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Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries About infoDev infoDev, a global trust fund program in the World Bank Group, supports growth-oriented entrepreneurs through creative and path-breaking venture enablers. It assists entrepreneurs to secure appropriate early-stage financing; convening entrepreneurs, investors, policy makers, mentors and other stakeholders for dialogue and action. We also produce cutting- edge knowledge products, closely linked to our work on the ground. About infoDev’s Climate Technology Program The Climate Technology Program (CTP), housed at infoDev, empowers developing countries to proactively and profitably adapt, develop, and deploy climate-smart technologies and business models. The CTP is creating a global network of Climate Innovation Centers (CICs) that provide a country-driven approach to addressing climate change and fostering green growth. The CICs are designed as locally owned and run institutions that provide a suite of services and venture financing that address the specific needs of local climate technology SMEs and entrepreneurs. At the global level, the CTP is providing linkages between CICs by facilitating market entry, access to information, and financing for the private sector, while also offering important tools for policy makers to measure and improve domestic climate innovation activities. Currently, the program is establishing CICs in eight countries: Kenya, the Caribbean, Ethiopia, Ghana, India, Morocco, South Africa and Vietnam. For more information visit www.infoDev.org/climate Follow infoDev at www.twitter.com/infoDev and www.facebook.com/infoDevWBG ii Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1. The Climate and Clean Technology Opportunity for Developing Countries . . . . . . . . . . . . 12 2. Sizing Climate and Clean Technology Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. The Role of SMEs in Climate and Clean Technology Industries . . . . . . . . . . . . . . . . . . . . . . 32 4. Case Study: Solar Energy in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 5. Case Study: Bioenergy in Kenya . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 6. Case Study: Climate Smart Agriculture in India and Kenya . . . . . . . . . . . . . . . . . . . . . . . . . 60 7. Actions to Support Clean Technology SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Appendix A. Market Sizing Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Appendix B. Value Chain Breakdowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Appendix C. Policy Options and Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 iii Foreword Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries By Anabel Gonzalez Senior Director, Global Practice on Trade and Competitiveness As we confront the challenge of climate change – a potentially lethal threat to our planet – it is vital that policymakers in every country resolve to take effective action to limit greenhouse-gas emissions. The technical challenge may seem daunting, yet taking far-sighted action to restrain climate-damaging emissions can have a net positive effect on the economy. As shown by a major 2014 World Bank Group report – “Climate-Smart Development: Adding Up the Benefits of Actions that Help Build Prosperity, End Poverty and Combat Climate Change” – making climate-smart investments can have, overall, a positive economic impact, particularly among the largest greenhouse-gas-emitting economies in the developed world. Reinforcing that analysis’ hopeful message, this new report shows that developing countries – like the world’s industrialized economies – can reap significant positive benefits by investing in technologies to restrain emissions and by developing new clean technology industries that can build resilience and limit further climate damage. This report analyzes the economic opportunity that developing and emerging countries can now seize, if they adopt policies to fight climate change and invest in low-carbon growth. This report, for the first time, quantifies the size of expected investment in clean technologies in the developing world over the next decade – and it finds that the opportunity is vast: the expected investment across a wide range of clean technology sectors, just in the world’s developing and emerging economies, will exceed $6.4 trillion over the next decade. Better still, about $1.6 trillion of that total offers an opening for small and medium-sized enterprises (SMEs) –key drivers of future job creation. SMEs also serve the local, rural and “base of the pyramid” markets that are often underserved by larger firms. Moreover, developing economies are already on the right track, with US$112 billion in clean-tech investments in 2012 – a 19 percent year-over-year increase. Doing the right thing for the environment could unlock a significant potential for a pathway towards a sustainable green economy. Creating competitive economic sectors is critical to stimulating the job growth that is indispensable to achieving the World Bank Group’s twin goals: eliminating extreme poverty and fostering shared prosperity. Fostering home-grown climate and clean technology industries in developing countries can create a sustainable and wealth-producing sector of the economy, while simultaneously addressing such urgent development priorities as access to clean and affordable energy, clean water and climate-resilient agriculture. In welcoming this hopeful analysis, policymakers worldwide can benefit from its clear-sighted calculation that the clean technology transition can deliver strong new economic benefits even as it protects the long- term well-being of our fragile environment. iv Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Acknowledgments This report was commissioned by infoDev’s Climate Technology Program at the World Bank Group, in collaboration with the World Bank’s Innovation, Technology and Entrepreneurship Practice. The project team was led by Michael Ehst and included Jin Lee and Selen Kesrelioglu of infoDev. The research and writing was carried out by The Carbon Trust UK team under the guidance of James Rawlins and including Cheryl Baum, Jeff Beyer and David Aitken. Additional contributions were made by James Haselip. Josh Wimpey of The World Bank’s Enterprise Analysis Unit and the staff of the Kenya Climate Innovation Center provided support to the design and planning of the India and Kenya surveys which were carried out by TNS BMRB. The study design benefited from discussions with and guidance from numerous World Bank colleagues, in particular Valerie D’Costa, Jonathan Coony, Esperanza Lasagabaster and Paulo Correa. The team gratefully acknowledges the comments and advice provided by reviewers Mark Dutz, Parth Tewari, Oliver Knight and Pablo Benitez. Thanks also to Colin Blackman for copyediting and Corporate Visions, Inc. for the design. This report was sponsored by infoDev of the World Bank under the leadership of Valerie D’Costa The report was made possible through the support of the governments of Korea through the ITC for Development Trust Fund and the United Kingdom through the Climate Innovation Trust Fund. Acknowledgments 1 Abbreviations ABPP Africa Biogas Partnership Program BoS Balance of systems BRT Bus rapid transit CAPEX Capital expenditure CDM Clean development mechanism CER Certified emission reduction CERT Central Electricity Regulatory Commission CGIAR Consultative Group on International Agricultural Research CHP Combined heat and power CIC Climate Innovation Center COMESA Common Market for Eastern and Southern Africa CSA Climate-smart agriculture CSP Concentrated solar power CWC Central Warehousing Corporation DCR Domestic content requirement EAC East African Community E-bike Electric bike EIA U.S. Energy Information Administration EPC Engineering, procurement, and construction EWEA European Wind Energy Association ETS Emissions Trading Scheme EV Electric vehicle FAO Food and Agricultural Organization of the United Nations FCI Food Corporation of India FIT Feed-in tariff GDC Geothermal Development Company GDP Gross domestic product GHG Greenhouse gas ICT Information and communication technologies IDB Inter-American Development Bank 2 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Simone D. McCourtie / World Bank. IEA International Energy Agency IFAD International Fund for Agricultural Development IPR Intellectual property rights IREDA Indian Renewable Energy Development Agency KCJ Kenya Clean Jiko KENDBIP Kenya National Domestic Biogas Program KJEL Kenya Jatropha Energy Limited KWH Kilowatt hour MDG Millennium development goal MMSME Indian Ministry of Micro, Small and Medium Enterprises MMTCO2E Million metric tons of carbon dioxide equivalent MW Megawatt NAPCC National Action Plan on Climate Change NCCAP National Climate Change Action Plan NCCRS National Climate Change Response Strategy NEMA Kenya’s National Environment Management Authority O&M Operations and maintenance PAC2 Brazil’s National Growth Acceleration Program PCT Patent Cooperation Treaty PV Photovoltaics R&D Research and development RD&D Research, development and demonstration RET Renewable energy technology SHP Small hydro power SME Small and medium enterprise SWC State warehousing corporations SWH Solar water heaters TCO2e Tons of carbon dioxide equivalent UNEP United Nations Environment Programme WRI World Resources Institute All dollar amounts are U.S. dollars unless otherwise indicated. Abbreviations 3 Executive Summary Climate Change Provides decade. It identifies which aspects of these markets are most accessible to local firms and Developing Countries with to small and medium enterprises (SMEs) in particular. Using a newly gathered set of firm data, an Opportunity to Build Local it identifies which parts of the value chain are Green Industries already being targeted by local industry. Finally, it provides a set of actions that can be considered Climate change will have its largest impacts for countries that intend to build up local green on developing countries, with poor populations industries. particularly hard hit and unable to adequately adapt (World Bank, 2013a). There are ongoing efforts to assist developing countries with efforts to mitigate and adapt to climate change through Developing Countries Are the deployment of appropriate climate and clean Increasingly Driving Growth technologies. However, the main thrust of many of these efforts is to transfer technology from the and Innovation in the Global developed world without regard to local industry involvement. There is an opportunity for developing Climate and Clean Technology countries to pursue a complementary approach, Market emphasizing building up the capabilities of local firms to participate in the business opportunities Until recently, businesses and governments in surrounding climate change. Climate change the developed world have been driving growth therefore represents an opportunity for developing and innovation in clean technology markets, countries to build local green industries that can but emerging economies and developing world drive sustainable economic growth and provide markets are increasingly powering the sector as environmental benefits. shown in Figure E1.2 In 2012, clean technology investment rose by 19 percent in developing This report offers insight to policy makers and countries (to $112 billion per year) compared with other stakeholders seeking to develop competitive an overall decline of 12 percent globally (to $244 green industries1 in developing countries. It billion per year), suggesting that clean technology provides an overview and estimate of the market investment is shifting towards developing opportunity for climate and clean technology economies in the near term. business in developing countries over the coming This accelerating shift from the developed to the developing world is driving innovation 1 In this report, the term “green industry” refers to services as technologies, processes, and financing and technologies aimed at contributing to reducing negative environmental impacts or addressing the consequences of various forms of pollution. This is not 2 This report uses the term “clean technology” to cover the to be confused with the term “greening of industries,” an range of technologies that provide climate mitigation or effort under which traditional industries improve their adaptation benefits or positive environmental benefits. A resource productivity and environmental performance typology of these technologies and related industries is (UNIDO, 2011). included in Chapter 2. 4 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: World Bank. public investment than traditional sectors. This FIGURE E1. Growth in clean technology sales, by investment obstacle is even more pronounced in region (2012) developing countries where payback scenarios are more uncertain and SMEs and new ventures are 7% 6.5% riskier. 6% Percent growth in clean tech sales 5% A $1.6 Trillion Market Is 4% 3.9% 3.7% 3.6% Accessible to SMEs in 3% 2.5% Developing Countries Over the 2% Next Decade This report illustrates the nature and likely size 1% of the clean technology opportunity for SMEs in 0% 145 developing countries over the next decade.3 Africa Europe Asia Americas Oceania In that time, expected investment across 15 clean Region technology sectors in these developing countries will top $6.4 trillion overall. Of that total market, Source: U.K. Department for Business, Innovation and Skills (BIS). roughly $1.6 trillion will be accessible to SMEs, as shown in Figure E2. Even when excluding China, mechanisms are adapted to suit local conditions India, Russia and Middle Income Europe, these and new innovations are emerging to address local customer needs. It is also opening up opportunities for ambitious entrepreneurs who are well positioned to capitalize on the sector’s growth. Furthermore, with this accelerating shift, the ability of clean technology to foster job growth and stimulate innovation makes it particularly relevant to developing countries. Clean technology is a growing employment sector globally and green jobs compare favorably to jobs in other sectors: they tend to be more skilled, safer, and better paid. Innovation is central to the development of Photo: World Bank. clean technology products and environmental technologies account for a significant proportion of global patent applications. However, the unique character of clean technology — such as high upfront capital requirements and longer payback periods 3 In this report, an SME is defined as an institution with for investors — means it has greater difficulty a maximum of 300 employees, maximum revenues/ attracting venture capital and requires more turnover of $15 million, and maximum assets of $15 million. Executive Summary 5 FIGURE E2. Market size through 2023 for 15 clean technologies in developing countries ($ trillion) $2.8 $1.0 $0.9 $0.79 $0.8 Market value (US$ trillion) $0.67 $0.7 $0.6 $0.48 $0.5 $0.4 $0.32 $0.31 $0.3 $0.26 $0.19 $0.2 $0.15 $0.14 $0.12 $0.1 $0.06 $0.04 $0.03 $0.03 $0.0 er er d V ro te es al k) SP s al it es ls ke in rP ns ue rm rm oc as yd at at cl cl rC w bi ra W hi hi w W la st of lh he he e te la t ic ve ve ed So Bi or al d ot rt tr So as pi fe sh ic s Sm Ge ec la ga W ra tr ex On So El ec al s y( Bu El ur rg at ne N oe Bi SME share Non-SME share Source: Authors’ analysis. opportunities are still significant: $4.1 trillion overall, of which $1.0 trillion is accessible to SMEs (see Chapter 2 for more detail). The SME opportunity is largest in the wastewater treatment sector, which makes up about one-third of the total, with small hydro, water treatment, onshore wind power, solar PV, geothermal and bioenergy the next largest SME opportunities. A number of the renewable and nonrenewable technologies are expected to present significant opportunities for SMEs as well and they are each discussed in turn with the top three opportunities for each region highlighted in Figure E3. While energy efficiency is not covered specifically, both the abatement potential and SME opportunity are Photo: Danilo Pinzon / World Bank. large. Opportunities are available for SMEs across the entire clean technology value chain, but are particularly prevalent in minor equipment manufacture, installation, civil works, retailing, and operations and maintenance (O&M) activities. Knowledge of local markets, the need for specialization, and lower financial and technical barriers to entry make these activities especially 6 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries FIGURE E3. Top three regional opportunities for SMEs Wastewater Wastewater Small Hydro Small Hydro Geothermal Waste Wastewater Onshore Wind Water Solar PV Solar CSP Electric Bikes Wastewater Bioenergy Onshore Wind Water Solar PV Wastewater Wastewater Small Hydro Water Source: Authors’ analysis. accessible to SMEs. While some opportunities exist in major equipment manufacturing, SMEs tend to FIGURE E4. Value chain activities in which Indian face barriers such as high startup capital costs clean technology firms are involved and the need for highly technical expertise and 90% equipment. 81% 80% 70% 70% 67% 65% SMEs Are Already Operating 60% 63% 56% Percent of firms and Innovating Across Clean 50% 48% 44% Technology Value Chains 40% 30% The report examines three technology areas across India and Kenya. The focus is on solar technology in 20% India and bioenergy in Kenya, while climate smart 10% agriculture is explored across both countries. 0% These case studies reveal that clean technology gn y D n y n ng M bl nc tio tio R& O& si si em ta la u SMEs are already working in the value chain en De rib ul al ss lic ns st st /a segments with the most opportunities for SMEs. In gy Co di re lo & tu no Most firms in India said they worked in several il ac ta ch uf Re Te an different parts of the value chain, as shown in M Figure E4, with over 70 percent of firms saying they worked in design and/or operations and Source: Survey of clean technology firms in India undertaken in July maintenance, and over 60 percent saying they and August 2013. Executive Summary 7 FIGURE E5. Innovation activities undertaken by FIGURE E6. Most common barriers cited by clean clean technology SMEs in Kenya technology SMEs in India 80% 76% 50% 46% 72% 70% 70% 67% 40% 60% 48% Percent of firms Percent of firms 50% 30% 26% 39% 24% 40% 22% 31% 20% 18% 30% 14% 12% 20% 10% 10% 10% 0% 0% n ns y ce ed ec rs ce nd its ng w tor lit de rvi ew D si ts o atin is f f tio sa t s s af af d en or io s o an R& ve ce rm s la le bi di al tit up st st se n ly t kf an pm ta la un fin to a ed orm pe e g or g d rr ns gu an p in lle f ss lo f m Co to d g li re t t ki an ce is in co in r De rke ss ca Bu uc str ex ls e is Ac ua he of ce at ng ad i lit od n Ra a na g uc ss pr o Ac M eq in t es tr si Po in m tio ne en ic n d an ai di ct lic ly Tr ad a te s Pr ss om g ne rin st si Hi Cu ad Bu In Source: Survey of clean technology firms in Kenya undertaken in Source: Survey of clean technology firms in India undertaken in July July and August 2013. and August 2013. worked in one or more of installation, manufacture, water and waste public works projects, and new and assembly, and/or R&D. clean transport options. The required technical capacity can also be a challenge, especially The potential for local innovation is demonstrated in developing countries where highly skilled by the clean technology SMEs interviewed for this workforces are still nascent. report. Innovation in Kenyan SMEs is undertaken through a breadth of activities as shown in Figure Nevertheless, the SMEs surveyed were optimistic E5, including research and development (R&D), about the future prospects of their own businesses business development, new products and services, and of the clean technology market more generally. and innovative financing options. They tended to have a strong history of growth, with 90 percent of firms experiencing revenue growth even through the global economic downturn. Most firms are planning to hire additional staff. About Removing Barriers for Clean 90 percent of surveyed firms are fairly or very Technology SMEs Could confident in the business environment for clean technology.  Promote Faster Growth of To make the most of this opportunity that clean Local Green Industries technology provides, SMEs would benefit from Accessing these clean technology opportunities a supportive and reliable policy and regulatory comes with a number of challenges for SMEs. environment that favors more resource efficient Clean technology SMEs find it difficult to access technologies and processes. Targeted business the capital needed to grow and expand, with almost support can also help SMEs in this space thrive, in half of Indian SMEs (see Figure E6) and two-thirds such ways as indicated in Figure E7. of Kenyan SMEs surveyed for this report rating With a $1.6 trillion clean technology opportunity access to finance as a major constraint. It is also available to developing world SMEs over the next a risk to rely on government policy to sustain decade, policy makers have a chance to stimulate markets, as is the case for most renewables, major local innovation and capture economic value by 8 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries FIGURE E7. Areas for government support identified by clean technology SMEs in Kenya 50% 45% 43% 40% 35% 31% Percent of firms 30% 24% 25% 20% 19% 20% 17% 15% 13% 13% 9% 10% 6% 5% 0% ts nt / rt its s m sm t/ fs vic g/ t en ou es e ni en po rif an or ad rin s e s di ed sc te em ha m ta ef si up gr cr al o di ran ub yr ci nt ec ce ur -in ts D x er e m or ts a r Ta oc R& ke m m ed to gu e nf c Pr la ar m ss Fe re nc e an gu M Di co ine ia ed Lo Re pl v s o Bu m pr co Im Source: Survey of clean technology firms in Kenya undertaken in July and August 2013. supporting the dynamism of their clean technology SMEs.  Actions to Support Clean Technology SMEs This report describes the importance of SMEs to the growth of competitive clean technology industries. It also illustrates that opportunities exist for developing country SMEs across clean technology industries and value chains. However, the growth of these firms is also dependent on consistent support to overcome the challenges characteristic of clean technology firms, including higher upfront capital requirements, longer payback periods for investors and a heavier reliance on government policy than other technology sectors. Five areas of action should be considered by governments, development agencies and other public and private actors to support clean technology SMEs in developing countries. Photo: infoDev. These areas, illustrated in Figure E8, are: entrepreneurship and business acceleration, innovation finance, market development, technology development and the legal and regulatory framework. Executive Summary 9 FIGURE E8. Key areas of support for clean technology SMEs Key Areas of Support for Clean Technology SMEs Entrepreneurship Legal & Regulatory and Business Framework Acceleration Innovation Technology Finance Development Market Development Policy makers and other stakeholders can draw and services of local SMEs, and facilitate the upon a broad tool-box of instruments in each of overall growth of the clean technology market. these five areas, listed in Appendix C and discussed For renewable energy these include portfolio in Chapter 7. standards, renewable energy certificates and • Entrepreneurship and business acceleration: feed-in tariffs. Clean technology markets There is a range of programs for businesses, can also receive a rapid boost through strict as well as international collaborations and sustainable procurement policies, manufacturer networks, which countries and businesses standards, product labeling and product can draw upon to help strengthen SME testing and certification, as well as indirect entrepreneurship and business acceleration and/or “soft” interventions such as education, in clean technology sectors. Here, countries campaigns and performance rankings. can pursue programs offering direct technical • Technology development: Instruments assistance and the linking of foreign investors designed to stimulate technology development with local clean technology SMEs for technology include R&D tax credits, research grants, development and/or production capacities. More publicly funded competitive research hands-on and in-country business incubation collaborations, competitions, public investment is also expanding, such as infoDev‘s Climate in R&D, public or private agreements on Innovation Centers. technology cooperation, demonstration projects • Innovation finance: There are various and applied research networks. instruments available to support early stage • Legal and regulatory framework: The overall financing and risk capital for clean technology enabling framework for clean technology SMEs SMEs, to complement traditional financing can be strengthened by implementing a number sources. These include providing soft loans of legal and regulatory policies, including and loan guarantees and stimulating seed and sector-specific tax incentives, cap-and-trade venture capital investment. On the demand emission schemes, emission reduction credits, side, there is a significant opportunity to taxation on pollution or natural resource use, establish technology-specific consumer credit import tax reductions or waivers and incentives facilities, which have proven particularly useful to attract skilled labor. These can be designed for technologies that require higher up-front to create business incentives and/or obligations investments such as renewable energy systems. that address both the supply and demand side • Market development: A range of instruments of clean technology markets. aim to increase demand for the products 10 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Policy makers, in particular, must adopt and In order to achieve complementarities and policy adapt these instruments to fit their country‘s coherence, policy makers are also advised to circumstances. They should also seek to mitigate survey the portfolio of existing policies and conduct key risks, including failures to coordinate policy a harmonization analysis, that is, to understand design and implementation, market distortions, if and how other policies and national economic and the effects of policy discontinuity. circumstances stand to conflict with, or undermine, planned interventions to support clean technology It is also important to design and implement these SMEs. instruments in parallel, as part of a broader, national strategy to support clean technology To illustrate policy considerations within specific SMEs. Policy makers are advised to take into national contexts, the report offers case studies account their national circumstances and focus of national programs targeting SMEs within green attention on developing policy interventions industry. These include South Korea‘s Green on “fertile ground,” as opposed to supporting Growth Strategy, India‘s National Solar Mission, technologies and sectors that do not have the Thailand‘s Energy Conservation Program, and support of already existing human and natural Ethiopia’s Climate Resilient Green Economy resource capacities. Strategy. Photo: Graham Crouch / World Bank. Executive Summary 11 Chapter 1 The Climate and Clean Technology Opportunity for Developing Countries Main Points • Climate change represents an opportunity for developing countries to build local green industries that can drive sustainable economic growth as well as environmental benefits. • Climate and clean technology sectors are intrinsically innovative and compare favorably to other sectors in terms of innovation output, job creation and job quality. • This report provides an overview and estimate of the market opportunity for climate and clean technology business in developing countries over the coming decade, with particular attention to opportunities and barriers for SMEs. Using the results of a new survey of clean technology firms in India and Kenya, the report identifies key barriers for these firms and which parts of the value chain are already being targeted by local SMEs. • Finally, the report provides a set of actions that can be considered for countries that wish to support innovative SMEs within local green industries. This report offers insight to policy makers and The Clean Technology other developing country stakeholders seeking to Opportunity develop competitive green industries. It provides an overview and estimate of the market opportunity Climate change will have its largest impacts for climate and clean technology business in on developing countries, with poor populations developing countries over the coming decade.4 It particularly hard hit and unable to adequately identifies which aspects of these markets are most adapt (World Bank, 2013a). There are ongoing accessible to local firms and SMEs in particular. efforts to assist developing countries with efforts Using a new set of firm data, it identifies which to mitigate and adapt to climate change through parts of the value chain are already being targeted deployment of appropriate climate and clean by local companies. Finally, it provides a set of technologies. However, the main thrust of many policy options and guidance that can be considered of these efforts is to transfer technology from the for countries that intend to build up local green developed world, with little emphasis on building industries. up the capabilities of local industries to participate in the business opportunities surrounding climate change. There is an opportunity for developing countries to take a complementary approach. Climate change represents an opportunity for developing countries to build local green industries that can drive sustainable economic growth as well 4 Market projections in this report cover the ten-year period as environmental benefits. 2014-2023. 12 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: © Arne Hoel / World Bank. The report is organized as follows. Chapter 1 defines clean technology5 and describes which Climate change represents an sectors are covered in the report and why. It then opportunity for developing countries compares clean technology to other technology to build local green industries that sectors in terms of investment, innovation and jobs. can drive sustainable economic growth Chapter 2 examines the projected size of clean technology investment globally and then delves as well as environmental benefits. deeper into the opportunities in developing countries. It highlights where investment is being focused on a regional basis. seeking to build their economies around sectors of Chapter 3 explores the role that SMEs play the future, where resource efficient and low carbon within clean technology industries. It highlights technologies are expected to become everyday the portion of the clean technology opportunity products and services demanded by consumers accessible for SMEs and looks at different stages of and of significant interest to investors. the value chain that SMEs can expect to enter. The concept of a “clean technology sector” has Chapters 4, 5 and 6 illustrate the opportunities only emerged over the past decade. Climate quantified in Chapters 2 and 3 by probing the change science and multiple environmental country and sector levels. They examine solar pressures led governments to build a policy space technologies in India, bioenergy in Kenya, and that encouraged more efficient, lower carbon climate-smart agriculture (CSA) in both countries, technologies. Investors became interested in the and explore how local SMEs are exploiting these nascent sector because of the opportunities and opportunities. risks presented by forthcoming environmental policies, high energy and resource costs that made Finally, Chapter 7 provides a set of actions that for resource efficiency more economically attractive, a policy makers and other stakeholders to consider maturing innovation landscape that reduced clean in supporting competitive green industries and technology costs, and a growing social appetite innovative SMEs in particular. for cleaner production. Together, these public and private sector shifts allowed a clean technology market to emerge, which encompassed an array of products, services and processes that shared a Defining the Clean Technology common set of characteristics: they all delivered Sector value using fewer resources and producing less pollution (carbon, waste or otherwise) than Clean technology has evolved from a niche 1970s conventional solutions (Pernick and Wilder, 2007). environmental aspiration into a competitive force motivating many of the world’s most progressive The clean technology banner has since been business planners and boardroom strategists. widely applied, although, given its relative youth, It has also caught the attention of governments consensus on which subsectors should be included in the market has not been reached. Nevertheless, 5 This report uses the term “clean technology” to cover the it is a market whose evolution is enthusiastically full range of technologies that provide climate mitigation tracked by both investors and government planners or adaptation benefits or other positive environmental who are eager to position themselves at the head of benefits. A typology of these technologies and related industries is included in Chapter 2. this growth-oriented sector. Chapter 1: The Climate and Clean Technology Opportunity for Developing Countries 13 Technologies Covered in BOX 1.1. Energy efficiency: a big abatement and this Report SME opportunity To stay below the internationally agreed limit While the commercial opportunities in energy of 2°C warming, low carbon technologies efficiency are large, multifaceted, and open and practices need to be applied across the to SME participation, they are not profiled in breadth of emissions sources (World Bank, greater depth in this study because of the 2013a). Action in all areas is important, but lack of data (particularly national investment especially in the power sector, industry, plans) needed to undertake the analysis to a forestry, and agriculture, which represent the comparable degree of country level granularity. four largest abatement opportunities. This The built environment accounts for up to 30 report focuses on some of the sectors that percent of annual global emissions and up to provide the greatest opportunities in reducing 40 percent of energy consumption, and the emissions and improving resource efficiency. industrial sector is also a major emitter (UNEP, The report equally focuses on technologies 2009a). Energy efficient technologies and that offer a “sweet spot” to developing practices can significantly reduce emissions countries in that they provide economic or from new buildings and industrial complexes, social co-benefits in addition to abatement and energy efficiency retrofits can unlock potential. Renewable energy, for example, is emission abatement opportunities in the highly featured heavily in this report partly because durable existing building stock. Implementing of its importance to the global abatement energy efficiency is needed as old buildings agenda, but also because developing countries and facilities are refurbished and as new have real, quantified policy intentions to ones are built to accommodate a growing and develop renewable power generation capacity increasingly urban and industrialized global to meet energy access needs. Lower carbon population, especially in developing-world transport options are also included because regions where population growth, urbanization, of their large abatement potential and their and industrialization are happening most alignment with the mobility challenges faced in quickly. rapidly urbanizing developing countries. While Skilled construction, new materials, innovative waste offers the smallest of the abatement design, and a focus on integrated resource opportunities in absolute terms, it is included use are all important facets of building and in this report because it is a large economic industrial energy efficiency. In the European opportunity and is a fast-growing challenge Union, where energy efficiency has been a in developing countries, as are water and policy priority and energy costs are high, sanitation (WRI, 2013). experience has shown that new green buildings Forestry is not profiled because it depends and energy efficiency retrofits are well suited more on government policy than an active to SME participation since they require more private sector. The market size for energy tailored and bespoke interventions (Carbon efficiency in buildings and industry is also not Trust, 2014). Similar types of SME opportunities quantified because the data available would exist in the developing world, especially as not allow for a robust estimation, although economic growth fuels energy demand in the both the abatement potential and SME face of power production capacity constraints. opportunity from energy efficiency are large, as Energy efficiency improvements can address described in Box 1.1. this dilemma cost effectively (UNEP, 2014). Agriculture is critical, especially in developing The overall size of these markets is undoubtedly countries whose populations and economies large, including for SMEs. Some estimates put rely heavily on the sector, which is why CSA the annual energy efficiency investment need at is profiled in this report. The market size of close to $100 billion per year over a twelve-year CSA opportunities that are accessible to SMEs, timespan in developing regions alone if cost- however, is not quantified, for reasons outlined effective energy efficiency opportunities are to in Chapter 5. be realized (McKinsey, 2008). 