valuable for the economy pay it to do. or society at large. This justifies the use of public money. There remain other complications associ- Climate change is a good example. Altruistic and ated with the dynamic of an additional incentive marketing opportunities aside, a private operator and the technology often used. of infrastructure (in particular in an arrangement 58 | handshake, june 2011 Utilities are generally built with public money, Technology for climate change is evolving. In connecting the rich and influential first. As the particular, renewable energy sources still pose utility becomes a going business concern, it must some logistical challenges. Solar, wind, and often recover its costs, or at least account for them. biomass are peak load generation technologies, Therefore new connections need to be paid for. depending on wind, sun, and harvest cycles, New connections cost money, and unless free or though storage technologies are improving. cheap public money is available, consumers must Lower- and many middle-income countries are pay for those connections in advance. Tariffs can chronically low on generating capacity. So should be increased to pay for this, but higher tariffs may precious funds be expended on less-needed peak not be affordable, or politically feasible. Con- load capacity rather than more essential base load nection fee increases are often needed to cover capacity? Wind is expensive, but solar (for large costs, so new consumers have to pay. Low tariffs scale thermal generation) is still very expensive. may therefore turn out to be anti-poor, since they So is it the best technology for use in developing benefit the connected, who are typically well-off. countries where the marginal challenge of pass- This is because the connected pay the low tariff, ing such costs on to the consumer is even more which keeps the utility underfunded and unable difficult? Hydro and geothermal are less expensive to subsidize or even finance connections for the technologies, but they are generally located far unconnected. from demand centers and therefore require larger In the end, the poor are left with access only investments in transmission facilities (with the through water vendors, car batteries, fuel stoves, associated environmental challenges) and grid or some other private, high-cost source of services. balance challenges. This is the context in many developing coun- This quandary highlights the critical need for tries, where utilities and public service providers project preparation assistance. We’re not referring strapped by low tariffs rely on government sub- only to money. We also promote sending skilled sidies. These are often unlinked to performance experts to help developing countries prepare and create a culture of dependency and perverse relevant and appropriate climate change solu- incentives. Within this context, including an tions. Ideally these will not just attract investors, additional subsidy to encourage green behavior but also meet the needs of the government in may just add to the inefficiency. Setting sensible, question. A quick look around the sector reveals environmentally and socially responsible tariff a large number of market-based and concessional levels for utilities takes courage and effort from funding sources, but precious few sources of proj- politicians. Unfortunately, however, modern ect preparation funding and even fewer sources of democracy and short attention spans often do not expertise. This is a massive gap, and probably one reward courage or effort. Will the government of the key reasons for frustrated green fund man- benefit more from additional energy to reform agers and donors sitting on piles of cash looking the sector, or, by creating an additional incentive, for good projects. If money could talk, this stack reduce climate impact? of bills would tell us how very lonely it is. IFC | 59 Infrastructure finance: East Asia’s new investment era By Aldo Baietti Relying purely on financial instruments to shape the green finance agenda exposes a limited set of options. More important, it misses policy and institutional interventions that governments must take on their own to promote a more attractive investment climate for green technologies. To remedy this, the World Bank is developing the framework to review the financing challenges of green invest- ments in the region, and to look for solutions that will close the gap. The resulting study, which includes a compilation of leading initia- tives, should be concluded by the summer of 2011. The following article is adapted from draft conclusions. During the last few years we have all witnessed an prominent role on how green investments intensified focus on climate change, the need to (a term used here interchangeably with low reduce greenhouse gases (GHG), and the drive to GHG, clean or low carbon investments) are cultivate more sustainable business and lifestyle evaluated, designed, financed, and implemented. practices. This has catalyzed initiatives to create The concept of green growth involves the process greener economies by emphasizing that sustain- of promoting economic growth while reducing able environments should command a more emissions, minimizing waste and the inefficient 60 | handshake, june 2011 green finance use of natural resources, and maintaining bio- The size of financing required to protect com- diversity. It involves the use of appropriate munities and ecosystems against flash floods, sea climate-friendly technologies and financing level rise, more frequent typhoons and droughts instruments that generate sustainable economic will likely be as large as the earlier estimates