By Giulia Christianson, Sustainable Finance, World Resources Institute
Overcoming the climate change challenge won’t come cheap. A World Economic Forum report released last year, for example, estimates that the world will need to invest at least $5.7 trillion annually in green infrastructure by 2020 in order to limit the worst impacts of climate change. In addition to the significant amounts of finance already committed by developed countries, this will require shifting the world’s $5 trillion in business-as-usual investments into green investments, as well as mobilizing an additional $700 billion to ensure this shift actually happens.
But while the climate finance gap is significant, we are learning some lessons on how to close it—namely, by tapping into the private sector’s vast resources. A new WRI working paper, Unlocking Private Climate Investment: Focus on OPIC and Ex-Im Bank’s Use of Financial Instruments, analyzes the investment practices of the Overseas Private Investment Corporation (OPIC) and Export-Import Bank of the United States (Ex-Im Bank), two significant providers of U.S. climate finance. Lessons from these two agencies show that through the smart and innovative use of financial tools, public institutions can play a key role in shifting private capital away from business-as-usual investments and into climate-friendly ones.
Learning from Experience
OPIC and Ex-Im Bank are important channels of U.S. climate finance. WRI studied 87 private sector climate-friendly projects that these two institutions supported between 2008 and 2012. OPIC’s investments in climate-friendly projects represented $2.7 billion, while Ex-Im’s totaled $700 million.
When analyzing the climate-friendly portfolios of these two agencies, two key lessons emerged:
1. Tailor financial instruments
OPIC and Ex-Im Bank offer a similar suite of financial instruments—direct loans, loan guarantees, and insurance—all of which are utilized by the private sector. By incorporating unique financing structures, OPIC and Ex-Im Bank have addressed requirements specific to climate-friendly projects, helping increase investment in those projects through modified financial instruments.
For instance, OPIC designed a $250 million loan guarantee for SunEdison Thailand to function as a revolving construction bridge financing facility for creating roughly 50 solar photovoltaic power projects in Thailand. By transforming its loan guarantee into a portfolio facility, OPIC supported numerous smaller projects—which would have had prohibitively high transaction costs when financed individually—through a more cost-effective, single transaction.
Tailoring insurance policies for climate-friendly projects is also important, as they can be exposed to risks that traditional projects are not. Failing to account for these risks may present challenges for the investor in filing and settling an insurance claim. For example, OPIC has long provided political risk insurance, but it recently developed a set of insurance policies tailored to cover political and regulatory risks in three climate-friendly areas: Feed-in Tariffs (FiT), carbon credit/Clean Development Mechanism (CDM), and Reduced Emissions from Deforestation and Degradation (REDD). For example, OPIC provided REDD insurance to protect Terra Global’s investment in the Oddar Meanchey REDD project in Cambodia. The result was a first-of-its kind intervention for climate-friendly markets. OPIC provided Terra Global—a carbon developer and investor in the project—with access to a financial product that was not available commercially or from other public financial institutions. The insurance provides coverage that protects against governmental breach of contracts, which can include regulatory risk protection for actions that rise to the level of expropriation. The REDD insurance also protects against damage to the project caused by political violence.
Meanwhile, more traditional instruments like direct loans have to be designed to meet climate-friendly project needs. For example, Ex-Im Bank typically provides low-interest loans within OECD limits, but its Environmental Exports Program provides enhanced support through features like extended repayment terms of up to 18 years. These lengthy terms match the longer payback periods of climate-friendly investments like renewable energy projects. It was this type of enhanced support for the Cerro de Hula wind farm in Honduras that made it possible for the project developer to complete the first utility-scale wind farm in the country, despite setbacks from political upheaval in the pre-construction phase. Ex-Im Bank’s 18-year, fixed-rate loan with a below-market interest rate not only enabled the project company—Energía Eólica de Honduras, S.A. (EEHSA)—to purchase turbines from Gamesa (a wind turbine manufacturer), but also helped the company secure additional financing from the Central American Bank for Economic Integration (CABEI).
2. Maximize impact by coordinating and playing complementary roles
OPIC is often a first-mover, supporting first-of-their-kind projects and testing out new financial instruments. Ex-Im Bank, on the other hand, provides inexpensive debt, but has a lower risk-tolerance. It tends to finance more established players rather than newer ones like clean energy entrepreneurs.
In theory, OPIC clients could graduate to become Ex-Im Bank clients. This would allow clients to benefit from the comparative advantages of each institution while also helping Ex-Im Bank build its pipeline of climate-friendly projects. Support from both institutions can be further complemented by financing from other multilateral and bilateral public financial institutions, either concurrently or at different points in time.
The case of Azure Power, a solar power project developer based in India, demonstrates how public financial institutions can work together to achieve greater impact. OPIC’s initial direct loan of US$6.2 million in 2009, combined with Azure Power’s demonstration of successful project development, opened the door to additional public sector financing for several other solar power projects. In 2011 and 2012, Ex-Im Bank provided direct loans of US$15.8 million and US$64 million to the company after it had proven initial success with OPIC’s assistance. Azure Power was also able to mobilize financing from other public financial institutions like the International Finance Corporation and DEG, a German development finance institution, as well as local commercial banks in India.
Coordinating with a range of other agencies can also help OPIC and Ex-Im Bank overcome limitations that prevent them from reaching certain markets. For instance, OPIC is not authorized by Congress to provide the grants or technical assistance that are often needed to turn early-stage projects into bankable investments. The US-Africa Clean Energy Finance Initiative—which was developed by OPIC, the US Department of State, the US Trade and Development Agency (USTDA), and the US Agency for International Development (USAID)—is a good example of how coordination can help OPIC reach and catalyze new markets. The four-year, US$20 million program is designed to align U.S. government aid, technical assistance, and development finance to leverage private sector investment in clean energy projects in Africa. With this, OPIC can reach those project developers and investors who could potentially utilize its financing or insurance products, but require early-stage support to develop their clean energy projects into bankable opportunities.
Bridging the Climate Finance Gap
The above insights apply to not just OPIC and Ex-Im Bank, but rather to all public financial institutions and mechanisms looking to mobilize more climate finance. If we can be smart about the use of financial instruments—and combine these with strong domestic climate change policies and financial regulatory frameworks—we will be that much closer to bridging the climate finance gap.
Visit these WRI publications on financial instruments to learn more:
- Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital
- Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies
- Raising the Stakes: A Survey of Public and Public-Private Fund Models and Initiatives to Mobilize Private Investment