14 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Other adaptation technologies (outside of water and wastewater treatment and purification) are Comparing Clean Technology not covered as the technologies and markets are with Other Technology Sectors not sufficiently defined for robust market sizing. However, adaptation technologies are of crucial importance particularly for the most climate- Different than Traditional Sectors vulnerable countries. They also present good SME The size of the clean technology market, discussed opportunities as countries with limited resources in Chapter 2, shows that it is important, but seek locally developed adaptation solutions. comparing it to other sectors allows us to examine Establishing a clearer understanding of these how clean technology differs (or is similar) to more technologies and markets presents an opportunity established sectors. This comparison provides for future research with high value to developing clues to how the SME experience in this emerging countries. sector might unfold, and how governments can develop policies and strategies based on the In this report, the market size for 15 clean experience of other sectors to support clean technology subsectors is estimated. The technology as it matures. Three different sectors subsectors included are shown in Table 1.1. were compared to contextualize the clean technology sector: • Construction • Biotechnology • Information and communications technology (ICT) TABLE 1.1. Clean technology sectors and subsectors covered in this report Sector Subsector Inclusions and exclusions Renewable • Onshore wind Included in market size energy • Small hydro • Technology costs, construction and installation of technologies • Solar photovoltaic (PV) equipment • Concentrated solar power (CSP) • Discounted operation and maintenance (O&M) for lifetime • Solar thermal of equipment • Bioenergy Excluded from market size • Biofuels • Transmission infrastructure • Geothermal Waste, water and • Water treatment and purification Included in market size sanitation • Wastewater treatment • Technology costs, construction and installation of • Municipal solid waste management treatment facility, plus collection/transport of solid waste • Discounted O&M for lifetime of plant and equipment Excluded from market size • Sewers, pipes and infrastructure outside fence of treatment facility Transport • Electric vehicles (EVs) Included in market size • Electric bikes (e-bikes) • Natural gas vehicle retrofit kit; entire EV and e-bike; buses • Bus Rapid Transit (BRT) and dedicated transit ways • Natural gas vehicles (NGVs) • Discounted O&M for lifetime of BRT Excluded from market size • O&M of NGVs, EVs and e-bikes Chapter 1: The Climate and Clean Technology Opportunity for Developing Countries 15 Comparing these sectors to clean technology Innovation along three themes that are particularly relevant Clean technology is a particularly fertile area to developing countries and SMEs—investment, for innovation since it is defined as any product, innovation and jobs—further highlights the service, or process that delivers value using fewer relevance of clean technology and the potential it resources and producing less pollution (carbon, has to drive employment, innovation, and economic waste, or otherwise) than conventional solutions. growth. Essentially, any innovative improvement that results in a greener outcome would fall under Investments the clean technology umbrella. Innovation is the Clean technology ventures have raised significant lifeblood of this sector, but illustrating that intrinsic risk capital investment in developed countries, connection with hard data can be challenging. although the overall amounts are lower than either Nevertheless, some indicators like patents are biotech or ICT. Moreover, the fraction of risk capital helpful. and R&D expenditure is modest as a proportion of overall deployment spending. OECD data shows environmental technologies account for a significant proportion of patent Clean technology ventures in Europe and the applications globally. There were 10,286 United States raised more than $24 billion in environmental technology Patent Cooperation venture capital (VC) between 2007 and 2012 (FS- Treaty (PCT) applications filed in 2010, representing UNEP Collaborating Centre, 2013). For comparison, 6 percent of total PCT filings globally in 2010 (the biotech ventures in Europe and the United States latest data available from OECD). This is similar raised over $31 billion, and ICT ventures raised to the biotech industry (also 6 percent), and more over $53 billion over the same period (PWC, 2013; than the construction industry (3 percent) and European Private Equity and Venture Capital mining industry (1 percent) combined. The ICT Association, 2012). sector dominates PCT filings though, with about 35 percent of applications in 2010 (OECD, 2011). Global new investment in renewable energy in 2011, which totaled $244 billion, was largely asset Environmental technology patents grew at a finance6 (for instance, investing in building a wind compound annual rate of 9 percent from 1999 to farm), while about 5 percent was risk capital 2010 (based on PCT filings), which is second only (1 percent from VC and about 4 percent from to the mining sector in terms of growth rate (10 private or government R&D). The relatively small percent) but for a significantly higher number of VC investment highlights one of the challenges patents (OECD, 2011). of investing in clean technology because of the particularly high CAPEX, long timeframes, less Jobs differentiated product, and regulation-dependent Looked at through the lens of job creation, clean innovations. As a result, clean technology VC is technology is impressive in the developed world. more likely to be invested in energy efficiency U.S. employment in clean technology represents solutions and software and services at the expense 2.6 percent of the total workforce, supporting of newer technologies that continue to rely on over 2.5 million private sector and 886,000 public government finance for early stage development. sector jobs (U.S. Bureau of Labor Statistics, 2013a). That is more than in educational services, The investment experience also highlights the at about 3.2 million; about one-third of America’s unique characteristics of clean technology, which employment in manufacturing, at 11.5 million; or has greater difficulty attracting VC, and requires 40 percent of the financial services sector, at 7.8 more public investment than traditional sectors. million (U.S. Bureau of Labor Statistics, 2013b). This investment obstacle is even more pronounced Germany has about 2 million people employed in developing countries where payback scenarios in the clean technology sector, almost 5 percent are more uncertain and SMEs and new ventures of its total workforce (European Employment are riskier. Observatory, 2013). For comparison, Germany’s automotive industry, one of the country’s largest employers and one of the engines of its industrial 6 Asset finance refers to all money invested in renewable production, employs about 742,000 people (Verband energy generation projects (excluding large hydro), der Automobil Industrie, 2013). German biotech whether from internal company balance sheets, from loans, or from equity capital. employs just over 35,000 people (Biotechnologie. 16 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Dana Smillie / World Bank. de, 2013). In the United Kingdom, about 940,000 people are employed in clean technology, Conclusion compared to about 213,000 in telecommunications Climate change presents a formidable challenge (U.K. BIS, 2013; Green Alliance, 2012). Against to developing countries. However, climate change these benchmarks, it is clear that clean technology also presents an opportunity. In the developed is a major employer. world, SMEs are crucial in driving clean technology innovation and activity, and evidence suggests Clean technology jobs also compare favorably SMEs in emerging economies can follow suit if to jobs in other sectors: green jobs tend to be supported by appropriate government policies and more skilled, safer, and better paid than jobs support structures to help them take advantage of in similar sectors. Indeed, the move towards a the lucrative opportunities that exist. lower carbon, more resource-efficient economy is expected to yield a double-dividend in terms of The clean technology sector has unique employment and environmental improvement. The characteristics that, for instance, limit private risk International Labour Organization (ILO) estimates capital investments and suggest a greater role for that transitioning to a greener economy could yield public finance in supporting early stage companies. a net gain of 60 million jobs (ILO, 2013). However, the clean technology sector as a whole compares favorably to other sectors on innovation output and job creation and quality. Countries that successfully build local green industries can capture this economic value while simultaneously building climate resilience. Chapter 1: The Climate and Clean Technology Opportunity for Developing Countries 17 Chapter 2 Sizing Climate and Clean Technology Markets Main Points • Clean technology is a huge global market. In 2011/2012 the sector was a $5.5 trillion global market and it is currently forecast to grow at around 4.1 percent annually until 2015/2016, significantly faster than the global economy. • Clean technology investment in developing countries is quickly catching up with investment in developed countries. In 2012, clean technology investment rose by 19 percent in developing countries compared with an overall decline of 12 percent globally, suggesting that clean technology investment is shifting towards developing economies in the near term. • Investment across 15 clean technology sectors in 145 developing countries is expected to top $6.4 trillion over the next decade, with $1.6 trillion of that market accessible to SMEs. • Investment in wastewater treatment facilities represents over a third of the total likely clean technology investment in developing countries (about $2.7 trillion), with water treatment, onshore wind power, solar PV, small hydro and waste management the next largest sectors (each between about $300-800 billion). Photo: Dave Lawrence / World Bank. Renewables should attract about $2 trillion in investment. • Regionally, about $1.5 trillion will be invested in China, and slightly less will be invested in Latin America and the Caribbean. Roughly $900 billion will be invested in each of Sub-Saharan Africa, Asia (excluding China and India) and North Africa and the Middle East; $440 billion will be invested in India, and $235 billion in Russian and Middle Income Europe. 18 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: © Simone D. McCourtie / World Bank. The Global Clean Technology FIGURE 2.1. Growth in global clean technology Market sales 2007-2012 (in $ trillion) The global clean technology market was valued at $5.6 approximately $5.5 trillion7 in 2012 (U.K. BIS, 2013), $5.5 comparable to the global construction industry, $5.5 which had a global turnover in 2013 of $7.0 trillion.8 $5.4 $5.4 $5.4 Sales (US$ trillion) Clean technology is also a fast growing sector whose growth is not only accelerating, but whose $5.3 $5.3 projected growth is regularly revised upwards;9 a 2012 German government study (DE BMU, $5.2 $5.2 2012) predicted the market would double by the mid-2020s. The global clean technology market is forecast to grow at around 4.1 percent annually $5.1 until 2015/2016 according to U.K. BIS (2013), which significantly outstrips global average economic $5.0 growth projections of 2.2 percent to 3.3 percent 8 9 0 1 2 00 00 01 01 01 /2 /2 /2 /2 /2 over the same period by the World Bank (2013b).10 07 08 09 10 11 20 20 20 20 20 By contrast, the global automotive industry is Year forecast to grow at 3.8 percent per year over the same time period (McKinsey, 2013a). Source: U.K. BIS (2013). Breaking down the clean technology market into 7 According to a U.K. Department for Business, Innovation its constituent subsectors shows which areas are and Skills (BIS) 2013 report, the total sales for the Low Carbon Environmental Goods and Services (LCEGS) driving this performance. The top six subsectors in sector in 2011/2012 was £3.4 trillion. This was converted terms of global market size are alternative fuels,11 to $5.5 trillion using an average exchange rate of $1.00 building technologies, wind power, alternative /£1.5847 for the year 2012 and uplifted to 2013 price from fuel vehicles,12 geothermal, and water supply assumed 2012 price levels using an average inflation rate of 1.5 percent. Historical exchange rate was obtained and wastewater treatment. Across the board, from www.oanda.com, and the U.S. annual inflation rates low carbon and renewable energy, water and were obtained from U.S. Department of Labor, Bureau of sanitation, waste management solutions, and Labor Statistics. cleaner mobility make up the bulk of the market 8 According to the Confederation of International (see Figure 2.2). Contractors’ Associations website: http://www.cicanet. com/ 9 The upward revision was documented in U.K. BIS reports 11 Alternative fuels include the manufacture, production, in 2011, 2012, and 2013. supply, and distribution of: batteries, biodiesel, butanol, 10 The Climate Group also conducted a market sizing ethanol, vegetable oils, biomass, methane, peanut oil, exercise and estimated the global clean technology vegetable oil, wood and woodgas, and hydrogen. market to be worth more than $2.56 trillion a year, and 12 Alternative fuel vehicles includes production, supply is expected to be valued at more than $5.13 trillion by and distribution of natural gas, synthetic fuel and auto the mid-2020s. They found the market to be growing at gas, RD&D for hydrogen fuel cells and hydrogen internal 12 percent a year since 2007. The overall size and growth combustion, electric, hybrid electric, steam powered, rate is different from the U.K. BIS estimate because the organic waste fuel, wood gas, solar powered and air, subsectors included in each report differ. spring and wind powered vehicles. Chapter 2: Sizing Climate and Clean Technology Markets 19 FIGURE 2.2. Global clean technology sales breakdown, 2011/12 Contaminated land reclamation and remediation 1% Air pollution 1% Environmental consultancy and related services 1% Carbon finance 1% Additional energy sources 2% Other 2% Energy management 2% Nuclear power 3% Alternative fuels 16% Waste management 5% Biomass 5% Photovoltaic 5% Building technologies 13% Wind 12% Recovery and recycling 6% Alternative fuel vehicle 10% Water supply and waste water treatment 8% Geothermal 9% Source: U.K. BIS (2013). Market Size in the Developing Similar pressures exist in other clean technology sectors that seek to provide basic services to World people in a more efficient, affordable, and clean manner. The investment figures suggest that The gap in clean technology investment between developing countries are rising to the challenge developed and developing economies is shrinking and investing in transforming environmental significantly; at the end of 2012 it stood at 18 and climate change challenges into market percent ($132 billion versus $112 billion per opportunities. year). This gap is down from 250 percent in 2007, according to Forbury Investment Network (2013). The same report cites that in 2012 alone, clean The Methodology for Sizing Developing technology investment rose by 19 percent in Country Markets developing countries compared with an overall decline of 12 percent globally, suggesting that Much of the existing literature has been devoted clean technology investment is shifting towards to understanding the dynamics of the clean developing economies in the near term. technology market in the developed world. Similarly, while there is fairly comprehensive data This trend is unsurprising given that developing on the size and value of clean technology markets countries face growing pressure to increase at a global or regional level, its coverage is focused their energy supply—in quantity, reliability, and on the developed world and a few large emerging affordability—while simultaneously increasing economies such as China. the clean share of their energy mix to decrease their emissions and mitigate climate change. This Clean technology markets in the developing world double challenge is particularly acute in low- are less well understood and suffer from a lack of income countries where people still lack access country-level granularity; it is not uncommon for to basic energy services, and where long-term assessments of the entire African market to be environmental benefits are difficult to favor over based on a handful of the larger of its 54 country demands for access to affordable energy. economies, or for Africa to be ignored altogether in important sectors like solid waste or clean 20 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries road transport. What coverage there is focuses on large-scale renewables (for instance, wind, solar, Market Size of Clean geothermal) and not on the other clean technology Technology Sector in sectors that are also highly relevant to SMEs. Developing Countries This report closes that gap through a regional analysis of 15 clean technology markets in 145 The fifteen clean technology subsectors are countries over the next decade. In order to cope likely to attract $6.4 trillion over the next decade with these data limitations, the methodology ($1.6 trillion accessible to SMEs) in the countries was designed to make use of existing data and examined, with considerable additional investment projections, coupled with clear assumptions to expected in the sectors not covered in depth by allow for estimates of the addressable market for this report (see Figure 2.3). Even when excluding local SMEs, at regional and sectoral levels.13 China, India, Russia, and Middle Income Europe, these opportunities are still significant: $4.1 trillion This research is unique in two ways: because of overall, of which $1.0 trillion is accessible to SMEs. the regional granularity underlying the market size analysis, and because the market forecasts are Over the next decade, it is estimated that based on planned investment rather than needed renewable energy deployment in 145 developing investment. This report’s regional granularity countries could attract just over $2 trillion of is stronger than most research because the investment. This would be the result of a policy and methodology extrapolated to data-poor countries regulatory environment that supports renewable using subregional groups (for instance, four deployment, fast-growing energy demand along African subgroupings) rather than using traditional with falling renewable energy costs, and available regional groups that rely on geographic borders local natural resources. rather than other indicators that are relevant to Water, wastewater, and solid waste management likely future investment (for instance, GDP/per would also require major investment of up to capita or ease of doing business factors). $3.9 trillion over the next decade. As countries Moreover, this research does not reflect possible enjoy growing national prosperity, investment in or needed investment like many studies do, but public services, especially water and sanitation, rather outlines investments that are actually is expected to be a priority. Now, wastewater expected to be made in these regions over the next decade, based both on current government policies and plans, and on careful extrapolation to nearby countries with similar policies and resource availability. The SME opportunities, therefore, are not based on broad-brush continental aspirations, but on regional evidence that deconstructs planned investment into a segmented value chain analysis. By illustrating the developing-world clean technology opportunity in this way, this chapter aims to provide governments and agencies with Photo: World Bank. evidence that can help them to promote the realization of these opportunities through policies and programs of entrepreneurial support that target the areas of high value. 13 The market sizing methodology is described in Appendix A. Full details of the market sizing may be requested from the authors. Chapter 2: Sizing Climate and Clean Technology Markets 21 FIGURE 2.3. Market size through 2023 for 15 clean technologies in developing countries ($ trillion) $2.8 $1.0 $0.9 $0.79 $0.8 Market value (US$ trillion) $0.67 $0.7 $0.6 $0.48 $0.5 $0.4 $0.32 $0.31 $0.3 $0.26 $0.19 $0.2 $0.15 $0.14 $0.12 $0.1 $0.06 $0.04 $0.03 $0.03 $0.0 er er d V ro te es al k) SP s al t es ls si ke in rP ue m rm oc as yd at at cl cl an rC w bi er W hi hi w W la st of lh he tr e te la ic ve ve h ed So Bi or al d ot rt tr So as pi fe sh ic s Sm Ge ec la ga W ra tr ex On So El ec al s y( Bu El ur rg at ne N oe Bi SME share Non-SME share Source: Authors’ analysis. treatment14 is increasingly becoming a public landfilling. In this report, sanitary landfills are priority as waterways grow polluted and water considered to be clean technology compared with scarcity becomes a more salient issue. Investment the most common alternative—open dumping— in the construction and operation of these systems which carries a much greater ecological cost. would come from the government or through Consolidating waste in landfill also enables landfill a public-private partnership, and would be gas recovery, a low carbon energy generation administered by water and wastewater treatment technology, to be deployed. companies, including their suppliers, among whom would be SMEs. Lower-carbon transportation is a smaller but still significant market, worth up to $456 billion Solid waste management15 is also a growing over the next decade. These sectors often attract priority. In densely populated urban areas, soaring investment because of their co-benefits rather waste volumes require organized public attention, than because of their environmental outcomes. and while solutions like waste-to-energy are Bus Rapid Transit has proven to be an effective gaining popularity, in poorer countries the majority way of transporting a lot of people from suburban of low-cost, sanitary disposal continues to be areas and through increasingly crowded urban centers with relatively low upfront capital cost, and are being built to accommodate swelling 14 In this report, the market size for water and wastewater urban populations. Vehicles powered by natural includes the CAPEX and operating costs that are inside gas are more cost-competitive than gasoline and the fence of the treatment facility itself. So filtration and purification systems, cesspools, dewatering equipment, diesel vehicles in many markets and generate holding tanks, internal piping, and treatment chemicals significantly less carbon emissions. Electric would be included, whereas municipal sewage systems vehicles are strongly supported by the governments and freshwater pipes and pumps would be excluded. of India and China, and Chinese consumers are 15 The market size for solid waste has two dimensions: leading the way in adopting electric bikes. collection (the costs of trucks and operating labor) and treatment (CAPEX and O&M related to landfill construction, operation, and decommissioning). 22 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries The Regional Picture FIGURE 2.4.Clean technology market size by The regional opportunities are diverse and highly region, and the shares of SMEs and non-SME driven by both natural resource endowments and ($ trillion) government policy priorities. While investment $1.56 is large and growing throughout the developing $1.6 $1.43 world, China and Latin America stand out as $1.4 leaders (see Figure 2.4). $1.2 Market value (US$ trillion) Wastewater features in the top three opportunities for SMEs across the entire developing world, with $1.0 $0.91 $0.88 $0.87 the exception of China. Countries are investing $0.8 heavily in wastewater infrastructure and services to provide basic services to their growing populations $0.6 while ensuring a stable water supply to grow $0.44 $0.4 industries reliant on water use. A number of the $0.24 renewable and nonrenewable technologies are also $0.2 expected to present significant opportunities for SMEs as well and they are each discussed in turn $0.0 e & ro e a a a th orth Asia a st pe with the top three opportunities for each region Eu dl ic ric in di dl a Ea e id er id ric In Ch Af m M Am highlighted in Figure 2.5. M f e A n co d ra In an tin ha ia La Sa N ss b- Ru Su SME Non-SME Source: Authors’ analysis. FIGURE 2.5. Top three regional opportunities for SMEs Wastewater Wastewater Small Hydro Small Hydro Geothermal Waste Wastewater Onshore Wind Water Solar PV Solar CSP Electric Bikes Wastewater Bioenergy Onshore Wind Water Solar PV Wastewater Wastewater Small Hydro Water Source: Authors’ analysis. Chapter 2: Sizing Climate and Clean Technology Markets 23 Latin America wastewater treatment levels from 15 percent in 2010 to 100 percent by 2015 (Sanitation Updates, The leading opportunities for Latin American 2010). SMEs are in wastewater (about $160 billion), bioenergy (about $40 billion), and water (about While it is not likely that SMEs will capture a large $40 billion) (see Figure 2.6). Within the region share of the wastewater market value across some countries are seeing fast growth. The Inter- the value chain, the overall scale of investment American Development Bank (2013) reports that required in the sector to meet government targets five countries experienced triple digit growth in creates a large opportunity (that is, SMEs can clean technology investment in 2012: Mexico (450 access a small portion (about 20 percent) of a percent), the Dominican Republic (431 percent), large market ($160 billion)). The need for ongoing Uruguay (327 percent), Peru (325 percent), and operational inputs, such as chemicals, polymers Chile (314 percent). and filters are niche SME opportunities and areas for innovation. For example, specific flocculating The lack of current wastewater treatment agents are added to wastewater pools to enhance threatening regional water sustainability is the aggregation of suspended particles, which driving investment in the region. Currently only accelerates wastewater separation and can 20 percent of Latin America’s wastewater is enhance the efficiency of the dewatering process. treated, explaining recent large government These opportunities are an example of potential investments (BN Americas, 2013). For example, ongoing income streams generated by wastewater the Brazilian government is investing heavily activity that are available to SMEs in this sector. in water, wastewater, and sewage treatment facilities (Carbon Trust, 2012a). New and upgraded Bioenergy presents a large opportunity for SMEs infrastructure is being financed through Phase 2 across the value chain in Latin America. The region of Brazil’s National Growth Acceleration Program has great bioenergy potential, with a land area of (PAC2) and this will see the deployment of water around 250 million hectares available for feedstock and wastewater solutions at an enormous speed production, led by Brazil (Inter-American Network and scale (Carbon Trust, 2012a). Peru is also of Academies of Science, 2012). Ethanol production prioritizing the sector and has committed to raise is poised to grow enormously over the next ten FIGURE 2.6. Size of the clean technology market accessible to SMEs in Latin America ($ billion) $160 $140 $120 Market value (US$ billion) $100 $80 $60 $40 $20 $0 er k) er ro d al ls te V t s P al si le in rP CS ue rm m c as yd at at an ic to w r W w W la of lh h r he he tr ds e te la ve So Bi or al id e ot rt So as fe sh s Sm p Ge la ga W ra x On So (e al s Bu y ur rg at ne N oe Bi Major equipment Planning, installation and balance of system O&M Source: Authors’ analysis. 24 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries years, and heat and electricity from biomass, The drive to achieve the Millennium Development especially from sugarcane bagasse, is also primed Goals (MDGs) in wastewater and water in Africa for significant growth (Carbon Trust, 2012a). would fuel investment and SME opportunities. Wastewater and water is a priority for investment All new mills in Brazil are now equipped with in Africa. Both markets are driven by investment by cogeneration equipment that produces heat and donors and governments. The largest opportunities electricity. Newer cogeneration equipment is more in wastewater are in West and Central Africa (about efficient, which has allowed mills to sell on the $41 billion), followed by Southern Africa (about $32 excess electricity (this can be up to 30 percent billion). of revenue for new mills) (Carbon Trust, 2012a). Forecasts estimate that newly built mills and Growth in wastewater investment however is not refurbished older ones will see power production solely driven by public investment; a significant increase to between 9 and 13 GW by 2020 portion of the market growth will be driven by (Carbon Trust, 2012a). Examples of potential SME increased wastewater treatment activities from activities in bioenergy are found throughout the fast growing mining activities in the region that value chain, but are most abundant in operations are now subject to more stringent environmental and maintenance, specifically around planning regulations (25 Degrees in Africa, 2011). There and feasibility consultancy, ash disposal, and is also increased pressure on countries to take component and equipment maintenance. a more integrated approach to their water and waste management activities, particularly in the fast growing urban areas across the continent. Sub-Saharan Africa SMEs active in the sector that are able to deliver solutions that look at the system as a whole The leading opportunities for Sub-Saharan African rather than in isolation will be particularly well SMEs are in wastewater (about $90 billion), small placed. Similar to wastewater, the water sector hydro (about $43 billion), and water (about $40 has a number of promising SME activities both in billion) (see Figure 2.8). Solar PV and geothermal urban and rural areas. SME opportunities include are also large potential markets worth between the supply of pressure and leakage management $20 billion and $30 billion to SMEs. equipment, and filtration and advanced treatment FIGURE 2.7. Size of the clean technology market accessible to SMEs in Sub-Saharan Africa ($ billion) $90 $80 $70 Market value (US$ billion) $60 $50 $40 $30 $20 $10 0 er ro er V al d te k) SP t al ls si rP in ue rm m c as yd at at an rC to w r W w W la of lh he he tr ds e te la So Bi or al id e ot rt So as fe sh Sm p Ge la W ra x On So (e s Bu y rg ne oe Bi Major equipment Planning, installation and balance of system O&M Source: Authors’ analysis. Chapter 2: Sizing Climate and Clean Technology Markets 25 membranes, both part of the balance of systems about $38 billion of the $43 billion regional SME segment of the value chain. Modeling of opportunity, in part because of the numerous distribution and collection networks, and water small rivers that run through the region. Small flow monitoring, are also opportunities. hydro provides large opportunities for SMEs in the balance of systems and operation and maintenance An example of an SME active in this space is Smart segments of the value chain. The low upfront Leak Detection Company, based in South Africa. It capital requirements for making small hydro offers water leak detection services for municipal systems means that SMEs could also realistically infrastructure, and commercial and residential capture about 25 percent of the major components clients. Infrared radiometric pipeline testing can segment of the value chain. Small hydro also has identify subsurface pipeline leaks, deteriorated significant development benefits as it offers the pipeline insulation, poor backfill or voids caused potential for electrification of isolated and rural by erosion. The technology detects differences areas, and provides local small business the energy in thermal conductance caused by a water leak needed to upscale (Consultancy Africa Intelligence, plume compared to dry soil or backfill, and can 2012). East African Governments have taken notice help municipalities save money, water, and energy of the small hydro opportunity. In Uganda and by identifying leaks without first having to excavate Rwanda, programs have been developed to target buried pipes. The company sources some of its private investment in small hydro projects; Uganda equipment from other South African suppliers, like has already introduced 30MW into the grid using Sewerin, a maker of water and gas leak detection privately financed projects (Consultancy Africa systems. Intelligence, 2012). Demand for small hydro projects in East Africa Small-scale hydropower projects are, by their would address rural electrification needs and nature, suitable for identification and development this sector is well suited to SMEs. East Africa is by SMEs. Scouting for appropriate sites, getting leading the way in small hydro opportunities with local consent for construction, connecting rural Photo: infoDev 26 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries populations with mini-grids, and designing Treating wastewater properly means it can be used bespoke systems are all activities that are more and re-used both for commercial purposes and suited to SMEs than large power companies. for drinking consumption. Not treating it means it Micro-hydro projects can even be owned and either gets used in an unsanitary way or does not managed by a local community cooperative, rather get used at all. Water treatment and purification than a corporate power provider. For instance, is also a growing sector as the region’s population Tungu-Kabiri community micro-hydro power grows and water demand increases. project in Kenya is community-owned. The project involved the construction of a small weir, canal Solar technology represents a significant and penstock, which diverts river water to an 18kW opportunity in the region. This is the only region turbine, supplying electricity to a small community where the size of the CSP opportunity exceeds through a micro-grid (Energize, 2012). This can that of solar PV. The region’s clear, sunny skies unlock design, construction, and operations make it ideal for CSP technology, which needs activities for SMEs, especially since many of the direct sunlight to work, unlike solar PV which system components of a small hydro facility do not still operates in cloudy conditions. This region is require advanced technology (Microhydropower.net, one of several global hotspots for solar resource, 2013). receiving over 3,000 kWh/m2/year, as much as parts of Australia, the Nevada desert, and areas on the leeward side of Chile’s mountain ranges. This Middle East & North Africa abundant resource could eventually be exported via The leading opportunities for North African and high-voltage subsea interconnection cables that Middle Eastern SMEs are in wastewater (about $90 link North Africa to European markets, although billion), water (about $40 billion), and CSP about such plans are more visionary than concrete at ($20 billion) (see Figure 2.8). present (PWC, 2010). Both types of solar, however, offer large regional opportunities. Given the region’s arid climate, it is unsurprising that investment in wastewater and water solutions dominate the clean technology opportunity space. FIGURE 2.8. Size of the clean tech market accessible to SMEs in the Middle East & North Africa ($ billion) $90 $80 $70 Market value (US$ billion) $60 $50 $40 $30 $20 $10 $0 er er P V d al ro k) te al s t si le rP in CS rm m c as yd at at an ic to w er W w W la lh h r he tr ds e te la ve th So or al id e ot So as fe sh r s Sm p Ge la ga W ra x On So (e al s Bu y ur rg at ne N oe Bi Major equipment Planning, installation and balance of system O&M Source: Authors’ analysis. Chapter 2: Sizing Climate and Clean Technology Markets 27 Asia (Excluding China and India) increased its 2006 goal of 9.5 GW of installed geothermal capacity by 2025 to 12.3 GW, with near- The leading opportunities for Asian SMEs are in term plans to deploy around 4 GW of new capacity wastewater (about $85 billion), small hydro (about by 2014 (IEA, 2011). Other nearby countries with a $50 billion), and geothermal (about $48 billion) strong geothermal natural resource, such as the (see Figure 2.9). The main drivers for increasing Philippines, could develop ambitious plans as well. investment in wastewater collection and treatment, and water treatment in Asia are the rapid growth KCT, an Indonesian SME formed in 1992, is of urban areas and also the increase in thermal highly active in the country’s growing geothermal power generation, as some Asian countries sector. KCT supplies and leases equipment (heavy drastically increase their coal generation capacity and utility) and provides other services for the and will need water treatment facilities. One such geothermal industry. KCT started its operation for SME taking advantage of the investment in water Unocal Geothermal Indonesia, providing equipment and wastewater treatment in Indonesia is Sinar rentals, welding services, and supply of both skilled Tirta Bening. The company, founded in 1998, and unskilled labor for the Gunung Salak Operation provides a range of services to companies including in West Java (KCT, 2014). procurement, design, and build systems for clean water and sewage water treatment systems. Russia and Middle Income Europe The Pacific Ring of Fire makes geothermal power a The report covers a number of middle-income viable natural resource for several Southeast Asian countries in Eastern Europe and also Russia. The countries and island states. The region’s strong leading opportunities for SMEs in this region are in geothermal investment potential largely reflects wastewater (about $30 billion), small hydro (about the Indonesian government’s ambitious plans. $29 billion), and waste (about $34 billion) (see Indonesia enjoys about 40 percent of the world’s Figure 2.10). total potential geothermal resources because of its location on some of the most volcanically active Small hydro is a particularly prominent opportunity sections of the Pacific Ring of Fire (McKinsey in Romania and Bulgaria, which have hundreds of Global Institute, 2012). In 2010, the government megawatts of untapped hydrological resources. FIGURE 2.9. Size of the clean technology market accessible to SMEs in Asia, excluding China and India . ($ billion) $90 $80 $70 Market value (US$ billion) $60 $50 $40 $30 $20 $10 $0 er ro al er k) V te d s t ls al SP si le rP in ue rm rm c as yd at at an rC ic to w W w W la of lh h he he tr ds e te la ve So Bi or al id e ot rt So as fe sh s Sm p Ge la ga W ra x On So (e al s Bu y ur rg at ne N oe Bi Major equipment Planning, installation and balance of system O&M Source: Authors’ analysis. 