cited development. Green growth describes mitiga- for reducing GHGs. One could conclude that tion measures for tackling the long-term costs these massive annual financing requirements of global warming, along with mitigating local are beyond the capacity of the public sector and costs of environmental degradation. traditional overseas development assistance. Full Recent studies by the World Bank and Interna- participation of private loans, equity, and other tional Energy Agency have projected the global instruments are essential. The dilemma is how consequences on greenhouse gases if energy usage public and donor support can fully leverage continues on a business-as-usual path between private finance. now and 2030 in major East Asia Pacific (EAP) developing countries. The solution is delivered Defining the investment through a combination of energy efficiency poli- challenge cies, investments in renewable energy, and sup- The majority of green investments are not port to other new climate-friendly technologies sufficiently attractive to solicit interest from that collectively could bend the GHG emissions the mainstream financial community on purely curve by 2030. However, as much as $80 billion commercial terms. As such, green finance needs a year of additional financing is required to fund to consider not only instruments and financial these greening investments. arrangements. There are policies and other factors World Bank analysis shows that most EAP that would ultimately balance out the cost of developing economies (notably China, Indo- clean investments to make them more attractive nesia, Thailand, Vietnam, Philippines and the against the full spectrum of investment options Pacific island nations) are extremely vulnerable to available. Financing issues relating to climate unpredictable changes in the water cycle induced adaptation investment will not be the focus of by climate change. Water variability affects food this initiative as these would require a different security, human health, and the ecosystem’s gen- set of financing solutions and approaches to risk eral well-being. A few cycles of excess and scarcity mitigation and risk sharing. can negate very quickly the gains in poverty reduction achieved in these countries over many decades. IFC | 61 Examining the challenges Green investments for mitigation present three financing challenges for investors: One Two Technologically proven green investments that Investments that may yield a positive return but are not yet competitive compared to their higher the discounted payback period is longer than loan GHG-emitting comparators. There is a distinct tenures, thus stifling the decision to finance — life cycle cost difference usually due to higher particularly in the absence of refinancing facilities upfront costs. As such, a financial viability gap in many of the East Asian and Pacific countries. needs to be overcome in order to shore up or In such cases, the investment may require rebalance the disadvantage to incentivize real substantially large, upfront capital costs in order investments in clean technologies. Many renew- to realize benefits in the future. Given the nature able energy projects fit in this category, as well of these cash flows, the higher the hurdle rate, the as some energy efficiency investments that may longer it may take to achieve a “go” decision. require higher rates of returns because of long payback periods. 62 | handshake, june 2011 Looking forward Photo © Ham Sun Three Investments in unproven technologies or pro- Securing such large commitments to tackle the cesses require different financing approaches for finance problems of low carbon investments will research and development initiatives in order inevitably require active participation from private to prove the technology for commercialization. financial markets. Innovative methods must be Before any operational financing considerations developed and brought to bear to best utilize are taken, risks of unproven technologies need to public policies and public finance, effectively be fully mitigated through different prescriptions, leveraging private and market-based instruments. such as incubation, demonstration, and other All measures are needed in order to bridge the public and corporate R&D interventions. financial viability gap of most green investments: public and private finance as well as international donor support and concessional finance. IFC | 63 Last Word Low-Carbon Investment How to move forward By Henry Derwent The international climate change negotiations Finance Initiative and other bodies involving still have a blind spot when it comes to private investing institutions produce good reports and finance. The sums required to achieve a trans- support renewables, but cannot conceal the formation of the global economy are absolutely fact that with no means of creating a return on enormous – many trillions of dollars in the carbon, investment will be limited to situations energy sector alone, as the International Energy where renewables are cheaper than conventional Agency keeps reminding us. The current focus is fossil fuel alternatives (or are mandated by regula- on scraping together the $30 billion “fast start” tion, which is still politically unattractive). The sum promised in Copenhagen. The $100 billion World Bank’s funds face the same problem, and promised by 2020 is spoken of vaguely as being its Partnership for Market Readiness, though contributed largely from private sources, but no important, begs the question of why developing serious work has yet been done on the means and countries would absorb the costs of cutting emis- the channels. The