Climate Change Financing: The Breakthrough for the Caribbean’s Sustainable Energy Transition?
Article by Judith Ephraim from the The OECS Commission for the Caribbean Electric Utility Services Corporation
There is a well-recognized, inextricable link between climate change and energy. Climate change has emerged as a global problem which requires innovative and collective effort to address it. Energy drives almost all aspects of life as we know it. The impacts of climate change are many, and in some cases irreversible damage has already been done.
For the Small Islands Developing States, SIDS, including Caribbean SIDS, climate change action is both a priority and a dilemma. SIDS are amongst the most vulnerable countries to the negative impacts of climate change, yet their contributions of global greenhouse gas emissions is negligible. SIDS contribute less than 1 per cent to the world’s greenhouse gas emissions, and these countries are among the first to experience the worst and most devastating impacts of climate change (UNDP 2017).
Reducing the level of greenhouse gases in the atmosphere, the main culprits responsible for global warming, requires a shift in our energy sources and consumption patterns. Sustainable energy clearly contributes to Climate Change Mitigation, the term used to describe actions that reduce the greenhouse gas emissions.
Although the impetus for sustainable energy on SIDS is not primarily climate change, opportunities exist to build on synergies between the two areas and to propose measures to achieve shared goals. Financing is one area that needs to be further explored to capitalize on joint strategies for a sustainable energy future.
Advancing the Sustainable Energy Transition
Most Caribbean SIDS are largely dependent on imported fossil fuels for their energy needs. Sustainable energy and more explicitly, renewable energy, is expected to provide significant benefits to the region including increased energy security, reduction in expenditure on imported fossil fuels and technological advancement. A key outcome sought from sustainable energy is the reduction in energy costs which will have positive ripple effects on other sectors, helping to stimulate economic growth and increasing the competitiveness of the region.
The Caribbean has a particularly diverse and large supply of renewable energy resources relative to the region’s energy needs but this has not been developed to any significant level. Amongst the barriers to realizing the full potential of the Caribbean’s renewable energy is financing. This is not unusual for developing countries who often struggle to access the large quantities of upfront financing needed for renewable energy investments. Even when available, the cost of financing is often substantially higher than in developed countries.
Given their upfront capital intensity, renewable energy projects are particularly sensitive to high costs of debt and equity. Innovative solutions are therefore needed to help de-risk and realise the renewable energy projects. This will ultimately improve the competitiveness of renewable energy projects in the region and help boost economic growth and resilience.
Caribbean SIDS have recognized the potential benefits of a shift towards sustainable energy. To this end, Governments, utilities, businesses and even home owners are embracing measures to adopt renewable energy. The transition away from fossil fuels to renewable energy and increased energy efficiency will require significant levels of investments particularly for Caribbean SIDS. Whilst these investments are expected to pay off within reasonable timeframes, neither the governments or the private sector in these countries have a ready source of funding for these energy initiatives.
In most cases, governments are too indebted to take on additional loans and even when financing may be available, access can be challenging due to reasons of technical capacity and availability of information to mention a couple. A key to solving the financing challenges for renewable energy projects in the Caribbean could lie in the financing opportunities linked to climate change.
Global actions to address Climate Change is formalized under the United Nations Framework Convention on Climate Change, the UNFCCC. The convention speaks to common but differentiated responsibilities with respect to addressing climate change based on the capabilities of countries. Recognising that additional financial support is needed to facilitate the achievement of the objectives of the UNFCCC, various vehicles and mechanism have been created to assist particularly developing countries with their mitigation efforts which are to a large part sustainable energy.
The following are some of the most relevant climate change financing avenues that could support sustainable energy in the region.
The NAMA Facility
The NAMA Facility, is a financing initiative launched in 2012 by the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMU) and UK Department of Business, Energy and Industrial Strategy (BEIS, former DECC). Three years later, the facility welcomed the Danish Ministry of Energy, Utilities and Climate (EFKM) and the European Commission joined the NAMA Facility as new Donors ( NAMA Facility, 2019).
As the name implies, this facility focusses on Nationally Appropriate Mitigation Actions, NAMAS, an important vehicle to implement Nationally Determined Contributions (NDCs) under the Paris Agreement. Although a concise definition for NAMAS has been somewhat elusive, renewable energy and energy efficiency projects do qualify. Amongst the criteria that are important for projects to be considered as NAMAS is the fact that they must be country-driven and anchored in national development strategies and plans. NAMAS should also consist of a combination of policies and financial mechanisms.
