Profitable investment in energy poverty
and environmental sustainability
Autumn, 2008
A research report by the London School of Economics on behalf of First London
by
Dr. Christopher Wright
LSE / Alcoa Post-Doctoral Research Fellow
Centre for Environmental Policy
and Governance (CEPG)
London School of Economics
Houghton Street
London WC2A 2AE
E [email protected]
T +47 22 85 89 51
F +47 22 85 89 20
Foreword
I am pleased and proud to share the following information with you; thank you for
taking the time to read this document which outlines the conclusion of research by
the London School of Economics and First London on Energy Poverty reduction and
environmental sustainability. The motivation for doing this work and sharing it with
you is to bring attention to the issue of and financial opportunity that energy poverty
represents. Energy Poverty ‘the lack of energy or affordable energy’ negatively
impacts on all of us as it is a barrier to global economic growth and causes significant
opportunity cost. This research was inspired by OPEC’s Third Summit in Riyadh last
September. At this summit energy poverty was identified as a term which describes the
way in which an economy is constrained by lack of energy at an affordable price. The
impact of Energy Poverty is to constrain and in some cases prevent economic growth;
conversely abundant energy is a major factor in the growth of developing economies
allowing them to thrive with all the commensurate benefits to consumers, businesses
and investors alike. Abundant, affordable and sustainable energy is becoming the life
blood of enterprise. In undertaking this report First London and The London School of
Economics have been able to break down some of the barriers to knowledge in this
area and therefore create a significant opportunity for investment. This investment
will be through an ‘energy poverty fund’ the latest details of which are contained on
www.firstlondonsecurities.com. First London is applying for a structural grant from
The OPEC Fund for International Development. The fund is open to OPEC member
states, institutions and sophisticated investors alike. Investments in sustainable energy
in the context of creating economic growth allows investors, sustainable technology
providers and those who suffer from the impact of energy poverty to meet and share
Guy Saxton
CEO
First London Plc
Access to Energy, Poverty Reduction
and Environmental Sustainability
in the positive, real and financial benefits that reducing energy poverty imply.
01
Table of Contents
Access to Energy, Poverty Reduction
and Environmental Sustainability
02
Foreword
Table of Contents
Boxes, Figures and Tables
Executive Summary
01
02
03
04
Background
1. Report Objectives
07
08-09
Mapping the Sustainability Linkages
2. Energy and Poverty Reduction – Exploring the Links
3. Energy and Economic Productivity– Exploring the Links
4. Energy and Environmental Sustainability – Exploring the Links
11
12-13
14-15
16-17
A Survey of Investment Opportunities in Sustainable Energy
5. Energy for Poverty Reduction: Micro-financing Electrification
6. Investments in Energy Efficiency and Demand-side Technologies
7. Investments in Low-Carbon Energy Production and Technologies
19
20-24
25-27
28-33
Conclusion
35
Boxes, Figures and
Tables
Figure 1
Global Sustainable Energy Investments 2004 - 2006
Box 1
World Access to Electricity
Box 2
Energy and Sustainable Development
Box 3
Deaths attributed to Indoor Air Pollution
Box 4
Global Energy Use and Efficiency
Box 5
Global Poverty-Biodiversity Map
Box 6
Distribution of global capital needs for energy
productivity (in percent)
Access to Energy, Poverty Reduction
and Environmental Sustainability
03
Executive Summary
“One recent account of the
phenomenal rise of clean
energy sector referred to it
as “the modern gold rush.1”
Energy and Poverty Reduction
Access to Energy, Poverty Reduction
and Environmental Sustainability
04
Energy and Economic
1 Cleantech: Green energy is the modern gold rush, Terry Macalister in The
Guardian, 2 July 2008. Date of Access: 2 July 2008.
[
]
“As a result, globalisation
has fuelled an increase in
the worldwide consumption
and trade of energy”
Background
Globalisation has improved
communications, integrated
financial markets, advanced
technology and increased
mobility all over the world.
These developments have
brought economic growth and
opportunity to many previously
impoverished regions in the
developing world, expanding
electrification and providing
new markets for energy. As a
result, globalisation has fuelled
an increase in the worldwide
consumption and trade of
energy.
But not withstanding these developments, globalisation
also poses difficult challenges to poverty and environmental
sustainability. Countries have not benefited equally from
globalisation for a number of reasons, including the quality
of domestic institutions, the competitiveness of national
industries, trade barriers, and their proximity to export
markets. And in many cases, governments are struggling
to protect their citizens from a variety of risks that have
increased with globalisation, including financial volatility and
climate change.
Among the most important obstacles to economic growth and
poverty reduction is the global prevalence of energy poverty,
defined as the lack of affordable and reliable energy.
(See Box 1)
Apart from hindering economic development, energy poverty
often perpetuates the unsustainable use of environmental
resources in many regions, evidenced in water contamination,
deforestation and soil erosion. A lack of reliable access to
sustainable energy is therefore not only a precondition for
reducing poverty but also environmental sustainability.
Box 1 World Access to Electricity
SOURCE: United Nations, 2005 The Energy Challenge for
Achieving the Millennium Development Goals
Access to Energy, Poverty Reduction
and Environmental Sustainability
Percentage of the population with access in 2000
3-33%
33-66%
<60%
Percentage of the population with access in 2000
07
1
Report Objectives
It is increasingly understood that achieving
the objectives of economic growth, poverty
reduction and environmental protection
requires a holistic approach that recognises
the relationships between them. As
governments are increasingly providing
incentives for market actors to increase
energy production while reducing GHG
emissions, investors are finding commercial
investment opportunities in everything from
forest protection and energy efficiency
to renewable energy and clean energy
technology. As a result, investors are
increasingly finding commercial investment
opportunities in the new energy economy,
evidenced by the growth of markets for carbon
credits and low-carbon technologies.
The report has two primary objectives.
The first half of the report will provide an
overview of the complex linkages between
energy, poverty and the environment, and
how each of these are emerging as an
important area of investment for global
financial markets. (See Box 2) In three
separate sections (# 2-4), the report will
consider these linkages and identify how
the need to develop new technologies
and stimulate innovation has surfaced
as a major cross-cutting public policy
objective in international development.
Box 2 Energy & Sustainable Development
Energy
Access to Energy, Poverty Reduction
and Environmental Sustainability
08
POVERTY REDUCTION
ECONOMIC
PRODUCTIVITY
ENVIRONMENTAL
SUSTAINABILITY
Demand -side efficiency
Low-carbon technology
Electrification for the poor
The second half of the report will consider the capital needs associated with responding to the energy poverty
challenge and identify the many commercial opportunities that the sustainable energy field is increasingly
offering investors. In three separate sections (#5-7), the report surveys financing mechanisms created by
both public and private investors that channel investments to electrification systems for the poor, demand-side
energy efficiency, and low-carbon energy sources and technologies. By providing examples and discussing
financial rates of return, the report identifies the investment areas that have attracted the most attention from
private investors and that most effectively address the inter-related policy objectives of poverty reduction,
economic growth and environmental protection.
In turn, the conclusion revisits the relative roles and responsibilities of governments and private investors in
stimulating investment flows to low-carbon energy sources and technologies. It identifies how transnational
market-based regulation that is neither created nor enforced by governments alone, but instead also draws on
the expertise of private companies, international organisations and civil society groups, is becoming increasingly
prevalent.
Access to Energy, Poverty Reduction
and Environmental Sustainability
09
[
]
“Currently more than three
billion people worldwide
continue to depend on solid
fuels for their energy needs”
Mapping the Sustainability Linkages
There are numerous inter-linkages between the issues of access to energy, poverty reduction, and environmental
sustainability. In many cases, policy problems associated with each of these serve to reinforce each other.
For example, a lack of access to energy forces people to use biomass, adding pressure on forest resources.
Similarly, poverty makes energy unaffordable, even if it is physically accessible.
