Cheap – or ‘concessional’ – finance is the vital ingredient for accelerating PV deployment in developing countries and can make solar and wind infrastructure more affordable than fossil fuels.
That was the headline finding of a BloombergNEF report commissioned by the $8.3 billion Climate Investment Funds’ Clean Technology Fund (CTF), which examined investment activity in Chile, Kazakhstan, Mexico, Morocco and Thailand.
With the report’s authors stating the CTF has invested $749 million in 2.3 GW of utility-scale clean energy generation capacity since the end of 2017, in these countries, the Clean Technology Fund and Concessional Finance: Lessons Learned and Strategies Moving Forward study, has for the first time quantified how much reduced-price financing can lower renewable energy’s levelized cost of electricity (LCOE), making it a more viable competitor to fossil fuel.
Clean energy tipping points
For a speedy clean energy transition, BloombergNEF identified two tipping points in its report. The first is the point at which building new renewable energy infrastructure becomes cheaper than new coal or gas fired power stations. The analysts said in developing markets not yet at that point, reaching it could take another five to ten years. However, concessional finance could reduce that waiting time. “In Thailand, for example, concessional finance has the potential to reduce clean energy costs by 5 to 7%, which would accelerate this tipping point by two years,” wrote the analysts.
The second threshold identified is when building a new clean energy facility is cheaper than continuing to run existing fossil fuel assets. To illustrate the point, the report considered hundreds of gigawatts of existing fossil fuel capacity that will continue to keep running until a more profitable choice becomes available. India, for example, has installed a coal-fleet one third the size of the United States’ in just five years. Coal and gas traditionally require relatively low upfront capital investment but the operational costs of such facilities are many times higher than those needed for solar plants, and are also subject to fuel supply chain volatility.
Higher initial capital requirements for renewable energy projects have impeded progress in developing nations. “In OECD countries, the benchmark weighted average costs of capital BNEF tracked for wind and PV projects in 2017-18, ranged from 2.5-6.5%. In emerging economies, the benchmark ranges from 5-11%,” the authors of the report state. In 2017, the report calculated, the LCOE of a utility-scale PV plant rose $5.8/MWh for each percentage point increase in the cost of financing.
A helping hand
In Kazakhstan, for example, the report identified CTF investments significantly helped jump start a renewable energy market by providing policy support that resulted in feed-in tariffs being introduced in 2013. That policy attracted $1 billion of clean energy investment into the central Asian country.
Without that policy support and affordable CTF finance, investors would have faced limited-term loans, high inflation, substantial currency fluctuation and high interest rates, according to the BNEF report. However, CTF investments of $55.5 million helped leverage a further $200 million worth of finance from multilateral development bank joint financing, and another $412 million in follow-up funding. Now, around 85% of Kazakhstan’s PV fleet – and 40% of its wind capacity – has received CTF financial support.
After the initial feed-in tariff, the country had help holding its first competitive clean energy tenders, with development banks and the CTF again playing a critical role in ensuring successful bids were built on time and on budget.
In that vein, the BNEF report’s authors found auctions were central to global renewables pipeline growth. In 2017, some 57.7 GW was auctioned in 32 markets, two thirds of them outside OECD countries. The need to deliver on the sort of record low electricity prices produced by reverse-auction bidding means affordable financing has become even more critical in countries with an auction procurement mechanism. Since the first half of last year, 29 GW of renewable project capacity has sought financing after winning a tender.
In the area of battery storage potential, the report identified the rising volume of intermittent renewable energy is necessitating greater grid flexibility and storage capacity. Though the technology is still expensive, the analysts noted that the higher the cost of any technology, the greater the potential impact concessional financing can make. “For a lithium-ion battery project, reducing capital costs by even one percentage point can reduce energy generation costs by $10/MWh,” the report’s authors wrote.
“Concessional finance has the potential to take developing nations’ clean energy markets to the next level,” said Luiza Demôro, lead author of the report. “With access to cheaper finance, many emerging countries would be able to kick-start their battery storage sectors and avoid capacity additions from fossil fuel fired plants.”