Clean Technology Fund (CTF) Proposal for CTF 2.0
Outline Clean Technology Fund: 2008 to 2016 The Journey so far Changing climate in a changing world SDGs, Paris Agreement Unique opportunity Use of assets Looking forward Progress so far and next steps
Going back in time.. Background Est: 2008 Funds: USD 5.6 billion Objective: provide scaled-up, concessional financing for the demonstration, deployment, and transfer of low-carbon technologies with a significant potential for long-term greenhouse gas (GHG) emission savings, through six partner multilateral development banks in middle income countries Technologies: Renewable energy, Energy efficiency, Sustainable transport January 2010 Contributor Type USD-eq. % Australia Grant 89 2% France Loan 283 6% Germany Loan 698 16% Japan Grant 1,000 23% Spain Capital 112 3% Sweden Grant 82 2% United Kingdom Capital 621 14% United States Grant 1,492 34% Total 4,377 Key features MDB-collective model Ability to leverage Private sector engagement, Innovative financial instruments Flexible programmatic approach
Journey so far January 2010 Contributor Type USD-eq. % Australia Grant 89 2% France Loan 283 6% Germany Loan 698 16% Japan Grant 1,000 23% Spain Capital 112 3% Sweden Grant 82 2% United Kingdom Capital 621 14% United States Grant 1,492 34% Total 4,377 March 2016 Contributor Type USD eq. % Australia Grant 86 2% Canada Loan 199 4% France Loan 231 4% Germany Loan 615 11% Japan Grant 1,056 19% Spain Capital 106 2% Sweden Grant 80 1% United Kingdom Capital 1,681 30% United States Grant 1,492 27% Total 5,546
CTF today.. Funding status Total funding Under implementation 5.59 4.96 Funding committed Disbursements 3.76 Areas ECA 18% LAC 18% ME 0% DPSP- Regional 3% ASIA 35% AFR 26% Renewab le Energy 69% Renewable Energy/Energy Efficiency 6% Transport 11% Energy Efficiency 14% Waste to Energy 1% Solar 48% Wind 14% Geothermal 18% Hydropower 3% Mixed 16% 1.67
Summary Impact on the ground USD 3.8 billion in CTF funding 70 projects reporting results, of which, 15 new projects this year 0% 20% 40% 60% 80% 100% GHG reductions (MtCO2/yr) 8 51 Co-financing ($B) 4 38 Installed capacity (MW) 1,172 16,775 Additional passengers (m-ppd) 0.17 5.40 Energy savings (GWh/yr) 3,591 10,313 Target GHG reductions (MtCO2/yr) RY16 8 Transport 2% Renewable Energy/Energy Efficiency 41% by source Energy Efficiency 14% 51 Renewable Energy 43% Target Cumulative RY16 Bilateral 12% Co-financing (US$B) Other 16% Private 26% $4.39 by source $37.72 $15.35 MDB 31% Government 15% Installed capacity (MW) Target Cumulative RY16 Hydro 23% Geothermal 9% Solar 22% 3,340 1,172 by source 16,775 Other /Mix 1% Wind 45% Based on Preliminary 2016 CTF Results Report, and where, - (GHG reductions/ Energy savings) ANNUAL - (Co-financing/ Installed capacity) CUMULATIVE - (m-ppd) Million passengers per day UPON IMPLEMENTATION
New World, New Challenges, New Commitment to Act New world: Addis Ababa Action Agenda, SDGs, Paris Agreement in 2015 New challenges: shifting from billions to trillions in development finance meeting USD 90 trillion demand for sustainable infrastructure limiting temperature rise to well below 2 C/1.5 C New commitment to act: INDCs submitted by 189 countries New MDB commitments on climate action
Marrakech Action Proclamation for our climate and sustainable development Rapid entry into force of the Paris Agreement has built an extraordinary momentum worldwide Irreversible momentum, driven not only by governments, but also by science, business and global action at all levels Ever growing momentum created among public and private entities in mobilizing financial resources for climate action These entities have a key role to play in assisting governments to translate NDCs into investment-ready vehicles as well as to scale up investment in infrastructure that delivers a range of benefits. Marrakech Partnership for Global Climate Action- multi-stakeholder engagement for mobilizing finance and investments from: National and international public finance institutions Investors Asset owners Investment and fund managers Financial markets Corporations International finance organizations and initiatives
Sustainable Infrastructure challenge-important role of the CIF By 2030, world needs over $115 trillion in infrastructure spending, incl. investments in energy efficiency and primary energy Around 70 percent of these in emerging markets and developing economies (EMDCs) Approximately 70 % of GHG emissions come from infrastructure, making it central to how societies adapt to climate change Underscores the importance of building low-carbon climate resilient infrastructure (LCR). Infrastructure needs over $52 trillion with the net (or incremental) cost of building LCR infrastructure only $4.1 trillion. Public concessional climate finance has a particularly key role as a low cost source of finance which, when blended with other sources of public finance, can de-risk LCR infrastructure projects and crowd-in private finance Esp. needed at early project preparation and construction phases, where risks are highest and capital costly and scarce. CIFs working with the MDBs to co-finance LCR infrastructure has demonstrated its relevance CIFs cannot be easily replicated by the other funds, given its unique business model.