This next section aims to identify and discuss
these linkages in greater detail.
Access to Energy, Poverty Reduction
and Environmental Sustainability
11
2
Energy and Poverty Reduction –
Exploring the Links
In the past 25 years, access to electricity and
modern energy services have been extended
to over one billion people around the world,
and commercial energy use by developing
countries has increased at a rate higher than
the OECD countries2. Despite this progress,
more than 1,6 billion people still lack access
to basic energy services, most of which live in
rural, often isolated areas, far removed from
electricity grids. This lack of electrification
likely has an adverse effect on their health,
nutrition and general well-being.
“While previously
considered ‘unbankable’,
‘the bottom billion’ of
the world’s population is
increasingly receiving the
attention of investors”.
Many of differences in rates of electrification
between countries can be explained by a lack
of investment in public energy infrastructure,
which not only impedes the addition of
production capacity, but also prevents the
import of energy and the expansion of the
grid to underserved regions. But failures
to attract long-term private capital is also
an important impediment. To alleviate this
problem, government and international
organisations are increasingly partnering
with private investors to create collective
investment vehicles that pool resources,
diversify risk, and provide capital at a
lower cost to recipients in developing
countries. In addition, financial innovation
in the private sector is allowing increasingly
sophisticated financing to reach the poorest
regions of the world, thereby connecting
them with international capital markets.
While previously considered ‘unbankable’,
‘the bottom billion’ of the world’s population
is increasingly receiving the attention of
investors, evidenced most forcefully by
the recent growth of microfinance. As
a result, investors are spelled to play a
major role in expanding electrification
and aiding governments in transforming
the world into a low-carbon economy.
Access to Energy, Poverty Reduction
and Environmental Sustainability
There are a variety of inter-linkages
between the lack of affordable and reliable
electricity and conditions of poverty.
Studies analysing the relationship between
the UNDP’s Human Development Index
(the foremost national-level index of
human welfare) have found a strong
correlation between low levels of energy
consumption and high levels of poverty.
The energy-poverty linkage is particularly
strong in two areas, health and education.
12
2 Gaye, A. (2007), “Access to Energy and Human Development”, Human Development Report Office, Occasional Paper, 2007/25.
The Health Impacts of Energy Poverty
The lack of access to electricity forces people to rely on alternative sources of energy. Currently more than
three billion people worldwide continue to depend on solid fuels, including biomass fuels and coal, for their
energy needs. According to the WHO, cooking with wood, dung, coal or other solid fuels is a major risk factor
for pneumonia among children and chronic respiratory disease among adults. Every year, it is the cause of
more than 1.5 million deaths, two-thirds of which are in Sub-Saharan Africa and South-East Asia3. (See Box 3)
The lack of access to electricity also influences food security, as it prevents people from realising the nutritional
and welfare benefits of modern food preparation and storage. For example, the lack of cold storage makes
people more vulnerable to changes in food prices, as they are unable to save. In addition, it reduces the range
of food varieties available to them, preventing the poor from attaining nutritional diets.
The Educational Impacts of Energy Poverty
Outside the household, energy poverty affects education. In peripheral regions, electrification provides
the necessary lighting for schools during dark hours. Access to modern energy services can also expose
children and students to information and communication technologies, and thereby increase the quality and
scope of education at all levels.
More broadly, electrification is a public good, as it increases the quality of public services outside the household. It is precisely the positive ripple effects that electrification may have in a region that justifies financing it
on a concessional basis.
Box 3 Deaths Attributed to indoor Air Pollution
Estimates based on WHO data for the year 2002.
Copyright WHO 2007.
Access to Energy, Poverty Reduction
and Environmental Sustainability
IAP DALYs/1000 population
0-2
2-5
5-10
10-30
30-60
13
3 WHO (2006), Fuel for life: household energy and health, World Health Organisation 2006.
3
Energy and Economic Productivity–
Exploring the Links
Apart from adversely affecting welfare in the home, energy poverty has a
significant economic dimension. Lack of access to affordable and reliable
electricity is both a function of growing worldwide demand, geography and market
volatility. Emerging economies will account for 85 percent of the growth in global
energy demand until 2020, which not only reflects their expected growth rates,
but also sheds light on the dire outlook for low-income countries. Reducing this
demand may be more cost-effective than expanding supply.
to energy efficiency (see Box 4) The economic perspective on
energy poverty would stress the need to prioritise cost-efficient
interventions that produce the largest gains. It is often said
the cheapest source of new energy supplies is increasing the
efficiency of current use. In many cases this leads us to consider
measures to increase the efficiency and productivity of existing
energy production, distribution and consumption, rather than
develop new sources of energy. While such measures would not
be addressing the problem of energy poverty, it would reduce
demand, relieve pressure on distribution lines and in principle,
put downward pressure on energy prices.
Finally, price fluctuations in global energy
markets add adjustment costs to energyimportant countries. Providing protections
against energy market volatility is therefore
also an important aspect of securing an
affordable and reliable supply of electricity
According to the International Energy Agency (IEA), on average
every $1 spent on more efficient electrical equipment, appliances,
and building avoids more than $2 invested in electrical supply4.
Research by McKinsey observes that increases in global
energy productivity can account for half of the growth in global
energy demand by 20205. The total cost would be $170 billion,
distributed across the industrial ($83 billion), residential ($40
billion), commercial ($22 billion) and transportation sector ($25
billion). Geographically, two-thirds of these capital requirements
would be in developing countries, with China accounting for 16
percent of the whole alone.
The electrification of large developing
countries using pre-modern energy
technologies is posing significant challenges
Box 4 Global Energy Use and Efficiency
10,000
9,000
BTU/$1,000 GDP
Access to Energy, Poverty Reduction
and Environmental Sustainability
In addition, a country’s geographical
location influences its access to world
energy markets. Most notably, land-locked
countries with low levels of electrification
that may also be in politically volatile regions
face perhaps the most difficult challenges.
In these contexts, the economics of
electrification, especially in rural areas, can
prove almost insurmountable, especially if
cost-recovery is a requirement in the shortrun.
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
14
4
5
IEA (2006), World Energy Outlook 2006, International Energy Agency (IEA), 2006.
McKinsey (2008), The Case for Investing in Energy Productivity, McKinsey Global Institute, February 2008.
The economics of electrification are such that landlocked countries often faced the highest costs. For them,
world energy markets can be inaccessible due to high transportation costs and political risks in surrounding
countries. For remote areas within countries, the lower density of rural connections and the smaller amounts
consumed by those connected also means higher marginal investment costs for expanding electrification. As
a result, high connection fees and investment selection criteria that prioritise communities that are likely to
generate economic returns often prevent electrification schemes from benefiting the very poor6. Indeed, even in
villages that have been connected to the grid for decades, it is not uncommon for some households to remain
unconnected. Therefore, investing in rural electrification so as to benefit the poor is a challenge of overcoming
low risk-adjusted returns on investment, and designing cost structures that provide access to all.
Not withstanding the challenging economics associated
with rural electrification in remote regions, cost-recovery
is often easier than assumed and can have important
advantages for an electrification program. In many cases,
villages can experience significant productivity gains from
gaining access to modern energy services. For example, it
is estimated that light power by a battery on average costs
10 to 30 times more than from mains electricity, while that
which is generated from a kerosene lamp costs 70 times
more, and candles 150 times. By extension, notwithstanding
the investment costs, expanding electrification can free up
funds that can be used for more productive purposes. In
addition, reliable electricity enables enterprise development by allowing for the purchase and use of machinery
beyond daylight hours. This allows workers to exchange their labour for technology. And cost-recovery can
prevent the inefficient use of electricity, and often ensures reliable and quality service as the income derived
from electricity provision can be used for routine maintenance of the energy infrastructure.
“Expanding
electrification can
free up funds that
can be used for more
productive purposes.”
