Read a pdf version of CIFs Monitor 9

Pilot countries update

The CTF trust fund committee has decided it is currently not selecting new countries. It will review information prepared by the CIF administrative unit and the MDBs on how to assess new country requests based on potential additional funding at the June meeting. There have been expressions of interest in joining the CTF from Costa Rica, Jordan, Pakistan, Peru and Uruguay.

Private sector programme

As part of the second phase of the dedicated private sector programme eligibility is to be expanded to all CIF countries and possibly non-CIF countries. The justification is that “the barriers and challenges of scaling up private sector investment are found in both middle-income and lower-income developing countries often with greater acuity” (see CIFs Monitor 8).

The CTF trust fund committee approved programme proposals in October 2013 including:

• $115 million for utility-scale renewable energy, with a specific focus on geothermal energy. This includes $20 million for Chile and $20 million for Mexico (see below). In future this could include funding for geothermal energy in Turkey, Indonesia, Ethiopia and Kenya.
• $35 million for renewable energy mini-grids and distributed power generation in India, Indonesia and the Philippines (see below).

Future proposals are expected by October from Colombia for $10 million and from Turkey for $65 million.

Two proposals will be discussed further at the June meetings:

1)      The income participation programme: to “facilitate the use of novel climate-smart technologies and innovative business models” by “supplying a variety of financial instruments such as mezzanine financing, instruments with convertibility features, equity, and quasi-equity, and other subordinated instruments”.

2)      Mezzanine finance for climate change: to push funds towards climate change projects which “otherwise would be not viable with traditional senior debt and equity financing.”

Germany and Canada both questioned the use of “risky financing instruments” that could compromise the future “financial sustainability of the CTF”. Instead they advocated for the continued use of loans, grants and guarantees. Both questioned the proposed expansion of the CIFs to new countries because the CTF lacks sufficient funds to do so. However, the US said it was comfortable with using financial instruments such as equity and subordinated debt, “provided that there is a compelling argument for the overall impact of doing so.” The UK asked “as the CTF typically focusses on large emitters with high mitigation potential, what is the strategic case for supporting mini-grids in countries with lower emissions?”

Updates on investment plans

South Africa investment plan

The CTF trust fund committee agreed on the update to the South Africa CTF investment plan, which involves cancelling $7.5 million for an energy efficiency component and a further $50 million for a solar water heater component. The $57.5 million has been reallocated to “finance either a private sector sustainable energy programme or a public sector vehicle efficiency program”.

Morocco: Push for solar and wind farms

Investment plan overview

“The first revision of the investment plan (October 2011) focused on Morocco’s Wind Energy Program (WEP) and provided support to the associated infrastructure necessary for wind energy generation. As of January 2014, $125 million of CTF funding has been committed by the CTF Trust Fund Committee to the wind program of the Morocco’s national utility ONEE, supported by the African Development Bank (AfDB).”

“The Government of Morocco (GoM) proposes to reallocate the remaining balance of $25 million for the Clean and Efficient Energy Project (World Bank). The project will support the first phase of ONEE’s solar strategy, which aims at installing 400 MW of solar photovoltaic technology in several sites near towns across the country located at the end of long transmission lines.”

Key donor questions and concerns prior to approval

Germany: “ONEEs financial situation is delicate due to high subsidies. Is there a sector dialogue between WB and the GoM about this issue?”

The UK: “We would like to understand in some greater depth why ONEE has chosen to develop solar photovoltaic energy. Is this to diversify its renewable energy sources, or are there other reasons?

IBRD responded that it “has been active in supporting power sector reforms and the development of a sustainable energy policy”. Furthermore: “The choice of photovoltaic technology for this project over concentrated solar power (CSP) and wind technologies is due technical reasons: the wind resource in the region is not sufficiently available to justify the economic viability of a wind project in these regions.”

Selected project updates

India, Indonesia and Philippines: will the poorest have increased energy access?

Programme details

“The programme proposes to introduce and pilot business models, which will help alleviate the principal barriers to private sector led development of mini-grids in rural areas without access to national electricity grids.”

