FEATURE: What opportunities do private investors see in low emission development?
In Paris last month, Ron Benioff asked Kyung-ah Park of the Environmental Markets Group of Goldman Sachs how the global investment community is engaging with low emission opportunities. Ms Park outlined Goldman’s $150 billion clean energy commitment – and shared her optimistic outlook for how private investment in clean energy and sustainable infrastructure could grow considerably, given the right supports and incentives.
Tell us about Goldman Sachs’ Environmental Markets Group – how does it work to catalyse investment in low emission approaches and technologies?
Goldman Sachs is planning to invest US$ 150 billion in the clean energy sector by 2025.
There is ample capital available on the global capital markets – for example, pension funds have close to $100 trillion under management and global capital is $150-200 trillion; there is some overlap with the former. These have been chasing long-term yields for a very long time. People are looking at renewable energy as a way of getting long-term yield exposure.
We want to drive down cost of capital and bring capital affordability for renewable energy solutions. We were the first bank in 2013 to aggregate solar projects to bring the benefits of diversification to capital markets – we did it in Japan (‘Goldman Sachs Eyes Japan Renewable Energy Investments’). The Japanese market has traditionally been a bank lending market. We were able to bring investors a long term yield exposure through renewable energy assets. That is how we are going to get to $150 billion worth of capital by 2025 to deploy to help countries like the Dominican Republic to meet its development goals.
More and more private sector capital is coming in through ‘strategic capital’ – these are corporates who are looking to make investments from the pool of capital in their balance sheets as well as leveraging their energy needs – for example, the Googles, IKEAs and Apples of the world. Goldman Sachs announced it would be part of RE100 so that we can act as a credit worthy off-taker to allow renewable energy to be deployed.
What are the most important measures and steps that developing countries can undertake to reduce investment risks and attract this private capital?
For clean energy and sustainable infrastructure solutions in developing countries, it’s critical that you have long-term stable policies that will be stable over administration changes for investors to have confidence.
Utilities are often backed by the state – the ability of those utilities to have good governance is absolutely critical.
The enabling infrastructure is more than the clean energy power plant, it’s about transmission as well as timely access to integration [with the electricity grid]. Countries may have very large renewable and portfolio goals such as feed-in tariffs, but the execution details are not there. For example, it may take a very long time to get integration into the grid and a long time [for the power provider] to get paid. If you don’t have the early win, then the market doubts.
It’s important for national governments to have a national infrastructure plan where it is not just a vague notion of what kind of investments you want. But more concretely, if you want clean energy investments: what are the priority sites where the transmission availability may be? Where are the sites where ease of permitting may be more facile? Where there’s the right human capital to get project pipelines off the ground?
On this question of investable, bankable projects: at Goldman Sachs, if you have a project that is ‘investment grade’ – ready to be financed – then you shift your attention to that project as opposed to going into the emerging market. So project pipeline readiness is absolutely critical.
Development finance institutions are also very important. They are better than private sector institutions to work bilaterally with governments to make a project pipeline bankable. Government guarantees can also make the economic equation right for clean energy compared to tradition energy sources.
Often private investors are risk averse – I have seen many approaches to addressing this. It can be making the utility more credit worthy – such as the facility offered by MIGA, part of the World Bank, which has credit de-risking roles. Depending on what kind of technologies you are importing, you can involve export credit banks and can work with them to provide credit guarantees as well.
There are examples of green funds and green banks emerging – Malaysia has one, the Dominican Republic is thinking of one. So there are lot of different mechanisms to facilitate de-risking and so facilitate bankable projects.
Can you especially highlight some new and innovative approaches that have potential for broad replication?
An up and coming area is green infrastructure. People are trying to understand how to finance green versus grey solutions. There are conversations about things like, for example, having oyster reefs and dunes and other types of natural capital in coastal areas (to address climate change) instead of hard coastal defences.
Goldman Sachs is piloting a project through the Climate Group in India where entrepreneurs are providing small scale solar power systems. They can’t access short term debt, so we are trying to figure out if there is a way to partner with local banks to offer it to them, as debt financing is usually a lot cheaper than equity financing in most circumstances.
There is no one size fits all – in an ideal world there would be a single, big global facility to handle such transactions. However, I think we are going to still see a variety of forms of credit de-risking of global public-private mechanisms.
Having said that, I think that national green funds are also important for a couple of reasons. A national green fund symbolises your commitment. It focuses your attention on national infrastructure priorities that are green and it’s a way of putting whatever public sector funds you can afford into these projects. It’s a way for private sector investors to work out where private sector funding can be channelled.
How do you describe climate risk?
There are country-specific risks; for example, in a very low income country, we see many dimensions of risk, whether it is the governance aspect, or the volatility compared to the OECD where people are familiar with the investment environment.
A project may appear ‘shovel ready’ but when you do the due diligence, it’s very often far from shovel ready – our environmental impact assessment standards are very stringent.
There can be relocation issues: if you are trying to bring energy or infrastructure into load centres, we often see projects that need relocation of local people. The question is: have they done the right stakeholder consultation and engagement? Have the people been adequately compensated?
Capital will go where the risk return is optimised, you have to make the cash flow visible – the credibility of the off-taker (this goes back to the utility and its governance structure), the credibility of the developer to deliver on the construction are important. It is important to assess all these aspects of risk. I’m optimistic, a lot of places evolve and there are a lot of emerging growth markets.
How can the LEDS Global Partnership have a big impact?
If you can demonstrate a number of countries that have infrastructure plans and investment plans, then it will give investors the confidence in LEDS.
Ron Benioff is Co-Director of the LEDS Global Partnership. The LEDS GP is to provide support to developing countries in preparing ‘bankable’ projects. In Latin America and the Caribbean, Africa and Asia, the LEDS GP will provide governments with training on risk reduction instruments and LEDS in public budgeting. Its experts are available to review funding proposals and identify donor support. CDKN, together with the National Renewable Energy Laboratory (NREL), runs the Secretariat of the LEDS GP.
If you are not already a member of the LEDS GP, please consider joining today to enjoy access to all these member services: visit www.ledsgp.org/join
Image: installing solar panels, Japan, credit Cocreatr (flickr.com)