Yet, despite the desirability of cost-recovery, it remains a very contentious issue. Introducing pricing that reflects
the true cost of production and distribution often makes electricity unaffordable to the poorest. As a result, costrecovery, compared to subsidised pricing, can have negative distributional outcomes. Therefore, if providing
electricity to the poorest is the primary objective, rather than maximising returns on investment, off-grid energy
technologies and alternative financing schemes may be better alternatives.
6
World Bank (2008), The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits An IEG Impact Evaluation, World Bank’s
Independent Evaluation Group (IEG), Washington D.C, 2008.
Access to Energy, Poverty Reduction
and Environmental Sustainability
Either way, the economic challenge of expanding access to electricity is to introduce a pricing scheme that
ensures quality service while not excluding the poorest from accessing it. In most cases, this requires some
form of public regulation of pricing or licensing schemes that oblige private energy providers to serve even
those that may not be able to pay market prices.
15
4
Energy and Environmental Sustainability –
Exploring the Links
And finally, apart from its close association with human welfare and its impact on
economic development, energy poverty has a significant environmental dimension.
The primary environmental impact of energy poverty is increased pressure on
local environmental resources.
Over two billion people depend directly on biomass fuels as their primary or sole source of energy. Not surprisingly,
research finds the poor disproportionately live in areas with low access to modern energy services, and even
alternative energy sources7. Those barred access to electricity are often forced to rely on less accessible,
unsustainable sources, notably fuel wood. While free, collecting biomass is hugely demanding in both time
and resources, particularly on women, as many poor families have to spend 2-6 hours each day collecting 10
kilograms of wood over distances of 4-8 kilometres8. Biomass energy, which includes fuel woods, crop residues,
and animal wastes, provides on average nearly 30 per cent of total primary energy supply in developing countries.
Moreover, because of their reduced purchasing power, the poor are dependent on already scarce and sensitive
resources, and in under conditions of population growth, these pressures on local environmental resources
grow even more exponentially.
The reliance on fuel wood places significant pressure on local environmental resources, as deforestation leads
to soil erosion and biodiversity loss. To illustrate, Box 5 identifies how high levels of population growth, high rates
of poverty and rapid biodiversity loss often coincide in the same area. Over time, people are forced to spend
more time and labour accessing energy sources, and as environmental resources deplete, they are caught in a
downward spiral that amounts to a poverty trap.
Box 5 Global Poverty-Biodiversity Map
Access to Energy, Poverty Reduction
and Environmental Sustainability
Selected major wilderness areas
Selected terrestrial biodiversity hotspots
Prevalence of stunting amoung under five, in areas of
> 2 inhabitants/sq. `km
0%
95%
No data
Low population density
Sources: FAO 2004, Landscan 2002, conservation international 2004
16
7
8
FAO (2004), Effects of Poverty on Deforestation: Distinguishing Behavior from Location, Suzi Kerr et.al, Food and Agriculture Organisation (FAO),
ESA Working Paper No. 04-19, 2004.
Energy For the Poor – Underpinning the MDGs, DFID Issues, DFID. Date of Access: 3 June 2008. www.dfid.gov.uk/pubs/files/energyforthepoor.pdf.
Globally, unsustainable patterns
of energy production and
consumption is a significant
cause of dangerous climate
change. Human-induced
climate change is predominately
caused by the release of
greenhouse gases (GHG) into
the atmosphere, of which the
burning of fossil fuels is a major
contributor. The conventional
wisdom is that curbing GHG
emissions requires a broad
transformation of the way we
produce, consume and trade
energy commodities and
services. This entails reducing
emissions and increasing
the efficiency of fossil-fuel
based energy production,
and expanding the share of
renewable energy in global
consumption.
However, expanding electrification to unserved regions does
not, and should not enter into the climate equation as a
negative intervention. For all intents and purposes, energy
use in rural areas of developing countries will marginally
contribute to climate change, and should be pursued for a host
of economic, political and moral reasons. However, the two
policy agendas do not always conflict. In fact, clean, efficient,
off-grid energy technologies are in most cases the most
cost-efficient alternative to expanding rural electrification.
In addition, in the absence of modern energy services, the
rural poor are often forced to use fuel wood for cooking and
heating. As a result, rural electrification can contribute to
reduce deforestation and therefore have a significant climate
dividend.
For investors, the dual objective of expanding electrification
to the poor while reducing the emission-intensity of energy
production are resulting in new market opportunities. Public
financial institutions are providing a variety incentives for
private investors to finance innovative energy schemes that
support financially sustainable energy development in poor
countries. Globally, the maturation of carbon markets are
providing mechanisms for investors and project developers
of clean energy projects to sell the climate benefits of these to
other market actors. While designed to foster a transition to a
low-carbon economy, assets created through the creation of
carbon markets are increasingly used by investors to make
electrification schemes financially viable.
Access to Energy, Poverty Reduction
and Environmental Sustainability
17
[
]
“The bulk of private long-term
capital going to sustainable
energy in developing countries
is mobilised by public funds or
supportive regulation”
A Survey of Investment Opportunities
in Sustainable Energy
The poor investment climate in many developing countries has kept risk-averse investors away. It is well known
that a number of developing countries lack the conditions to attract private foreign investment, such as a secure
environment, economic and political stability and a supranational system for resolving state-investor disputes.
Without a minimum level of transparency, stability, and predictability, the demand for investment in sustainable
energy will continue to exceed the supply of capital.
Excessive risk remains the primary reason why private investment into energy and poverty reduction lags
behind demands in most low-income countries. In Sub-Saharan Africa, a large proportion of foreign direct
investment goes to the extractive industries sector, with other sector unable to attract long-term capital. It is
widely recognised that augmenting the volumes of private investment into sectors that are vital to reducing
poverty and increasing economic growth remains essential.
According to WHO, in order to halve the number of people that do not currently have access to modern energy
services by 2015, 485,000 people will need to gain access every day for the next eight years9. In order to
achieve this daunting task, both public and private investment needs to be mobilised to the fullest. To stimulate
private long-term capital flows to developing countries, two complementary policy interventions are commonly
proposed. First, low-income countries should undertake policy reforms that reduce the financial and political
risks of investing, and introduce reforms that provide investors more security and stability. And secondly, public
financial institutions, national, regional and international, need to pave the way by providing financing that is
specifically designed to mobilise additional capital from private sources by using a variety of credit, guarantee
and risk management measures.
In reference to the latter, the bulk of private long-term capital going to sustainable energy in developing
countries is mobilised by public funds or supportive regulation. Over time, public-private investment schemes
have become increasingly complex, drawing on new financing methodologies, tools and products to develop
investment schemes that more efficiently identify, assess and allocate risk. Coupled with increased attention
among donors to development effectiveness, such schemes have increased volumes of investment, on better
terms, and often with a greater development impact.
Access to Energy, Poverty Reduction
and Environmental Sustainability
19
9 WHO (2006), Fuel for life: household energy and health, World Health Organisation 2006.
5
Energy for Poverty Reduction:
Micro-financing Electrification
Electrification remains critical for alleviating poverty in rural areas in many lowincome countries and has been a priority for many development agencies. In this
regard, the evolution of the World Bank’s investments in energy is symptomatic.
Since 1980, the World Bank has financed more than 120 rural electrification
programs.
A noticeable trend is that its support for
off-grid electrification has grown over
time, including new renewable energy
technologies that are both cost-effective
and less emission-intensive. Yet, according
to the World Bank’s Independent Evaluation
Group, whereas three-quarters of rural
electrification projects have objectives
related to improving energy supply and the
same proportion have objectives related to
institutional development, only 7 percent of
projects (excluding multi-sectoral projects)
had an explicit poverty reduction objective
and the largest share of benefits have been
captured by the non-poor10. While the
causes of this shortcoming could be many,
it reflects how investors often find it difficult
to integrate poverty reduction objectives
into electrification programs, because
commercial feasibility relies on costrecovery mechanisms which may price the
poor out of the market.