28 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Small hydro also tends to be an inherently local FIGURE 2.10. Size of the clean technology market activity. Onsite planning, site design, hydrological accessible to SMEs in Eastern & Northern Europe surveys and environmental impact assessments ($ billion) can often be carried out cost effectively by local firms with knowledge and experience regarding $30 domestic regulatory requirements and approvals processes. The relatively small scale of small $25 hydro activities also helps open them up to SME participation, since the capital and workforce Market value (US$ billion) $20 required is relatively small. $15 In Bulgaria, HEC is an SME that invests in, develops, and implements integrated turnkey $10 projects in the renewable energy sector. Their core area of focus is small hydro power plants. Their $5 expertise is particularly strong in the construction of hydro power plants and hydrotechnical $0 equipment. In 2007 they also expanded their portfolio of services to include PV power plants er ro te er d V s le in rP as yd at at (HEC Partners, 2014). ic w W w W la lh h e te ve So or al as sh s Sm ga W On al ur China at N Because of its size, data availability, and Major equipment O&M uniqueness, China is treated as a region on its own. Planning, installation and balance of system The leading opportunities for Chinese SMEs are in onshore wind (about $80 billion), solar PV (about $70 billion), and electric bikes (about $63 billion) Source: Authors’ analysis. (see Figure 2.11). FIGURE 2.11. Size of the clean technology market accessible to SMEs in China ($ billion) $90 $80 $70 Market value (US$ billion) $60 $50 $40 $30 $20 $10 $0 d V s er ro al k) te SP er s t s ls al si ke le le in rP ue rm rm oc as yd at at an rC c ic w bi W hi w W la st of lh h he he tr e te la ic ve ve ed So Bi or al id rt ot tr So as fe sh ic s Sm p Ge ec la ga W ra tr ex On So El ec al s y( Bu El ur rg at ne N oe Bi Major equipment Planning, installation and balance of system O&M Source: Authors’ analysis. Chapter 2: Sizing Climate and Clean Technology Markets 29 The strength of the electric bike market in 2013). The government’s institutionally coordinated China makes it an outlier compared with other industrial PV strategy has helped develop a strong regions. China has a strong tradition of cycling as domestic manufacturing base, and domestic a common mode of transport. The introduction innovation, targeted subsidies, and lower-cost of electric bikes that are accessibly priced for government loans have enabled manufacturers an increasingly wealthy population, and which to thrive while cutting costs through process enable longer distance travel on roads that are innovations. According to Bloomberg News (2012), increasingly navigable, are accelerating the solar PV costs have fallen by 80 percent since deployment of this technology. Over the decade 2008, which has given the government confidence between 2012 and 2022, over 450,000 e-bikes could to boost its deployment targets to 50 GW installed be sold (assuming they are replaced after a seven capacity by 2020, and to further support its year lifespan), which makes China the undisputed domestic industry. As a result, solar PV continues global leader in this mode of transport. The major to present a large opportunity in China. equipment component of e-bikes is also considered to be fairly accessible to SMEs. India While electric vehicles do not appear to be a large The clean technology market opportunity analysis opportunity compared with other clean technology shows that as much as $103 billion will be invested sectors, China nevertheless leads the countries across 13 clean technology sectors in India over the in this report with ambitious deployment plans next decade. The leading opportunities for Indian endorsed by the state. These two sectors illustrate SMEs are in onshore wind (about $23 billion), solar the degree to which China is adopting low carbon PV (about $21 billion), and wastewater (about $18 mobility. billion) (see Figure 2.12). China’s deployment plans for onshore wind and India’s response to its rapidly growing energy solar PV are also driving an enormous amount of demand, concerns about energy security, and a investment. China’s global market share of solar desire to reduce greenhouse gas emissions have PV production grew from less than 2 percent in directed investment towards domestic renewable 2002 to 45 percent in 2010 (Sahoo and Shrimaliy, FIGURE 2.12. Size of the clean technology market accessible to SMEs in India ($ billion) $25 $20 Market value (US$ billion) $15 $10 $5 $0 s s d PV er P te er al ro ls k) t si le le in CS ue rm c as yd at at an ic ic to w r W w W la of lh h h r he tr ds e te la ve ve So Bi or al id e rt So as fe sh ic s Sm p la ga W ra tr x On So (e ec al s Bu El y ur rg at ne N oe Bi Major equipment Planning, installation and balance of system O&M Source: Authors’ analysis. 30 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries energy sources. India enjoys among the world’s highest insolation rates as well as clear, sunny Conclusion skies, which makes it ideal for both solar PV and Significant investment in clean technology is CSP. The falling prices of onshore wind and PV planned for the developing world, which is have also made those technologies economically expected to reach $6.4 trillion over the next competitive with other fuels. Chapter 3 examines decade, with $1.6 trillion of that market accessible in detail the clean technology market and policy to SMEs. environment in India, and focuses in particular on the solar industry and opportunities for SMEs in These investments are happening across the that sector. developing world. Regionally, about $1.5 trillion will be invested in China, and slightly less will India’s installed wind capacity is forecast to be invested in Latin America and the Caribbean. approach 60 GW by 2020, up from about 18 GW in Roughly $900 billion will be invested in each of 2012 (GWEC, 2012, 2013). The country also plans Sub-Saharan Africa, Asia (excluding China and to deploy up to 22 GW of solar power by 2022 as India), and North Africa and the Middle East; $440 part of its National Solar Mission (Ministry of New billion will be invested in India, and $235 billion in and Renewable Energy-India, 2012a). These energy Russian and Middle Income Europe. investments are creating significant opportunities for SMEs, especially in planning, installation, and These clean technology investments are also balance of systems, and O&M segment of the value diverse and go beyond renewable energy. chain. Investment in wastewater treatment facilities represents over a third of the total likely clean As with most other regions, water, wastewater technology investment in developing countries treatment, and solid waste management are (about $2.7 trillion), with water treatment, onshore all significant opportunities since hundreds of wind power, solar PV, small hydro, and waste millions of Indians lack access to basic water management the next largest sectors (each and sanitation services. Government programs between about $300 billion and $800 billion). are aiming to accelerate the deployment of these Renewables should attract about $2 trillion in important public services. Netsol Water Solutions investment. PVT, for example, is an Indian SME established in 2006 working across the water, and wastewater This investment will create substantial sector offering reverse osmosis systems, effluent opportunities for entrepreneurs and SMEs seeking treatment plants, and sewage treatment plants. to develop new businesses or expand existing ones. In the next chapter, the role of SMEs in clean technology is explored in greater detail. Chapter 2: Sizing Climate and Clean Technology Markets 31 Chapter 3 The Role of SMEs in Climate and Clean Technology Industries Main Points • The clean technology sector’s size and growth prospects make it attractive for SMEs, but it is not without challenges: failure rates are high, capital requirements are a barrier, reliance on government policy is a risk, and the technical and commercial capacity required of clean technology SMEs can be a challenge. • SMEs are most able to access opportunities in the middle segment of the value chain (including balance of systems components, installation, engineering, procurement and construction) and the final segment (O&M). Opportunities in the first segment (major equipment manufacturing) are less accessible but still possible. • This chapter explores the opportunities and challenges clean technology SMEs face and where in the value chain large commercial opportunities for SMEs are most likely to be found. Despite rich opportunities for SMEs in clean Investment in Clean Technology technology markets, many businesses still fail. Means Opportunities for SMEs While there are no definitive statistics on clean technology failure rates, clean technology SMEs SMEs are well positioned to participate in future probably have failure rates comparable to SMEs clean technology markets in the developing world. in the ICT and biotech sectors, which experience SMEs play an instrumental (but often under- 80-90 percent failure rates. Failure rates are lower recognized) role in furthering growth, innovation, in more established industries like construction, and development, which coupled with a growing where, for example, 64 percent of construction clean technology sector, can help build prosperity firms in the United States fail within 5 years (Small in the poorest countries. Business Trends, 2012). Clean technology markets are well suited to High capital requirements can also be a barrier SMEs. For example, it is estimated that SMEs to SMEs, especially those looking to be involved in make up over 90 percent of clean technology the design or manufacture of major equipment. businesses in the United Kingdom, which Accessing opportunities in the later stages of the compares similarly to other sectors like ICT (U.K. value chain (minor equipment manufacturing, BIS, 2010) or biotechnology (Biotechnology Industry installation, civil works, and operations and Organisation, 2011) but differs from industries maintenance) tends to require less upfront capital. like mining where large companies dominate Even so, raising the money needed to develop (ICMM, 2012). Nevertheless, failure rates are high, a clean technology business is consistently capital requirements are a barrier, reliance on highlighted as a challenge for SMEs in the clean government policy is a risk, and the technical and technology industry. commercial capacity required of clean technology SMEs can be a challenge. 32 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Nonie Reyes / World Bank. Indeed, venture investment across all clean technology sectors in 2013 was 14 percent lower SMEs play an instrumental role in than in 2012, which itself was 24 percent lower furthering growth, innovation, and than 2011 (Cleantech Group, 2014). While clean development, which coupled with a technology is growing as a sector, it is still developing, and raising VC has been a challenge growing clean technology sector, recently. Many clean technology funds have not can help build prosperity in the achieved the exits and returns they expected so capital for new ventures, particularly those poorest countries. at an early stage, is limited. However, venture investments account only for a small fraction of overall sector spending so its recent shrinkage does not undermine the sector’s prospects, which while firms in construction or ICT are less exposed are dominated by deployment numbers rather than to this risk since their sectors are more driven VC spending. Moreover, this VC challenge is not by consumer preferences and broader economic unique to clean technology SMEs; many biotech conditions. companies also find it challenging to raise finance. Finally, technical and commercial expertise and For example, in 2012 the innovation capital raised experience is another limit for SME-driven clean by biotech companies with revenues below $500 technology development worldwide and is already million remained significantly below pre-economic an issue for the clean technology industry in crisis levels and raising capital was a top strategic many developed countries. There may be a lack of priority for biotech firms (Ernst & Young, 2013). depth of experience technically or commercially The uncertainty of government regulation and in specific clean technology areas, hampering policy is another key constraint on clean technology the development of vibrant clean technology SME development, especially in developing countries communities in developing countries. where policies and regulations can be subject Despite these risks and barriers, clean to frequent change. Many clean technology technology markets exist and are growing, and innovations depend at least initially on government their accessibility to SMEs represents a genuine regulation or policy to drive market growth, rather opportunity. than consumer preference for a new product. Strong and consistent government regulation and clean technology policy can be key enablers for the clean technology industry and underpin early development and deployment. For example, the development and deployment of solar PV Photo: John Hogg / World Bank. technology in Europe has been driven by subsidies, particularly feed-in tariffs in Germany and Italy. However, this reliance on government regulation and policy creates risks for investors and businesses that rely on long-term continuity since regulations and policies can change quickly. Some SMEs in other industries also face risks in this area (for instance, biotech companies that rely on government approvals for new drug developments), Chapter 3: The Role of SMEs in Climate and Clean Technology Industries 33 Value Chain Opportunities BOX 3.1. Why focus on SMEs? There are important niches for SMEs Most Easily Accessible to in established clean technology value SMEs chains. As discussed in Chapter 2, there are significant investment opportunities in The types of opportunity that exist for SMEs in developing countries, particularly prevalent in developing countries differ by region but tend minor equipment manufacture, installation, towards larger opportunities downstream in the civil works, retailing, and operations and value chain, in equipment component supply, maintenance activities. Knowledge of local installation and retrofit, customization, and markets, the need for specialization, and lower operations and maintenance. financial and technical barriers to entry makes these activities especially accessible to SMEs. The major equipment segment of the value chain includes the technology element(s) that SMEs are well positioned to uncover are specific to that particular technology. These and address opportunities in local clean include, among others, the wind turbine and technology markets. Local SMEs are deeply tower, solar PV module, solar thermal collector; embedded in local markets, enabling them to geothermal turbine; biofuel mills and fermentation identify appropriate business models, products, tanks; water purification equipment; wastewater and services for these markets. Moreover, local aeration basins and dewatering equipment; landfill SMEs have an advantage in base of the pyramid construction; transit ways and buses; natural gas markets, which continue to be unattractive and vehicle conversion kits. impenetrable for many globally dominant firms. The middle segment of the value chain, called SMEs play an important role in adapting balance of systems (BoS) or engineering, existing technology for local conditions. procurement, and construction (EPC), includes SMEs are better disposed than large firms technology elements that are not specific to the to the type of innovative entrepreneurship particular technology and also project development required to develop clean technology solutions costs. These include, among others, civil works; that meet local needs. While large firms mounting structures; installation costs; common are constrained by their existing products, electronics and controls; general piping, wiring and technologies, skills, and organization, firms fittings; planning and design; permitting; retailing; that are small and young can more easily work and sales and delivery. outside dominant paradigms. SMEs have the flexibility to experiment and take risks, and The last segment of the value chain is operations are not discouraged by small markets of early and maintenance. O&M costs were calculated over technology adopters. This allows local SMEs the average expected lifetime of the technology to undertake the important work of adapting and discounted to present values so that they could existing technologies for local conditions and be sensibly compared to the first two segments customers. of the value chain. Costs for O&M include, among others, routine maintenance and inspection; parts Innovative SMEs face different barriers to replacement; vegetation clearing; ongoing labor growth. SMEs face different obstacles to costs; vehicle operations; reservoir management; growth than large firms. Lack of access to landfill leachate collection and treatment; warranty finance, lack of economies of scale, and lack of enforcement; and insurance. operational efficiency are just a few. Innovative SMEs face even more constraints due to greater Table 3.1 summarizes the value chain segments asymmetries of information between sources and Appendix B shows more detailed value chain of finance and SMEs, as well as higher rates of breakdowns. failure and longer-term returns on investments. Growth opportunities also exist for SMEs that are Developing policy options that can specifically already active and may have particularly relevant target clean technology SMEs is therefore capabilities to leverage in adjacent markets. For critical to the successful development of clean many of these existing SMEs, the clean technology technology industries in developing countries. industry provides new opportunities for growth. For example, an electrician can begin installing solar 34 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE 3.1. Activities in the value chain for the 15 technology areas Technology Major equipment EPC/BoS O&M Onshore wind 57% (of the value) 22% 21% Turbine Civil works 44% Insurance Balance of system 31% Routine component and Other costs 25% equipment maintenance Replacement parts & materials Solar thermal 45% 37% 19% Solar collector Civil works Routine inspection Balance of system Maintenance of absorption and Other costs adsorption chillers Solar PV 54% (>1 MW) 36% (>1 MW) 10% (>1 MW) 45% (<1MW) 46% (<1MW) 9% (<1MW) PV module Civil works 57% Routine inspection Balance of system 29% Preventative maintenance Other costs 14% Corrective maintenance Solar CSP 36% 55% 9% Solar field 80% Civil works 35% Routine inspection Thermal storage system 20% Balance of system 30% Preventative maintenance Other costs 35% Corrective maintenance Small hydro 23% 57% 20% Electro-mechanical equipment Civil works 65% Fixed costs Balance of system 25% Variable costs Other costs 10% Geothermal 32% 45% 23% Power plant Civil works 40% Fixed costs Balance of system 30% Variable costs Other costs 30% Bioenergy 42% 27% 32% Feedstock conversion 80% Civil works 30% Fixed costs system Balance of system 50% Variable costs Prime mover 20% Other costs 20% Biofuels 46% 27% 27% Major equipment Civil works Fixed costs Balance of system Variable costs Other costs Water 68% 27% 5% Purification Purification Purification Distribution and storage Distribution and storage Distribution and storage Watershed management Watershed management Watershed management Wastewater 40% 50% 10% Collection Collection Collection Treatment Treatment Treatment Final disposal Final disposal Final disposal Municipal solid 18% 23% 59% waste Collection & recovery Collection & recovery Collection & recovery Sorting Sorting Sorting Treatment Treatment Treatment Final disposal Final disposal Final disposal Natural gas 95% 5& 0% vehicles Natural gas conversion kit Labor n/a Electric vehicles 100% 0% 0% Entire electric vehicle n/a n/a Electric bikes 81% 18% 1% e-bike Battery replacement Equipment maintenance Labor Bus rapid transit 15% 35% 50% Buses Bus system Buses Bus system Source: Authors’ analysis. Chapter 3: The Role of SMEs in Climate and Clean Technology Industries 35 PV panels and a heating engineer who previously fit boilers can expand his business to install heat Conclusion pumps. The size and growth prospects of the clean technology sector present a large business A closer look at how the investment breaks down opportunity for SMEs. However, not all technology across the value chain sheds light on where the sectors or value chain segments are equally most promising opportunities might be (see Figure accessible to SMEs. Policy makers should consider 3.1). For most of the renewables a significant these variances when designing programs to portion of the investment is in major equipment, support local SME participation in green industries. which is likely to offer less opportunity for SMEs. The next three chapters examine how policy has Downstream in the value chain, SMEs are likely been designed in particular country contexts to able to capture over 50 percent of the market in a capture such value and explores the results of number of sectors. While opportunities also exist those policy efforts. in highly specialized and technically sophisticated major equipment, customers tend to favor larger companies with significant access to capital in highly industrialized and vertically integrated markets. In general, the major equipment component segment of the value chain favors the more developed countries, with the exception of economies like China that have established and sophisticated manufacturing sectors. FIGURE 3.1. SME opportunities in the value chain Onshore wind Solar thermal Solar PV (>1MW) Solar PV (<1MW) Solar CSP Hydro (small) Geothermal Bioenergy (ex feedstock) Biofuels Water Wastewater Municipal solid waste Natural gas vehicles Electric vehicles Electric bikes Bus rapid transit 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Value Added of Industry Segments % Major equipment % BoS % O&M Level of SME Opportunity Very Little Low Medium High Source: Authors’ analysis. 36 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: John Hoggs / World Bank Chapter 3: The Role of SMEs in Climate and Clean Technology Industries 37 Chapter 4 Case Study: Solar Energy in India Main Points • This case study takes a deep dive into the solar industry in India to illustrate the SME opportunity more clearly across the value chain segments and presents findings from a survey with 50 clean technology SMEs in India. • Solar is particularly interesting in India because of the Indian Government’s ambitious plans and targets for solar energy at small and large scales (as embodied in the Jawaharlal Nehru National Solar Mission). India is by far the world’s most advanced market for small-scale concentrated solar power (CSP) for industrial heat, with supply dominated by local Innovative Indian technology suppliers. • The SME opportunity in on-grid solar PV and CSP technologies over the next decade in India is roughly $41 billion, including lifetime O&M. • The bulk of that opportunity is in the latter segments of the value chain: planning, installation, Balance of Systems, and O&M. Innovation opportunities also exist around customization of small systems for PV and accelerating the time between commissioning and operational readiness for CSP. • According to the survey, Indian clean technology SMEs are working across value chain segments and innovation activities. However, they point out several barriers and suggest targeted policy support areas. Addressing these could provide opportunities for additional industry growth and SME participation. BOX 4.1. Setting the scene: SMEs in India After earning an engineering and management for a shortfall in biomass currently used by the degree from the University of Pennsylvania, pharmaceutical packaging industry in the state Siddharth Malik began working in the energy of Gujarat. finance sector in the United States. But he was soon drawn back to India, where he could put Siddharth personifies the buoyant and dynamic his entrepreneurial character to work in the atmosphere that is permeating India’s diverse country’s burgeoning clean technology sector. clean technology market. With its large An ambitious innovator in his late twenties, economy, surging demand for energy, active Siddharth founded Megawatt Solutions, a policy environment, and a commitment to renewable energy company specializing in slow the growth of greenhouse gas (GHG) concentrated solar thermal power. Three years emissions, Indian SMEs are capitalizing on later, he led the company through innovative the opportunities in the sector. While the pilots and demonstrations, and is now at the survey shows that significant barriers persist, helm of India’s largest solar industrial heating entrepreneurs like Siddarth are finding ways of project, displacing diesel fuel and making up overcoming them. 38 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Ray Witlin / World Bank. Solar Energy Market and Of all renewable energy Policies technologies, solar is one of the best India’s energy demand is forecast to increase by suited for use in rural areas to help about 40 percent over the next decade, from 630 meet basic energy needs. Mtoe to over 880 Mtoe (U.S. EIA, 2013a). Meeting that demand will require enormous investment in new energy sources and electricity generating capacity. As a part of its effort to diversify its energy The Jawaharlal Nehru National Solar Mission, part mix, India plans to install 22 GW of solar capacity of India’s National Action Plan on Climate Change by 2022, and over 40 GW of new wind power (NAPCC), was launched in January 2010 to promote (Ministry of New and Renewable Energy-India, the development and use of solar power. It is the 2012a; GWEC, 2013; GWEC, 2012). foundation for policies and programs that are accelerating deployment of both grid-connected Of all renewable energy technologies, solar and off-grid solar power, encouraging deployment is one of the best suited for use in rural areas of solar thermal collectors, and improving to help meet basic energy needs (Malaysian conditions for solar manufacturing capability in Commonwealth Studies Centre, 2012). Both India, particularly in the local supply chain (Ministry decentralized, off-grid systems and larger scale, of New and Renewable Resource-India, n.d. (a)). grid connected solar power are highly relevant to India. India has one of the world’s highest solar The government has also established institutions intensities, with an annual solar energy yield of and centers to facilitate solar development. The 1,700 to 1,900 kilowatt hours per kilowatt peak Solar Energy Centre, accredited testing facilities, (kWh/kWp) of installed capacity (Germany has an workforce training programs, and research and average of 900 kWh/kWp) (McKinsey, 2008, 2013b). technology validation projects. The Solar Energy India also has about 300 clear, sunny days per year Corporation of India, a not-for-profit organization, (Muneer, Muhammad, and Munawwar, 2005). promotes R&D, selects sites for solar power stations, sets up transmission facilities, and owns, Since India’s resource base is suitable for operates, and manages projects (Solar Energy the whole breadth of solar technologies, grid Corporation of India, 2014). The Ministry of New connected and off-grid solar photovoltaic as well and Renewable Energy (MNRE) organized the as CSP16 and solar thermal technologies are all Solar Mission into three phases and set targets discussed in this case study. They are all relevant to for each phase (Ministry of New and Renewable the Indian context and represent different market Energy-India, 2012). As of June 2013, greater than niches and commercial opportunities for SMEs. 85 percent of the 652 MW Phase I grid connected Solar PV targets have been deployed. Some delays have been experienced for CSP (projects have 16 It is also important to clarify India’s solar nomenclature. been selected, but no new CSP has actually been National documents refer to CSP as “solar thermal,” and brought online). State policy is also driving the refer to what is traditionally called solar thermal as “solar collectors.” In this case study, the term “CSP” refers solar market, especially where the natural solar to technology that uses reflectors to concentrate solar resource is particularly strong (that is, Gujarat, energy for use as electricity or heat, and “solar thermal” Rajasthan, and Karnataka). refers to flat plate or evacuated tube solar collectors that are used to generate heat, usually hot water, but not electricity. Chapter 4: Case Study: Solar Energy in India 39 India also has many different incentives designed to BOX 4.2. India’s Feed-in Tariff encourage the deployment of different sizes and types Experience of solar technology, including feed-in tariffs, capital cost subsidies, exemptions from electricity tax, tax Feed-in tariff (FIT) schemes have concessions, and exemption from electricity demand been successful at accelerating cuts to those who produce rooftop solar power. The renewable energy deployment in feed-in tariff (see and some capital subsidies are Germany and Spain, but have also administered nationally, while state governments sometimes burdened consumers with manage other policies. fixed long-term contracts that deliver windfall profits to developers who take advantage of falling technology costs and slow-to-adjust government The SME Opportunity in the support. In India, the Central Electricity Regulatory Commission Indian Solar Market (CERT) analyzed the market and set On-grid solar PV and CSP technologies are among the a benchmark FIT, a maximum rate largest clean technology SME opportunities identified that can be offered to developers. The in India. Taken together, the SME opportunity for solar Indian government also requested development over the next decade is estimated at about project proposals from developers in $41 billion, including lifetime O&M (see Table 4.1). The a ‘reverse auction’, where developers bulk of that opportunity is in the latter segments of submit their plans and any discount the value chain: planning, installation, and Balance of they can offer from the FIT. In practice, Systems, and O&M. Planning, installation and Balance 44 percent of the developers offered of Systems activities have smaller upfront capital costs hundreds of megawatts at significantly and require less technical sophistication. O&M activities lower cost. As a result, the government will grow cumulatively as technologies are deployed, awarded 140MW of solar PV capacity creating business opportunities that are suitable for new at an average of 32 percent below the entrants or existing SMEs looking to grow their service CERT benchmark tariff, and 350MW of offerings. PV capacity at an average of 43 percent below the benchmark (Phase I). For The solar thermal sector is expected to be a smaller CSP, the average tariff was 25 percent market compared to solar PV and CSP, and the lower than the benchmark. While this opportunities for SMEs are spread more evenly across is advantageous for consumers and the value chain. Considering the size of the market efficiently allocates scarce government opportunities, this chapter explores the solar PV and resources, it may favor large power CSP market in depth. producers who can leverage economies of scale and established supply chains to reduce costs, and use their TABLE 4.1. SME Solar opportunity by value chain financial strength to cushion against segment in India over the next 10 years ($ billion) cost overruns or overestimated power production. Solar Major Planning, O&M Total subsector equipment installation & BoS Solar PV 0.8 15.0 5.5 21.3 CSP 0.5 13.9 2.2 16.6 Solar 1.3 1.7 0.9 3.9 thermal Total 2.6 30.6 8.6 41.8 Source: Authors’ analysis. 40 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries FIGURE 4.1. Solar PV value chain Planning, installation & Major equipment Operations & maintenance balance of system > 54% ( 1 MW) > 36% ( 1 MW) / > 10% ( 1 MW) < 9% ( 1 MW) < 46% ( 1 MW) < 9% ( 1 MW) PV module Civil works (57%) Routine inspection • Structural installation Preventative maintenance • Site preparation • Panel cleaning Balance of system (29%) • Vegetation management • Solar racks, inverter, • Upkeep of power and transformer, wiring, battery monitoring systems or storage system Corrective maintenance Other costs (14%) • Critical repair • System design, permit fees, • Warranty enforcement management, up-front financing costs Source: Authors’ analysis. The Solar PV Market Domestic Content Requirement (DCR) for Phase I of its PV deployment schedule. In The solar PV market opportunity in India potentially Phase I Batch I, projects using crystalline exceeds $60 billion over the next decade, with modules needed to ensure they were made over $21 billion accessible to SMEs.17 The solar PV in India (though the firm could be foreign value chain can be broken into three major stages, owned), and in Batch II, crystalline PV cells as shown above. SME prospects are strong in the and modules both had to be domestically latter two stages of the value chain, which together produced. Thin film solar PV was exempt comprise 45 to 55 percent of the total value of solar from the DCR. The DCR is being challenged PV systems and where about 95 percent of SME by the United States through the World value lies. Trade Organization, but the requirement Opportunities for Indian SMEs for each of the has nevertheless been extended to Phase II, value chain segments of the solar PV market are though reduced to only 50 percent of the 750 discussed below: MW target (PV Magazine, 2013). Thin film is still exempt (Ministry of New and Renewable • Major equipment: Energy-India, 2013). Manufacturing of cells and modules is While these rules are attempting to shape thought to be neither an area of particular the domestic manufacturing market in strength for SMEs nor an area where India is India’s favor, the reverse may actually be competitive internationally. Government rules happening. Indian crystalline modules can are trying to change that, but this may have be more expensive and of lower quality unintended effects since domestic content than foreign ones, and experts believe that rules for solar PV modules are encouraging the absence of a DCR for thin film PV may developers to install imported thin film solar be driving India’s peculiar appetite for the instead, which is not subject to domestic technology: about 42 percent of modules in content rules. India are thin film, compared with only about 10 percent of the global market share (Sahoo Local crystalline PV module manufacturers and Shrimaliy, 2013; PV Tech, 2013; Four were supported by the Indian government’s Peaks Technologies, 2011). And while the Indian crystalline PV supply chain has decent 17 To determine the share of each segment of the value capacity in cells and modules, it is struggling chain that could be accessed by SMEs, an assumed global average was applied across all regions. to compete with Chinese equipment Chapter 4: Case Study: Solar Energy in India 41 manufacturers, as the capacity map clearly may allow operators to distribute electricity at shows (see Figure 4.4). peak times and enable hybrid operation capability • Planning, installation, and balance of system: with other fuel types to meet base-load energy demands. Some CSP technologies have better The balance of system components like the conversion efficiencies than PV, and, depending solar rack, inverters, transformers, wiring, on their level of sophistication, can be made at low and battery storage systems are widely cost. The drawbacks of CSP technology include produced by domestic SMEs, like Kripa Power the need for direct sunlight (PV works even under Systems, which sells inverters, or Tara Solar, cloudy conditions), the relative immaturity of the which sells mounting racks (The Solar India, technology, the consequent difficulty in securing 2013; Kripa Power Systems, 2013; Tara Solar, low-cost finance, and the relatively long lead-times 2013). Many other elements are inherently required from concept to operation. local, such as structural installation and site preparation. System design, permitting, and As previously mentioned, the first call for 500 MW project management also require the kind of grid connected CSP was fully subscribed under of bespoke engineering consultancy and the National Solar Mission. The distribution of CSP planning services that are better suited to technology types that were selected under Phase local firms. I of the National Solar Mission is shown in Figure Customization of systems to suit smaller, 4.2. The first 50 MW parabolic trough installation off-grid loads are rapidly gaining popularity, came online in June 2013, but most companies especially since the cost of PV modules has have been delayed bringing their systems online fallen so dramatically. Small PV retailers (Godawari Green Energy, 2013). are outfitting shops and small businesses Like PV, the SME opportunities for this technology with systems to offset the cost of purchased lie mostly in the latter two stages of the value electricity and to keep merchandise cold and chain, which together comprise up to 65 percent other systems operational in the event of of the total value of the CSP market and about 95 power cuts. percent of SME value lies. • O&M: These activities are crucial to maintaining high performance and successfully operating solar PV equipment. O&M activities last for FIGURE 4.2. Technology choice for grid connected the lifetime of the projects and grow as the CSP cumulative stock of installed PV equipment expands. For these reasons, O&M activities are 400 380 likely to be an increasingly lucrative and fast- 350 growing market. 