Green Bond Market Critical to Raising Private Sector Climate-Smart Capital at Scale Green Bonds Small buy Growing Segment of Global Bond Market Green bonds, first issued by the World Bank in 2008, accounted for approximately $130 billion of debt outstanding as of July 2016, comprising of just 0.15% of the $86 trillion global fixed income market Outstanding Green Bonds By Sector and Rating, 2015 Issuances include 600 bonds from 24 countries in 23 currencies, with most bonds investment grade This year, issuances have hit $75.3 billion, with $12.4 billion of issuances in November Green Bonds Market Growth Critical Moving Forward BlackRock, the world s largest asset manager, sees green bonds as part of the solution to finance the estimated $90 trillion of global infrastructure needed by 2030 to limit climate change But green bond issuances need to accelerate in order to meet the lowcarbon investment goals set under the Paris Agreement Source: BlackRock Investment Institute and Bank of America Merrill Lynch, November 2015. Note: The size of each bubble reflects the U.S. dollar amount of the outstanding green bonds of each category and S&P rating. The universe of green bonds reflects the $96 billion of outstanding issuance as of November 2015.
(USD million) Unique opportunity: Use of Assets Expected Net REFLOWS 5,500 5,000 Option 1 Do nothing 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Option 2 Allow for use of reflows under Business-as-Usual (la-ctf1.0) 1,000 500 0 Option 3 New modalities
Options today Option 1 Do nothing Option 2 Allow for use of reflows under business-as-usual Lost opportunity Reflows to accumulate until 2028 to ensure repayment to loan contributors until capital and grant contributors would have a say in the use of reflows, which means ZERO new climate-smart projects supported until then Missed opportunity Only USD 665 million of cash to accumulate by FY22, and USD 1.9 billion by FY30, which means, on average, a commitment level of around USD 150 million per year for new projects from FY18 to FY22.
Option 3: New financing Structure Objective Introduce a financing structure capable of independently raising funds from institutional investors through the issuance of green bonds or other debt instruments in the international capital markets Legacy reflows from CTF 1.0 to serve as credit enhancement for new debt issued by a newlyformed legal vehicle Build on the institutional legitimacy of the multi- MDB origination framework Preserve the flexibility and responsiveness of CTF instruments to support the next generation of low carbon investment projects
Scenario 1: WITHOUT contingent liquidity (FY18-30) Projected bond issuance amounts (USD millions) 3,500 3,320 3,000 2,500 2,600 2,000 1,500 1,000 1,575 1,350 1,295 1,150 2,175 1,910 1,830 1,710 500 0 520 270 315 FY18 FY25 FY30 Baseline High concessional Additional USD1billion Equity Shock to Country X Shorter Maturity Bonds issuance *7-year break in FY23-29, and FY35-41
Scenario 2: WITH contingent liquidity (FY18-30) 9,000 Projected bond issuance amounts (USD millions) Confidential 8,000 7,920 7,000 6,000 5,000 4,000 3,000 5,640 4,575 4,055 3,700 3,195 6,420 5,710 5,655 4,485 2,000 1,000 0 795 645 500 450 FY18 FY25 FY30 Baseline High concessional Additional USD1billion Equity Shock to Country X Shorter Maturity Bonds issuance
CTF 2.0: Risk Mitigation Facility (RMF) Objective Utilize expected CTF reflows to scale up mobilization of local and international private capital through provision of risk mitigation guarantees Expected demand across national and sub-national space (including Colombia, Mexico, India, Philippines, Egypt, South Africa and Nigeria) Potentially include both non-accelerable and accelerable guarantee products such as loan guarantee, payment guarantee and contingent finance, to help enhance credit quality, bankability and affordability of projects. Requires a dynamic, multi-disciplinary, risk exposure management function that would track portfolio reflow information, calculate capacity for expected commitments and advise the TFC in its decision making role Upstream leverage: 1:1.3 (assuming re-cycle of funds resulting from uncalled guarantees), while the downstream mobilization (co-financing in CTF lending): 1:7.4