Access to Energy, Poverty Reduction
and Environmental Sustainability
Sizable inflows of private investment to
energy requires a national policy framework
that provides a stable and reliable investment
climate. Yet, as most of the world’s poor
that lack access to modern energy services
do not live in countries with financial
and political stability, such favourable
conditions are often absent. However,
some of this scepticism is unwarranted,
as it is common to overestimate the costs
of rural electrification in poor regions. The
10
20
11
high capital costs of installing renewable, decentralised forms
of energy systems are often inappropriately compared to the
capital costs of conventional energy technologies. Economic
studies have shown that the poor (are often forced to) pay
disproportionately more for each unit of energy than the rich,
while often not getting the same level of quality service11. In
many cases, decentralised, off-grid delivery options and
alternative energy sources, such as solar photovoltaics, smallscale hydro, and other renewable energy sources – can be
provided cost-effectively with cost-recovery.
Therefore, particularly in remote locations, the low operation and
maintenance costs, as well as the nonexistent fuel expenses
and increased reliability and life span of renewable energy
technologies, often offset the high initial capital costs.
Furthermore, new off-grid technologies should also be attractive
to investors with long-term time horizons as the cost of
producing energy from renewable energy sources, in contrast
to conventional fossil-fuel based sources, will decrease in the
future, given the necessary conditions.
“Economic studies have shown
that the poor (are often forced to)
pay disproportionately more for
each unit of energy than the rich,
while often not getting the same
level of quality service”.
World Bank (2008), The Welfare Impact of Rural Electrification: A Reassessment of the
Costs and Benefits An IEG Impact Evaluation, World Bank’s Independent Evaluation Group (IEG), Washington D.C, 2008.
Energy For the Poor – Underpinning the MDGs, DFID Issues, DFID. Date of Access: 3 June 2008. www.dfid.gov.uk/pubs/files/energyforthepoor.
pdf. See also ‘Poor Pay More’ for Energy Claim, BBC Scotland, 2 September 2006. Date of Access: 23 June 2008.
http://news.bbc.co.uk/2/hi/ uk_news/scotland/5309172.stm
Research has suggested that micro-financing can be used to increase access to energy among the world’s
poor. The appeal of micro-financing for commercially-minded investors is that it enables access to untapped
consumer credit markets and is based on supporting essentially productive economic activities, albeit on
a small, disaggregated scale. In 2006, Muhammed Yunas, founder of the Grameen Bank, won the Nobel
Peace Prize for his efforts to extend credit to the poor, especially women, in Bangladesh. The evolution of his
microfinance enterprise, from a largely concessional-lending based operation to an increasingly sophisticated
and commercially viable enterprise that partners with foreign investors and offers a full range of banking
services, reflects the growing maturation of the business model.
Due to financial innovation and a growing interest from institutional investors, micro-financing has grown
dramatically in recent years. Large banks, including Citibank, Morgan Stanley, ABN Amro and Deutsche Bank,
have recently decided to test their fund management skills in the burgeoning microfinance market. Between
2006 and 2007, the top 10 microfinance institutions in Latin America increased their lending by 36 percent,
whereas India saw a 76 percent increase in micro-loans. At the end of 2006, microfinance institutions (MFIs)
worldwide had a collective outstanding portfolio
of more than $23 billion loaned to some 52
million people, according to the Microfinance
Information Exchange (MIX).
“Between 2006 and 2007,
the top 10 microfinance
institutions in Latin
America increased their
lending by 36 percent,
whereas India saw a
76 percent increase in
micro-loans”.
More broadly, the financial infrastructure that is necessary to foster microfinance growth requires the
development of credit bureaus, payment systems, and rating agencies, as well as secondary markets, all of
which necessitates government interventions. By 2006, the World Bank had invested $421 million in various
microfinance schemes, and plans to double that amount by 2009. And apart from structuring financing to
small-scale borrowers, the International Finance Corporation (IFC), the World Bank’s private sector lending
arm, is implementing programs aimed at creating and expanding markets for decentralised, renewable energy
technologies in developing countries, most notably photovoltaics13. In combination, such efforts by public
financial institutions contribute to expanding both the supply and demand for sustainable energy in developing
countries, and increasing the number of investment opportunities for private investors.
12
13
See The Changing Face Of Microfinance Funding, by Elizabeth Littlefield, Director at the World Bank, Forbes Magazine, December 12, 2007. Date
of Access: May 30 2008. http://www.forbes.com/2007/12/20/elizabeth-littlefield-microfinance-biz-cz_el_1220littlefield.html
For example, see Photovoltaic Market Transformation Initiative (PVMTI), the International Finance Corporation (IFC). Date of Access: 14 June
2008. http://www.ifc.org/ifcext/enviro.nsf/Content/SustainableEnergy_Projects_PVMTI
Access to Energy, Poverty Reduction
and Environmental Sustainability
Despite the growing interest from private
investors, it is worth noting that most large
microfinance schemes have a significant share
of public investors. This reflects the historically
dominant, but gradually declining role of public
financial institutions in microfinance schemes,
and more broadly, investment projects in
developing countries. It also demonstrates the
continued utility of including public financial
institutions in order to draw on their resources,
expertise and risk management skills. According
to the World Bank, public involvement continues to be essential given that private investors cannot be expected
to be able to absorb the risks of operating in and developing nascent markets, provide training to microfinance
bankers, and ensure that a variety of consumer protections are developed alongside the provision of banking
services12.
21
Examples of Investments
As noted, investors have found microfinancing to be an increasingly viable
business model for providing a variety of financial services to the poor in support
of entrepeneurship and small-scale development, including electrification. Here
are some of the largest and long-standing microfinance funds.
Catalyst Microfinance Investors (CMI) is a private equity investment fund managed in partnership by ASA
of Bangladesh and Sequoia, an independent, international corporate finance advisory and investment firm,
dedicated to investing in emerging, fast-growing microfinance institutions (“MFI’s”) throughout Asia and
Africa. It has mobilised capital from pension funds (28 percent), investment funds (43 percent), private
investors (18 percent), and investment managers (11 percent.) Its business plan is to establish and develop
‘greenfield’ MFIs in the largest markets in Asia and Africa, as well as making strategic equity investments in
other markets14. The fund takes on 30-plus percent shareholding positions in existing MFIs, and uses this to
foster the adoption of ‘best practice’ methodology and operating procedures, so as to increase productivity.
It selects investments on the basis of strict commercial criteria; MFIs have to provide credit for incomegenerating activities only, loan officer should assess repayment capacity of every individual borrower, and
group members need to assess the willingness to repay. It exits investment by sale or IPO.
The Global Commercial Microfinance Consortium is a $75 million multi-tiered commercial fund that provides
local currency financing to microfinance institutions globally. Deutsche Bank acted as lead arranger and
managed the sale of the fund, which consists of $15 million in equity and $60 million in debt, 25 percent of
which has been guaranteed by the U.S. Agency for International Development (USAID). The three-tranche
debt and equity structure provides commercially structured financing for MFIs working throughout the
developing world in providing credit to the self-employed poor, such as street vendors, traders, farmers and
service providers. The consortium provides funding of up to $4m (or equivalent) on competitive commercial
terms, in the form of loans (single or multiple draws), swaps, leveraged loan guarantees and participations,
at a fixed or variable rate for up to five years15.
Access to Energy, Poverty Reduction
and Environmental Sustainability
The SNS Microfinance Fund was closed in June 2007, attracting $125 million in financing. The investment
fund is designed to provide capital to microfinance institutions (MFIs) in developing countries in a regionally
diversified portfolio16. It follows a “balanced” approach in making microfinance investments with debt
representing approximately 70 percent of fund capital and equity investments permitted up to 30 percent.