300 Commissioned capacity (MW) The CSP Market 250 India’s CSP market is projected to be worth up to 200 $45 billion over the next decade, with about $16.5 billion accessible to SMEs for grid-connected 150 CSP alone. CSP technology has two major types 100 of application: CSP for electricity, where water 100 is turned into steam and used to drive turbines; 50 and CSP for heat, where heat or steam is used 10 10 for medium-energy intense industrial processes 0 like cooking, laundries, bakeries or dairy er sh lle gh le r or or ef ea ow di co rou ct ct l r lin pasteurization. ic rt t ol ne ct la ic b es pa So ol ra Fr om b Pa ra Grid-connected CSP has several advantages C Pa over PV. Thermal energy storage systems, with Source: Ministry of New and Renewable Energy-India, 2012b. which CSP can be equipped, help buffer against transient cloud cover and enable the technology to generate electricity after sunset. They also 42 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Figure 4.3. CSP value chain Planning, installation & Major equipment Operations & maintenance balance of system 36% 55% 9% Solar field 80% Civil works 35% Routine inspection • Mirrors • Structural installation Preventative maintenance • Receivers • Site preparation • Mirror cleaning • Steel construction Balance of system 30% • Vegetation management Thermal storage system 20% • Balance of plant • Upkeep of power and • Salt • Power block monitoring systems • Storage tanks • Heat transfer fluid system Corrective maintenance • Insulation materials • Grid interconnection • Mirror & receiver • Foundations • Electronics and controls replacement • Heat exchangers Other costs 35 % • Warranty enforcement • Pumps • Project development, EPC, • Plant insurance financing costs, allowances The opportunities for Indian SMEs for each of the • Planning, installation, and balance of system: value chain segment are discussed below: About 50 percent of the latter segments of the • Major equipment: value chain are thought to be accessible by SMEs. Many of these components are less Seven companies were awarded CSP technically sophisticated and would require contracts under the National Solar Mission, less upfront capital investment to develop and and one (Aurum Renewable Energy Pvt Ltd) produce. Many of the services are inherently was an SME. It was awarded 20 MW of CSP local, such as engineering consultancy, capacity, or 4 percent of the total (Aurum permitting, site preparation, and structural Ventures, 2013). SMEs are not completely installation. shut out of this segment of the grid connected CSP value chain will have some opportunities. • These activities are considered to be quite For off-grid CSP, especially CSP for heat, accessible to SMEs, especially new startups, the opportunities for SMEs in the major since several of the O&M activities require equipment segment are significantly better. minimal initial inputs. For example, the Scheffler dish is a parabolic dish design that can easily be manufactured Innovation Opportunities in the Indian locally in developing countries, and was Solar Market intentionally designed to be manufactured anywhere. The design specifications are Analysis of India’s innovation system questions freely available online and systems can be whether it has the competitive enablers that assembled using basic engineering skills China’s system does. China’s global market share and easily available materials. India is also for PV production grew from less than 2 percent by far the global market leader in small- in 2002 to 45 percent in 2010, while India’s fell scale off-grid CSP, which may create export from 4 percent to 2 percent over that period. It opportunities as other markets catch up. is argued that China’s institutional coordination, Another solar concentrator used for thermal wide-ranging capital and resource subsidies, deep applications is called ARUN and was designed and responsive R&D support, and upstream and by an SME called Clique Solar. There are 15 downstream corporate integration made Chinese ARUN dishes in operation, all in India, which PV extremely competitive. China also offered cheap are used for process heat in the dairy and financing, which reduced equity requirements hotel industries (Clique Solar, 2013). and gave firms the freedom to operate with Chapter 4: Case Study: Solar Energy in India 43 Innovative financing arrangements are needed to FIGURE 4.4. Capacity map for crystalline PV open up the market to potential customers with (global, China, India) limited upfront capital. The Asian Development Bank is experimenting with pay-as-you-go 45 41 schemes in partnership with Simpa Networks, 40 40 40 38 an SME that is helping energy-poor households access solar energy using a solar home system 35 and a low-cost prepaid meter connected to cloud- Capacity volume (GW) 30 27 27 based software (ADB Knowledge Showcases, 25 23 2013). Accessing low-cost finance is also important 22 for larger-scale projects, especially in the highly 20 competitive cost environment that is encouraged 15 by the reverse-auction approach to feed-in tariffs. Innovation is also needed to improve the degree 10 of technical quality assurance, which would help 5 1.7 1.7 build trust in a technology’s claimed specifications 0 .01 .01 so that developers and financiers can reduce technology risk and financing costs. es ts s lls er ul go Ce af od In W M Global China India Indian Clean Technology Firm Source: Sahoo and Shrimaliy, 2013. Survey Results A survey of 50 clean technology firms in India lower returns, and had a DCR that covered all PV suggests that a large majority of the firms are technologies rather than just crystalline. active in renewable energy, including solar; 68 percent of firms said they worked in renewable India lacks the same degree of institutional energy, 40 percent are in energy efficiency, and integration, has an unreliable electricity supply, 18 percent worked in waste management and has an R&D agenda that is more driven by the purification (note that firms could select more than public sector than the private sector, and has a one sector) (see Figure 4.5). These commercial DCR that covers only crystalline technology (Sahoo activities largely reflect the areas of greatest and Shrimaliy, 2013). For these reasons, the major opportunity that were identified through the market equipment stage of the PV value chain is not sizing study, and may reflect the fact that firms likely to gain a significant competitive edge, and is are choosing to get involved in sectors that are considered to be an especially limited opportunity growing. for SMEs. However, there are particularly strong technology-specific innovation opportunities for The survey also revealed that clean technology solar PV around customization of small systems, SMEs are already working in the value chain including roof-mounted ones and off-grid bespoke segments with the most opportunities for SMEs applications for small power requirements. From (see Figure 4.6). Most firms said they worked in an R&D perspective, there is innovation potential several different parts of the value chain, with for solar PV cells and modules to be calibrated to over 70 percent of firms working in design and/or India’s latitude rather than the irradiance spectra O&M, and over 60 percent working in one or more that are more common in European markets. For of installation, manufacture and assembly, and/or CSP, innovation is needed to accelerate the time R&D. between commissioning and operational readiness, The surveyed firms were also international, and since that has been a major stumbling point for the significantly more international than non-clean CSP commissioned under Phase I of the National technology firms in India (World Bank, 2006). Solar Mission. For solar thermal, innovation is Nevertheless, 70 percent of firms said that more needed to improve integration with other energy than three-quarters of their sales came from sources. domestic customers. Forty-six percent of firms had customers overseas, 43 percent of those firms had customers in Africa and non-China Asia-Pacific, 44 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Figure 4.5. Sectors in which Indian clean technology SMEs are involved 70% 68% 60% 50% Percent of firms 40% 40% 30% 20% 18% 14% 10% 8% 2% 2% 2% Photo: Ray Witlin / World Bank. 0% a ati t em ste de ed gy & ana ncy m sti ure r n Do gric on t gn n he en tio bl ific e er g ov si ag wa na pur gem t e Ot ta ul en in pr ci or te effi an c ild Im le sp ab e gy an m m w e er tr bu ne En n Re as ea ai W Cl st Su Source: Survey of clean technology firms in India undertaken in July and August 2013. and more than 30 percent had customers in each of Europe, North America, and the Middle East. Sixty-six percent had suppliers based in a foreign Figure 4.6. Activities in which Indian clean country, hailing mostly from China and Europe technology firms are involved (61 percent each) but also from North America 90% (39 percent) and other parts of East Asia (30 81% percent). A further 30 percent of firms identified 80% international expansion as a priority. 70% 67% 70% 65% 63% Overall, the firms expressed a high level of 60% 56% Percent of firms optimism about the current and future Indian 50% 48% clean technology market: 88 percent of the firms 44% indicated that they were either very (62 percent) or 40% fairly (26 percent) confident about their business 30% environment in India. The surveyed firms’ historical and projected growth also showed promising signs: 20% 94 percent experienced sales growth in 2013 and 10% nearly 70 percent of the firms purchased fixed assets in 2013, reflecting their willingness to invest 0% y n y n ng M gn D bl nc and suggesting their confidence and optimism tio io R& O& si si em ut ta la en De ib ul al ss about the market. Further evidence of optimism ic r ns st st /a yl In Co di re g and growth expectations can be seen in the fact lo l& tu o ac hn i ta that 96 percent of the firms expected the number uf c Re Te an M of employees focused on clean technology to increase over the next three years (with 53 percent Source: Survey of clean technology firms in India undertaken in July expecting a large increase). and August 2013. Chapter 4: Case Study: Solar Energy in India 45 Indian clean technology firms are avid innovators. biggest obstacle to their business. To overcome Over the past two years, about 70 percent of this barrier, efforts could be made to educate surveyed firms introduced new or significantly finance providers about the real risks posed by improved clean technology products or services, investments in solar, including the strength of methods of manufacturing their clean technology contractual guarantees on product performance products, and process-based activities to enhance and the longevity and robustness of the feed-in clean technology product delivery (see Figure 4.7). tariff. Likewise, developers could benefit from Such innovation across such a broad spectrum of support in writing detailed and realistic business indicators suggests that firms are responding to cases that meet the standards of lenders. the dynamic market conditions that are present in India. Access to land, corruption, and customs and trade regulations were also significant barriers for As with any market, there are barriers to the rapid clean technology firms. A lot of clean technologies scale-up and deployment of solar technologies in require access to land, especially large-scale solar, India. The top two barriers identified by the clean which may underlie this concern, but a focus on technology firms surveyed in India for this report rooftop solar PV (which does not require additional are shown in Figure 4.8. land) or smaller, more customized PV applications could mitigate this issue. When asked what the The most commonly cited barrier by far was government could do to help overcome these access to finance, which is particularly problematic barriers and foster growth in clean technology, considering that 84 percent of surveyed firms plan surveyed firms indicated a range of potential areas to raise funding in the next two years. This barrier where help would be welcomed, as shown in Figure was particularly acute for the surveyed clean 4.9. These results show that there is a wide range technology firms compared to average Indian firms, of different government interventions that would be who considered access to finance to be the fifth welcomed by clean technology firms. Figure 4.7. Innovation activities undertaken by Figure 4.8. Most common barriers faced by clean clean technology SMEs in India technology SMEs in India 80% 50% 80% 46% 74% 70% 70% 68% 68% 40% 60% 54% 52% Percent of firms 50% 30% Percent of firms 26% 24% 40% 22% 20% 18% 30% 14% 12% 20% 10% 10% 10% 0% 0% n ns y ce c s ce nd its w tor lit tio at l se tor sa t g rvic w st al D f s g tin s sk dd es f or io af d en an af si m la in bi R& le rin se ne ed n up t kf st a i ly nd ta ill itio er la an pm t fin to ed rm pe na or rr Hi or ng s g gu p fu in ss ly nfo om lo Co to ta d i re ts at De sing ve an ce al a is ed ss ke c uc str e ic de ex Ac ua he of ce ng ad ar lit i od n Ra uc ng ss Ac pr mo eq in t es tr si M i Po en ne ni ic d an ai ct lic si Tr a Bu te s Pr ss om ne st si Cu ad Source: Survey of clean technology firms in India undertaken in July Bu In and August 2013. Source: Survey of clean technology firms in India undertaken in July and August 2013. 46 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Figure 4.9. Areas for government support identified by clean technology SMEs in India 35% 32% 30% 28% 26% 24% 24% 25% 20% Percent of firms 20% 18% 15% 10% 8% 6% 4% 5% 0% es rm ts its fs rt t en ad g / ou / ni t / po rif an e s s di ed fo sc es em nt sm vic ha en ta si up al in gr cr re di nte ub ci or ec m ur -in ts D x ry er nt m ce ts Ta oc R& a ke ed to ar m e e r c Pr la o ar m m Fe re gu nc nf gu M Di co ss ia e an Re ne pl d Lo m ove si Bu co pr Im Source: Survey of clean technology firms in India undertaken in July and August 2013. Conclusion According to surveys of clean technology SMEs in India, firms are optimistic about the market and The clean technology market is set to grow in India. are active in innovative activities. However, they Over the next decade, economic growth will be highlight several barriers to entrepreneurship bolstered by India’s large population, peaking labor such as access to finance and land. Removal force participation rate, increasingly educated of these barriers and providing targeted policy and skilled workforce, and the emergence of a support (for instance, loan guarantees or subsidies, wealthier and more urban middle class. marketing and sales support, and improved access to technical R&D facilities) could provide Significant investment in solar power, which opportunities for additional industry growth and is especially well suited to India’s climate and SME participation. geography, is being driven by the National Solar Mission, the feed-in tariff and falling technology costs. The SME opportunity in on-grid solar PV and CSP technologies over the next decade is about $41 billion, including lifetime O&M. The bulk of that opportunity is in the latter segments of the value chain: planning, installation, and balance of systems, and O&M. Innovation opportunities exist around customization of small systems for PV and accelerating the time between commissioning and operational readiness for CSP. Chapter 4: Case Study: Solar Energy in India 47 Chapter 5 Case Study: Bioenergy in Kenya Main Points • This case study takes a close look at the bioenergy industry in Kenya to illustrate the barriers and opportunities in the various subsectors, including examples of Kenyan SMEs. It also presents findings from a survey with 50 clean technology SMEs in Kenya. • Bioenergy already plays a significant role in Kenya’s energy mix. It is entrenched in Kenyan domestic and working life and as such presents an excellent opportunity for local SMEs to grow the sector and make it more sustainable. • The SME opportunity in bioenergy—efficient biomass, biogas, crop-based biofuels, and cogeneration or combined heat and power—is abundant but specific to certain technologies or geographical locations. Investment of $2.4 billion is expected in the East African bioenergy sector, with almost $1.4 billion accessible to SMEs, and Kenyan SMEs may benefit from these opportunities. • Kenyan SMEs face a number of barriers including incoherent bioenergy policies, high cost of investment/ access to finance, lack of business skills, and so on. Despite the challenging environment, the survey of clean technology SMEs in Kenya suggests that firms are optimistic about the clean technology market and have strong growth ambitions. Some Kenyan clean technology SMEs are highly innovative and are developing pioneering financing models and new products and services. • Removing key barriers and providing targeted policy and business support could provide opportunities for additional industry growth and SME participation. Biomass currently accounts for 70 percent Kenya’s Bioenergy Market and of total energy demand (90 percent of rural Policies household energy needs—33 percent in the form of charcoal and the rest, firewood). There is also Bioenergy is a renewable energy made from over 1.8 million metric tons of estimated bagasse biomass, which is organic material derived from production with a potential to generate 120 MW plant or animal matter. Three main sources of of electricity. Bioenergy has great potential to biomass are used to produce modern bioenergy in continue to play a significant role in Kenya’s energy Kenya: naturally occurring biomass (for instance, mix. It is already entrenched in Kenyan domestic from trees or manure); industrial biomass and working life so it would be easier to build waste from agro-industries; and crops grown upon existing industries than develop new ones. commercially with the sole purpose of biofuel Furthermore, bioenergy is particularly suited to production. This case study considers all three Kenya’s level of development: it can provide off- sources but excludes charcoal. Biomass can be grid power solutions to remote areas; much of the used to supply heat, power, gas, and transport fuel. infrastructure involved is low-tech and/or available 48 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Curt Carnemark / World Bank. bioenergy… can provide off-grid BOX 5.1. Setting the scene: SMEs in Kenya power solutions to remote areas; A socioeconomist by training, Samson Gichia much of the infrastructure started his career as a research assistant at the involved is low-tech and/or International Centre of Insect Physiology and Ecology. Testing his entrepreneurial instincts, available on small scales… in 2007 he started a family-run maize milling business, raising the startup capital from his personal savings. In 2010, Samson’s ambitions grew as he sought to provide a solution to one of on small scales; and it is fed by a resource that Kenya’s most pressing problems—rural energy Kenyans are able to produce on a range of scales. provision. In response, he founded Cobitech Limited, a bioenergy company specializing in the If poorly managed, however, a focus on scaling construction of fixed dome biogas systems. These up bioenergy could lead to other environmental systems are aimed at both domestic household problems. In the past, exploitation of forests for clients with access to livestock waste to use biomass has led to large-scale deforestation as feedstock and organizations like Naivasha (National Climate Change Action Plan 2013-2017- Water and Sewerage Company, where human Kenya, 2013). Additionally, charcoal, which provides biowaste can be utilized as feedstock for biogas 82 percent of urban fuel consumption and which is generation. Cobitech currently has ambitious the largest rural employment sector in Kenya after plans to build a 2 MW biogas plant in Kiambu agriculture (Hunt, 2013), is a source of dangerous County with the aim of generating renewable indoor air pollution (Kenya’s Energy Regulatory energy in rural areas across the country for Commission, 2004). It is also inefficient, typically onward sale to government. 60-80 percent of the energy in the wood is lost and charcoal stoves are particularly wasteful, operating Samson is in many ways typical of Kenyan at efficiency rates as low as 3 percent. The clean technology entrepreneurs—driven to find environmental issues associated with some forms solutions to local problems, willing to put his own of bioenergy make it important that any future resources behind his ambitions, and eager to development is managed sustainably. take advantage of startup support mechanisms available in the region. Cobitech has already The overall government approach to bioenergy sought out support from several organizations, is inconsistent and could be clarified further to winning prizes and getting assistance ranging provide market certainty. The National Climate from mentorship support to capital finance. Change Action Plan (NCCAP) of 2012, an action plan based on the 2010 National Climate Change With Kenya’s position as a regional hub, the Response Strategy (NCCRS),18 includes developing process of East African Community (EAC) industrial-scale cogeneration using biogas from integration well underway, and a significant agricultural residues and introducing a 10 percent number of innovation support facilities dotting biodiesel fuel blend into liquid transport fuels. the country, Kenyan entrepreneurs are well placed to lead on clean technology innovation for the region. Although as shown later in this 18 See “National Climate Change Action Plan 2013 -2017: chapter, significant barriers remain. Executive Summary.” Republic of Kenya. 2012. http:// cdkn.org/wp-content/uploads/2012/12/Kenya-Climate- Change-Action-Plan_Executive-Summary.pdf Chapter 5: Case Study: Bioenergy in Kenya 49 It also has plans for maintaining and increasing Climate Innovation Center19 for example, has 33 of forest cover (that is, a minimum of 10 percent its 79 clients active in the bioenergy and biofuels of land) and promoting improved cooking stoves sector. Opportunities related to bioenergy are and LPG cooking stoves. A Biofuel Policy, drafted discussed below. in 2010 has yet to pass through Parliament. The absence of a formally acknowledged policy framework presents uncertainty as to what support More efficient use of biomass or restrictions may be offered or imposed in the Products like improved cooking stoves and biomass future. A further indication that the government boilers have significant benefits for end users: may be reluctant to support bioenergy is that its they reduce fuel costs for the purchase of wood potential negative impacts are presented without or charcoal; improve indoor air quality thereby any suggestions as to how they could be resolved. reducing associated health problems; and reduce These impacts include competition for agricultural the time spent by individuals in finding fuel. Key land, resulting in increased food prices, and barriers include a lack of financial investment and extensive rural biomass consumption, causing lack of awareness among end users. deforestation and widespread biomass scarcity. The Kenyan government introduced a feed-in tariff Biogas (FIT) to allow renewable electricity producers, Biogas digesters convert water and organic including from biogas, to sell electricity to material into a gas, which can be used as a fuel, Kenya Power and Lighting Company Limited at often replacing LPG. This technology is available a fixed price for a given length of time (Energy, on different scales—domestic, community/ Environment, and Development Network for institutional, and commercial. Africa, 2009). First introduced in 2008, it has been reviewed twice, in 2010 and 2012, because the Domestic biogas digesters are low-technology FIT price was insufficient to attract significant constructions involving concrete or plastic tanks. investment. The government also developed a There has been some take-up of biogas digesters strategic plan for biodiesel (2008-2012) to be used since the 1950s, but certain barriers restrict both in transport (10 percent blend by 2020) and wide-scale installation. The quantity of organic electricity generation. The government hopes that material required to power the digester (at least growing biofuel feedstocks on marginal land will two cows which must be standing) is unsuitable not impact food security and expects the biodiesel for pastoralists and some farmers (Hunt, 2013; industry to sustain itself without state subsidy after Resources, Conservation and Recycling, 2010). a short term of government monetary support and It also uses about four buckets of water per day, plans to tax biodiesel production in the long run. making it inappropriate in some water-scarce areas of the country. Many biogas digesters have fallen into disrepair because of poor maintenance— The SME Opportunity in the the Africa Biogas Partnership Program (ABPP) reports that only around half of all biodigesters Kenyan Bioenergy Market installed were still operational in 2008. Demand is further limited by the large upfront installation The increased (and more sustainable) use of cost of KES 100,000-150,000 (about $1,100-1,700). biomass, biogas, crop-based biofuels, and However, large donor funded programs like cogeneration presents a range of opportunities the Kenya National Domestic Biogas Program for SMEs. While bioenergy (including biofuels) is (KENDBIP) are working to reduce the investment forecast to reach a relatively small market size cost barrier of domestic biogas installations by compared to small hydro, geothermal, and PV in providing a subsidy. This market will most likely East Africa, this is partly because of the relatively be driven by donors, government, and NGOs in the low capital investment required to enter the short and medium term. market, which makes it a particularly appealing market to SMEs and entrepreneurs. The Kenya 19 The Kenya Climate Innovation Center is one of the business incubators supported by the World Bank/ infoDev’s Climate Technology Program. For more information, see www.infodev.org/climate 50 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries SMEs focused on adapting or making biogas digesters more suitable for domestic users, by BOX 5.3. Nairo-Bio Limited and Four for One providing a more tailored service (for instance, Trading Services pay-as-you-go business models, including lifetime In 2012 Evans Kamau Munira, a Swedish- servicing which reduces the barrier of high up- Kenyan entrepreneur, won the European- front investment costs), could generate more African Entrepreneurship Award for his demand for these products. An example of an SME proposed biodiesel business venture. After applying business model innovation is presented in substantial market research he had created Box 5.2. a business model that involves turning used There is high potential for industrial-scale biogas cooking oil into biodiesel. The company in Kenya because many substrates from typical plans to source the equipment from Sweden Kenyan agricultural production and industry can and the oil from local waste producers and be used to produce biogas. Industrial-scale biogas then to sell to transport firms and private technology is exploited in dairy, slaughterhouses, fuel stations. It addresses the need in and farms. A number of donors have also the market for a cheaper fuel source for undertaken feasibility studies for different transport as imported fossil fuels become industries to assess their potential and encourage unaffordable, accounting for a significant investment. A study by GIZ found that municipal portion of total costs borne by companies. solid waste from Nairobi had the highest potential The plan also capitalizes on the zero- for a single input, followed by sisal waste, coffee rated duty for imported clean technology production, and certain food processing (German processing equipment and the availability Biomass Research Centre, 2010). Two SMEs of waste cooking oil at low cost (it currently operating in the industrial bioenergy sector are presents a disposal problem for many described briefly in Box 5.3. restaurants). Four for One Trading Services is another SME supported by the Kenya Climate BOX 5.2. Takamoto Biogas Innovation Center. In contrast to Takamoto Biogas, it operates in the industrial biogas Takamoto Biogas is one of the 52 SMEs market, targeting companies that produce currently registered with the Kenya Climate large quantities of organic waste, such Innovation Center, which was established as the dairy and sugar sectors. It offers by infoDev’s Climate Technology Program services in the design, construction, and (Anjarwalla, 2013). Established in 2011 by operation of biogas plants and employs a Brown University graduate, it employs a 88 skilled workers, besides expecting to mix of eight Americans and Kenyans. Its employ at least six technicians at each target market is the domestic household, industrial installation (Four for One Trading selling biogas appliances such as stoves, Services, 2013). In its targeted approach it water heaters, and lamps and also providing has managed to exploit huge demand, with installation of the digesters (Takamoto over 500 clients in four years. Four for One Biogas, 2013). It is currently rolling out its Trading Services integrates technological new innovative financing mechanism, the innovation into its business model. First, pay-as-you-go system, to address the high it claims to have a unique biogas digester installation cost that acts as a barrier to many system, the Ambita model, which produces households. Under this system, customers pay almost twice as much biogas as conventional a small upfront cost (about one-tenth of the systems, and furthermore it is looking at normal price) and then pay per usage, utilizing novel feedstocks, such as investigating smart meter and mobile phone technology the potential for creating biogas from the (Anjarwalla, 2013). Fifty systems have so hyacinth weed that is a pest for fishermen far been installed through a pilot project on Lake Victoria (Kenya Climate Innovation (Anjarwalla, 2013). Takamoto Biogas hopes this Center, 2013). scheme will expand its market and improve access to biogas technology in rural areas. Chapter 5: Case Study: Bioenergy in Kenya 51 Crop-based biofuels opposition owing to disputes over access rights and furthermore people are unwilling to make Crop-based biofuels have not had particularly good long-term investment in land without guarantee of success in Kenya. Jatropha—a crop whose seeds ownership. produce oil that is used to create biodiesel—was introduced to Kenya several years ago on the basis that it could grow on arid lands and hence provide Cogeneration or combined heat and economic activity in otherwise unproductive areas. power (CHP) However, time has shown that while jatropha can indeed grow on poor land, the results are similarly Sugar companies have the opportunity to produce poor, and it has consequently become less popular two types of bioenergy from waste sugar material: (Khatun, 2013). bioethanol from molasses; and cogeneration using bagasse. Inefficiencies in the Kenyan sugar As shown in Figure 5.1, the potential for feedstock industry mean that prices are about twice the production varies dramatically across Kenya international level (FAO, 2012). Market protection (African Centre for Technology Studies, 2010). currently provided by the Common Market for The coastal, central, and western regions are Eastern and Southern Africa (COMESA), which suitable for a large number of crops, while the limits sugar imports through tariffs and quotas, north, east, and southwest could only support a will expire in 2014 and the resulting market few. Besides geographic limitation, there are also liberalization could result in a flood of imports significant regulatory barriers for SMEs thinking driving domestic prices down by as much as 25 of entering this market. Much of Kenya’s land has percent (FAO, 2012). Therefore companies will no formal owner. This lack of land tenure restricts need to find methods of cost reduction and income development: proposed developments face diversification, to which bioethanol and electricity production could both contribute (Mumias Sugar Company, 2013). Figure 5.1. Number of biofuel crops suitable per There is also potential for adoption of a scheme scene common to Brazil where sugar and bioethanol production can be altered according to relative prices, in order to maximize income (Hunt, 2013). Bioenergy from sugar residues—through bioethanol or cogeneration—could therefore become more attractive, expanding these markets. Cogeneration plans have been incorporated into four of the seven large Kenyan sugar companies, but bioethanol production has not received the same level of take-up. Development in this area has so far been limited because of high investment costs, uncompetitive price mechanisms, limited technology, and a weak legal and regulatory framework. However, Kenya Sugar Board newly requires all sugar mills to include ethanol and electricity production in their operations within 24 months (Business Daily Africa, 2013). This condition is currently met only by Mumias Sugar Co., the largest sugar producer by volume. These factors could provide the necessary incentives to kickstart the bioethanol market, creating potential for SMEs in ethanol retail and ethanol-related products and appliances. The diversification of sugar companies into ethanol and electricity production has impacted the supply Source: ACTS, PISCES and UNEP, 2010. chain of companies that solely produce ethanol. 52 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Spectre International, also known as Kisumu turn the lack-of-capital barrier into an opportunity. Molasses, used to source 60 percent of its material Accessing low-cost finance is also important from Mumias Sugar Co., for whom it was a waste for larger-scale projects, especially in a highly product. However, since Mumias opened its own competitive cost environment. Innovation is also distillery, this supply has been greatly reduced. As needed to improve the degree of technical quality a result, Spectre was forced to close for several assurance around the performance of particular weeks in early 2013 until new suppliers could be technologies, once confidence in the technology is found. Spectre now imports molasses from Kakir established developers and financiers will be more and Kagera in Uganda and Tanzania respectively willing to invest as the technology risk is lower. (The Star-Kenya, 2013). The bioethanol industry also has opportunities for SMEs in appliance production and small-scale fuel Innovation opportunities in the Kenyan retail, as large companies such as Spectre prefer bioenergy market to sell in bulk to vendors. This market should expand because of the push factors examined There are strong innovation opportunities in above, including the removal of trade barriers and bioenergy through the entire value chain (see new policies requiring ethanol production. Overall, Figure 5.2), such as maximizing the yields of innovation in all segments of the value chain, dedicated energy crops (particularly those on as well as in sales, service, and financing, has a marginal land), which would reduce costs and key role to play in supporting the deployment of relieve pressure on land use. There are also bioenergy in Kenya. significant innovation opportunities in improving the technologies used to convert feedstocks In addition to innovation opportunities, there and waste so that it can be done more reliably, are support structures in place to drive clean- efficiently and at greater scale (Carbon Trust, technology growth particularly among SMEs. 2012b). Much of this innovation might be done Nontraditional financing and NGO support is abroad, however there may be opportunities for available to assist preliminary entry into the local firms to customize these technologies to local market. For example, the Visionary Empowerment conditions and needs. Program offers microfinance to small-scale farming and industrial businesses. It works with Innovative financing arrangements are needed the Kenya National Biogas Program to fund in bioenergy to open up the market to potential construction of biogas technology (The Guardian, customers with limited upfront capital particularly 2011). Further, the market for the Kenya Clean Jiko on the domestic and small business side. (KCJ) stove (an efficient cooking stove) was initially Takamoto Biogas is one such company trying to supported by NGOs, but now runs commercially Figure 5.2. Bioenergy value chain (excluding feedstock) Planning, installation & Major equipment Operations & maintenance balance of system 29% 37% 34% Feedstock conversion Civil works 30% Fixed costs system 80% • Construction costs • Routine component and • E.g. boiler/gasifier/gas • Site preparation equipment maintenance collection system • Building construction • Operations labor • Insurance Prime mover 20% Balance of system 50% • Power generation • Fuel handling / preparation Variable costs technology • Control systems • Ash disposal • Grid interconnection • Unplanned maintenance • Incremental servicing costs Other costs 20 % • Project consultancy • Planning / feasibility / permitting costs Chapter 5: Case Study: Bioenergy in Kenya 53 in its own right (Hunt, 2013). The Kenya CIC also turn presents opportunities for other local SMEs. provides financing and incubation support to clean For example, Kenyan company CYPRO Biogas is technology SMEs. working with Polytanks (a Kenyan business in molded plastic products) to produce an innovative To encourage domestic deployment of renewables, plastic tank for them to distribute as part of their the government recently applied a zero-rated business (Anjarwalla, 2013). import duty on renewable energy technologies and removed VAT from related equipment and components. This could reduce costs for SMEs but the availability of cheap imported systems Kenyan Clean Technology could make it hard for domestic producers of clean technology equipment to compete. Firm Survey Results The clean technology market opportunity analysis SMEs often try to source from local suppliers shows that as much as $290 billion will be invested to keep costs down (Anjarwalla, 2013), which in across 11 clean technology sectors over the next decade in East Africa.20 The analysis was conducted at the regional rather than country level so does BOX 5.4. infoDev’s Kenya Climate Innovation not estimate Kenya-specific investment, however it Center is expected that a significant portion of the regional investment would be focused on Kenya. The Kenya Climate Innovation Center (Kenya CIC) was the first CIC to be established by In East Africa, wastewater, small hydro, solar PV, infoDev’s Climate Technology Program at the geothermal, and water were among the top five World Bank. Since its launch in September clean technology sectors (see Figure 5.3), and 2012, the Kenya CIC continues to support SMEs would find the best opportunities in small a growing network and cluster of climate hydro and geothermal sectors (see Figure 5.4). innovators and entrepreneurs. Similar to other regions, SMEs are expected to be most active in planning, installation, balance It aims to provide holistic, country-driven of system and O&M segments of the value chain. support to accelerate the development, In this section, these estimates are compared to deployment, and transfer of locally relevant the results from the survey of 50 clean technology climate and clean energy technologies. The firms in Kenya. Kenya CIC provides incubation, capacity- building services and financing to Kenyan The survey suggests that a large majority of the entrepreneurs and new ventures that are firms are active in renewable energy, including developing innovative solutions in energy, solar: 87 percent of firms said they worked in water, and agribusiness to address climate renewable energy, 46 percent are in energy change challenges. Its priority sectors efficiency, 28 percent in sustainable agriculture, are off-grid renewable energy, water and 26 percent in waste management and management and purification, biofuels, and purification (note that firms could select more than climate-smart agriculture. It is also a key one sector). These commercial activities largely part of the government of Kenya’s National reflect the areas of greatest opportunity that were Climate Change Action Plan. identified through the market sizing study, and may reflect the fact that firms are choosing to get The Kenya CIC has supported more than 70 involved in sectors that are growing. clients and has provided more than $250,000 in proof-of-concept grants as of November The survey also revealed that the Kenyan clean 2013, while offering direct services and technology SMEs are working throughout the broader training sessions on accessing value chain: over 80 percent of firms work in carbon finance and intellectual property design, and/or consulting and over 70 percent rights, each done in partnership with the work in installation, operations and maintenance, World Intellectual Property Organization (WIPO). The KCIC aims to further grow its 20 Based on authors’ analysis, which assumes that the client base and will expand its services with planned investment by the Kenyan government is realized a seed capital investment facility. in full. Actual investment might be lower than suggested if there are significant delays or changes to the proposed investment plans. 54 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries FIGURE 5.3. Investment in clean technology in East Africa: SME and non-SME share ($ billion) $80 $70 Investment ($US billion) $60 $50 $40 $30 $20 $10$ 0 s er d k) o V al er te it s al le dr el in P s rm rm c as at at an ic to fu w ar hy W w W h he he tr ds o e l te ve So l Bi or al id e ot rt as fe sh s Sm p Ge la ga W ra x On So (e al s Bu y ur rg at ne N oe Bi SME share Non-SME share Source: Authors’ analysis. FIGURE 5.4. SME share of East African clean technology market by value chain segment ($ billion) 40 35 30 Market value (US$ billion) 25 20 15 10 5 0 it s te ls al d ro al es a s er er V k) in ue as an cl l G m rP ed gy rm d at at oc w Hy r W of Tr fe r hi ra he W w la he x ne st re Bi te Ve atu d l So rT al ho ot (e ioe pi as Sm Ge N Ra la s W B On So s Bu Major equipment Planning, installation and balance of system O&M Source: Authors’ analysis. Chapter 5: Case Study: Bioenergy in Kenya 55 manufacture and assembly. Compared to Indian, reflecting their willingness to invest and suggesting firms in Kenya are younger and spread throughout their confidence and optimism about the market. the value chain, at least for now as they find their footing. The survey shows that Kenyan clean technology firms regard themselves as innovators. Over the The surveyed firms were also international, and past two years, about 85 percent of surveyed firms significantly more international than non-clean introduced new or significantly improved clean- technology firms in Kenya; 25 percent of non-clean technology products or services. There is also a technology firms in Kenya export and 78 percent of noteworthy range of activities undertaken by clean their sales are domestic (World Bank, 2013). Of the technology SMEs to grow or enhance their clean clean technology firms surveyed, 52 percent had technology business, as shown in Figure 5.5. customers overseas (mostly in Africa, and some in Europe and North America). Nearly 80 percent had While a promising market opportunity, there are suppliers based in a foreign country, unsurprisingly also barriers to the rapid scale-up and deployment many from China (83 percent), followed by Europe of bioenergy in Kenya. The top barriers faced by (53 percent) but also from India and other parts of surveyed clean technology firms in Kenya are Africa (about 30 percent each). shown in Figure 5.6. Overall, the firms expressed a high level of In common with surveyed firms in India, the barrier optimism about the current and future Kenyan most commonly cited by respondents was access clean technology market: 96 percent of the firms to finance. A further 85 percent of those surveyed indicated that they were either very or fairly indicated they plan to raise funding in the next two confident about their business environment in years, making the issue of access to affordable Kenya. The surveyed firms’ historical and projected finance a priority. Limited capital creates the need growth also showed promising signs: 91 percent for credit, but this is often unaffordable or simply experienced sales growth in 2013 and nearly 70 unobtainable. Kenyan banks are reluctant to loan to percent of the firms purchased fixed assets in 2013, people without financial records, and their interest rates are high, for example, interest rates are in the region of 18 percent (Anjarwalla, 2013). Interviews with firms suggested that there is substantial FIGURE 5.5. Innovation activities undertaken by interest from potential foreign investors, especially clean technology SMEs in Kenya following the opening of the Kenya CIC, but this is not being realized as the pipeline of opportunities 80% 76% currently do not meet their standards. There are 72% 70% further opportunities for funding through grants, 70% 67% but these are very competitive (Anjarwalla, 2013). 