Key comments by civil society observer World Resources Institute, on behalf of Sierra Club

• Scale of projects: Instead of ensuring mini-grids have a minimum capacity of 100kW to receive funding there should be more flexibility to include more companies by allowing them to aggregate their installations to be at least 100kW, rather than 100kW per installation.
• Financing structure: Ensure some funding is in the form of long-term debt and not purely in short or medium-term loans.

ADB and the CIF administrative unit responded: “This is in fact our intent. ADB is currently evaluating companies contemplating projects ranging in aggregate capacity from 100 kW to 5 MW. Individual system sizes may vary from approximately 1kW to 1MW.”

Key donor questions and concerns prior to approval

Several donors requested further information on how CTF resources will be used in terms of the financing plan, financial products and terms (equity comprises around 50 per cent of the programme), size of stand-alone operations, how gender will be monitored, and impact on the CTF cash flow model.

Key comments by the independent review

“Given the competing objectives of projects being financially sustainable and electricity being affordability to low-income rural customers, it is likely that the private firms will target markets, which have relatively affluent rural populations and ignore market segments with poorer populations.” ADB responded: “Whilst private sector developers may choose more profitable projects to develop, affluence will not be the determining factor for selecting viable investments.”

Indonesia: geothermal projects in forests

Geothermal projects in Indonesia have been questioned by civil society groups in the past. In an April 2013 submission 43 CSOs, including Indonesia-based Solidaritas Perempuan and US-based Center for International Environmental Law, stated “70 per cent of the nation’s geothermal areas occur partially or completely in forest areas” leading to “a high risk that this ‘green’ technology will lead to remarkable forest destruction and degradation and negative climate change impacts as well as impacts on forest-dependent communities” (see CIF Monitor 7).

Project details

A programmatic initiative that aims to promote transformation of Indonesia’s renewable energy (RE) sector, particularly its private geothermal power subsector.

“Environmental risks: With a large proportion of Indonesia’s geothermal resources located in the vicinity of forests, project development and implementation will bear some environmental and social risk. Consultations with all affected persons and stakeholders will be carried out and concerns addressed in a participatory fashion and with due respect to gender impacts.”

Key donor questions and concerns prior to approval

Germany: “With respect to forest and environmental protection we reiterate that we encourage ADB to strictly implement its safeguards procedures.”

The US: “We are supportive of Indonesia’s efforts to jumpstart its geothermal industry by reducing the significant barriers to geothermal exploration and development that exist despite the enormous resource potential in the country. However, given that two of the three sub-projects identified for support under the program are in ‘frontier’ regions of Indonesia, we would like to emphasise the importance of prudent planning and management in minimising any negative impacts on natural habitats, particularly on forests”.

The UK: “Please can you confirm that any credits sold to the market will be reported to the CTF? The use of financial instruments such as equity and mezzanine finance seems to go beyond the activities that are usually financed under the Clean Development Mechanism (CDM).” The IFC confirmed that any sale of carbon credits on carbon markets will be reported on and that at this stage the project will not generate monetised carbon budgets.

Mexico: private sector geothermal project funded by grants

Project details

“The program intends to scale up investments in geothermal power generation projects by making available a range of financial mechanisms tailored to meet the specific needs for each project’s stage of development.”

“CTF resources under the Mexico revised investment plan in the form of a harder concessional loan are requested to be blended with IDB/[national implementation agency] resources for financing at all stages of the development of the projects.”

“CTF resources from the Dedicated Private Sector Programmes (DPSPs) are requested in the form of a contingent recovery grant to support the deployment of risk mitigation instruments specifically designed to maximize leverage and to back the financing of the projects”.

Key donor questions and concerns prior to approval

Several donors requested confirmation that funding from the dedicated private sector programme would be sourced from grant contributions. Germany noted that this implies “that losses resulting from the use of this instrument will be borne by grant contributions”.

The CIF administrative unit confirmed that projects will be funded only from grant contributions, “however, since contributions to the CTF are commingled in a single trust fund, it is not possible to attribute a specific project to a contributor type of financing in the decision”.