A number of the investments made by the Fund will be in local currency, and it lends money to MFIs or
invests in their share capital. In turn, MFIs make loans, mostly ranging between $100 and $1,500 for a term
of six months to one year, which enable micro-entrepreneurs to start and expand their small businesses.
According to the business plan, the majority of these business operators are women who use micro-loans
to improve their circumstances and the lives of their families.
22
14
15
16
The Global Microfinance Investment Congress Equity Investment & Microfinance ASA International, Dirk Brouwer, Executive Director Catalyst
Microfinance Investors http://www.microfinance-congress.com/docs/EN/Dirk_Brouwer-CMI_GMIC_Paris.pdf
Deutsche Bank (2005), Global Commercial Microfinance Consortium, presentation given at the Microfinance Composium, Geneva Switzerland
October 10-11 2005. Date of Access: May 30 2008. http://www.geneva-conference-microfinance.com/powerpointpresent/hattemdb.pdf
€ 125 million ($170 million) First Closing of the SNS Institutional Microfinance Fund, Developing World Markets (DMW), press release. Date of
Access: May 31 2008. http://www.dwmarkets.com/News/Press%20release_SNS%20Fund_Final.pdf
These are just a few examples of the many successful microfinance funds that have sprung up in
recent years. By channelling private capital to microfinance institutions (MFIs), these funds are investment vehicles pool and distribute resources. Expanding access to energy as a means of alleviating public
health problems or enhancing educational opportunities has also been a source of attention for several
multinational companies and public-private partnerships.
The Global Village Energy Partnership (GVEP) was launched at the UN World Summit on Sustainable
Development in 2002. It forges partnerships between developing and industrialised country
governments, public and private sector institutions, and multilateral organisations in an effort to ensure
energy access to modern energy services by the poor. It provides financing to a range of sectors,
including health, education, agriculture, water, transport, and telecommunications. Significantly, it
also covers renewable energy, energy efficiency, modern biomass, liquefied petroleum gas (LPG)
and cleaner fossil fuels. Ongoing projects include a Bangladesh Coastal Women’s Electrification
Project, and an effort to incorporate 20,000 integrated cooking systems in Bolivia by mid-2009. The
partnership is active in 17 countries in Africa, Asia, and Latin America, and has grown to include more
than 700 partners worldwide, representing a diverse range of bilateral and multilateral institutions,
national governments, financial institutions, NGOs, and private firms.
The Bangladesh Solar Program, supported by the World Bank Group, has increased financing for
renewable energy and energy efficiency projects in Bangladesh by 45 percent over 2005 levels. The
project has already provided electricity to nearly 90,000 homes in rural Bangladesh, a country in which
80 percent of the country’s population do not have access to electricity.
GE Energy has pledged to support the “Power to All by 2012” and “Rural Electrification/Rural Business
Hub” initiatives that have been launched by the Indian government17. As part of the effort, GE Energy
plans to deploy a variety of power generation technologies, including solar and wind, to help some of
the more than 350 million Indians who currently lack adequate and/or reliable power supplies.
The Biomass for Rural India (BERI) project mobilises village forest communities for raising plantations
of 28 different local plant species to be grown for biomass production on public and private land
allocated for the purpose. The BERI project, supported by a grant from the Global Environment Facility
(GEF), aims to generate 2.5 million units of electricity for the state grid, of which 0.7 million units will
be consumed by the villages providing the biomass, and the remainder sold to the regional utility, the
Bangalore Electricity Supply Company (BESCOM), at commercial rates.
Access to Energy, Poverty Reduction
and Environmental Sustainability
ABB’s Access to Energy program has provided electricity to Ngarambe, a Tanzanian village of 1,800
people on the edge of the Selous National Park. As a result of the $10 million investment, changes and
improvements in such areas as small businesses, education and health care have been realised18. The
program planning phase sought to gain acceptance for cost-recovery by letting the future consumers
of electricity collectively decide how they would pay for the service. The design of the management
scheme became tailored to the local political and cultural circumstances which proved decisive in
ensuring the commercial viability and financial sustainability of the electrification program.
23
17 GE Commitment to India’s Rural Electrification Program Highlighted at New Delhi Event, GE Energy, press release, 23 March 2006.
18 Summary of ABB’s Access to Energy program, see http://www.wbcsd.org/web/publications/case/abb_electricity_access_full_case_final_web.pdf
Return on Investment
The expansion of electrification to the poor is commonly assumed to be a
responsibility of government. Private investors are deterred from investing in such
programs without significant public support because of the lack of economies
of scale, and the uncertainty associated with excessive sunk costs. As such,
electrification programs, even in cases where private capital has been mobilised,
are rarely driven solely by financial objectives or returns.
The most notable exception is commerciallydriven microfinance funds. During the past
five years, there has been an enormous
growth in both the supply and demand
for microfinancing. In 2005 alone, the
combined portfolios of microfinance funds
nearly doubled. The strong showings of
many microfinance funds, and the prospect
of providing financial services to a largely
untapped “bottom billion’ has induced
large banks and venture capitalists into the
sector.
Access to Energy, Poverty Reduction
and Environmental Sustainability
24
While it is still difficult to assess financial
performance across funds given the
absence of objective performance criteria
and data, the maturation of the market
suggests that microfinance is gradually
turning into an asset class. The maturation
of the microfinance business models has
yielded healthy investment returns for
many private investment funds. As with any
market in its early stage, microfinancing
is characterised by a diverse range of
business model achieving different levels
19
20
of financial returns, and development returns more broadly. In
a sample of around 704 microfinance institutions published by
The MIX, the leading 176 microfinance funds exhibited returns
on equity of 17.2 percent - which in some countries exceeds that
of conventional banks19. In addition, these returns are largely
stable over the economic cycle. As an example, the Grameen
Bank’s return on equity was 21 percent in 2005. Average returns
for a broader sample of microfinance institutions was lower, at
roughly four percent.
Thus, whereas international financial institutions stood for
the bulk of capital just a few years ago, private institutional
investors are beginning to fill the funding gap. The are doing
so for three primary reasons20. First, they provide a vehicle
for steering investments to emerging markets, and toward good
development causes. Secondly, they simultaneously offer an
attractive risk-return profile that is marked by largely stable
financial returns, low credit default rates and low correlation to
the mainstream financial assets as well as the general domestic
economy. And third, some evidence even indicates that
microfinance investments might be conducive to the efficient
portfolio diversification.
“In 2005, the Grameen
Bank’s return on equity
was 21 percent”.
2006 MFI Benchmarks, MicroBankingBulletin by The MIX.
Microfinance: An Emerging Investment Opportunity, Deutsche Bank Research, December 19, 2007. Date of Access: 24 June 2008. http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/
PROD0000000000219174.pdf
6
Investments in Energy Efficiency and
Demand-side Technologies
BTU/$1,000 GDP
At a time when commodity prices are rising and the demand for energy is soaring, it is remarkable how public
policy and financial markets continue to fail to identify, manage and realise the productivity gains that can be
achieved from more efficiency use of energy. According to McKinsey, projected energy demand growth by 2020
can be cut in half by capturing opportunities to invest in energy productivity using existing technologies that pay
for themselves. The International Energy Agency (IEA) estimates that an additional $1 spent on more efficient
electrical equipment, appliances, and buildings avoids more than $2 in investment in electricity supply21. This
would not only make available electricity by increasing the efficiency of use, but also release investment that
otherwise would have been used for energy infrastructure. Thus, by meeting growing demand through energy
efficiency interventions, the utility of existing infrastructure can be maximised.
