Finance and investment for clean energy in Asia: banks tell it how it is

The UNFCCC announced in a press conference last week that private investment was vital in driving forward a low carbon economy. “86% of all investment comes through the private sector” said Yvo de Boer. He called for "intelligent financial engineering”, whereby countries create the right policy framework to drive private investment in clean energy.

A little way down the road from the conference, the banks needed to drive that investment discussed how to drive forward clean energy investment in Asia at an event held by the Asian Development Bank.

Asia is home to the fastest growing greenhouse gas emissions on the planet. According to Josh Commody from the Asian Development Bank, a multilateral development finance institution, Asia’s share of emissions was 9% in 1973 and by 2030 its share is predicted to grow to 42%; “and there are still a billion people in Asia without access to electricity” Commody reminded the audience.

“The largest share of investment into renewables needs to be directed towards developing countries were the most cost effective opportunities lie” he said.

Whereas households drive 25% of private investment, 60% of investment is made by corporations said Cammody. The pressure is on corporate investors to drive the new low carbon economy Asia needs.

Adam Kirkman, programme manager for energy and climate at the World Business Council for Sustainable Development, and Odin Knudsen, managing director of environmental products at investment bank JPMorgan, agreed that investors would need lower risk and bigger paybacks before they invested large sums in renewable energy in Asia.

Knudsen said that the payback from renewables projects under the Clean Development Mechanism (CDM) was too little and that banks were wary of project financing in “dicey emerging markets".

He raised concerns about the future of the CDM in Asia. The payback for cleaning up hydrofluorocarbons (HFCs) was massively more than for investing in renewable energy, Knudsen said. “HFCs have disappeared from the market, they were sucked up straight away”. Now the question is whether investors will take on the less fruitful challenge of renewables energy projects.

Carmody accepted that, aside from investing in CDM projects, there was little incentive for banks to invest heavily in renewable energy in Asia, as long as Asian countries continued to refuse to accept a price on carbon.

He added that national government targets for renewables, such as China's 20% renewables target for 2020, were providing other incentives to invest, "though not on the scale needed to tackle climate change".

Kirkman explained that unless the risk in renewable energy investment was reduced, mainstream investors would remain skeptical. Whilst private equity is willing to invest in riskier ventures, he said, big institutional investors are far more risk averse. He produced a graph displaying investment rising exponentially as risk declined.

What needs to happen to reduce the investment risk?

“Clear and strong expectations of a carbon price”, according to Kirkman, as well as “predictable future demand for key technologies”.

The problem is not creating the technology, it's developing it to a commercial scale. “A number of technologies have been developed that could offer low carbon solutions”, he said. Unfortunately, investors are most likely to step in once a technology has reached the “near commercial stage” explained Kirkman. In short, this leaves low carbon technologies languishing at the high cost, low volume stage with no one willing to invest in their development.

Knudson suggested that national funds should be set up dedicated to clean technology development, whilst Kirkson suggested public private financing in the early stages of R&D might provide the solution.

Carmody said we should be encouraged by the simple fact that banks were at the Bali conference, taking the issue seriously, “In the COPs we’ve attended previously, the question was where are the banks? Well they’re here now” he said.

But maybe they should be somewhere else - not at the side events, but with the UNFCCC advising governments on what types of "intelligent financial engineering” will actually work. “The conversation going on between banks and governments definitely isn’t loud enough”, said Carmody, in conclusion. "We risk spending ten years setting up something that doesn’t work, and spending the next ten years trying to undo the mess.”