60% As a result, ventures are commonly funded informally using money from friends and family 48% (Khatun, 2013). There is also a high level of reliance Percent of firms 50% 39% on international donors as many businesses 40% cannot afford to operate unsupported. This lack 31% 30% of finance restricts entrepreneurial development. For example, one Nairobi entrepreneur receiving 20% incubation support from the Kenya CIC, manufactures charcoal briquettes in a process 10% that involves drying out charcoal dust in the sun, 0% which is vulnerable to Nairobi’s unpredictable rain. A solar dryer is needed but the entrepreneur ng de rvi ew D si ts o atin is f f sa t s s af af d en R& ve ce s le di st st se n ly an pm un cannot receive credit as he has no financial record a g g d an in lle f lo g t t ki is in r De rke (Anjarwalla, 2013). Bu uc str ex ls is od n Ra a na g ss pr o M in m tio ne n ai di Kenyan private companies from a range of sectors Tr ad g surveyed in 2013 indicated that practices in the rin Hi informal sector was the biggest barrier they faced, Source: Survey of clean technology firms in Kenya undertaken in with corruption ranking as the second biggest July and August 2013. barrier. While not at the top of their list of barriers, 56 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries FIGURE 5.6. Most common barriers faced by clean technology SMEs in Kenya 80% 72% 70% 60% 50% Percent of firms 40% 30% 20% 19% 20% 15% 15% 13% 11% 10% 7% 7% 0% se rs la and kf ly rm g ce n nd s ty or ns ce its te pe in io or te ili al tito an la ct or tio t ra d ns w qua ab up gu s fin to rm pe re m an lice x st rr Ta ed e e to ss fo m in to Co at ad ad s ss ce in o l ss tr Cu uc In e fc ca ne Ac ce iti th o si Ac in ices l Po Bu ed t ac Pr Source: Survey of clean technology firms in Kenya undertaken in July and August 2013. the surveyed clean technology firms (20 percent) there cannot be a market for ethanol without the were similar to their private sector counterparts availability of stoves with which to use it. Similarly, (24 percent) in identifying the practices of the a biofuel processing plant requires feedstock, informal sector as significant. Corruption and which will not exist without a market to sell to. access to land were also significant barriers for This increases the capital intensity of new biofuel clean technology firms. A lot of clean technologies development as the two often need to be created require access to land, which may underlie this simultaneously. concern. Corruption is prevalent in Kenya, and Kenya regularly scores badly on transparency Because much of bioenergy requires the collection international’s corruption perception index, ranking and transport of large volumes of biomass to 139 out of 176 countries. Indian firms also indicated get workable economies of scale, Kenya’s poor corruption as a significant barrier, although India infrastructure and numerous remote communities is ranked 45 countries ahead of Kenya on the can make scale-up difficult. For example, biofuel index. One example of corruption impacting on production can be hard to develop from a pilot to the bioenergy sector is the extraction of “tariffs” a commercially viable business because of the by police. Historically it was illegal to produce and fragmented nature of Kenyan farming, as feedstock transport charcoal, so biomass is still the target collection from a large number of small farms of police checks, often solely to extract illegal incurs logistical difficulties and large expense tariffs on transporters, who are not sufficiently (Anjarwalla, 2013). knowledgeable of the change in law to question it There are also human capital constraints. There is (Hunt, 2013). a skills gap in Kenya, and many Kenyans lack the The bioenergy sector in and of itself suffers from training necessary to turn an idea into a successful some specific obstacles (see Table 5.1). Because business. Many are unable to compose investment much of it relies on new technology, it suffers proposal documents, such as technical reports from a ‘chicken and egg’ problem, whereby it and financial projections, thus further reducing is hard to get a venture off the ground because their chances of obtaining credit. Support is largely of a codependency. For example, the ethanol unavailable from banks, which generally do not appliance industry is currently limited, as there engage with their clients in business activities such is little ethanol available to use, but meanwhile as sales and marketing (Anjarwalla, 2013). Chapter 5: Case Study: Bioenergy in Kenya 57 There is also inequity in the awareness of and access to support for SMEs. The fact that it is cheaper to reach those who are located in more accessible places means rural and remote areas are at an immediate disadvantage (Hunt, 2005). For example, owing to its physical presence in Nairobi, the Kenya CIC has a Nairobi-heavy portfolio of businesses in incubation (Anjarwalla, 2013). There is also a gender imbalance: 80 percent of the entrepreneurs supported by the Kenya CIC are men, perhaps Photo: Stephan Bachenheimer / World Bank. resulting from the traditional patriarchal culture. The SMEs surveyed highlighted areas where they could use government support in growing and overcoming some of the key barriers they face with the top three areas relating directly to accessing capital (see Figure 5.7). Forty-three percent thought the government could provide more research and development grants, 31 percent TABLE 5.1. Barriers and opportunities faced by Kenyan SMEs Main barrier Main opportunity Industry-specific Domestic Market is restricted by requirement for Innovative financing mechanisms such as the biogas two standing cows, water usage, and large pay-as-you-go system installation cost Industrial Upfront capital investment is required Demand from companies with large quantities of biogas organic waste, such as dairy and sugar Ethanol Upfront capital investment is required Market set to expand as new legislation forces sugar companies to diversify into ethanol production; opportunity for SMEs in distribution and the appliance market Crop-based Land tenure and food security issues result in Improvement in crop efficiency on marginal lands biofuels dramatic opposition to proposed development; uncertainty over potential due to lack of a published biofuel policy Market-wide Skills Lack of business skills; inequity in access to Incubation and finance support from the Kenya support CIC and other government and donor programs aimed at promoting the SME sector Markets Poor infrastructure impedes transportation Businesses looking to source locally to keep costs down 58 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries FIGURE 5.7. Areas for government support identified by clean technology SMEs in Kenya 50% 45% 43% 40% 35% 31% Percent of firms 30% 24% 25% 20% 19% 20% 17% 15% 13% 13% 9% 10% 6% 5% 0% its es rm sm t/ t ts nt / rt fs vic g/ en ou es ni en po rif an ad rin s e s di ed fo sc te em ha m ta si up gr cr re al o di ran ub ci nt ec ce ur -in ts D x ry er e m or ts a Ta oc R& ke m m ed to gu e nf c Pr la ar m ss Fe re nc e an gu M Di co ne ia ed Lo Re si pl ov Bu m r p co Im Source: Survey of clean technology firms in Kenya undertaken in July and August 2013. pointed to loan guarantees or discounted financing, biogas, in particular for companies in industries and 19 percent to direct subsidies. Not far behind producing large volumes of organic waste, such at 17 percent was improved regulatory reform, as dairy or sugar. The bioethanol market also which could help address the obstacle related to has potential for growth as sugar companies practices of the informal sector identified in the look to income diversification for financial and survey and barriers related to land tenure. regulatory reasons. Bioethanol production in itself is not a large SME opportunity, but linked The survey also identified areas of support SMEs markets including distribution and appliances sought from organizations outside of government, could provide an opportunity for SMEs. Barriers to which differed from the support they required these opportunities, however, do exist, especially from the government. SMEs identified support involving access to finance, the practices of the in networking and the development of business informal sector, and corruption. skills in marketing and sales as key areas where organizations like the Kenya CIC could assist. According to the survey of clean technology SMEs in Kenya, firms are optimistic about the market and are active in a variety of innovation-oriented activities. However, they indicate the need for Conclusion financial assistance for both seed and growth The clean technology market in Kenya is capital, as well as general business support relatively nascent and a wave of policies and programs. Removing key barriers and providing programs are beginning to translate into market targeted policy and business support would provide opportunities for SMEs and entrepreneurs. opportunities for additional industry growth and The most promising opportunity in the sector SME participation. appears to be in the production of industrial-scale Chapter 5: Case Study: Bioenergy in Kenya 59 Chapter 6 Case Study: Climate Smart Agriculture in India and Kenya Main Points • This case study examines climate-smart agriculture (CSA) in India and Kenya, and highlights the differences between agriculture and other clean-technology sectors and the main challenges facing the two countries. • Agriculture is a major employer and source of economic activity in developing countries but faces many environmental, institutional, financial, and behavioral challenges that are exacerbated by climate change and rural poverty. • Climate-smart agriculture is an approach that aims to integrate social, economic and ecological objectives to increase agricultural yields, boost profits, reduce local pollution, address poverty, enhance climate resilience and reduce greenhouse gas emissions. • CSA differs from other clean technology sectors because it tends to rely on donor and government involvement and depends heavily on behavior change, education, and institutional reform, but nevertheless represents a commercial opportunity for SMEs. • Drip irrigation, food storage, and agroforestry are three innovative agricultural activities profiled in this case study; there are many other SME opportunities that align with CSA goals. To address growing challenges, society will agricultural productivity and the livelihoods of depend on a productive agricultural system that billions of people. is economically, socially, and environmentally sustainable. Agriculture underpins the livelihoods CSA is an approach that aims to integrate social, of billions of the world’s poorest, employing 2.6 economic, and ecological objectives to increase billion people, most of whom are smallholders. A agricultural yields, boost profits, reduce local growing global population requires agricultural pollution, address poverty, enhance climate productivity to increase substantially over the resilience, and reduce greenhouse gas emissions. coming decades, but current agricultural practice The approach combines proven agricultural is putting unsustainable demands on the natural techniques with innovative farming practices, and environment. Increasing the use of agricultural addresses multiple local and institutional barriers inputs is delivering diminishing returns in many to change in order to improve the sustainability of parts of the world, and practices that were agriculture (FAO, 2013). promoted throughout the Green Revolution are Institutions like the World Bank and the turning out to be unsustainable in the longer International Fund for Agricultural Development term. These challenges, together with the rapidly (IFAD) are leading the way in approaches to changing environmental conditions caused by sustainable development that integrate the fields climate change, are putting serious pressure on of agriculture, water management, forests, 60 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Edwin Huffman / World Bank. food security, and socioecological systems. While climate-smart agriculture is for the most Climate-smart agriculture is part being led by governments, bilateral, and generating commercial opportunities multilateral institutions, it is also generating commercial opportunities for SMEs in Kenya, India, forSMEs in Kenya, India, and other and other countries around the world. countries around the world. This case study examines the role of agriculture in Kenya and India and documents the challenges facing the sector in those countries. It discusses under cultivation for wheat, rice, and cotton, and is why agriculture is different to other clean the second largest producer of wheat, rice, cotton, technology sectors, and describes how CSA is sugarcane, farmed fish, sheep meat, goat meat, an approach that is starting to overcome the fruit, vegetables, and tea (World Bank, 2012a). unique barriers facing it. India and Kenya’s policy frameworks are explained to show how they are Kenya has a much less bountiful natural promoting and implementing CSA practices. agricultural resource endowment than India. Its Finally, three different potential SME activities soils are less suitable for crops and livestock, and are described to illustrate the ways in which CSA tend to be deficient in nitrogen and phosphorus, can create opportunities for entrepreneurs in and occasionally potassium, the three key developing countries. ingredients of fertilizer. Rainfall is low, variable, and unreliable, which leads to limited organic buildup and poor soil fertility and structure. As such, only about 15 percent of its land has the Importance of Agriculture soil and precipitation characteristics to make it Sector in India and Kenya’s agriculturally appropriate, and only about 7 percent of land is of high quality (FAO, 2006). Just less than Economies 10 percent of Kenya’s land as of 2011 is being used for agricultural purposes (World Bank, 2011b). Agriculture underpins employment in both India and Kenya, and contributes significantly to With such characteristics and the subsistence economic productivity. The agricultural sector nature of most of its farmers, Kenya is employs 51 percent of the Indian workforce and understandably not the regional leader in many makes up about 15 percent of GDP. The numbers agricultural products. Nevertheless, it leads the are even more striking in Kenya, where agriculture African continent in tea production and is a large employs 75 percent of the Kenyan workforce and exporter of coffee. It is also well known for floral makes up 51 percent of GDP (Feed the Future, exports, as well as other horticultural products 2013). including green beans, onions, cabbages, snow peas, avocados, mangoes, and passion fruit India is a regional leader in farming and animal (Horticultural Crops Development Authority, 2013). rearing. India is the world’s largest producer of milk, pulses, and spices, and has the largest cattle Both the Indian and Kenyan governments herd of buffalo. acknowledge the enormous importance of agriculture as it relates to both economic India has 195 million hectares under cultivation, performance and the livelihoods of the country’s of which roughly 63 percent is rain fed, with the most disadvantaged population groups. They also remainder irrigated. It has the world’s largest area Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya 61 recognize the threats to agriculture caused by which exacerbates the agricultural impacts of climate change. In 2013 alone, sudden and severe climate change. Together, the countries face rains caused extensive flooding in India’s north, some of the same agricultural challenges, but while severe drought struck in the east of the also have different characteristics that require country. A major drought across the entire East bespoke agricultural interventions to be tested, African region in 2011 devastated agricultural disseminated and adopted at large scale. output and led to regional instability as people fled from neighboring countries into Kenya and staple food prices soared. Agriculture is different than other clean technology sectors Both countries suffer from soil degradation, water stress, crop productivity problems, the need to Unlike renewable energy or cleaner transportation feed a growing population, and increasingly severe options, improving agricultural practice depends threats from climate change. Many agricultural heavily on behavior change, education, and products in India and Kenya are being grown at or institutional reform rather than on technological close to their maximum heat tolerance. Sustained interventions. It is also almost exclusively driven heat waves can devastate wheat, rice, maize, by donor agencies and governments, and tends not and other crops, and negatively impact upon the to be as suitable for public-private partnership as productivity and reproduction of higher-yielding other clean technology sectors. cattle species compared to more resilient but less While agriculture has been practiced for thousands productive local varieties. of years, sustainable agriculture that enhances Given India’s size and the diversity of its climatic climate change resilience and increases the zones (ranging from arid to tropical wet to humid intensification that is required to feed the world’s subtropical), responses to climate impacts are growing population is a more nascent area of study. necessarily varied and regionally specific. Kenya’s Newer sustainable farming practices reimagine rural, poorly educated, impoverished, and fast- the agricultural paradigm that propelled countries growing population limits its adaptive capacity, like India through the scarcity challenges of the 1970s. At that time, the Green Revolution addressed the challenge of population growth outstripping agricultural productivity gains through agricultural intensification practices such as BOX 6.1. Solar pumps make irrigation mass mechanization, the introduction of pest and accessible disease resistant crop varieties, and subsidies for Irregular and insufficient rainfall is a agricultural inputs like seed, fertilizer, pesticide, challenge to farmers who must pump and irrigation infrastructure. water onto their fields manually or with the help of expensive and polluting petrol While the Green Revolution has been an effective or diesel pumps. SMEs like Future Pump intervention that significantly improved yields, Ltd, a Kenyan company, are helping to its limitations are becoming clear. Mechanized solve that problem with innovative solar ploughing has accelerated soil erosion and land powered pumps that can irrigate half an degradation. Excessive use of fertilizers and acre per day with no manual labor or fuel pesticides has degraded soil quality, increased costs. The initial investment of around $400 pest resistance, and polluted waterways and can be recouped in 1-2 years compared groundwater sources. Monocropping has reduced to the ongoing running costs of diesel or soil fertility and biodiversity, and has exposed petrol engines, and higher yields from farmers to ecological and economic threats. more productive crops further boosts the Excessive and continual irrigation has led to soil business case for these pumps. Future salinization and unsustainable withdrawals from Pump Ltd. is working with Kenya Climate aquifers (IFAD, 2012). The negative environmental Innovation Center to get business support, externalities from these kinds of agricultural introductions to distributors and sales practices coupled with the accelerating impacts partners, and linkages to potential investors of climate change are making it more difficult for for business acceleration. today’s farmers. 62 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries faced in changing agricultural practices that other BOX 6.2. Drying food to cut post-harvest clean technology sectors, like public transit or losses water, wastewater, and solid waste management solutions do not face. Ineffective and inadequate food storage systems lead to postharvest food losses, Climate-smart agricultural solutions tend to foregone revenue, and wide fluctuations have more difficulty attracting finance than other in the market price of harvested sectors too, especially in the context of carbon produce because of seasonal gluts and sequestration. Sequestration benefits from undersupplies. Drying food for storage can agriculture are more difficult to measure and verify effectively address these problems. Azuri than traditional abatement opportunities in energy, Health Ltd is a Kenyan SME that uses solar industry, or transport, and may be easily lost if driers to treat and preserve food bought behavior change is not sustained in the longer from farmer groups, including mangoes, term. And climate resilient agricultural activities pineapples, bananas, sweet potato flour, and often include both mitigation and adaptation nutri-porridge. outcomes, whereas many climate funds tend to focus on one or the other. Conventional driers tend to rely on costly fossil fuels or electricity, and generate Understanding what constitutes better agricultural greenhouse gas emissions, but Azuri’s practice is not always straightforward, either. technology has lower operating costs and Whereas, for example, well-designed feed-in is emissions-free. Azuri has sought advice tariffs are almost guaranteed to accelerate the from Kenya Climate Innovation Center to deployment of renewable energy and can be easily address several business and technical scaled, agriculture’s site specificity means that challenges including product development it is often ineffective to standardize and scale up and information on international markets. uniform solutions. Moreover, existing agricultural policies and programs often promote the very practices that are degrading ecological services. Moving towards more resilient agricultural policies Likewise, the speed and severity of climate-related and programs means that policy makers and changes is a challenge for governments, many of their rural and often poor and undereducated which lack the funding and institutional capacity constituencies need to reverse the spread of to disseminate better agricultural practice. recently promulgated policies and practices. Their responses to these multiple agricultural challenges are often under-researched and poorly Scaling is also a challenge because of the number communicated. of farmers that must be reached. There are about 2.6 billion farmers in the world—about 40 percent Setting this against a backdrop of extreme of the global population—most of whom are vulnerability exacerbates the challenge. Poor smallholders. The sheer number of people involved subsistence farmers tend to either cling to in agriculture makes large-scale dissemination traditional agricultural practices, which are of best practice a daunting challenge, and also becoming increasingly inappropriate given the makes transaction costs too high for farmers to be changing climate, or must unlearn some of the involved in climate finance schemes. farming practices that government agricultural extension services have been disseminating, which For all these reasons, sustainable agriculture faces are delivering diminishing returns today and are a multitude of barriers that other clean technology proving to be unsustainable in the long term. sectors do not. Overcoming these barriers, though, is fundamental to enhancing the food security Subsistence farmers with no savings and no public and livelihood opportunities of billions of people, safety net are understandably risk-averse. They and is needed to ensure that the planet’s growing are reluctant to experiment with new practices that population can be fed. may require more than one harvest season before showing dividends, have strained human, financial, and environmental capital, and are suspicious of agricultural extension services whose message is changing. This issue of trust is another barrier Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya 63 CSA Is Beginning to Deliver diagnostics are complete, appropriate interventions can begin. Dividends The fundamental underpinnings of CSA already Despite these challenges, CSA is starting to deliver exist and are being successfully applied in many results. Donor agencies like IFAD and branches countries. They include interventions such as of the World Bank Group have been working with terracing and leaving crop residue cover to government partners to develop approaches to CSA prevent water and wind erosion and enhance soil that are paying real dividends, not only in terms of retention; zero or minimum tillage combined with higher yields and profit, reduced local pollution, the application of mulch, manure, or other organic poverty reduction, and enhanced climate resilience, fertilizers to improve soil quality and structure; but also in terms of greenhouse gas abatement. and fallowing and crop rotation, including the use of leguminous nitrogen-fixing varieties, to Indeed, mitigation and adaptation are linked in enhance soil fertility. Interventions can also be the World Bank’s definition of CSA, which sees it more technical, such as precision agriculture as an activity that “seeks to increase sustainable to optimize inputs using sensors and software; productivity, strengthen farmers’ resilience, water conservation and reuse activities like drip reduce agriculture’s greenhouse gas emissions irrigation; and biotech improvements to introduce and increase carbon sequestration. It strengthens drought- and pest-resistant varieties and increase food security and delivers environmental yields. benefits. Climate-smart agriculture includes proven practical techniques—such as mulching, Animal systems also factor in. Fodder crops can be intercropping, conservation agriculture, crop grown and stall-fed to livestock in order to intensify rotation, integrated crop-livestock management, livestock production while freeing up rangeland for agroforestry, improved grazing and improved water other productive purposes. Better yielding livestock management—and innovative practices such as varieties can also be introduced. better weather forecasting, more resilient food crops and risk insurance” (World Bank, 2013e). Agroforestry is another intervention, where planted trees improve microclimates; provide shade to CSA works when approached from a multiple- crops and livestock; enhance water retention benefits perspective. Such an approach aims to in soils; and bring underground nutrients to address the complex links to other socioecological the surface through the growth, shedding, and phenomena, like deforestation, land degradation, decomposition of leaf litter. Trees can also provide water stress, food insecurity, poverty, and an opportunity for income diversification and asset gender discrimination. Understanding these accumulation as they grow and produce fuel wood, interconnections through deep vulnerability construction materials, or food like nuts and fruit. assessments, the use of climate modeling, and an understanding of integrated landscape and These interventions help to improve crop yields, watershed dynamics is the first step to developing lead to enhanced biodiversity, improved climate a CSA plan. resilience and asset diversification, pollution reduction, and reduced reliance on expensive CSA plans integrate a host of approaches, including agricultural inputs. They also fix carbon through maximizing the use of natural processes and sequestration in soils and standing biomass, and ecosystems; reducing external inorganic inputs and can help minimize the release of greenhouse waste; diversifying production and ensuring crops gases from inorganic fertilizers, slash and burn and livestock are cultivated in locally appropriate techniques, and enteric methane emissions from proportions; and mixing new technologies with cattle. However, many interventions focused on traditional knowledge (IFAD, 2012). behavior change do not obviously lead to significant opportunities for SMEs, and highly technical Integrated vulnerability assessments indicate interventions may be inappropriate for a typical how, when, where, and in what quantity certain rural farmer. CSA activities do, however, make the interventions can generate multiple benefits. They livelihoods of farmers (many of whom are SMEs in can be done on different scales and in different their own right) more secure. landscapes that have various assets but face multiple threats. Once these socioecological 64 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Government Policy Is FIGURE 6.1. Functional areas and their budgets Supporting the Promulgation ($ billion) of CSA Infrastructure, Research and development $1.2 incl. insurance $5.9 Like the Solar Mission, India’s National Mission for Capacity building Sustainable Agriculture was released in 2010, two $0.94 years after the NAPCC (Department of Agriculture 6% 29% 5% and Cooperation-India, 2010). Implementation of this mission falls to the Department of Agriculture and Cooperation, which is part of India’s Ministry of Agriculture. Recognizing the threats to agriculture posed by climate change, the mission seeks to “transform Indian agriculture into a climate resilient production system through suitable adaptation and mitigation measures in the domain of crops and animal husbandry“(Department of 60% Agriculture and Cooperation-India, 2010). The breadth of activities that fall under CSA makes Technology, products and practices $12.2 this mission more of a list of recommendations than a targeted set of interventions. To provide Source: Department of Agriculture and Cooperation-India, 2010. some structure, however, sustainable agriculture Note: Exchange rate, World Bank 2008-2012 average http://data. is framed using ten main objectives (Press worldbank.org/indicator/PA.NUS.FCRF Information Bureau- Government of India, 2013): 1. Improved crop seeds, livestock and fish culture are addressed. Deep in chapter six of the mission document,21 three key mitigation measures are 2. Water efficiency mentioned (changing livestock feeding practices; 3. Pest management further adopting the System of Rice Intensification; and soil-related measures including reduced 4. Improved farm practices tillage and using improved crop varieties that 5. Nutrient management exhibit better carbon sequestration), but they are 6. Agriculture insurance only mentioned in passing and without any specific plan for action. 7. Credit support 8. Markets Overall, the National Mission for Sustainable Agriculture is a broad set of aspirational objectives 9. Access to information that as of yet are not specific, measurable, or time- 10. Livelihood diversification bound. They aim to ameliorate a wide variety of physical, behavioral, and institutional obstacles to a Under each objective, activities are qualitatively more productive and more sustainable agricultural listed and grouped into four “functional areas.” The sector, but do not specifically target the areas of areas and their respective budgets are shown in greatest agricultural emissions. Figure 6.1. Kenya’s ten-year Agricultural Sector Development It is worth noting that half of the budget under Strategy was also released in 2010 and includes “Technology, products and practices” is earmarked recommendations that could enhance the for water use efficiency, including micro-irrigation resilience of the agriculture sector in the face of and efficient water management. Water use climate change. It recognizes that changes are and water conservation also feature in the other functional areas, and naturally overlap with the National Water Mission. 21 See “National Mission For Sustainable Agriculture: Strategies for Meeting the Challenges of Climate Change.” What is surprising about this mission’s multiple Department of Agriculture and Cooperation Ministry of objectives is the limited degree to which the Agriculture New Delhi, 2010. http://www.nicra-icar.in/ nicrarevised/images/Mission Documents/National Mission biggest sources of agricultural GHG emissions For Sustainable Agriculture-DRAFT-Sept-2010.pdf Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya 65 needed in the policy, legislative, and institutional increased forest cover. Approaching CSA with space, as well as in the field through education and a multiple-benefits perspective is helping the awareness-raising activities and local vulnerability government align its departments and their assessments (Agricultural Sector Development activities, and is effectively aiming to mainstream Strategy-Kenya, 2010). Specific interventions the kind of landscape-level planning that CSA were outlined in more depth in Kenya’s updated demands. National Climate Change Action Plan, which was released in 2013 (National Climate Change Action Plan 2013-2017-Kenya, 2013). The plan includes interventions for agriculture, and livestock and The SME Story for CSA pastoralism. The differences between CSA and other clean technology sectors, and the types of activities In agriculture, the plan aims to promote irrigation that are involved in CSA, illustrate why the SME and conservation tillage; develop weather-indexed opportunities in this sector are significantly crop insurance schemes; and provide support for different from those in other clean technology community-based adaptation schemes including sectors. The value chain approach—major the provision of drought-resistant seed and equipment, installation and balance of systems, agricultural extension services that aim to educate and O&M—is less clearly applicable than in the farmers about climate risks. In terms of livestock Indian solar or Kenyan bioenergy case studies. and pastoralism, the plan recommends breeding heat-tolerant animals; promoting vaccination Many CSA activities are rooted in behavior campaigns; ensuring a safe and adequate water change, sustainable use of natural capital, and the supply for both animals and people; and providing intelligent application of knowledge and practice insurance schemes. to natural systems. The activities that drive these CSA changes include clinical diagnostics Kenya recognizes the triple wins that climate- of local threats and opportunities, education and smart agriculture can deliver from enhanced awareness raising, farmer field demonstrations, carbon mitigation, improved adaptation benefits, and ultimately adoption of integrated, sustainable and higher productivity and profits. It is currently techniques. developing policies and approaches to implement CSA on a large scale, and does not have to Unlike the renewable energy, transport, and water overcome deeply institutionalized policies and and sanitation sectors, whose market sizes and practices that are not necessarily congruent with commercial SME opportunities could be more CSA, as India does. easily articulated, CSA is often not a technocentric activity particularly on smallholder farms in The government is active in moving its CSA developing countries. Many interventions require program forward with the help of development little or no new equipment. CSA plans also tend groups such as CCARS (the Research Program on to be driven by government or donors, since the Climate Change, Agriculture and Food Security), commercial returns of improved practice accrue which is supported by CGIAR (the Consultative to the farmer and community at large, rather than Group on International Agricultural Research). The the trainer or extension agent, so the commercial group is working to build consensus on the priority opportunity space is more limited. Furthermore, actions related to agriculture that are proposed individual farmers may be too small to serve in the NAPCC so that they can be piloted and profitably and most smallholder farmers are not ultimately scaled up when appropriate (Research ready to pay for education about new techniques. Program on Climate Change, Agriculture and Food Security, 2013). One of the biggest opportunities However, in developed countries CSA technologies for the government is to improve agricultural are emerging that are relevant. These technologies extension services to help accelerate the traditional provide an indication of some of the opportunities rate of learning and knowledge dissemination, that may emerge over time in developing countries. and improve the distribution of improved seed and They include: other technological innovations. • Sensor-driven technologies, software, and The government’s plans for agriculture also robotics to drive precision agriculture, for overlap with other national priorities, like water instance, soil and plant sensors that monitor conservation and improved catchment, and growing conditions and enable inputs to be 66 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries tailored at small scales to increase productivity The technology varies in its sophistication, ranging and reduce costs—SolChip is one example from a bucket and hose with holes in it to a more of an Israeli company developing wireless precise system with anticlogging apparatus, agricultural sensors.22 backwash controller, and other innovations. • Lighting technologies that can be tailored to Drip irrigation systems can also be used to target the growing requirements of plants indoors, for fertilizer delivery. The combination of irrigation and instance, Valoya Oy is a Finland based company fertilization is called fertigation. Such combined that is developing energy efficient light emitting systems enable farmers to deliver fertilizer loads diodes for more efficient indoor growing that with precision and accuracy, which can reduce improves product quality.23 overall fertilizer use, minimize polluting runoff • Greenhouse technologies, for instance, and harmful eutrophication (nutrient enrichment Israel based Drygair’s combined heating and leading to excessive plant growth, decomposition, dehumidification systems for greenhouses.24 oxygen depletion, and fish death in surrounding • Crop breeding technologies, for instance, water bodies), and reduce greenhouse gas hybrid potato breeding being developed by emissions from inorganic fertilizer production and Netherlands-based Solynta.25 decomposition. In addition, there are some interventions that The technology helps reduce soil erosion, evenly already lend themselves to commercialization distributes water resources, reduces weed growth, for SMEs in developing countries. Three such is less labor intensive, can reduce total water use or opportunities include: make water delivery more efficient, and is usually • Drip irrigation systems; • Improved storage facilities to reduce food waste; and BOX 6.3. Improving yields with drip irrigation • Seedling plantations for agroforestry. Godavari Polymers provides drip irrigation These areas and the opportunities they present for products for farmers to improve agricultural SMEs are described below. yields and reduce water consumption. It makes and sells drippers suitable for orchards, plantations, fruit crops, and broad Drip irrigation spacing crops. Water stress is an issue in both India and Kenya. Godavari Polymers is a medium-sized Drip irrigation is a technology that delivers an enterprise in India specializing in polymer appropriate amount of water targeted at the roots tubing, pipes, and sprinklers, and was of crops through a network of pipes and tubing, recognized as the Best Performer of the controlled by valves and delivered either under Year—Manufacturing Sector at India’s pressure or by gravity. 