Chile: consultation of local communities on geothermal projects

Project details

Support up to three geothermal projects in Chile with a potential installed capacity of 100-150 MW. These projects “have already completed some exploratory drilling but require concessional risk mitigation support to advance with additional drilling and plant construction”.

Key comments by civil society observer the World Resources Institute, on behalf of the Natural Resources Defense Council (NRDC)

• Local communities should be informed about potential negative impacts of geothermal exploration activities including a preliminary environmental impact study to ensure communities have “a true voice in the decisions that affect their surrounding environment”.
• Previous geothermal projects have gone ahead in Chile despite the opposition of indigenous communities. The indigenous right to free, prior and informed consent should be considered.
• There are potential negative impacts during the exploratory phase on air quality from release of geothermal fluid vapors, cultural heritage from transport routes, ecological resources due to erosion and water resources because of drilling.

IDB responded: “The remarks sent by NRDC are very valuable to us, and we will take them into account when designing the project’s components.”

Nigeria: financial intermediary to lead on renewable energy projects

Project details

“A 7 year line of credit to a Nigerian bank targeting renewable energy/energy efficiency projects in Nigeria. The objective is to facilitate the provision of financing to projects on terms and conditions relevant for renewable energy/energy efficiency.”

Key donor questions and concerns prior to approval

Several donors requested further information about the borrower, which is a financial intermediary. Germany asked for information on its “role and position in the Nigerian market as well as details on [its] credit rating.” AfDB responded that the borrower is a major financial institution in Nigeria in terms of asset size and has an investment-grade rating. It clarified that AfDB has a “number of requirements for financial intermediaries, key of which are commercial viability, additionality and development outcome”.

Kazakhstan: private or public wind power plant?

Project details

“Financing the construction, commissioning and operation of a 50 MW wind power plant in the Yereymentau region … the project will result in large volume of CO² emissions reductions, by replacing electricity produced from low-efficiency obsolete coal-fired power stations.”

Key donor questions and concerns prior to approval

The UK: “Why have the EBRD classified this as a private sector project rather than a public sector project given that this is a sub-sovereign borrower who are providing a corporate guarantee?”

EBRD responded: “We treat this as a private project due to the project’s financial structure, which reflects private sector project structures (including the corporate guarantee) and the absence of a sovereign guarantee from the sponsor. Also, given the project structure, the use of the harder concessional element is more appropriate in our view. Nevertheless, for procurement purposes, we will ensure more stringent safeguards and treat this as a public project.”

Ukraine: energy efficiency projects approved despite political turmoil

 Project details

“The CTF financing will be used to introduce energy efficient technologies for water and wastewater systems, as well as finance a municipal landfill site with biogas collection system that allows for gas recovery and electricity generation.”

Project details

“The proposed CTF facility will provide sub-sovereign loans and technical assistance to public and private municipal heating companies to enable these companies to rehabilitate and modernise the district heating infrastructure in their cities, decrease operating costs, reduce CO² emissions and make the district heating system more energy efficient.”

Project details

“Debt financing and technical assistance for renewable energy projects in Ukraine”.

Project details

“Reduce greenhouse gas emissions through avoided heat generation by improving heat generation efficiency, reducing heat losses in district heat transmission and distribution systems and reducing residential heat consumption.”

Key donor questions and concerns prior to approval

For all four projects the most important questions from donors concerned the political risk related to the severe crisis in Ukraine, particularly in the east of the country where several of the projects are located. For the district heating energy efficiency project Germany raised the possibility of postponing the project until “a reasonably stable political situation would make the necessary regulatory decisions more likely”.

On the district heating modernisation project the EBRD responded: “We agree that the short-term risk is high, but expect the situation to normalise and return to a more stable environment prior to any sub-projects being signed.” On the sustainable energy lending facility: “The EBRD continues to work with the government on further improvements. Due to the changes in government, now there is full commitment to work with the IFIs in removing such obstacles. … The situation is also offering opportunities, e.g. with a strong focus on the need to improve energy independence, which is in favour of renewable energy development. EBRD remains fully committed, and is in fact expanding, its activities in Ukraine and the sector.”