In 2010 world governments agreed to limit the increase in global temperature to two degrees Celsius (2 °C) above pre-industrial levels to avoid the worst impacts of climate change.
To have an 80 percent chance of maintaining this 2 °C limit, the IEA estimates an additional $36 trillion in clean energy investment is needed through 2050—or an average of $1 trillion more per year compared to a “business as usual” scenario over the next 36 years.
A new Ceres report has provided recommendations for investors, companies and policy makers to increase the annual global investment in clean energy to at least $1 trillion by 2030—roughly a four-fold jump from current investment levels.
The market for clean energy project bonds is poised to grow. As of November 2013, utility-scale clean energy projects (mostly for wind and solar) had issued over $7 billion of project bonds to insurance companies, pension funds and other investors.
Given the pipeline of 225 utility-scale (i.e. 95 megawatts and above) wind and solar projects in the U.S. and Europe, the potential clean energy bond market is estimated to be $142 billion, with bond issuances of $18- $40 billion annually by 2020 (up from roughly $2 billion today).
To be investable by institutional investors, however, bonds backed by revenues from clean energy projects must be rated as “investment grade.” Limited performance history, however, can make this rating difficult for some projects to attain. Policy makers can address this problem and accelerate issuance of clean energy project bonds by using public funds to provide “credit enhancement” to such
By being first in line to assume losses, subordinated debt reduces the probability of loss for senior debt. A loan-loss reserve facility is a pool of funds set aside to cover a maximum portion of losses (e.g. 10-20 percent) on a specified pool of loans.
By reducing the probability of investor losses, publicly funded subordinated debt or loan-loss reserve facilities will improve the creditworthiness of clean energy project bonds and bolster investor demand.
For example, New York State’s new $1 billion Green Bank Initiative, offering subordinated debt and loan-loss reserve facilities to renewable energy and energy efficiency projects, estimates that over 20 years such credit enhancement techniques can leverage $5-10 of total clean energy investment for every $1 of public funds.
Similar initiatives are underway elsewhere in the U.S. and U.K., suggesting an emerging model for other countries to replicate. Regional initiatives to provide credit enhancement across multiple sectors, such as the €5bn Europe 2020 Project Bonds Initiative (PBI), should also be modified or expanded to include greater allocations to clean energy projects.
Development banks are major players in funding clean energy projects in both emerging and developed economies. From 2007-2012, KfW and the European Investment Bank together deployed $202 billion toward clean energy in Europe. Funding from the China Development Bank ($77.8 billion from 2007-2012) and the Brazilian Development Bank ($46.8 billion from 2007-2012) makes these institutions similarly dominant in the clean energy financing landscapes of their home markets.
This scale and experience positions these institutions to successfully provide credit enhancement to clean energy project bonds. As a complement to their traditional focus on low-cost direct loans and other forms of concessionary finance, these institutions should prioritize opportunities to use their balance sheets in support of clean energy and energy efficiency bonds.