2013 SME Excellence Awards for its rapid The micro-irrigation market is forecast to be worth growth and high turnover. The company was $4.8 billion by 2018 and is growing at almost 20 established in 1991, and between 2009/10 percent per year (Transparency Market Research, and 2012, saw its turnover rise from about 2013). Compared to other irrigation methods, drip $14 million to over $25 million. irrigation can reduce total water consumption Its inline drip lines are made from by reducing evaporation and minimizing deep polyethylene, which is resistant to ultraviolet drainage. In water stressed areas, drip irrigation rays, chemicals and fertilizer used in drip may not reduce total water consumption, but can systems. Godavari uses sand as a primary boost yields by delivering water more efficiently. filter, which is effective against organic impurities, algae and very fine suspended 22 “News & Events.” 2013. Sol Chip. http://www.sol-chip. particles. It also offers fertilizer tanks to com/ deliver water-soluble fertilizers like urea 23 See “Professional LED Grow Lights.” 2013. Valoya. http:// www.valoya.com/ and potash to send equal portions to every 24 See DryGair, “The Company.” http://www.drygair.com/ plant root zone directly. 25 See “Solynta B.v.” 2013. http://www.solynta.com/#home. Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya 67 operated at low pressure, which can reduce energy costs and associated emissions from pumping. BOX 6.4. Improving grain storage in India Drip irrigation, however, can suffer from higher G.T. Engineering Pvt. Ltd. produces, sells, upfront capital costs, system clogging, and damage and installs grain storage silo systems, from rodents, and can interfere with harvesting. chain, screw, and belt grain conveyors and belt and chain bucket elevators for SMEs in India and elsewhere are exploiting this food grain. A company with less than 100 agricultural opportunity and are expanding plastic employees, and based in Pune, Maharashtra, and polymer manufacturing activities to capitalize the company provides turnkey solutions for on this growing market. stable, waterproof and rated capacity silo systems Food storage Post-harvest food loss is an enormous global is considerable. SMEs can build mud or brick silos issue, with about one-third of all food produced equipped with polythene films to prevent water lost because of storage issues, waste, or ineffective intrusion, keeping grains fresher. Cylindrical processing and logistics (FAO, 2011). Insufficient rubberized structures supported by poles keep storage is a particular issue. It reduces incomes grains elevated to protect them from flooding since predatory buyers can often buy crops at and to reduce rodent problems. Grain is removed the farm gate for extremely low prices at harvest from such structures through capped holes in the time because of an oversupply and an inability of bottom. Cover and plinth structures are silo-like farmers to store food and sell it when prices are structures that allow crates of protected grains higher. Inadequate storage also contributes to food to be stacked in conditions suitable for storage insecurity, which exists when people do not have of between 6 and 12 months. They can be built access to enough food in the right place at the right in a matter of weeks and are an inexpensive and time that is accessibly priced and meets dietary effective storage method. Modern silos, which can needs and preferences. be made from either concrete or metal, are also effective storage options. India has a few large “safe and scientific” public food storage warehousing organizations, including All of the above storage facilities are potential SME the Food Corporation of India (FCI) and the Central construction opportunities, and this activity is set Warehousing Corporation (CWC), as well as State to grow as India aims to reduce food waste through Warehousing Corporations (SWC). The FCI is the improved storage facilities. largest food storage facility in India, with storage capacity of over 37 million tons (India Agronet, 2013; Food Corporation of India, 2014). Given Seed plantations for agroforestry the public role in large-scale food storage, the Agroforestry is an important tool that can be opportunity for SMEs lies more in the small and included in the basket of CSA interventions. It medium-scale storage market. creates integrated and sustainable land-use systems by combining agriculture and forestry, and Traditional food storage devices include structures capitalizes on the beneficial ecological dynamics of made of paddy straw, wheat straw, wood, bamboo, combining trees and shrubs with crop or livestock reeds, mud, bricks, and cow dung, which tend not systems (USDA National Agroforestry Centre, to provide the security 2013a). It draws on both traditional and modern from pest infestation, land-use systems to increase the resilience of rodents, and molds that farmers to the impacts of climate change (Climate more modern storage Smart Agriculture, 2014). provides (India Institute of Technology, 2011). Trees can be used in different ways to produce There is opportunity for benefits that are appropriate to local circumstances. SMEs to participate in They can protect and enhance natural capital, this space. diversify income streams by producing wood for fuel or other productive uses, and can produce The variety of more useful crops themselves such as fruit and nuts. The modern storage facilities agricultural component of agroforestry can also help Photo: World Bank 68 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries increase bee and insect pollination (USDA National BOX 6.5. SME opportunities in agroforestry Agroforestry Centre, 2013e). Maurice Kwadha is a Kenyan entrepreneur Overall, agroforestry is an important opportunity who recognizes the value of including that can help to increase yields, protect farmland, trees in the agricultural landscape. He improve resilience to climate threats, enhance understands that the right kinds of trees biodiversity, and diversify income streams. One in the right places can help to stabilize and SME opportunity lies in cultivating seedlings that replenish soil, retain moisture and provide can be sold for agroforestry purposes. shade, protect topsoil from water and wind erosion, and provide fresh food and also The World Agroforestry Centre has developed a building material and fuel wood. Maurice has toolkit and reference source, published in Kenya, improved agricultural yields on his own farm to help SMEs get started in tree nurseries as an while enhancing the resilience of his plot and enterprise (World Agroforestry Centre, 2013). diversifying his income streams. The toolkit outlines the elements of a business approach and how and why each element Maurice has capitalized on his agroforestry contributes to running a successful business. It success by starting a tree nursery. He has also explains how to assess the market, price about 20,000 seedlings that he sells direct to products, and determine which species will farmers but also to the Kenyan government. maximize profitability, as well as how to effectively His successful business demonstrates market products and interact with competitors. one of the SME opportunities afforded by Finally, it describes how tree nurseries can be a agroforestry. successful enterprise, and how it is only through commercialization of the activity that agroforestry practices can be sustained in the long term. bridge the time it takes for trees to become mature enough to produce an income stream. Alley cropping refers to the practice of growing Conclusion trees simultaneously with agricultural crops. Agricultural systems are changing fast. The This allows high-value trees, like hardwoods or adoption of CSA in India and Kenya will improve the nut trees, to mature while the agricultural crops long-term sustainability of their farming systems provide a steady annual income, allowing the and, if applied well, can improve yields and landholder to diversify their income streams (USDA incomes, enhance food security and biodiversity, National Agroforestry Centre, 2013b). and reduce greenhouse gas emissions while Riparian forest buffers are stands of trees, bushes, increasing climate resilience. and grasses planted and grown on riverbanks or Policy frameworks exist to promote CSA in both the sides of streams. They stabilize the banks and India and Kenya, although they have different focus prevent erosion, enhance biodiversity, and protect areas. While many of the improvements required aquatic life, and act as a natural barrier to fertilizer by CSA involve behavior change, modification of runoff, reducing the pollution of waterways (USDA agricultural practice, and institutional reform, CSA National Agroforestry Centre, 2013c). also provides some opportunities for SMEs. Silvopasture combines trees and livestock in an Three specific opportunities—drip irrigation, food integrated system that produces shade to help storage and agroforestry—illustrate the potential increase the productivity of livestock and forage for entrepreneurs to find and develop successful while allowing trees to grow for other productive businesses that fit into the CSA framework. While uses, such as fruits, nuts, timber, or fuelwood this sector is different to other clean technology (USDA National Agroforestry Centre, 2013d). sectors, this case study shows that there are Finally, windbreaks are made by planting trees potential commercial opportunities for SMEs in all in lines to protect crops, livestock, and soils from areas of clean technology. wind stresses. They buffer against storms, enhance soil water retention, reduce wind erosion, can reduce the visual and odor impacts of animals, and Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya 69 Chapter 7 Actions to Support Clean Technology SMEs Main Points • This report has described the importance of SMEs to the growth of competitive clean technology industries. It has also illustrated that opportunities exist for developing country SMEs across clean technology industries and value chains. However, as illustrated (particularly in the case studies in Chapters 4, 5 and 6), the growth of these firms is also dependent on consistent support to overcome the challenges characteristic of clean technology firms. • This chapter identifies five areas of action that should be considered by governments, development agencies, and other public and private actors to support clean technology SMEs in developing countries These areas are: Entrepreneurship and business acceleration Innovation finance Market development Technology development Legal and regulatory framework Policy makers and other stakeholders can draw upon a broad tool-box of instruments in each of these five areas, to promote clean technology SMEs, listed in Appendix C and discussed in this chapter. • Policy makers, in particular, must adopt and adapt these instruments to fit their country‘s circumstances. They should also seek to mitigate key risks, including failures to coordinate policy design and implementation, market distortions, and the effects of policy discontinuity. • To illustrate considerations within specific national contexts, case studies of national programs targeting SMEs within green industry development are incorporated in the chapter. These include South Korea‘s Green Growth Strategy, India‘s National Solar Mission, Thailand‘s Energy Conservation Program, and Ethiopia’s Climate Resilient Green Economy Strategy. 70 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Curt Carnemark / World Bank. Growing a Dynamic Clean industries and value chains. However, as illustrated in the case studies in Chapters 4, 5 and 6, investments Technology SME Sector in clean technology businesses often have higher upfront capital requirements, longer payback periods Requires Sustained for investors and a heavier reliance on government Commitment from Government policy than other technology sectors such as ICT. These issues can make clean technology markets and Other Stakeholders more risky and difficult for SMEs to engage with. As such, and as part of a wider agenda to pursue “green This report has described the importance of SMEs to growth,” there is an important role for governments, the growth of competitive clean technology industries. development agencies, and other public and private It has also illustrated that opportunities exist for actors to play in creating and supporting new markets developing country SMEs across clean technology for clean technology in developing countries. BOX 7.1. National commitment: SMEs in South Korea’s Green Growth Strategy South Korea launched its Green Growth Strategy in to clean technology SMEs by the state-backed Korea 2009, with a primary focus on (i) the development of Credit Guarantee Fund (KODIT) and the Korea Technology green technologies to provide new “growth engines;” Finance Corporation (KOTEC), providing for preferential (ii) the ”greening” of traditional industries through fees. greater energy and natural resource efficiency and waste management; and (iii) targeted support to emerging Furthermore, the ceiling on guaranteed credit is set at clean technology SMEs (Kamal-Chaoui et al., 2011). The ₩7 billion (about $6.8 million) for “green” businesses, key policy instruments being used, or planned to be compared to ₩3 billion (about $2.9 million) for nongreen used, in the Green Growth Strategy include: loans. Government investment in green technologies rose from 16 percent to 20 percent of total government • Credit guarantees for clean technology SMEs spending on R&D between 2010 and 2013, totaled ₩3.5 • Public sector financing for clean technology R&D trillion (about $3.4 billion), making it the highest among • National public-private partnerships for education all OECD countries as a proportion of GDP (Jones and training in key clean technology sectors and Yoo, 2012). Under the strategy, the government’s Small and Medium Business Administration (SMBA) • Business skill training and competitions for clean facilitates collaborations between industry, universities, technology SMEs and research institutions and provides up to 75 percent • Development of a cap-and-trade Emissions Trading financing to promising clean technology SMEs for Scheme (ETS) technology development. In 2010, the SMBA awarded ₩56 billion (about $54 million) for 1,228 SME projects (Kamal- • Carbon taxes for sectors not included in the ETS Chaoui et al., 2011). The government implemented its first 5-year plan (2009-13) with public spending equal to 2 percent of GDP Finally, the government is promoting the study of climate per year on about 600 projects with a total 5-year cost of change at university level and has funded courses on ₩108.7 trillion (about $106 billion). During the first half renewable energy and clean technologies in the 36 of the 5-year Plan ₩14 trillion (about $13.7 billion) (1.3 regional polytechnic colleges, with the express aim of percent of 2009 GDP) in credit guarantees were provided training a “green workforce” with links to local SMEs. Chapter 7: Policy to Support Clean Technology SMEs 71 In nurturing innovative SMEs in particular, working towards the same goal. However in some governments and other stakeholders can help cases, such as feed-in tariffs for renewable energy, businesses to capture value across the value chain the instrument is comprehensive enough to be and provide a basis for growth and innovation in considered a policy per se. While various studies national clean technology industries. Governments refer to “enabling frameworks” as a specific subset that have successfully promoted a dynamic clean of policy instruments (UNIDO, 2011) here this technology SME sector have maintained a long term is used in reference to all of the instruments, term political and policy commitment to the regulations and activities aimed at supporting participation of SMEs in these industries (World clean technology SMEs. Bank, 2013i). Entrepreneurship and business acceleration Five Areas of Support for Entrepreneurship and business acceleration refers Clean Technology SMEs to actions designed to assist entrepreneurs in turning ideas into viable businesses, or to scale This section discusses five areas of support that up an existing business or business line. This should be considered by governments and other has traditionally taken the form of programs stakeholders to provide effective support to that provide direct training and capacity building innovative clean technology SMEs in developing to managers and owners of entrepreneurial countries. These areas are: businesses, ranging from general financial and • Entrepreneurship and business acceleration managerial skills to targeted support for technical • Innovation finance aspects of the business. These programs are frequently delivered by advisory services firms, • Market development business incubators or technical experts. • Technology development More recent programs seek to develop • Legal and regulatory framework collaborations and networks that aim to assist Policy makers and other stakeholders can draw clean technology SMEs to share knowledge and upon a tool-box of instruments in each of these experience. These entrepreneurial networks, for five areas to promote clean technology SMEs. the sake of collective and mutual innovation, can These are listed in the tables in Appendix C, which greatly reduce transaction costs for individual provide a brief description, evaluation and applied SMEs. By pooling resources and potentially sharing country example. Here, “instruments” are referred R&D and intellectual property rights (IPR), the to as the means by which the intent of a policy or costs of technology deployment and access to program is accomplished. Indeed, policies and markets can be reduced. However, the success of programs can include various instruments, all such collaborations depends upon a high degree FIGURE 7.1. Key Areas of Support for Clean Technology SMEs Areas of Support for Clean Technology SMEs Entrepreneurship Legal & Regulatory and Business Framework Acceleration Innovation Technology Finance Development Market Development 72 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries of trust and openness, especially when faced with the risk of losing IPR to larger or better funded BOX 7.2. infoDev’s Climate Innovation Centers partners (Hultman et al., 2012). In some instances, infoDev is a global multi-donor program of these kinds of interventions have been designed the World Bank that supports growth oriented to incubate and grow clean technology SMEs. For entrepreneurs in developing countries. infoDev’s example, Climate Innovation Centers, supported Climate Technology Program supports SMEs by the World Bank’s infoDev Climate Technology and emerging entrepreneurs that are developing Program have been set up to provide in-country innovative products and new business models in investment and advisory services to clean the climate technology sector. The CTP’s flagship technology SMEs (see Box 7.2). initiative is the development and implementation Collaborations between national governments, the of country-level Climate Innovation Centers private sector and the international community (CICs). The CICs are designed as locally owned can also support the creation and sharing of and run institutions that provide a suite of technical knowledge, while building upon existing services and venture financing that address the entrepreneurial cultures. They can innovate and specific needs of local climate innovators and deliver new models for financing and intellectual companies. property sharing, and finance the demonstration Currently, the program is establishing CICs in of complex technologies that have strategic, eight countries: Kenya, the Caribbean, Ethiopia, transformative, value. Such international, public- Ghana, India, Morocco, South Africa and Vietnam. private, collaborations are able to achieve these The innovation centers in Kenya, the Caribbean, functions partly through education and capacity and Ethiopia are already fully operational while building for SMEs, but also through protections for the others are in an advanced development stage. intellectual property and the provision of economic At the global level, the CTP is providing linkages resources and legal conditions required to enable between CICs by facilitating market entry, access commercial risk-taking. to information and financing for the private Business clustering, that is, the sector-specific sector, while also offering important tools for and/or spatial concentration of SMEs, has been Policymakers to measure and improve domestic studied in various geographical and sector-specific climate innovation activities. contexts, indicating their potential benefits. These Host country governments see the CICs as a include the facilitation of inter-firm cooperation, key tool to support domestic private sector labor market pooling and technological learning participation in growing climate technology and well as providing a focal point for targeted opportunities to achieve economic growth and policy support (McCormick, 1999). Further, job creation. Climate technology SMEs and deliberate SME clustering can be of particular entrepreneurs look for the investment and value to developing countries as they enable risk advisory services that the CICs will provide sharing between businesses and the pooling of for them to succeed. When asked about their limited capital and entrepreneurial skills within interest in accessing CIC”s business advisory a defined space and infrastructure. However and financing services, the surveyed Indian experiences from around the world show that and Kenyan clean technology SMEs were clusters tend to benefit export-oriented markets, overwhelmingly enthusiastic (that is, 70 percent sectors with already-existing trade networks, of Indian firms and 100 percent Kenyan firms). and SMEs operating in relatively low-technology sectors such as textiles and non-electronics This growing experience with CICs is now manufacturing. This suggests that efforts to beginning to provide lessons about the stimulate clustering in the clean technology sector effectiveness of targeted support to clean may be of limited benefit to SMEs supplying local technology SMEs within a wide range of and relatively high-technology markets. developing country contexts. Results are measured in terms of both economic impacts Clean technology SMEs and the “greening of (for instance, growth and job creation of the SMEs” can be also be supported by working supported SMEs), as well as environmental in collaboration with large companies with and social impacts (for instance, CO2 mitigated, long supply chains. An example is Mexico‘s increased access to energy, or cleaner water). Green Supply Chains program, a public-private partnership, which succeeded in achieving Chapter 7: Policy to Support Clean Technology SMEs 73 improved productivity, competitiveness and natural opportunity costs for local banks where high resource efficiency for 146 SMEs working in and reliable rates of return can be secured from partnership with 14 multinational companies (Van lending to high-turnover businesses, for example Hoof and Lyon, 2012). those trading in high-volume, perishable goods (Haselip et al., 2014). There can also be a strong Finally, public and private agencies can also cognitive bias on behalf of potential lenders conduct a facilitating and mediating role between in favor of traditional business activities, as entrepreneurs and their market clients. This can they are unused to viewing the world through include awareness raising activities, information a clean technology “lens” and hence perceive sharing and simple communication of ideas more problems than solutions. While “impact and opportunities of mutual interest to clean investment,” or investments made against technology SMEs and their customers. Such “triple-bottom-line” calculations are more likely activities constitute the intangible assets of human to tolerate a higher rate of strictly financial risk capacity necessary to make markets work, beyond in the face of clearer environmental and social the more easily measured financial barriers. Here, benefits, the aim of instruments to push demand governments, other stakeholders, and SMEs can for clean technology products and services should draw upon technical support and advice from a be to attract investors that are not necessarily range of international collaborations and networks seeking these non-financial rewards. In this sense, to promote clean technology and small business instruments should aim to normalize the market development (see Appendix C, Table C1). whereby investment in clean technology becomes profitable and hence “rational.” Innovation finance Other factors, including the relatively high Innovation finance refers to instruments that aim transaction costs of investing in SMEs and the to provide clean technology SMEs with several longer supply chains inherent to the market forms of early stage financing and risk capital, structure of many clean technology businesses, not available from traditional financing sources. also serve to increase the financial risk of investing This includes seed capital, venture capital, soft in clean technology SMEs. Given this reality in loans and loan guarantees (see Appendix C, Table many developing countries, government-backed C2). Here, governments and investors motivated support for concessional and/or flexible loans by impact can also provide funding to bolster creates the risk that these businesses become private sector lending to clean technology SMEs dependent upon non-market financing. In order on preferential terms, that is, at lower interest to mitigate this risk, and enable a longer-term rates and more flexible collateral and repayment transition to market-based financing, soft loans conditions, or by providing loan guarantees. Such and credit guarantees must be issued through support addresses what is (beyond the absence of a commercial banks that set their own financial high price for carbon emissions), in most countries, and technical criteria. This “double assessment” the most significant barrier to clean technology approach is particularly relevant for SME startups SMEs. This was confirmed in the surveys in India or development projects that involve a significant and Kenya (see Chapters 4 and 5) where access technological element, thus increasing both to finance was identified as the most significant borrower and lender confidence. Equity financing barrier to SMEs operating in clean technology is another supply-side option for clean technology sectors, especially in Kenya where 70 percent of SMEs in the early stages of the innovation cycle, bioenergy firms identified it as the primary barrier, however even in OECD economies equity financing compared to 46 percent of solar energy firms in is used by less than 2 percent of SMEs, with the India. vast majority dependent upon internal or debt finance (MENA-OECD, 2011). To some extent, the high cost of capital and business financing for clean technology SMEs often Innovation finance can also operate on the demand reflects a lack of awareness on behalf of local side. Here, the most important instrument to banks about clean technology opportunities, which promote growth in clean technology markets translates into higher financial risk assessments. is technology-specific consumer credit. Such However the decision to invest in clean technology facilities can greatly overcome the financial SMEs, even for those seeking finance for proven barriers surrounding high capital cost goods, technologies in existing markets, also presents such as off-grid renewable energy technologies 74 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries (RETs). For example, high demand for solar water framework that creates them. Therefore the heaters (SWHs) in South Africa, Tunisia and penalties for non-compliance must be significant, Mauritius has largely been due to the availability and floor prices should be set high enough to of low-cost commercial loans, offered specifically ensure energy companies are incentivized to invest for SWHs (Ölz, 2011). These technology-specific in clean technologies. credit markets have enabled, and were enabled by, greater awareness and acceptance for SWHs, Large organizations, whether they are private lowering risk premiums. In the case of small-scale corporations or government departments, can have and off-grid clean technologies, SMEs tend to a significant influence in driving demand for clean benefit most as the market for retail, installation technology by mandating sustainable procurement and maintenance favors smaller, local, businesses. policies. However the exact criteria used will vary significantly between organizations, thus consumption that is radically more sustainable Market development than “business as usual” does not always occur A range of instruments aim to increase demand for and hence close attention must be paid to the detail the products of local SMEs and facilitate the overall of procurement policies. growth of the clean technology market. The main Similarly, manufacturer standards, product purpose of demand-side instruments is to reduce labeling and product testing and certification are commercial uncertainties for businesses supplying potentially powerful means to drive demand for clean technologies, thus reducing investment risk clean technologies and raise consumer awareness. (OECD, 2012). Support for consumer financing, However such instruments are mostly limited to as discussed earlier, is an important means to consumer goods such as household appliances stimulate the growth of clean technology markets which are of marginal significance to SMEs in at the household level. However there is also plenty developing countries since such goods are more that governments can do to stimulate industrial likely to be imported than manufactured locally. demand for clean technology. Nonetheless, government-imposed standards, In the area of renewable energy, the most well- for example for energy efficiency in buildings, are known instrument to strengthen market demand an important means to drive demand for clean for grid-connected technologies in developed technologies that are likely to be supplied or countries has been feed-in tariffs, which support installed by SMEs. India‘s National Solar Mission approximately 75 percent of global installed (detailed in Box 7.3) is a good example of a national solar PV capacity and 45 percent of wind power strategy to help develop a specific clean technology (Deutsche Bank Group, 2010). While FITs have market, drawing upon a range of complementary been instrumental in driving demand and cost instruments. reductions in RETs in developed countries, their presence in developing countries is relatively recent and so their impact is yet to become clear. However, given that FITs operate as a cross subsidy, where the cost of tariff-supported RETs is divided among all grid-connected consumers, this particular instrument becomes less economically viable and relevant in lower-income countries where levels of energy access remain low. Renewable Energy Portfolio Standards or Photo: Danilo Pinzon / World Bank Obligations and Renewable energy certificates (RECs) are also widely used to develop renewable energy markets. These are government-imposed mandatory targets for utilities to generate X percent of their power from RETs, that normally result in the creation of certificates which can be “surrendered” or traded, providing a market-based subsidy. While RECs are a market mechanism, their prices are largely influenced by the regulatory Chapter 7: Policy to Support Clean Technology SMEs 75 Finally, there are numerous “soft” interventions BOX 7.3. SMEs in India’s National Solar Mission that public agencies, NGOs and charities can pursue to promote clean technologies. These India’s National Solar Mission was launched in include education, which can operate at various 2010 and aims to accelerate the use of solar PV and levels from primary to advanced, to either raise solar thermal technologies, with a target of 20,000 awareness about clean technology or build specific MW of grid-connected and 2,000 MW off-grid solar capacities and campaigns which can take many energy capacity by 2022 (PWC, 2014). The national forms and be official (that is, government-led), solar energy strategy is one of eight missions commercial, individual or community-based and launched under the country’s national action plan broad or specific in focus. Authorities or well- on climate change, and is divided into three phases known organizations can also promote a spirit (Government of India, 2010). Various instruments of competition between countries, businesses, are being used at the state level to incentivize organizations or municipalities based on the investment in grid-connected solar energy and production or consumption of clean technology, local manufacturing capacity. These include: in the form of public rankings. The strengths and • Renewable Purchase Obligations weaknesses of these instruments are presented in • Renewable Energy Certificates (RECs) Appendix C, Table C3. • Feed-in tariffs • 50 percent of all capacity is subject to a Technology development “domestic content requirement” of solar cells Technology development instruments aim and modules to assist SMEs with the technical aspects of • Incubation of startup solar SMEs developing an innovative product. These can include R&D tax credits, research grants, publicly • Concession loans to solar SMEs funded competitive research collaborations, India’s 2003 Electricity Act is credited with competitions, public investment in R&D, public or enabling an increase in private sector investment private agreements on technology cooperation, in renewable energy capacity, which is driving demonstration projects and applied research the solar market. However, policy and regulatory networks. These instruments are briefly assessed incentives are at an early stage of development and in Appendix C, Table C4. have suffered some setbacks, including the weak Perhaps unsurprisingly, 43 percent of the Kenyan economic impact of the RECs market, launched in firms surveyed in this report (see Chapter 5) stated 2011 (Climate Policy Initiative, 2012). that governments could provide more funding for Under the Solar Mission, SMEs are benefitting R&D, with 31 percent identifying loan guarantees in a similar way to how they did under the ICT or discounted financing as most useful, followed by revolution, that is, by operating in the slipstream 19 percent in favor of direct subsidies. Similarly, in of large corporations who are driving the market, India direct subsidies were identified as being the and by innovating technological solutions and local most popular form of government support by clean manufacturing skills and capacity. Indeed, SMEs technology firms (32 percent). mostly occupy the manufacturing level of the solar While instruments to provide public support for market supply chain in India, supplying mostly R&D can be a powerful catalyst to the development electronics equipment such as inverters, batteries, of clean technologies and local SME capacities, micro-controllers, chargers, cable connectors, and they also carry structural risks that policy meters. Here, the solar strategy benefits from the makers should consider and anticipate. Above strong power electronics base, already present in all, government funding for R&D may result in an India. The Indian Renewable Energy Development inefficient allocation of resources as a non-market Agency (IREDA) provides concessional loans for means to pick technology and business model SMEs partaking in RET projects and incubation winners, and/or result in over-subsidization that of solar SMEs is conducted by centers such leaves technologies far from the market. Policy as the Centre for Innovation, Incubation and makers also need to consider the risks of political Entrepreneurship (CIIE) in Gujarat (Ministry of New capture and rent seeking surrounding the use of and Renewable Energy 2014). subsidies, as well as opportunity costs where the potential benefits of supporting other markets 76 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries and technologies may be significant. Therefore, sector—working together or separately—to when taking the decision to finance R&D, policy launch competitions, backed with monetary makers must ensure that this does not occur at prizes.26 Competitions, if well-focused, can drive the expense of private sector innovation funding, innovation especially for bottom-of-the-pyramid and that the commercialization phase of clean and/or technologies for problems that have been technology innovation is determined by market neglected by the market in developing countries forces (Hultman et al., 2012; UNDESA, 2011). (Dutz and Sharma, 2012). Such competitions would attract mostly innovative SMEs, driving local Another significant area of technology development interest, creativity and competitive advantage. concerns Intellectual Property Rights (IPR). This is a controversial aspect of the debate surrounding climate technology development and transfer, Legal and regulatory framework given the perceived conflict between the provision The legal and regulatory framework is the set of legal patent protection (and hence profits) to of laws and related regulations that aims to incentivize private sector investment in R&D, and strengthen the overall enabling environment the need for developing countries to purchase for clean technology SMEs, adding weight to the clean/low-carbon technologies at affordable instruments discussed in the preceding sections. prices. In recognition of the strategic importance Here, the main instruments are: sector-specific of patenting in the “knowledge economy,” many tax incentives, emission reduction credits, taxation developing countries have implemented patent on pollution or natural resource use, import tax policies, often with technical support and funding reductions or waivers and incentives to attract from international organization such as the World skilled labor. These can be broadly divided Intellectual Property Organization (WIPO). Rwanda, into “carrot” and “stick” instruments, creating for example, has a comprehensive IP policy as incentives or obligations that address both the a means to support scientific and technological supply and demand side of clean technology capacity and technology transfer (European Patent markets (see Appendix C, Table C5). Office/UNEP, 2013). In terms of financial incentives for clean technology Further issues relate to the trade-off between SMEs, governments can introduce sector-specific effective enforcement mechanisms and the need to business income tax breaks and import tax provide geographically-appropriate technologies. reductions or waivers. Such tax-related incentives Here, some attention has been given to the can result in efficiency and productivity benefits, potential role of Open and Compulsory License driving innovation and profitability (KPMG 2013). In Agreements for climate technologies, that is, general, the main benefit of legal and regulatory legal permission to use software or manufacture instruments to support the supply-side is that technology hardware without the consent of the they offer non-prescriptive support, that is, they patent owner, as has been used for drugs under tend to be generic and not technology-specific, the WTO‘s Trade-Related Aspects of Intellectual encouraging early-stage business innovation Property Rights (TRIPS) agreement. However and competition. However strict criteria and it is unlikely that a global agreement will be oversight is required in order to avoid non-eligible reached on whether climate change should be businesses claiming tax benefits, especially with rightly considered a public health issue, thus regard to import tax relief. There are also risks covering low-carbon technologies under the TRIPS surrounding the use and effectiveness of tax provision. This is partly because of the greater credits in countries with widespread tax evasion. number of patents required for specific climate technologies, as compared, for example, to drugs On the demand side, governments can establish for HIV/AIDS. Growing competition from emerging clear economic signals that “polluters pay,” economies also makes compulsory licensing less in order to stimulate clean technology use likely, and there is wide agreement among private and innovation (KPMG, 2013). To this end, sector actors that it would dampen incentives to Governments can impose taxation, charges or invest in clean technology innovation (Ebinger and Avasarala, 2009). 