There are essentially three ways for society to address energy efficiency22. The most traditional approach
is stimulating the growth of companies that provide energy efficiency products. Over time, if green products
become competitive on price and quality, growing sales will contribute to their expanded use with the
consequence of increasing energy efficiency. Secondly, government can support so-called Energy Service
10,000
Companies (ESCOs) which provide technical, commercial and financial services, and take project performance
risk (technical risks associated with the project), arrange financing for the project, and depending on their reach
9,000
and agreement with the client, may take customer credit risk (financial risks) also. ESCOs can contribute to
8,000
reductions in energy use by using proceeds from fees to install or redesign building and industrial systems. And
7,000
third, governments can directly regulate utilities and demand that they offer energy efficiency services.
6,000
5,000
“The IEA estimates that an additional $1 spent on
3,000
more efficient electrical equipment, appliances,
2,000
1,000 and buildings avoids more than $2 in
investment
in1995
electricity
supply”.
1975 1980 1985 1990
2000 2005 2010
2015 2020 2025
4,000
Box 6: Distribution of global capital needs for energy productivity (in percent)
25
40
83
38
69
35
22
28
Residential
Indestrial
21
22
Commercial
Transportation
United States
China
Other Developed
Other Developing
IEA (2006), World Energy Outlook 2006, International Energy Agency, 2006.
ESCOs and Utilities: Shaping the Future of the Energy Efficiency Business, Greenbiz.com, April 15 2008. Date of Access: 30 June 2008. http://
www.greenbiz.com/feature/2008/04/14/escos-and-utilities-shaping-future-energy-efficiency-business?mode=one
Access to Energy, Poverty Reduction
and Environmental Sustainability
Source: McKinsey (2008), The Case for Investing in Energy Productivity,
McKinsey Global Institute, February 2008, p.8.
25
While policy interventions to expand access to energy direct attention to developing countries that lack universal
electrification, energy efficiency is as much a problem in developed countries as in developing countries. It is
notable that 73 percent of global capital needs for increasing energy productivity are in developed countries.
(Box 4) By sector, the commercial and industrial sectors, in which economies of scale should exist, account for
more than two-thirds of the opportunity. For reasons that continue to puzzle economists, consumers typically
do not invest in energy-efficiency even though significant cost-savings can accrue in the short to medium-term.
Therefore, while the marginal cost of increasing energy productivity may be higher than in many developing
countries, there are still un-tapped opportunities for increasing the efficiency of energy even in the most
developed countries.
Examples of Investments
Compared to electrification or clean technology, investments in energy efficiency
have a different incentive structure. Specifically, the financial benefits of energy
efficiency most often accrue to the end-user, in the form of cost savings, rather than a financial return, a considerable proportion of energy efficiency
investment is funded by energy consumers (domestic and industrial) rather than
investors23. Nevertheless, public funds have played a major role in providing
consumers, and notably large industrial consumers of energy, incentives to use
energy more efficiently.
Access to Energy, Poverty Reduction
and Environmental Sustainability
The International Finance Corporation’s Sustainable Energy Facility (SEF) is a US$14 million global fund to
finance investments in and technical assistance to renewable energy and energy efficiency enterprises24.
A successor to the pioneering Renewable Energy and Energy Efficiency Fund (REEF), it is also structured
to make minority equity and quasi-equity investments in profitable, commercially viable private companies
and projects in sectors that include 1) grid-connected, renewable energy projects including wind, biomass,
run-of-river hydropower, geothermal, and solar power less than 15 MW with projects ranging from US $1-2
million per MW, 2) off-grid, distributed generation projects including solar home systems and small central
stations, and 3) Energy Service Companies (ESCOs) as they implement energy efficiency investments in
areas such as industry, lighting, and heating. The facility is managed by E+Co, and its ultimate goal is to
enable successful enterprise investments to expand into more mature projects.
In May 2007, the Clinton Climate Initiative announced the Energy Efficiency Building Retrofit Program
that finances performance contracts with energy-savings guarantees managed by four large multinational
ESCOs; Honeywell, Johnson Controls, Siemens and Trane25. Furthermore, five multinational banks (ABN
AMRO, Citi, Deutsche Bank, JPMorgan Chase and UBS) will provide $1billion each in financing to cities and
private building owners to undertake these retrofits at no net cost.
23
26
24
25
Global Trends in Sustainable Energy Investment 2007, UNEP Finance Initiative, SEFI, and New Energy Finance. 2007. Date of Access: 23 June
2008. http://www.unep.org/pdf/SEFI_report-GlobalTrendsInSustainableEnergyInverstment07.pdf
Sustainable Energy – Our Projects, the International Finance Corporation (IFC). Date of Access: 23 June 2008. http://www.ifc.org/ifcext/enviro.nsf/
Content/SustainableEnergy_Projects_SEF
Landmark Program to Reduce Energy Use in Buildings, the Clinton Foundation, 16 May 2007. Date of Access: 23 June 2008. http://www.
clintonfoundation.org/051607-nr-cf-fe-cci-extreme-makeover-green-edition.htm
Returns on Investment
For ESCOs, who rely on making sales to individual
corporations and other entities (government,
residential, etc.), The challenge is to develop tools
and models that allow for low-touch, high volume
energy efficiency solutions. ESCOs have to convince
each energy consumer that they would benefit from
their services. Yet, evidence suggests that there are
many large energy customers relying on low-grade
technology that could benefit from energy-efficiency
measures in the short to medium term.
More broadly, McKinsey Global Institute recently
released a study claiming annual global investment
of $170 billion between now and 2020 would cut
greenhouse gas emissions in half, while producing
an internal rate of return on investment of about
17 percent26. What is preventing investment in this
area is a range of market distortions and failures
which increase transaction costs and reduces the
incentives that end-users have for seeking energy
efficiency financing.
“According to McKinsey Global
Institute, annual global investment
of $170 billion in energy productivity
between now and 2020 would cut
greenhouse gas emissions in half, while
producing an internal rate of return on
investment of about 17 percent”.
Access to Energy, Poverty Reduction
and Environmental Sustainability
27
26
McKinsey (2008), The Case for Investing in Energy Productivity, McKinsey Global Institute, February 2008.
7
Investments in Low-Carbon Energy
Production and Technologies
The growing evidence that climate change is human-induced, and occurring
more rapidly than previously predicted, has triggered a proliferation of regulatory
schemes designed to encourage the development of cleaner energy sources
and technologies. In 1994, virtually all government adopted the United Nations
Framework Convention on Climate Change (UNFCCC), which contained no
binding emissions reduction targets, but forged a consensus around the objective
of stabilising greenhouse gas concentrations in the atmosphere at a level that
would prevent dangerous anthropogenic interference with the climate system.
In 1997, the Kyoto Protocol operationalised
this principle by setting legally binding
emissions reduction targets for 37
developed countries (an average of 5
percent by 2012 relative to 1990 levels) and
introducing flexible mechanism as options
available to governments to comply with
their obligations. Instead of being limited
to making investments in their domestic
economy to reduce global emissions,
governments could meet their obligations
through emissions reduction investments
in other countries, notably developing
countries that lacked capital to do so. Such
emissions trading facilitated the flow of
capital to countries and regions where the
marginal cost of emissions reductions was
the lowest.
Access to Energy, Poverty Reduction
and Environmental Sustainability
28
In 2005, the Kyoto Protocol entered into
force as a result of Russian ratification. The
same year, the European Union launched
the first phase of its EU Emissions Trading
Scheme (EU ETS), aimed at maximising
the efficiency of emissions reductions in
the EU. In December 2007, parties to the
UNFCCC met in Bali and agreed on a Bali
Road Map, which implicitly endorsed a
post 2012 framework in which developed
countries would have to cut their emissions
by 25-40 percent by 2020. Most observers
predict that developing countries, or at least
a subset of them, will also be subjected
to legally binding emissions reduction
targets in a post-2012 framework, as this has been a long-time
precondition for the U.S to provide its consent. As a result,
there is a real prospect that carbon will be constrained, and
thus priced, in all of the largest and most rapidly-growing energy
markets, including China, India and Brazil, greatly expanding
the current reach and depth of carbon markets.