Kyoto Mechanisms are getting sions just because they are delegated through cap easier to use, but their small scale and bad reputa- and trade schemes to their industries. tion puts major investors off carbon. To make progress on low carbon investment Ban KiMoon’s Advisory Group on Financing that is not conventionally competitive, we must reported before Cancun with a useful survey of remember two lessons from the last 30 years of possibilities but no clear proposals. Project Cata- private financing. The first, the idea of using a lyst has provided figures and structures, but we regulatory cap on emissions to give commercial still await action by governments and institutions. value to units of emissions reduction, is excellent. the United Nations Environment Programme The hard politics of deciding the level of a cap, 64 | handshake, june 2011 Last word the transaction costs and other problems of the is the tried and tested route to the syndication of clean development mechanism, and the accident- risk. The MDBs have a suite of existing guarantee prone recent history of the European Union and other products that can be used or developed. Emission Trading Scheme, should not obscure the They also provide a structure within which devel- fact that this idea has been successful. It creates oping country projects can be tested and assessed a powerful economic driver where none existed for consistency with low carbon agendas. before. The need for private investment and for a struc- The second lesson is that public-private partner- ture that will minimize risks and keep investors ships are necessary when public money is tight interested must be recognized at the United and private investors need to be tempted into Nations Framework Convention on Climate investing in public goods. This means risks Change and elsewhere. There is no point in and returns have to be planned and distributed developing the concept of nationally appropri- appropriately, and financial structures have to be ate mitigation actions purely on the basis of created that make every public dollar achieve the what governments alone will invest in: it will maximum leverage. Public sector contributions, not be enough to make a difference. The future conventional revenue from the investment, the of measurement, reporting and verification, in a prospects of carbon revenue, and guarantees or world more fragmented than the Kyoto architects other de-risking devices all have to be blended intended, must be pursued in a way that recog- into a product that will attract investors, and nizes the needs of private investors, and it must can in time be commoditized. If an important be consistent with the crucial role that MDBs will part of the investment value comes from the play in supporting low carbon investment. For continued fulfillment of promises by the public low carbon investment to take place at sufficient sector, whether financial contributions or a fixed scale, we are not just faced with the need to create regulatory environment, guarantees and insur- new sources of economic value: we will need the ance will be essential. This is especially true in the biggest-ever program of international public-pri- developing countries where so much forthcoming vate partnerships, structured to blend all sources investment has to be made low-carbon. of value into compelling investment cases. In those countries, there will be a very large role The task is huge, and progress so far has been for the multilateral development banks (MDBs), limited. But by recognizing it and defining it in export banks, and other international financial terms that make economic sense, we can start institutions. From the perspective of the devel- getting to work now. oped countries that contribute to the MDBs, this IFC | 65 Photo © Adrian S. Jones Our Common Future: From One Earth to One World Climate Risk and Business: Donald G. Hanway Agribusiness - Tropical Plantation and Refinery (UN Documents, 1987) (IFC, April 2011) Climate Risk and Business: Changing Course: A global business Hydropower (Run of the River) (IFC, April 2011) perspective on development and the environment Climate Risk and Business: Julian Dumanski Manufacturing (Pulp and Paper) (Soil & Water Conservation Society, 1993) (IFC, April 2011) Climate Risk and Business: Ports (IFC, April 2011) The Ecology of Commerce: A The Water Footprint Assess- Declaration of Sustainability ment Manual - Setting the Paul Hawken Global Standard (Harper Business, 1994) (Earthscan, March 2011) Climate Change Scenarios - Implications for Strategic The Economics of Climate Asset Allocation Change: The Stern Review (IFC, February 2011) Sir Nicholas Stern (Cambridge University Press, 2007) 66 | handshake, june 2011 Open book Our Choice: A Plan to Solve the Climate Crisis Al Gore (Rodale Books, 2009) Climate Risk and Business: Prac- tical Methods for Assessing Risk (IFC, November 2010) Limits to Growth: Energy For Tomorrow The 30-Year Update (National Geographic, Donella H. Meadows, Jorgen March 2009) Randers, Dennis L. Meadows The Energy Issue (Chelsea Green, 2004) (Good, Winter 2011) “An Inconvenient Truth” A film by Davis Guggenheim A Comparison of “The Limits to (2006) Growth” with Thirty Years of Reality “The 11th Hour” Graham M. Turner A film by Leonardo DiCaprio (CSIRO Sustainable Ecosystems, 2008) (2007) “Home” A film by Yann Arthus-Bertrand World on the Edge: How to Prevent (2009) Environmental and Economic Collapse Lester R. Brown (W. W. Norton & Company, 2011) Photo © MistikaS/istockphoto IFC | 67 Subscribe: ifc.org/ppp Connect with us: facebook.com/ifcinfrastructure scribd.com/ifcppp handshake@ifc.org ifc.org/ppp July 2011