26 Competitions can also be viewed as a mechanism to drive An important means of overcoming the demand for clean technologies, however this discussion is about competitions used as a means to achieve a pre- aforementioned barrier is for governments, defined target or objective, hence pushing investment and multilateral organizations and the private innovation in a particular direction. Chapter 7: Policy to Support Clean Technology SMEs 77 levies on pollution, waste production and/or the BOX 7.4. SMEs in Thailand’s Energy Conservation unsustainable consumption of natural resources. Program As an alternative to taxation, governments can utilize market-based mechanisms such as the Thailand first made serious efforts to promote energy trade in emissions permits or credits, whereby efficiency with its Energy Conservation Promotion Act of economic entities are subject to an emissions cap 1992, which has since been revised and expanded. The (absolute limit) which obliges actors to reduce centerpiece of this policy is the Energy Conservation emissions or waste, instead of simply punishing Promotion (ECON) Fund, which is financed by a $0.001 them. However the cap on emissions must be tight per liter charge on petroleum, raising about $50 million and become more stringent over time, in order to per year, which is then invested into support for energy set permit prices at a meaningful level. In support efficiency projects (Grüning et al., 2012). By 2012 the of market mechanisms, taxation can be deployed program was estimated to have resulted in a reduction as a “baseline instrument” to send the economic in peak electricity demand of 2,600 MW and a cumulative signal, especially to major industrial emitters, that saving of 15,700 GWh of energy (Polycarp et al., 2013). investment in clean technology is an act of self- The main policy elements of Thailand’s drive to increase interest (OECD, 2012). energy efficiency include: • Renewable Purchase Obligations Here, the effectiveness of pollution taxation depends upon strong and sustained political • Taxation on fossil fuel consumption, demarcated for support so as to give clear signals that delayed investment in energy conservation (ECON) investment in clean technology will result in higher • Active involvement of multilateral and donor costs. Although emissions trading and taxation is organizations for financing and technical assistance mostly targeted at large corporate players, SMEs • Revolving fund for concessional loans stand to benefit directly from these policies as they strengthen demand for technical solutions to The ECON fund is used to support various agencies reduce emissions and waste, much of which will implementing energy conservation projects, as well as come from innovation-led SMEs and from those renewable energy, R&D, training, and public awareness contracted to install, operate and maintain clean campaigns, through grants, subsidies, and tax incentives technology solutions. The case study on Thailand’s and two dedicated funds for energy efficiency: the Energy Conservation Program (see Box 7.4) refers Revolving Fund and Energy Services Company (ESCO) to a mix of legal and regulatory instruments, as fund. The revolving and ESCO funds provide credit to well as an innovative financing mechanism, to local banks that issue low-interest loans to project drive the supply and demand for energy efficient developers. The country’s support for energy efficiency technologies. has driven demand for efficient transport, lighting, air conditioning, and solar energy technologies, as In addition to the presence of economic incentives, well as construction and insulation materials. Large, the growth of clean technology SMEs also depends mostly foreign, corporations have taken the largest upon a country’s “absorptive capacity” which is the share of the market in energy efficient technologies, result of creative talent and a skilled workforce which are mostly imported to Thailand. However, operating within a favorable business environment SMEs have obtained some market share through the to enable experimentation and learning. Here, one retail, installation, and maintenance of energy efficient instrument to attract relevant skills and talents equipment, such as air conditioners, solar thermal is to offer income tax benefits and/or subsidies to systems, and low-energy lighting systems. targeted individuals, the so-called “sticky cities” policy. This can be a low-cost, low-risk, option Another way in which SMEs have accessed the energy for governments and is of particular value to less efficiency market is through the ESCO model, supported developed countries that typically suffer a “brain by the ECON fund. Indeed most ESCOs are SMEs and drain” to richer counties. However reversing this suffer from the same financial barriers as SMEs in trend is a challenge and success depends upon other sectors, where banks have been less familiar concerted efforts to attract a critical mass of with the ESCO model and hence less willing to lend to individuals, working in a specific sector. them, which in turn has limited their participation in the revolving fund (Polycarp et al., 2013). 78 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Country Context There is also a range of social and cultural barriers to the update of clean technologies that may There is limited empirical knowledge regarding the inhibit the growth of clean technology industries. relationship between specific developing country These can include limited acceptance or trust in contexts and the most effective instruments to the suitability or reliability of clean technologies, promote clean technology industries. However, as well as consumer resistance on the basis of there are a number of national, economy-wide, aesthetic criteria, for example in the uptake of conditions necessary to support clean technology roof-top rain water harvesting. Resistance at the industries, whether investors are domestic or community level has also been experienced, for foreign. These include a stable macroeconomic example in efforts to encourage collectivized food environment, meaning rational interest rates, tight storage in flood-prone areas. Tradition, social control over inflation and competitive exchange esteem, pride and religious beliefs may also be rates. More generally, countries should have a source of resistance to the uptake of climate undergone, or be in pursuit of, reforms to simplify technologies. However there are various options and minimize the cost of business registration to address these barriers, including campaigns and formalization, including decentralized to disseminate information, educate and raise administration, strong rule of law, contract awareness as well as public-private partnerships enforcement, pro-business bankruptcy and and targeted assistance to promote early adopters re-entry rules. While these may appear obvious and technology front runners (Boldt et al., 2012). prerequisites that stand to benefit all industries, there can be profound contradictions between a government‘s sector-specific policies and the wider economic and business framework, thus hindering Policy Interaction and Risk clean technology industries. In addition to providing active, positive, support for clean technology markets via the menu of When designing instruments to support clean instruments detailed in tables in Appendix C, technology industries, governments, in particular, governments and regulators also need to ensure should take into account their country‘s that they remove or minimize any “negative administration and innovation capacities, in order incentives,” that is, fiscal instruments, subsidies to pursue realistic goals and strategies (UNDESA, or regulations that favor conventional energy and 2011). This applies to education policies through other “dirty tech” markets. Action to remove or to IPR regimes, though the need to take into reform such policies, thus reducing policy conflicts, account national development circumstances is is another key aspect of an enabling framework for perhaps most important when thinking about clean technology SMEs. clean technology transfer. For countries with weaker capacities, it makes more sense to focus Negative incentives for clean technology SMEs in on attracting foreign direct investment (FDI) and in developing countries are likely to result from red creating a role in global value chains, where joint tape and import taxation, as well as more sector- ventures with foreign firms are the best options specific regulations that restrict market access, for securing technology transfer, in addition to such as monopoly status awarded to State utilities supporting local research capacities. to generate electricity or operate water treatment plants. For example, despite low levels of rural An example of this is Egypt‘s Kuraymat Integrated electrification, the Tanzanian utility TANESCO Solar Combined Cycle power plant, a grid- maintained control over all grid and mini-grid connected project including 20MW of concentrated power generation up until the creation of the Rural solar capacity, which became operational in June Energy Agency (REA) in 2008. Since then the REA 2011. Sixty percent of the value for the Kuraymat has supported small-scale independent power plant was captured by local SMEs through the producers, thus opening up investment in small supply of civil works, mounting structure, tubes, scale hydro power and mini-grid technologies to electrical cables, grid connection, engineering, supply villages and rural areas (Uisso, 2011). and procurement and construction responsibility. Many local SMEs obtained knowledge and Another source of policy conflict that undermines skills regarding the design, construction and clean technology SMEs are subsidies issued to maintenance of the solar plant, in the process of fossil fuels, which remain widespread in both working with foreign firms (MEDREC, 2013). developed and developing countries (Whitley, 2013). Chapter 7: Policy to Support Clean Technology SMEs 79 Governments often justify these subsidies on BOX 7.5. Ethiopia’s Climate Resilient Green Economy the basis of welfare, for example for kerosene Strategy (CRGE) which remains an important fuel for domestic lighting in rural, off-grid, Africa. However, The Ethiopian government launched its Climate Resilient technical progress and cost reductions with Green Economy Strategy (CRGE) in 2011 to support the solar lighting technology mean that subsidies 5-year Growth and Transformation Plan (GTP), which aims for kerosene are no longer justified, and for the country to obtain middle-income status by 2025, in fact governments would be advised to via carbon-neutral growth. This is an ambitious target, tax unsustainable fuels, further driving the especially given the country’s high GDP growth rates, which market for clean technology alternatives. averaged 10 percent between 2004 and 2013. The CRGE stands out as being a model strategy in bringing green Clean technology SMEs and investors that economy and climate resilient objectives to the forefront depend upon government policies and of national economic planning. Indeed, on paper, it is regulations for the size and strength of their difficult to fault the CRGE, which, unlike green strategies markets need to be aware of the risk of policy in many other countries, benefits from high-level support discontinuity. There are two types of such and oversight. The CRGE Ministerial Steering Committee policy risks: prospective and retroactive risk. operates within the Prime Minister’s Office, and works in Prospective policy risk refers to the overall partnership with the Ministry of Finance and Economic level of instability or uncertainly regarding a Development and the Environmental Protection Agency. country‘s enabling framework, upon which clean technology SMEs may depend. In other In a similar way to the Korean Green Growth Strategy, the words this is the risk that governments will CRGE is made up of a portfolio of specific projects, across make frequent or irregular and unpredictable numerous sectors. These include the fast-tracking of changes in policies that may have a negative support to develop the country’s hydro power resources, the impact on project planning, thus pushing up scaling up of fuel-efficient cooking stoves in rural areas, the cost of borrowing or the rate of return efficiency improvements to the livestock value chain, and demanded by investors. Retroactive policy financing for Reducing Emissions from Deforestation and risk refers to changes in policy or regulations Forest Degradation (REDD) projects (Federal Democratic that affect existing projects, especially when Republic of Ethiopia, 2012). Although some policy they have an impact on business income. instruments have been legislated, including a FIT to support Indeed, retroactive changes to policies investment in grid-connected renewable energy, most of that financially support clean technology the strategy will be delivered through direct investment investments has become a main barrier and spending from a central fund, managed by the Ministry to scaling up private investment in the of Finance and Economic Development. This fund, known renewable energy sector (Micale et al., 2013). as the CRGE Facility, aims to mobilize $200 billion from national and international public and private sources over a In the area of renewable energies, the most 20-year period and has already received international donor well-known risk relates to changes in the support, including $24 million from the U.K. government value of feed-in tariffs where, for example, (GGGI, 2013). In terms of how these funds are spent, the Spanish government issued a decree the government has established the Sectoral Reduction limiting the rate of return on RET investments Mechanism Framework, which purports to outline the to 7.5 percent, effectively cutting the value precise mechanisms of implementation, though it makes of tariff support by up to 25 percent for scant reference to clean technology innovation or the role both existing and future projects (PV Tech, of SMEs. Indeed this highly centralized approach risks 2014). Such retroactive changes in key resulting in an inefficient distribution of resources if private financial instruments are what businesses sector actors and investors are not systematically drawn and investors fear most as it can result into decision-making processes. in a drop in forecast revenues, increase borrowing costs and diminish the confidence Another risk is weak implementation or enforcement of the of investors, undermining market growth government’s stated policies. It remains to be seen if the prospects. There are various circumstances CRGE’s clear national vision and planning will be translated under which such changes tend to occur, into lasting support for the private sector that is necessary though the most are related to changes in the to develop green industries in Ethiopia. political ideology of presiding governments and economic crises. 80 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries While policy change is not always and necessarily bad for business (indeed sometimes it is BOX 7.6 Climate Smart Agriculture—a potential “sweet welcomed), changes especially to instruments spot” industry offering environmental and social co- that provide financial support to investments benefits? must be developed in consultation with the As discussed in the previous chapter, CSA is more a affected businesses and investors. Ideally change product of behavior change than hard technological should be implemented gradually, after plenty of change; hence, policy support should be geared more warning. Indeed, sudden and unexpected changes towards shifting farming away from unsustainable in policy are likely to cause most damage, practices. However the widespread uptake of CSA especially when foreign companies and investors policies by governments provides some opportunities are involved. for SMEs (including small holder farmers) through Finally, it is important to bear in mind the demand for drip irrigation, food storage and similar challenges surrounding the implementation, technologies. In order to design a policy framework enforcement and regulation of any given to stimulate CSA, there is wide agreement on the instrument. In many developing countries fundamental need for effective coordination between this issue presents the greatest risk, where national agricultural development plans, food security even well designed legal frameworks and and climate change (FAO, 2010). Since these are often financial mechanisms can fall victim to poor the domain of different Ministries, such coordination is implementation or compliance. Regulatory a challenge. policies, such as import tariff waivers designed In terms of specific instruments to support CSA, the to support clean technology sectors, can FAO identifies three key mechanisms: reformed credit, create incentives for corruption as does the insurance and payments for environmental services, demarcation of government funds to support all of which should be designed to incentivize farmers nascent industries. Indeed, 26 percent of the to adopt CSA practices. First of all, commercial credit solar energy firms surveyed in India (see Chapter and insurance sold to farmers needs to be reformed 4) identified corruption as a major barrier facing in order to incentivize the use of crop residues and the development of their business, with 22 restoration projects, which usually involve withdrawing percent pointing to unfavorable customs and land from short-term production, in order to obtain trade regulations. In order to reduce the risk greater longer-term productivities from increased of rendering supportive instruments obsolete natural fertility. Traditional credit and insurance because of poor enforcement, governments and products do not encourage such practices and view other stakeholders must sustain capacity building these ecological investments as negative financial programs, combined with reforms that allow trade-offs. Governments are also able to legislate for greater transparency, reporting and auditing payments for environmental services, in support of the processes throughout public administration. Box transition to CSA. Payment for environmental services, 7.5 discusses some of these issues, with regard such as the mitigation of climate change, has been to Ethiopia’s Climate Resilient Green Economy successful in the forestry sector and is a service that Strategy. smallholder farmers can easily provide, as a means to In the least developed countries and those with compensate for the short-term productivity losses that major resource constraints, governments and often result from CSA practices. other stakeholders are advised to identify clean Many countries have already proposed the use of these technology “sweet spots” in order to maximize instruments through national strategy or planning the co-benefits of economic growth and climate processes, such as Poverty Reduction Strategy Papers resilient development or greater energy access. (PRSPs), National Action Plans for Adaptation (NAPAs), This is of particular importance in countries Nationally Appropriate Mitigation Actions (NAMAs) or whose greenhouse gas emissions are of global Technology Needs Assessments (TNAs) for climate insignificance, such as in most Sub-Saharan change. In addition to highlighting the ecological African countries, where there is a far greater benefits of CSA, governments and other stakeholders need for economic development than climate could explore the potential benefit of CSA as a driving change mitigation. In such countries, instruments force for local SMEs supplying clean technologies, that support clean technology sectors should be adding, where necessary, political support to the CSA integrated into national development strategies, agenda. Chapter 7: Policy to Support Clean Technology SMEs 81 targeting the most attractive value chains, as can also receive a rapid boost through strict discussed in Chapter 3. sustainable procurement policies, manufacturer standards, product labeling and product testing and certification, as well as indirect and/or “soft” interventions such as education, Conclusions campaigns and performance rankings. This chapter has discussed the broad tool-box of • Technology development: Instruments instruments to promote clean technology SMEs designed to stimulate technology development that public policy makers, development agencies, include R&D tax credits, research grants, and other public and private actors can adopt and publicly funded competitive research adapt to fit their country‘s circumstances. These collaborations, competitions, public investment instruments have been categorized into five areas: in R&D, public or private agreements on entrepreneurship and business acceleration, technology cooperation, demonstration projects innovation finance, market development, and applied research networks. technology development and the legal and regulatory framework. • Legal and regulatory framework: The overall enabling framework for clean technology SMEs • Entrepreneurship and business acceleration: can be strengthened by implementing a number There is a range of programs for businesses, of legal and regulatory policies, including as well as international collaborations and sector-specific tax incentives, cap-and-trade networks, which countries and businesses emission schemes, emission reduction credits, can draw upon to help strengthen SME taxation on pollution or natural resource use, entrepreneurship and business acceleration import tax reductions or waivers and incentives in clean technology sectors. Here, countries to attract skilled labor. These can be designed can pursue programs offering direct technical to create business incentives and/or obligations assistance and the linking of foreign investors that address both the supply and demand side with local clean technology SMEs for technology of clean technology markets. development and/or production capacities. More hands-on and in-country business incubation This chapter has also discussed the importance is also expanding, such as infoDev‘s Climate of designing and implementing these instruments Innovation Centers. in parallel, as part of a broader, national strategy to support clean technology industries. Policy • Innovation finance: There are various makers and other stakeholders are advised to instruments available to support early stage take into account their national circumstances and financing and risk capital for clean technology focus attention on developing policy interventions SMEs, to complement traditional financing on “fertile ground,” as opposed to supporting sources. These include providing soft loans technologies and sectors that do not have the and loan guarantees and stimulating seed and support of already-existing human and natural venture capital investment. On the demand resource capacities. side, there is a significant opportunity to establish technology-specific consumer credit In order to achieve complementarities and policy facilities, which have proven particularly useful coherence, policy makers and other stakeholders for technologies that require higher up-front are also advised to survey the portfolio of existing investments such as renewable energy systems. instruments and conduct a harmonization analysis, • Market development: A range of instruments that is, to understand if and how other instruments aim to increase demand for the products and national economic circumstances stand to and services of local SMEs and facilitate the conflict with, or undermine, planned interventions overall growth of the clean technology market. to support clean technology SMEs. The case For renewable energy these include portfolio studies highlighted in this chapter illustrate how standards, renewable energy certificates and effective policies have been used to promote feed-in tariffs. Clean technology markets a dynamic SME sector within specific green industries. 82 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: Boris Balabanov / World Bank. Chapter 7: Policy to Support Clean Technology SMEs 83 Appendix A. Market Sizing Methodology The market sizing methodology has five main steps (further detail available upon request): 1. Regional clusters were defined based on a variety of indicators that allowed for modeling of regional opportunities amongst similar countries. This allowed country-level data gaps to be filled by extrapolation. The clusters group similar countries within regions, with India and China treated as stand- alone, both because of their relative uniqueness, size, and better data availability. 2. A short list of clean technology sectors was created and the overall market value for each sector for each region was estimated using a variety of data sources, including: investment projections, installed capacity projections, and national plans. Country data gaps within regions were filled by extrapolation using GDP as the main scaling factor. 3. The value chains for each sector were mapped and the proportion of value in each segment estimated (for instance, 40 percent of the value is in major equipment; 10 percent in engineering, procurement and construction; and 50 percent in operations and maintenance). This was combined with the regional estimates of sector market value to estimate the addressable market in each segment. 4. The share of each value chain segment that could be captured by local SMEs was estimated. A rating of Low, Small, Medium, or High was assigned to each value chain segment for each sector with a corresponding fixed percentage for each rating in order to estimate the value that could be captured by local SMEs. The ratings were based on the technical complexity and market structure of the segment and experience in the United Kingdom of working with SMEs in clean technology across the value chain. 5. All of the estimates were sense checked against existing global estimates and the findings from the case studies. In the analysis of opportunities the subregions were reaggregated to more conventional regions for the purposes of presenting the findings. 84 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE A1. Market sizing methodology Classify countries into regional clusters (11 regions, 2 country stand-alones) Geography Population and GDP Innovation capacity Ease of doing business ¸ Develop regional market projections (15 technology areas) Investment projection per region Installed capacity projections per Regional projections extrapolated region from national plans ¸ Map the value chain (lifetime) Major equipment Engineering, procurement, and Operation and maintenance construction ¸ Estimate the opportunity for SMEs (average) Technical complexity of value chain Localization of activity Authors’ analysis segment ¸ Triangulate findings Appendix A. Market Sizing Methodology 85 Appendix B. Value Chain Breakdowns TABLE B1. Renewables value chains Technology Major Equipment EPC O&M Onshore wind 57% 22% 21% Turbine Civil works 44% • Insurance • Tower 28% • Foundation • Administration • Blades 22% • Site access & preparation • Fixed grid access fees • Gearbox 11% • Building construction • Routine component and • Power converter 5% Balance of system 31% equipment maintenance • Transformer 4% • Control systems • Replacement parts & • Generator 3% • Substations materials • Other equipment 27% • Grid interconnection • Labor costs Other costs 25% • Project consultancy • Planning / feasibility / permitting costs Solar thermal 45% 37% 19% Solar collector Civil works • Routine inspection • Evacuated tubes • Site preparation • Maintenance of absorption and • Flat plates Balance of system adsorption chillers • Collector mounting components • Storage vessel • Plumbing Other costs • Project development, EPC, financing costs, allowances Solar PV 54% 36% 10% >1 MW PV module Civil works 57% Routine inspection • Structural installation • Site preparation Balance of system 29% Preventative maintenance • Solar racks • Panel cleaning • Inverter • Vegetation management • Transformer • Upkeep of power and • Wiring monitoring systems • Battery or storage system Other costs 14% Corrective maintenance • System design, permit • Critical repair fees, management, up- • Warranty enforcement front financing costs continued on next page 86 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE B1. Renewables value chains (continued) Technology Major Equipment EPC O&M Solar PV 45% 46% 9% <1 MW PV module Civil works 57% Routine inspection • Structural installation • Site preparation Balance of system 29% Preventative maintenance • Solar racks • Panel cleaning • Inverter • Vegetation management • Transformer • Upkeep of power and • Wiring monitoring systems • Battery or storage system Other costs 14% Corrective maintenance • System design, permit • Critical repair fees, management, up- • Warranty enforcement front financing costs Solar CSP 36% 55% 9% Solar field 80% Civil works 35% Routine inspection • Mirrors • Structural installation • Receivers • Site preparation • Steel construction Thermal storage 20% Balance of system 30% Preventative maintenance system • Balance of plant • Mirror washing • Salt • Power block • Vegetation management • Storage tanks • Heat transfer fluid system • Upkeep of power and • Insulation materials • Grid interconnection monitoring systems • Foundations • Electronics and controls • Heat exchangers • Pumps Other costs 35% Corrective maintenance • Project development, EPC, • Mirror & receiver replacement financing costs, allowances • Warranty enforcement • Plant insurance Small hydro 23% 57% 20% Electro-mechanical Civil works 65% Fixed costs equipment • Dam / reservoir • Routine component and • Tunneling / canal equipment maintenance (e.g. • Site access infrastructure replace pitted turbine blades; • Powerhouse generator rotor and bearings) • Operations labor Balance of system 25% • Insurance • Control systems • Grid interconnection Variable costs Other costs 10% • Unplanned maintenance • Project consultancy • Incremental servicing costs • Planning / feasibility / permitting costs continued on next page Appendix B. Value Chain Breakdowns 87 TABLE B1. Renewables value chains (continued) Technology Major Equipment EPC O&M Geothermal 32% 45% 23% Power plant Civil works 40% Fixed costs • Turbine • Drilling • Routine component and • Heat exchanger • Powerhouse / surface equipment maintenance facilities • Operations labor • Site access infrastructure • Insurance Balance of system 30% Variable costs • Steam gathering • Unplanned maintenance (e.g. • Control systems well replacement drilling) • Grid interconnection • Incremental servicing costs Other costs 30% • Exploration and resource confirmation • Project consultancy • Planning / feasibility / permitting costs Bioenergy 42% 27% 32% Feedstock conversion 80% Civil works 30% Fixed costs system • Construction costs • Routine component and • E.g. boiler / gasifier • Site preparation equipment maintenance / gas collection • Building construction • Operations labor system • Insurance Prime mover 20% Balance of system 50% Variable costs • Power generation • Fuel handling / preparation • Ash disposal technology • Control systems • Unplanned maintenance • Grid interconnection • Incremental servicing costs Other costs 20% • Project consultancy • Planning / feasibility / permitting costs Biofuels 46% 27% 27% Major equipment Civil works Fixed costs • Milling / crushing • Construction costs • Routine component and components • Site preparation equipment maintenance • Cooking tanks • Building construction • Operations labor • Centrifuges • Insurance • Drying systems Balance of system • Boilers • Piping Variable costs • Thermal oxidizers • Rolling stock • Energy costs • Distillation & • Forced air • Effluent treatment & disposal evaporation columns • Water treatment / digesters • Storage tanks • Chemicals, enzymes, yeast • Denaturant Other costs • Project consultancy • Planning / feasibility / permitting costs 88 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE B2. Water and sanitation value chains Technology Major Equipment EPC O&M Water 68% 27% 5% Purification Purification Purification • Filters • Sales, delivery & installation • Scheduled filter replacement • Testing & monitoring • On-going testing & monitoring equipment Distribution and Storage Distribution and Storage Distribution and Storage • Pipes • Pipe laying • On-going delivery • Tanks • Sales, delivery & installation • Replacement parts • Water towers and pumps • Civil works / construction Watershed management Watershed management Watershed management • Reservoir facilities • Civil works / • Reservoir management • Monitoring instruments construction • Data processing & logistics • Installation & calibration Wastewater 40% 50% 10% Collection Collection Collection • On-site collection (septic • Civil works (construction) • Infrastructure maintenance tanks, on-site cesspools, • Sales, delivery & installation • Trucking/transport upkeep septage removal trucks) Treatment Treatment Treatment • Sewage treatment plants • Civil works (construction) • Plant operations & • Industrial treatment plants • Sales, delivery & installation maintenance • Agricultural wastewater • Management of erosion, • Chemicals and enzymes management nutrient runoff, & IPM • Land management Final disposal Final disposal Final disposal • Dewatering equipment • Sales, delivery & installation • Equipment operations & • Processing equipment for • Retailing of processed maintenance reuse or landfill/incineration sludges Municipal solid 18% 23% 59% waste Collection & recovery Collection & recovery Collection & recovery • Collection vehicles • Strategic planning • Vehicle operations & upkeep • Communal bins • Sales & delivery Sorting Sorting Sorting • Sorting equipment (manual • Civil works and on-site • Sorting facility upkeep and mechanical) construction Treatment Treatment Treatment • Recycling facilities • Civil works and on-site • Waste management and • Organic waste facilities construction recycling facility operations Final disposal Final disposal Final disposal • Sanitary landfill construction • Civil works and on-site • Landfill operations (leachate / • Incineration equipment construction methane management) • Monitoring Appendix B. Value Chain Breakdowns 89 TABLE B3. Transport value chains Technology Major Equipment EPC O&M Natural gas vehicles 95% 5% 0% Natural gas conversion Labor n/a kit • Mechanic • Tank • Cylinder • Vapor bag • High pressure pipe • Refueling valve • Pressure regulator • Gas-air mixer • Petrol-solenoid valve • Selector switch Electric vehicles 100% 0% 0% Entire electric vehicle n/a n/a Electric bikes 81% 18% 1% E-bikes E-bikes E-bikes • Cost of an e-bike • Battery replacement • Equipment maintenance • Labor Bus rapid transit 15% 35% 50% Buses Bus system Buses • Bus station • Bus maintenance • Bus terminal • Control center Bus system • Roadway construction • Upkeep of infrastructure 90 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries Photo: World Bank. Appendix B. Value Chain Breakdowns 91 Appendix C. Policy Options and Instruments TABLE C1. Entrepreneurship and business acceleration 27 28 Name Description of Evaluation (summary of Commitment Example collaboration strengths / weaknesses) period Startup or A network of SME A more business-oriented Effectiveness is linked Brazil‘s Centre for innovator innovators or means to achieve the to establishing relevant Innovation, Entrepreneurship networks “startups” aiming same intended outcomes relationships and and Technology (CIETEC)27 to share ideas and as bilateral and multi- trust-building was set up in 1998 by the facilitate access lateral agreements and Secretariat of Development to markets and partnerships to incubate of the State of São Paulo investors clean technology SMEs and/ and the São Paulo Micro and or connect investors with Small Enterprise Support business opportunities, Service. It is hosted at the mostly in developing University of São Paulo and countries. has the capacity to support 120 technology-led firms through the pre-incubation, incubation and post- incubation phases. Management and Targeted capacity Enterprise development, that Normally a short- GVEP‘s €4 million entrepreneurship building for is, business skills capacity term, project-based, Developing Energy training entrepreneurs and development, is often an development cycle as a Enterprises Project (DEEP),28 managers operating integrated part of donor- prerequisite for access supported 900 “bottom of in, or planning backed projects to help to soft loans the pyramid” micro and to develop, clean push clean technology SME small businesses across technology SMEs ideas and opportunities in East Africa with mentoring, developing countries. Such training and support services programs are most valuable covering product quality and in developing countries technical issues, business where general business and sales skills, access skills and/or awareness to finance and business regarding clean technology networks. opportunities may be lower. continued on next page 27 For a detailed study of startup and innovator networks in Latin America, see OECD (2013) “Startup Latin America: Promoting Innovation in the Region.” www.redue-alcue.org/redue/documentosredue/StartupLatinAmerica.pdf 28 For a summary of the DEEP project (2008-2013), see: www.gvepinternational.org/sites/default/files/deep_booklet_2013_0.pdf 92 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE C1. Entrepreneurship and business acceleration (continued) Name Description of Evaluation (summary of Commitment Example collaboration strengths / weaknesses) period Multilateral Programs to Can be cooperation or Can be short or long Key initiatives include the support for support specific competition-based methods term GEF-UNIDO Global Clean clean technology clean technology to identify clean technology technology Program for entrepreneurs startup SMEs and entrepreneurs and connect SMEs29 and World Bank enhance business them to potential investors, infoDev‘s Climate Innovation environments partners and markets. Centers.30 Both have been Various programs focus building up work programs on capacity building and and capacities in developing business skills development, countries since 2011. spanning sectors and technologies. National or To link investors There is a tendency for Effectiveness is linked The Private Financing multilateral with clean such agreements to operate to establishing relevant Advisory Network (PFAN) is public-private technology at higher levels, involving relationships a multilateral, public-private partnerships opportunities in governments and large partnership initiated by the developing countries corporate players. However, Climate Technology Initiative as with bilateral agreements, (CTI) in cooperation with the these are be designed or UNFCCC Expert Group on reformed to incorporate SME Technology Transfer. PFAN players. However criteria aims “to bridge the gap and terms of reference will between investments and have to reflect sector and clean energy businesses.”31 market characteristics. Official Public spending by ODA is increasingly directed ODA funding and Danida (Danish development development OECD governments at climate change mitigation project tend to follow assistance) runs “Business assistance (ODA) on assistance to and adaptation programs, multi-year cycles Partnerships,” providing developing countries in continued recognition of financial support for to implement the relationship between the “preparation and sustainable environment and poverty. implementation of development As such there is significant commercially oriented scope for program partnerships” between developers to integrate Danish companies and clean technology SMEs into partners in developing their work plans, including countries.32 capacity building and soft financing, as a key means to address develop goals. continued on next page 29 See: www.thegef.org/gef/sites/thegef.org/files/publication/GEF-UNIDO_GlobalCleantech.pdf 30 See: www.infodev.org/articles/cicbusinessplans 31 See: www.cti-pfan.net 32 Danida Business Partnerships: http://um.dk/en/danida-en/activities/business/partnerships/ Appendix C. Policy Options and Instruments 93 TABLE C1. Entrepreneurship and business acceleration (continued) Name Description of Evaluation (summary of Commitment Example collaboration strengths / weaknesses) period UN-led initiatives Primarily technical Funding is in place under Ongoing and linked The Climate Technology to enable assistance for the UNFCCC‘s Technology to UN-chaired Centre and Network (CTCN) technology clean technology Mechanism, providing negotiations under is the operational arm of transfer “readiness,” country-specific technical the global Climate the UNFCCC Technology donor-funded but support for low-carbon Convention Mechanism providing country-led and climate resilient technical assistance to development. Interventions developing countries, in are country-led and so there support of their low-carbon is plenty of scope to involve and climate-resilient SMEs. However the longer- development plans. This term impacts depend upon will be provided through 11 the delivery of large-scale expert organizations located funds for investments that in developing and developed enable technology transfer countries, as of 2014.33 to developing countries. Knowledge Designed to Can be valuable when Ongoing, built up over International Cleantech platforms promote knowledge focused and well structured, time Network,34 hosted by the sharing on both however success depends Copenhagen Cleantech technical inputs and upon positive reputation and Cluster; Climate and project/business the achievement of “go-to” Development Knowledge implementation status. This is challenging Network (CDKN)35 (that is, “good given the plethora of online practice”) knowledge platforms. 