While US rejection and Russia’s late ratification of the Kyoto
Protocol delayed its entry into force, the Kyoto Protocol
nevertheless signalled that governments regarded the creation
of carbon markets as the most efficient policy response to
reduce greenhouse gas emissions. The EU ETS is now in
its second phase, and regulators are reducing the volume of
pollution permits in an attempt to increase their market price.
Both U.S presidential candidates favour introducing a domestic
cap-and-trade, raising the prospects of a future integrated
transatlantic market. By introducing such regulatory schemes
and putting a constraint on carbon emissions, governments
hope to price carbon into commercial transactions and thereby
induce investors and private companies to invest in and develop
renewable energy and low-carbon technologies.
Apart from creating and maintaining emissions trading
system, many governments are setting long-term emissions
reduction targets beyond 2012 (when the commitment period
of the Kyoto Protocol end), alongside goals for increasing the
share of renewable sources in the energy mix. Policy plans
outlining emissions targets for 2020 and even 2050 are quite
commonplace, suggesting that the possibility of emitting
carbon, free of cost may be a thing of the past. EU countries
have all endorsed a target to have 20 percent of energy come
from renewable sources by 2020, while China has pledged a 15
percent target in that time frame. Such long-term targets have
increased confidence among investors that regulatory biases
against carbon-intensive energy sources will persist.
“Both U.S presidential candidates favour introducing
a domestic cap-and-trade, raising the prospects of a
future integrated transatlantic market”.
But in the short-term, only public subsidy schemes have proven effective in stimulating investments in renewable
energy. By helping to bring down the marginal cost of energy production associated with renewables relative
to traditional sources, favourable regulations enable investors and project developers to profit from earlystage technology investments. A number of countries are introducing renewable energy portfolio standards for
utilities. In addition, several, including Germany and France, have feed-in tariffs for wind power, whereas Britain
and Italy operate with more complex quota-and-trade systems. Among developing countries, the Chinese wind
power sector is growing rapidly on the back of ambitious government targets to generate 30 GW of wind power
by 2020, which would make China far and away the largest wind power generating market in the world.
Such schemes are further supported by public investment programs in research and development that
contribute to driving down the marginal cost of renewable energy production and the manufacture of cleaner
technologies. The emergence of both national and international market-based carbon regulation based on
incentives rather than a heavy hand has induced many private companies to move away from a strategy of
contesting the scientific evidence and opposing regulatory initiatives to developing business plans that identify
and take advantage of emerging investment opportunities. As a result of realising that carbon markets can be
sources of considerable profit, private companies, and most notably investors, have become some of the most
consistent advocates of long-term carbon regulation.
Figure 1: Global Sustainable Energy Investments 2004-2006
Note: Grossed-up values based on disclosed deals. The Figures represent new investment only, and do not include PE buy-outs,
acquisitions of renewable energy projects, nor investor exits made through Public Market / OTC offerings.
Source: New Energy Finance
$49.6bn
$27.5bn
81%
2004
43%
wth
Gro
wth
Gro
2005
Access to Energy, Poverty Reduction
and Environmental Sustainability
£70.9bn
2006
29
Examples of Investments
The emergence of favourable regulation at the national and international level
is increasing the competitiveness of new technologies in the market place, and
placed investors at the centre of an emerging global carbon market, as investors,
traders, advisors and clearing houses. According to New Energy Finance, global
investment in renewable power-generation rose from $28 billion in 2004 to $71
billion in 2006. Within this sub-set of the power sector, wind and solar achieved
the highest annual growth rates (18 percent and 41 percent, respectively), while
biomass has the largest share of the market, largely due to the dependency on
fuel-wood in many developing countries.
The fastest growing energy technology
in the world is grid-connected solar
photovoltaics (PV), with 50 percent annual
increases in cumulative installed capacity
in both 2006 and 2007, to an estimated 7.7
GW. This translates into 1.5 million homes
with rooftop solar PV feeding into the grid
worldwide. Another estimated 2.7 GW
of stand-alone systems brings global PV
capacity to over 10 GW27.
Over time, stable public subsidy schemes
have stimulated market maturation, which
has gradually brought down the marginal
cost of producing energy from renewable
sources28. While their share of total
primary energy supply remains marginal,
There have been a number of cleantech IPOs in recent years that
reflect the markets favourable evaluation of the future potential
of particular energy technologies, notably wind and solar.
Access to Energy, Poverty Reduction
and Environmental Sustainability
In December 2007, the Spanish utility Iberdrola raised EUR 4.5 billion by floating a 20 percent stake in
Iberdrola Renovables on the stock market. The IPO of the subsidiary, which was the second biggest of the
year by funds raised, just behind the IPO of Russia’s VTB Bank in May 2007.
Xinjiang Goldwind Science & Technology Co, China’s biggest wind-powered generator manufacturer, went
public in December 2007 and soared 264 percent from its initial public offer price to close at 131.00 yuan in
their first day of trade, far exceeding expectations31.
In July 2008, Energy Recovery (NYSE: ERII) priced its IPO on a share price of $8.50, ending the first day of
trading on $9.83. The company develops systems that capture and recycle energy from desalination, and
had its revenue grow $4 million in 2003 to $35.4 million in 2007.
27
28
29
30
renewables are no longer simply attracting the attention of
niche investors that have a strategic interest in promoting
the sector, but are becoming interesting prospects for larger,
mainstream investors as well. The rise of cleantech – shorthand
for the renewable energy and environmental technology sector
– is symptomatic in this regard. According to Lipper Feri, the
data provider, a record 15.2 percent – or €4.6bn from just over
€30bn – of the total sales of global pooled equity funds in the
first seven months of 2007 poured into environmental funds29.
So despite volatile credit markets, experts are forecasting
growth of cleantech IPOs as “money will continue to flow into
the environmental sector30.” As a result, some are expecting
the cleantech sector to help reinvigorate the IPO market in 2008.
30
31
Renewables 2007 Global Status Report, REN21, 27 February 2008. Date of Access: 12 June 2008. http://www.ren21.net/pdf/RE2007_Global_
Status_Report.pdf
Cleaning Up, The Economist, Leaders, 2 June 2007, p.13. For example, the price of wind power has fallen from $2 dollar/kwh in the 1970s to less
than 10 cents today.
Clean tech booms despite the bubble talk, responsible-investor.com, 27 October 2007. Date of Access: 20 June 2008. http://www.responsibleinvestor.com/home/article/clean_tech_booms_despite_the_bubble_talk/ investor.com, 27 October 2007. Date of Access: 20 June 2008. http://www.
responsible-investor.com/home/article/clean_tech_booms_despite_the_bubble_talk/
Cleantech IPOs to thrive from this autumn, BusinessGreen.com, 30 June 2008. Date of Access: 30 June 2008. http://www.businessgreen.com/
business-green/news/2220287/cleantech-ipos-thrive-autumn
China wind power firm soars in stock market debut, Wall Street Pit – Stock Market Insights, 27 December 2007. Date of Access: 12 June 2008.
http://wallstreetpit.com/forums/wall-street-news/901-china-wind-power-firm-soars-stock-market-debut.html
Private equity is increasingly becoming an important asset class for renewable energy financing32. Both earlyand late-stage funds are attracted to the sector. In terms of later-stage capital, it tends to predominately finance
companies in mature technology markets, notably wind and solar, by for example providing funds for capitalintensive project implementation. According to UNEP, asset financing of new generation capacity, the largest
single source of renewable energy investment, accounted for nearly 40 percent of cleantech investment in
200633. In general, less capital is flowing to research and development around first-generation technologies, but
the market is characterised by an increasing number of technologies And whereas large boutique funds exist in
both North America and Europe, risk capital is much more readily available in the former, notably Silicon Valley.
The spirit of entrepeneurship that captured the internet revolution has now benefited the cleantech sector, as
many of the same investors are mixing idealism with strong profit-motives to identify winners in the market place.