Additionality Why a Risk Mitigation Facility? Conventional risks, such as institutional, political or legal risks, can be mitigated with traditional instruments, while the incremental risks that are specific to clean technology require targeted risk mitigation instruments Frontier clean technologies face additional challenges such as inability to obtain long term technology warranties, limited performance track record and higher operational and maintenance costs, among others RMF guarantees would de-risk projects and provide investment risk mitigation to financiers, project entities and development institutions help secure competitive terms to improve bankability and affordability of projects MDB (e.g. MIGA) vs. CTF-RMF Guarantees MDB Guarantees Broader support for economic and social programs in member countries Included within country exposure limits and therefore spread between various sector programs under a country partnership framework Risks covered include, political, institutional, legal/contractual and creditworthiness of public sector undertakings and contractual obligations MDB guarantees typically require counter guarantees from the member countries Follows MDBs approval processes based on Country Partnership Framework. CTF-RMF Guarantees Targeted for clean technology projects in CIF countries Not included within country exposure levels and therefore provide an additional capital source for climate friendly projects Risks covered include technology, economic performance, regulatory, resource intermittence, commercial, counterparty creditworthiness and financial risks. No requirement for sovereign government indemnity (subject to MDB policies) Follows TFC and MDB approval based on agreed CIF/CTF Programs
Investment Frontiers for CTF 2.0 Energy Storage Manage intermittent and distributed nature of RE Improve grid efficiency Cost-effective alternative to aging transmission and distribution networks Building Energy Efficiency Account for about one-third of global energy use and related GHG emissions Short payback periods; $1 invested in energy efficiency measures can potentially generate $3 in future fuel savings by 2050 Distributed Generation/Solar Energy Global capacity additions to surpass new centralized additions in 2018 Over 80 GW of annual installed capacity in emerging markets (2014-23) Global distributed solar PV annual capacity additions to grow from 20 GW (2015) to over 30 GW (2020), $70 billion market Sustainable Transport Transport accounts for 23% of global CO2 emissions. Addressing sustainable transport challenges would also result in cobenefits like reduced congestion, pollution and accidents, improved health, quality of life, enhanced productivity and economic growth.
Preliminary pipeline Based on initial MDB scoping Investment Area Number of Potential Projects/ Programs Approximate Amount (billion USD) Energy Storage 10 0.8 Building Energy Efficiency 18 1.7 Sustainable Transport 4 0.3 Distributed Generation 10 0.4 Solar Energy/ Renewable Energy 22 3.3 Total 54 6.5
Thank You! Mafalda Duarte Mduarte@worldbank.org (202) 473-4678 www.climateinvestmentfunds.org @CIF_Action https://www.youtube.com/user/cifaction https://www.flickr.com/photos/cifaction/sets
CTF Portfolio Credit Risk Public Sector CTF Portfolio Amount Credit Rating Portfolio Obligor/Guarantor ($MM) S&P Moody's Fitch Concentration Colombia 79 BBB(N) Baa2 BBB 3.2% Egypt 150 B-(N) B3 B 6.0% India 308 BBB- Baa3(P) BBB- 12.3% Indonesia 125 BB+(P) Baa3 BBB- 5.0% Mexico 401 BBB+(N) A3(N) BBB+ 16.1% Morocco 534 BBB- Ba1 BBB- 21.4% Philippines 125 BBB Baa2 BBB-(P) 5.0% South Africa 350 BBB-(N) Baa2(N) BBB- 14.0% Turkey 150 BB(N) Baa3(CWN) BBB-(N) 6.0% Ukraine 148 B- Caa3 CCC 5.9% Vietnam 128 BB- B1 BB- 5.1% Total 2,498 Sector Confidential MDB-approved Public Sector Loan Portfolio Credit Risk Exposure Portfolio Weighted Average External Credit Rating Total MDB-approved Loans (MM USD equivalent) Estimated Probability of Default (PD) Public BB 2,498 9.6% Sector Portfolio Weighted Average MDB Credit Rating Note: Private Sector does not include ADB or AfDB loans. MDB-approved Private Sector Loan Portfolio Credit Risk Exposure Total MDB-approved Loans (MM USD equivalent) Estimated Probability of Default (PD) Private B+ 292 19.8% 6