33 See: www.unep.org/climatechange/ctcn/ 34 See: http://internationalcleantechnetwork.com/ 35 See: http://cdkn.org/ 94 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE C2. Innovation finance Name of Description of Evaluation Commitment Example instrument instrument period Loan Can be commercial Targeted, that is, subsector- Guaranteed loans The Central American guarantees36 business loans issued specific, schemes are more can be issued from Renewable Energy and by private banks, effective. Dual approval anywhere between 3 Cleaner Production though with the processes for technical and months to 10 years Facility (CAREC) provides backing of State funds commercial criteria can “mezzanine” financing to share the financial reduce business default rates. to small grid-connected risk and provide Markets can be developed for RET projects, with typically <100 percent guaranteed loans, however the a loan guarantee guarantees in case State must intervene to provide facility provided by the of default, or State- an independent guarantee United States Agency backed specialist approval process, so as to for International lenders minimize risk of moral hazard. Development (USAID), Development Credit Authority (DCA).37 Business soft State or multilateral- A very important means to Normally subject UNEP‘s African Rural loans subsidized loans assist clean technology SMEs, to negotiation, but Energy Enterprise given to SMEs on especially in Less Developed not dissimilar to (AREED) provided preferential terms, Countries where financial timeframes for concessional loans to that is, less than markets are often closed commercial loans more than 60 clean market interest rates, to smaller players or exact energy SMEs across lower or no collateral prohibitively high interest rates 5 African countries, requirements and/ and stringent lending terms. totaling approximately $5 or repayment grace Soft loans carry a lesser degree million between 2003 and periods of moral hazard risk than 201238 providing soft loans, however legal certainty regarding debt liability is desirable. State-funded Where public funds Can provide capital investment, Are normally non China‘s Shenzhen Capital venture capital are used to invest in on more favorable terms time-bound and based Group39 is one of China‘s and equity unproved or far-from- than private VC, to support on acceptance of the most successful state- guarantees market technologies, early-stage innovating clean business plan controlled venture capital often in exchange technology SMEs. However groups, pioneering the for a share of future they run a high risk of failure by Government Sponsored business ownership backing technologies that have Fund structures, (equity) not been backed by commercial investing in a range of risk capital. Also a tendency technology startups for public equity guarantees to including clean be offered for low quality and/ technologies. or high-risk investments, thus increasing failure rates. continued on next page 36 For a comprehensive overview, see: “SME Credit Guarantee Schemes in Developing and Emerging Economies: Reflections, Setting-up Principles, Quality Standards” published by GTZ (2012) www.aecm.eu/servlet/Repository/giz-study-on-smes-credit-guarantee- schemes.pdf?IDR=553 37 For more information on the Central American Renewable Energy and Cleaner Production Facility, see: www.iadb.org/en/projects/ project-description-title,1303.html?id=rg-m1002 38 For a detailed study on the AREED project see: Haselip, J., Desgain, D. and Mackenzie, G. (2013) “Energy SMEs in sub-Saharan Africa: Outcomes, barriers and prospects in Ghana, Senegal, Tanzania and Zambia.” http://orbit.dtu.dk/fedora/objects/orbit:121830/ datastreams/file_0c82ddc4-488c-4ac1-95b4-dba29ea1a29a/content 39 Portal for Shenzhen Capital Group: www.szvc.com.cn/Default.aspx Appendix C. Policy Options and Instruments 95 TABLE C2. Innovation finance (continued) Name of Description of Evaluation Commitment Example instrument instrument period Targeted Commercial or Can help overcome demand- Can be developed as a Tunisia‘s consumer credit consumer credit subsidized lending side barriers to clean short-to-medium term facilities for solar water to household technology products with bridge to “normalize” heaters40 (SWH) have or commercial relatively high up-front capital commercial lending been a key means to consumers for specific costs, where banks have either boost demand and lower clean technology blocked loans or charged high system costs, working in products rates for unknown products partnership with multi- that were perceived as right lateral agencies and local risk. Tailoring technology- banks. specific loans, rebates or tax credits builds specific knowledge within banks, enables more accurate risk assessment and cheaper financing. 40 For a detailed study of Tunisia’s PROSOL programme to support SWHs, see the Climate Policy Initiative (2012): http:// climatepolicyinitiative.org/wp-content/uploads/2012/08/Prosol-Tunisia-SGG-Case-Study.pdf 96 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE C3. Market development Name of Description of Evaluation Commitment Example instrument instrument period Sector-specific Can be applied to a Government-imposed performance Medium to Thailand‘s 1992 Energy government range of sectors to standards are a key means to long-term, with Conservation Promotion standards pull demand for clean influence the pace of innovation clear year-based Act (subsequently revised) technology, from and technological change in targets initiated demand for energy efficiency in specific sectors, driving demand efficient lighting, air- buildings to biofuel for clean technology products and conditioning, and hot mixing services. The main challenge is to water generation and steer a course beyond business solar energy systems, as as usual, balancing ambition and well as the construction of realism. Most effective standards energy efficient buildings are developed in partnership with (envelope).41 local industry, charting a clear, long-term transition that will ensure future market demand. Manufacturer A standard for Manufacture and/or performance Once The Energy Star standard standards and the purchase or standards and labeling have established, is the most successful product labeling manufacture of proved to be a powerful means performance international label for appliances that meet of driving demand for clean criteria must energy efficient consumer certain environmental technologies, in particular tighten over goods which offer performance energy efficient consumer time so as to efficiencies of at least 25 goods. Success is achieved by drive further percent above the United means of communicating simple innovation and States federal standards information, offering “win-win” investment and has been adopted by benefits and raising consumer to improve the EU and most other consciousness. However their performance OECD countries.42 power depends upon wide recognition of the standard, thus limiting the scope for new standards. Product testing Aims to level the In embracing quality control Requires strong, IFC/World Bank‘s Lighting and certification playing field between and certification schemes, sustained Africa initiative supports businesses and ensure governments can support support “Lighting Global” quality quality control. This local clean technology SMEs and market verification of solar lamps, can be done either by that would otherwise face stiff regulation where approved products national governments competition from low-cost and commanded about a third or international low-quality imported goods, of Africa’s off-grid lighting agencies. thus maintaining or improving market in 2012.43 technology reputations. Can work in partnership with product labeling initiatives, but success depends upon a significant degree of consumer awareness to make informed decisions. continued on next page 41 For a detailed study of energy efficiencies driven by Thailand’s government-set building standards see: Chirarattananona, S. et al. (2010) “Assessment of energy savings from the revised building energy code of Thailand,” Energy, Vol.35 (4) p. 1741–1753. 42 For more information on Energy Star and qualified products, see: www.energystar.gov/index.cfm?fuseaction=find_a_product 43 See here for more information about Lighting Global’s minimum quality standards: www.lightingglobal.org/activities/qa/standards/ Appendix C. Policy Options and Instruments 97 TABLE C3. Market development (continued) 44 45 46 Name of Description of Evaluation Commitment Example instrument instrument period Renewable Obligations or Portfolio standards (or obligations) As with RE portfolio standards and Energy Portfolio portfolio standards tend to drive price competition all market obligation have been used Standards or are government- between different RETs, however mechanisms, the in the United States, United Obligations imposed mandatory they often fail to support import but effectiveness of Kingdom and Sweden as and Renewable targets for utilities to more expensive technologies, such RECs depends an alternative to feed-in energy generate X percent as solar PV. In order to stimulate upon sustained tariffs and have succeeded certificates of their power from investment in renewable energy government in supporting mostly (RECs) RETs. This normally capacity, the demand and price commitment. onshore wind power. RECs results in the creation for RECs has to be high. While have been traded in India44 of certificates which RECs are a market mechanism, since 2011 however market can “surrendered” or prices are largely influenced by the participation has been low traded, providing a regulatory framework that creates and has failed to attract market-based subsidy. them. Therefore the penalties for significant investment. noncompliance must be significant, and floor prices should not be set so low that the value of RECs becomes of marginal importance. Feed-in tariffs Provide a minimum Simpler than RECs, FITs have The number of 80+ countries worldwide (FITs)45 guaranteed price been successful in many OECD years offered have legislated FITs, paid by utilities to countries, driving markets for by the FIT is of however the vast majority all generators of wind and solar power where SME fundamental of RET investments electricity from participation is high for installation importance and supported by FITs has been renewable energy, and operation. They are unlike can range from in developed countries. supplying the grid. conventional subsidies in that they 5-30 years This is partly because of The exact value of are intended to spur market and the rapid uptake of FITs in tariff support is set by technological development, driving developing countries since government, usually cost reductions in the process, 2009, following which there for a fixed time period, normally by tapering tariff over is a delay during projects and tends to vary time. FITs are conceptually very are designed and investors according to the type of simple and easy to administer, are mobilized.46 generation technology. offering clear financial risk management for investors. However, once renewables take up a larger share of the generation market place, fixed-price (as opposed to market-based) FITs can become expensive and harder for governments to justify. Advanced A legal contract A means to minimize investment Technology- Pneumococcal Vaccine market between public risk in important but unproven specific and supported by the Global commitment or private entities technologies, where payment is only time-bound Alliance for Vaccines and that guarantees made upon delivery. To date has Immunization the purchase of a only been used for the development technology, subject to of medicine and is most relevant meeting minimal, pre- in addressing specific technical defined, performance problems or requirements. requirements Of minimal relevance to clean technology, and its effectiveness diminishes along with a high degree of technological uncertainty. ontinued on next page 44 For an assessment of the first year of REC trading in India, see: www.isb.edu/download/16739/Falling-Short-An-Evaluation-of-the- Indian-Renewable-Certificate-Market.pdf 45 46 For a comprehensive overview of FITs for developing countries, see: www.unep.org/pdf/UNEP_FIT_Report_2012F.pdf 98 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE C3. Market development (continued) 47 48 49 50 Name of Description of Evaluation Commitment Example instrument instrument period Sustainable Purchasing policies by Can be a powerful means to drive Policy continuity In 2007 the Federal procurement47 governments and large demand for clean technology drives long term government of Brazil corporations, where products and services as demand for imposed public decision making takes governments tend to be the single clean technology procurement criteria to into account external largest consumers in an economy. products and ensure the purchase of environmental and However the exact criteria can vary services legally-certified sustainable social costs, in addition significantly between organization, wood products, with criteria to financial (internal) thus consumption that is radically designed to increase the costs more sustainable than “business participation of SMEs. as usual” does not always occur. However more wide- reaching and progressive social and environment criteria has been legislated by the State of Sao Paulo.48 Public rankings A ranking of As with all rankings, results Most rankings The Global Clean countries, businesses, are the product of context-free are published technology Innovation organizations or criteria that are unlikely to reflect yearly and obtain Index, published by the municipalities based fairly the performance of all status and Clean technology Group on the production or target entities or jurisdictions, following over and WWF, first published consumption of clean for the sake of comparison. time in 2012 ranked Denmark, technology While rankings can stimulate a Israel, Sweden, Finland and healthy degree of competition, the United States as the and hence motivation to reach top-5 countries for clean specific targets, they can also technology innovation.49 have a counter-productive effect whereby the “usual suspects” (for instance, Scandinavia) dominate the rankings, thus demotivating others and having a competitive effect only at the top. Campaigns Can take many forms Need to be simply, clear Normally short UNDP has supported a and be official (that messages most campaigns are term, targeted campaign to “crowdfund” is, government-led), conducted online and can lead to solar energy for schools commercial, individual “crowdfunding” (that is, a large in Croatia, which or community-based number of small contributions), demonstrated the power and broad or specific especially relevant for diaspora of campaigns and the in focus populations to support initiatives in potential of crowdfunding their home countries as a niche instrument.50 ontinued on next page 47 For a generally overview of sustainable public procurement (SPP), see: http://esa.un.org/marrakechprocess/pdf/ InnovationBriefs_no5.pdf 48 See Brauch, M. (2012) “Sustainable Public Procurement in the Sao Paulo State Government” www.iisd.org/pdf/2012/spp_sao_ paulo_brief.pdf 49 For the full report, see: http://awsassets.panda.org/downloads/coming_clean_2012.pdf 50 For more information on this campaign, see: www.al.undp.org/content/croatia/en/home/presscenter/articles/2013/12/02/ crowdfunding-campaign-for-the-first-energy-independent-school-in-croatia-to-be-launched/ Appendix C. Policy Options and Instruments 99 TABLE C3. Market development (continued) 51 Name of Description of Evaluation Commitment Example instrument instrument period Education Can operate at various Education is fundamental to Long term, Cleantech.org‘s levels from primary any enabling framework and sustained “Professional Series” to advanced, to either potentially most powerful, seminars and short courses raise awareness about influential instrument. In the on how to commercialize clean technology case of clean technology SMEs, clean technology. These are or build specific education can be a means to raise online courses and hence capacities awareness and hence demand accessible to potentially for clean technology products anyone, worldwide.51 and services, though greater influence is more likely through specific courses at University level. However can be longer-term, difficult to measure impact. 51 See: www.cleantech.org/education.html 100 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE C4. Technology development 52 53 54 55 56 Name of Description of Evaluation . Commitment Example instrument instrument (summary of strengths / period weaknesses) R&D tax Various forms of This is the primary nongrant To be effective in South Korea‘s Limited Tax credits52 tax exemption financial incentive for SMEs to stimulating business Incentives Law53 offers a tax or reduction enter the clean technology sector ideas, plans and deduction for SMEs of 8-25 granted to SMEs and is an established benefit investment, tax percent when 40 percent of that pursue clean often afforded to SMEs in general, credits need to be current year R&D current- technology market given their higher innovation rates simple, clear and year R&D expenditures opportunities and job creation. For the clean stable, backed by exceed the average over technology sector tax jurisdictions strong political the previous 3 years. can extend and/or deepen the tax commitment in the Nonetheless, the relative credits to SMEs given their positive medium to long share of R&D investment by environmental externalities. term. SMEs has decreased since 2001, despite tax regimes being more beneficial than for large firms.54 Research Mostly public but An important means to provide Normally these The multi-donor Africa grants sometimes private funding for early-stage business are one-off grants Enterprise Challenge Fund funding to conduct and innovation ideas that are too with no conditions, (managed by KPMG) awards R&D in a specific high risk for private investors, though can be linked up to $2.5 million in grants area or application, including venture capital. In to the promise of and interest free loans to normally the competition-based awards, next-stage financing innovating SMEs in Africa, awarded on a naturally high failure rates are with a primary focus on competitive basis exacerbated by the risk of “picking climate technologies.55 by a committee winners.” However this can be Launched in 2008 the fund of experts. mitigated by support for business has grown from $30 million Typically grants ideas that spin-off from University- to $190 million and approved are structured into based research. 133 projects across 22 “phases,” from African countries. exploratory to pre-commercial. Publicly funded Clean technology There is a trend in OECD countries Normally time- EU‘s €70.2 billion Horizon competitive research and to combine business, especially bound and subject 2020 framework56 research innovation projects SMEs, into research and innovation to funding cycles, (2014-2020) merges collaborations involving numerous processes where public research reflecting high-level research and business partners to address funding is no longer the primary political priorities innovation, intended to specific, normally domain of Universities. While this boost competitiveness of cross-boundary, has been criticized by some for the host regions but also problems prioritizing business interests, it includes significant scope is likely to enable a faster rate of for involving University and technology commercialization, SME partners in developing informed by public-funded R&D. countries, to develop clean technology markets. ontinued on next page 52 For a summary of tax incentives for R&D and innovation, see OECD: www.oecd.org/sti/outlook/e-outlook/stipolicyprofiles/ competencestoinnovate/taxincentivesforrdandinnovation.htm 53 In January 2014 Korea passed tax reforms including changes to R&D incentives, though these remain favorable to smaller businesses. See: www.ey.com/Publication/vwLUAssets/Korea_passes_tax_reform_proposals_including_several_changes_to_R_D_incentives_ regime/$FILE/2014G_CM4141_KR per cent20passes per cent20tax per cent20reform per cent20proposals per cent20including per cent20changes per cent20to per cent20R per cent20D per cent20incentives.pdf 54 For a detailed study, see: Song, Jong Guk (2007) “The impact of fiscal incentives for R&D investment in Korea” www.oecd.org/sti/ inno/40023738.pdf 55 For more information on the Africa Enterprise Challenge Fund (AECF) see: www.kpmg.com/eastafrica/en/services/advisory/ development-advisory-services/services_and_expertise/private_sector_development/aecf/pages/default.aspx 56 See: http://ec.europa.eu/programmes/horizon2020/ Appendix C. Policy Options and Instruments 101 TABLE C4. Technology development (continued) 57 58 59 60 Name of Description of Evaluation . Commitment Example instrument instrument (summary of strengths / period weaknesses) Competitions Mostly launched Can be a simple and powerful Normally time- South Africa‘s “Step-Up by public means to stimulate technical bound events Technology Innovation organizations innovation and progress in specific with an entrance Competition” for SMEs to incentivize areas, often more effective when deadline, depending does not specify technology the invention of a target-based criteria is used, on the nature of the targets or sectors. It is an new hardware or for instance, to invent a light challenge open competition to all solutions, designed bulb that uses less than X unit of technology innovations, as either open energy. Competitions are open to where the prize is a competitions based anyone and can have unintended combination of business on the merit of positive spin-off effects, though development training and idea or to address where the scope and parameters contact with potential specific technical of the competition itself is set investors.57 problems or by technical experts they may targets, normally overlook more relevant or pressing backed by a targets or problems. significant financial incentive (prize money) Public Fiscal spending Has been a powerful means to Strong top- Brazil‘s National Bioethanol investment in on R&D as part of boost innovation and technical down political Science and Technology R&D58 national strategy capacities in many developed commitment and Laboratory (CTBE) was to boost clean and emerging economies. Is stability is essential, set up in 2008 to build technology, either most effective when markets or ideally with clearly the country‘s competitive through direct technologies are well-defined and defined phase-out advantage in biofuel funding to SMEs in support of strategic national or exit strategies technologies, co-located with or through public development goals, ideally the Brazilian Synchrotron institutes and building upon pre-existing national Light Laboratory (LNLS) Universities capacities. However can run risk and the State University of of undermining market forces if Campinas (UNICAMP) and designed to pick winners. funded by the Brazilian Ministry of Science and Technology.59 Public or Can be Most such agreements are Success depends “Bridge Clean technology,” private government-to- designed to promote mutual upon trust and launched in 2010 and hosted agreements government or via interests in clean technology relationship- by UK-India Business on technology trade associations development and market building, so tend to Leaders Climate Group cooperation expansion, based upon sharing of strengthen over time aims to “bridge the gap knowledge and skills. Most tend to between businesses, involve larger corporate players. technology developers, And while much depends on the financial institutions and nature of the sector, technology policy makers with the and type of agreement, there is objective of promoting clean certainly great scope to involve technology development, clean technology SMEs, especially commercialization, adoption for sectors with distributed and diffusion.”60 operations or more complicated supply chains. ontinued on next page 57 For more information see: www.step-up.org.za 58 For more information on the role of public R&D and international Science, Technology and Innovation, see OECD (2012) www.oecd.org/ sti/outlook/e-outlook/stipolicyprofiles/interactionsforinnovation/buildinginternationalstilinkages.htm 59 Portal for Brazil’s National Bioethanol Science and Technology Laboratory (CTBE): www.bioetanol.org.br/english/ 60 See: www.bridgecleantechindia.com 102 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE C4. Technology development (continued) 61 62 Name of Description of Evaluation . Commitment Example instrument instrument (summary of strengths / period weaknesses) Demonstration Specific clean If well designed can be of strategic Only necessary for Turkey‘s International projects technology value, accelerating learning-by- the duration of the Centre for Hydrogen Energy projects, normally doing and rapidly reduce future project itself, though Technologies61 (2003-2012), backed by national project cost with high visibility makes sense if there funded by UNIDO and or multi-lateral leading to public acceptance. is wider strategy the Turkish Government, public funds to However can be overly expensive or commitment to provided technical and demonstrate and/or demonstrate failures and develop and apply financial support to feasibility of near well as successes, translating the technology in the development and or far-from-market into political risks that may be the demonstration implementation of hydrogen technologies counter-productive. country energy demonstration projects, conducting applied R&D for developing countries, training and education programs. Applied A network of A proven means to conduct Effectiveness The CGIAR62 umbrella Research researchers important problem-driven is linked to group funds and co- Networks focusing on applied research, based on knowledge establishing long- ordinates research via 15 topics, in either and resource sharing between term relationships organizations, mostly based North-South developed and developing in developing countries, and South-South countries and to avoid duplication into sustainable agriculture collaborations of data gathering and analysis and forestry enabling a high degree of knowledge sharing. 61 For more information on Turkey’s International Centre for Hydrogen Energy Technologies, see: www.unido.org/en/what-we-do/ environment/energy-access-for-productive-uses/energy-and-climate-change/global-forum-activities/energy-technology-centers/ international-centre-for-hydrogen-energy-technology.html 62 See: www.cgiar.org/ Appendix C. Policy Options and Instruments 103 TABLE C5. Legal and regulatory framework 63 64 65 66 Name of Description of Evaluation . Commitment Example instrument instrument (summary of strengths / period weaknesses) Cap-and-trade The trading of This is the most common To be effective cap- European Union‘s Emissions emission permits, normally market mechanism to and-trade systems Trading Scheme (EU-ETS) schemes between private incentivize investment in clean need to be in place is the world‘s largest and entities, for the right technology, popular with both indefinitely, with longest-running, covering to emit X tones of governments and businesses clear indications around 12,000 industrial industrial gases (CO2, in OECD nations for the ease that caps will installations responsible for SO2, NOx) or extract of administration. However become tighter over 45 percent of the EU‘s total natural stock (for unless the caps are revised in time GHG emissions.63 Similar instance, fishing line with technological change schemes are operating or quotas), subject to a and economic growth then the planned in emerging markets, nationally-set limit price signals may be too weak to for example in China where (cap) influence investment behavior. 7 cities are launching their More effective if permits are own ETS, starting with auctioned instead of being given Shenzhen which covers 635 away, within a broad cap so as to installations.64 However no present “leakage.” Furthermore, ETS has, as of 2013, managed it is difficult for developing to push carbon prices up countries to implement ETS to levels likely to stimulate and offset schemes as many significant investment don’t have the data or capacity in climate mitigation to establish GHG emissions technologies, mainly because baselines and projections. of weak caps. Emission A system where As with cap-and-trade systems, To be effective in The Clean Development Reduction businesses are baseline-and-credit trading reducing emissions Mechanism66 (CDM) is the Credits65 rewarded for can provide simple economic in the long term, best known example of the reducing emissions incentives to invest in clean baseline-and-credit trade in Emission Reduction below a baseline, technology. However since trading needs to be Credits, which issues 1 billion usually intensity- baselines are normally set followed with long- Certified Emission Reductions based (for instance, against intensity targets, term commitments (CERs) credits between 2001 CO2 emissions per increases in total production by all countries to and 2012. However the price unit of production). can outweigh the emissions reduce absolute of CERs collapsed to below 1 These reductions reductions. Furthermore, it emissions levels EUR by 2012 following huge are converted into can be difficult to establish oversupply in the EU-ETS and tradable credits “additionality,” that is, to know the failure to secure a post- where liable parties if the emissions reductions Kyoto agreement on global must purchase awarded credits under the reductions. Furthermore, 60 credits and then scheme would have occurred percent of CERs have been surrender them to anyway. sold by Chinese companies the regulator at the for the destruction of end of each year, non-CO2 gases, as opposed to meet their share to investment in low-carbon of an economy or technologies. sector-wide reduction targets. ontinued on next page 63 For detailed analyses of the EU”s ETS see: www.carbontrust.com/resources/reports/advice/ eu-ets-the-european-emissions-trading-scheme 64 For a summary of the Shenzhen pilot ETS see: www.economist.com/blogs/analects/2013/06/carbon-emissions 65 For a succinct explanation of Emission Reduction Credits, see the Australian government’s Department of Environment (2010) guidance on “Baseline and credit schemes” http://climatechange.gov.au/sites/climatechange/files/files/reducing-carbon/mpccc/baseline-credit- scheme-pdf.pdf 66 For detailed analysis of CDM projects in emerging economies and developing countries, see: http://cdmpipeline.org/cdm-projects- region.htm 104 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries TABLE C5. Legal and regulatory framework (continued) 67 68 69 Name of Description of Evaluation . Commitment Example instrument instrument (summary of strengths / period weaknesses) Taxation on Taxes can be levied Born out of the “polluter As with most Among developing countries, pollution on specific pollution pays principle,” that is, that fiscal measures, India introduced a carbon or natural outputs or on the a company causing pollution its effectiveness tax in 2010, though only for resource use abstraction or or resource extraction should depends upon coal, charged at $1.07 per consumption of pay for the cost of removing sustained ton either produced in or natural resources or replacing it, or provide government imported to India.67 South including water user compensation to those who commitment Africa, as another carbon- fees, wastewater have been affected. While such intense developing economy, discharge fees, and taxes can raise revenue streams has embraced the idea of solid waste disposal to finance clean technology a carbon tax, though has fees ventures and business delayed implementation until development they do not, unlike 2016.68 market-based mechanism, ensure pollution reductions. Rather they simply penalize unsustainable behaviors, which may not trigger investment in clean technologies. Import tax Key fiscal measure Can assist clean technology As with most Senegal‘s 2010 Renewable reductions or that can be targeted SMEs that depend upon the fiscal measures, Energy (RE) Law includes a waivers for specific clean importing of specific, often its effectiveness 0 percent corporate income technology imports high-tech, inputs. Most relevant depends on stable tax (normally 30 percent) for to Less Developed Countries. A and long-term investors in RE and 0 percent main challenge is to maintain an commitment from VAT (normally 7 percent) for up-to-date list of technologies government RE products and services, and associated equipment which has been of particular (such as inverters used for PV benefit to the solar PV systems) that is fair and not market.69 open to abuse by traders who would avoid tax but use the equipment for other, that is, nonclean technology, sectors. Attracting Government policy Aims to attract creative and Strong top- Various African governments talent (“sticky to attract and retain scientific talent for clean down political committed to the idea cities”) talent and human technology, especially relevant commitment and under the New Partnership capital through for less developed countries stability is key to for Africa‘s Development income tax breaks that have suffered a “brain effectiveness (NEPAD), though it has mostly drain.” However needs to be been implemented on an implemented in concert with ad-hoc basis with no formal other enabling policies and mechanisms in place or also to significant enough to means to measure impact, to trigger a flow of talent to be date. successful. Policy risk is higher in the countries that would stand to benefit most and eligibility requires strict oversight so as to avoid gaming. 67 Information on country carbon taxes is compiled by KPMG: www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/green- tax/Documents/kpmg-green-tax-index-2013.pdf 68 News report of the South African government’s 2014 decision to delay carbon taxation until 2016: www.bloomberg.com/news/2014-02- 26/south-africa-delays-carbon-tax-plans-levies-on-acid-mine-water.html 69 See Senegal’s ‘Renewables Readiness Assessment’ (2012) published by the International Renewable Energy Agency (IRENA) www.irena. org/DocumentDownloads/Publications/IRENA per cent20Senegal per cent20RRA.pdf Appendix C. 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