Some examples of private equity funds active in the cleantech sector.
Climate Change Capital, the London-based boutique investment bank, raised €200m for its first private
equity fund targeting European companies in green power, transport, energy efficiency, water and waste,
including money from Dutch pension funds PGGM and ABP and the UK’s Universities Superannuation
Scheme. The fund took Climate Change Capital’s assets under management to over US$1.5bn in the sector.
HgCapital’s Renewable Power Partners fund raised € 300 million in 2006, and has since financed wind farm
development in Europe at all stages of development, from development to pre-construction to operating
projects.
In September 2007, Canadian investor services firm Criterion Investments launched its Global Energy
Fund, advised by Pictet Asset Management. Criterion said the clean energy investment universe had a
market cap of $1.4 trillion with expected capital flows of $70bn a year.
Impax Asset Management recently announced a £ 100m fund-raising for a listed environmental fund. In
total, it has € 930m under management, which nearly doubled between 2005 and 2006.
And finally, the growing materiality of carbon risk can be seen across the financial sector in a number of recent
voluntary initiatives in which investors team up to harmonise risk management practices.
In early 2005, the United Nations Secretary-General invited a group of the world’s largest institutional
investors to join a process to develop the United Nations Principles for Responsible Investment (UNPRI).
Individuals representing 20 institutional investors from 12 countries agreed to participate in the Investor
Group. Today, its members include asset owners, investment managers, and professional service partners.
The Investor Network on Climate Risk (INCR) is a network of institutional investors and financial institutions
that promotes better understanding of the financial risks and investment opportunities posed by climate
change. INCR is coordinated by Ceres, a coalition of investors and environmental groups. Most recently,
the INCR has lobbied the U.S Securities and Exchange Commission (SEC) to require full corporate climate
risk disclosure.
32
33
Buyout funds struggle to invest to save the planet, Financial News Online, 27 July 2007. Date of Access: 14 June 2008. http://www.efinancialnews.
com/usedition/index/content/2448374894
Global Trends in Sustainable Energy Investment 2007, UNEP Finance Initiative, SEFI, and New Energy Finance. 2007. Date of Access: 23 June
2008. http://www.unep.org/pdf/SEFI_report-GlobalTrendsInSustainableEnergyInverstment07.pdf
Access to Energy, Poverty Reduction
and Environmental Sustainability
In June 2003, ten leading commercial banks voluntarily adopted the World Bank’s standards for environmental
and social risk management in project financing, as part of signing onto the Equator Principles Since then,
an additional 50 financial institutions have pledged to comply with the framework, cover more than 85
percent of the global project finance market.
31
What these funds and governance initiatives illustrate is the extent to which the realities of a future carbonconstrained world is beginning to significantly shape investor behaviour in emission-intensive sectors, notably
energy. While public regulation certainly plays a role in transforming carbon emissions into liabilities, the
maturation of the cleantech market has reached a point where a critical mass of investors have invested significant
resources into solidifying a market presence. As investors are both responding to government action as well as
the behavior of clients and competitors, the cleantech market is no longer solely driven by government actions.
“A five year holding period would yield an estimated
IRR of 30 percent, whereas a seven-year holding
period would generate an IRR of 20 percent”.
Access to Energy, Poverty Reduction
and Environmental Sustainability
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Returns on Investment
Public figures on investment rates of return associated with
cleantech investments are difficult to find, and typically draw
on different methodologies. However, there are a number
of credible sources that provide estimates of returns based
on secondary data. A quoted industry insider claims there
is a consensus within the investment community that the
clean tech sector is producing earnings growth of 20 percent
per annum34. The Nex Clean Energy Index, which tracks 88
companies listed on 25 exchanges worldwide, increased nearly
100 percent between 2006 and 2007, outstripping most global
benchmarks35. Looking at the European market, New Energy
Finance estimates that European venture capitalists have made
an average return of 87 percent a year on venture investment in
low carbon technologies since 1999.
The most authoritative study on sector growth and investment
returns in the Cleantech Venture Network’s Cleantech Venture
Investing: Patterns and Performance, released in March
2005. It estimates that cleantech markets represent annual
global revenues greater than $150 billion, with wind and solar
power being able to boast of 5 – 10 year
compound annual revenue growth rates
as high as 35 percent36. Based on a
study it conducted of 56 publicly-traded
U.S. cleantech companies, the Cleantech
Venture Network estimates that the median
estimated returns were 433 percent, or
about 5.3 times invested capital. Based
on a hypothetical portfolio of cleantech
venture investments comprised of the 56
IPOs and 21 M&A transaction, the report
speculates that from realised returns on
60 percent of the fund and a 40 percent
write-off rate, it returned an estimated
6.2 times invested capital. By extension,
a five year holding period would yield an
estimated IRR of 30 percent, whereas a
seven-year holding period would generate
an IRR of 20 percent.
Access to Energy, Poverty Reduction
and Environmental Sustainability
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35
36
Comments by Ian Simms, Impax Asset Management, in Clean tech booms despite the bubble talk, responsible-investor.com, 27 October 2007.
Date of Access: 20 June 2008. http://www.responsible-investor.com/home/article/clean_tech_booms_despite_the_bubble_talk/
Clean tech booms despite the bubble talk, responsible-investor.com, 27 October 2007. Date of Access: 20 June 2008. http://www.responsibleinvestor.com/home/article/clean_tech_booms_despite_the_bubble_talk/
Cleantech Venture Investing: Patterns and Performance, James LoGerfo, Vortex Energy LLC for the Cleantech Venture Network LLC, March
2005. Date of Access: 30 June 2008.
33
[
]
“What these funds and governance
initiatives illustrate is the extent
to which the realities of a future
carbon-constrained world is
beginning to significantly shape
investor behaviour in emissionintensive sectors, notably energy”
Conclusion
The report has considered the growing public policy challenges associated with two challenges: reducing
energy poverty - defined as the lack of affordable and reliable energy – and averting dangerous climate
change. By identifying the links between energy on the one hand, and poverty, efficiency, and climate change
on the other, the report has provided an overview of how energy is central to some of the most pressing
development challenges. Subsequently, the report considered the investment opportunities that have arisen as
a result of market-based regulations intended to provide incentives for investors to finance projects that have
development benefits.
The report highlights the extent to which governments and international financial institutions are central to
mobilising private investment flows to developing countries. In particular, investments that address energy
poverty, such as rural electrification schemes, or those that aim to increase energy efficiency, are commonly
public. The main exceptions are commercially-based microfinance funds that have been able to exploit
experience and local knowledge to lend with a health return on investment, and various cleantech funds, which
provide later-stage capital to renewable energy and technology sector.
But the growth of commercial microfinancing cannot be understood without reference to the existing concessional
lending market in many target countries, as the growth of profitability in the sector is in many case a result of
restructuring existing microfinance institutions that operated on a concessional basis. Likewise, the profitability
of later-stage equity in wind and solar is closely associated with supportive government regulation which enable
these technology companies to be competitive in the energy sector.
In summary, the dual challenge of increasing access to energy in developing countries while avoiding dangerous
climate change spells both risks and opportunities for business. As noted in the analysis, to effectively confront
these growing challenges, many governments have found it necessary to engage the private sector in order
to mobilise resources and technical expertise, and formulate more effective solutions. They have realised that
given the right institutional design and incentives, market-based regulations have the potential to greatly expand
private investment to sectors and projects with clear development benefits. The proliferation of public-private
partnerships, and the growing prevalence of market-based regulation, reflects not only the growing influence of
the private sector on public policy-making, but also a recognition among governments that private companies
can constructively contribute to solving many pressing problems in society. Therefore, as governments
continue to harmonise their policies and regulations, investors will find it easier to identify profitable investment
opportunities to reduce energy poverty and expand sustainable energy.
Access to Energy, Poverty Reduction
and Environmental Sustainability
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