The policies serve ideally to create an enabling environment and channel financial flows into low-carbon investments. The financial mechanisms in turn address potential barriers for investment and leverage potential public support for mitigation activities. One unique aspect of NAMAs is the strategy of using international funds to enable the implementation of NAMAs and leverage additional public and/or private capital investment.
The NAMA facility in 2019 published its 6th round of calls for projects and the facility prides itself in supporting the implementation of what it terms “transformative NAMAs”. The facility focuses on those parts of NAMA plans that are ambitious and aspirational and are pushing to do much more than business as usual to mitigate the impacts of climate change.
The process for project selection is an open and competitive process, which ensures that the most ambitious NAMA Support Projects from around the world go forward. However, attention must be paid to not only ensuring that the criteria selection is met but also to the time for submission of the project proposals.
The Green Climate Fund
The Green Climate Fund (GCF) is perhaps the most well- known source of climate financing available for investing in low-emission and climate-resilient development. This unique global financing platform was established in 2010 to limit or reduce greenhouse gas emissions in developing countries, and to help vulnerable societies adapt to the unavoidable impacts of climate change. The GCF is actually part of the UNFCCC’s financial mechanism that aims to deliver equal amounts of funding to mitigation and adaptation, while being guided by the Convention’s principles and provisions. Funding for the GCF is provided mainly by the developed countries although there are also contributions some developing countries and regions.
The initial resource mobilization for the GCF which began in 2014 obtained pledges worth USD 10.3 billion. By 2017, the Fund had made significant progress with 19 projects under implementation by the end of the year, totalling an estimated USD 633 million in GCF resources( GCF, 2019). The GCF has a paid particular attention to the needs of the Least Developed Countries (LDCs), Small Island Developing States (SIDS), and African States who are amongst the most vulnerable to the impacts of climate change. Within the Caribbean, there are three accredited institutions to the GFC, the Caribbean Community Climate Change Centre and Antigua and Barbuda.
A unique advantage of the GCF is its ability to unlock private finance as it can engage directly with both the public and private sectors. Direct engagement with the private sector is facilitated through the Fund’s Private Sector Facility (PSF)(GCF, 2017). An important part of its innovative framework, is the capacity to bear significant climate-related risk, allowing it to leverage and crowd in additional financing. It offers a wide range of financial products including grants, concessional loans, subordinated debt, equity, and guarantees. This enables it to match project needs and adapt to specific investment contexts, including using its funding to overcome market barriers for private finance.
The Caribbean Development Bank has been successful in obtaining funding from the GCF to support renewable energy and in particular geothermal energy. The Banks’s Sustainable Energy Facility for the Eastern Caribbean (SEF-Expanded) is designed to reduce the financial, technical, and institutional barriers to geothermal energy development in five Eastern Caribbean nations. The SEF-Expanded programme of the CDB, a mixed loan and grant package, has obtained US$ 60 million from the Green Climate Fund (GCF) for a 20 year term (Richter 2018). This financing is administered with a 5.5 year grace period and a concessional based interest rate to develop geothermal plants and transmission lines. The CDB has also obtained US$ 4 million from the GCF in grants to fund capacity building for geothermal analysis, environmental and social safeguards, and additional support for the CDB. These funds are being used to support the energy transition in the Eastern Caribbean and lessen its dependence on fossil fuels.
The Caribbean NDC Finance Initiative
A review of the initial Nationally Determined Contributions of Caribbean shows that sustainable energy projects dominate the proposed actions. However, it has been recognized that without financial assistance the region will not be able to deliver on these ambitious yet necessary objectives. A regional vehicle to advance and accelerate the implementation of NDCs, termed the Caribbean NDC Finance Initiative (NDCFI) was launched in 2017.
The Caribbean NDCFI is a joint initiative being led by some key partners including the Organisation of Eastern Caribbean States Commission, the Government of Saint Lucia and the United Nations Convention on Climate Change. The initiative is implemented under the auspices of the NDC Partnership and to date has received strong support from some other development partners such as the Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ (BVC ,2018).
The NDCFI aims to support participatory engagement processes and regional fora that seek to catalyze investments in resilient and low-carbon infrastructure across priority sectors as identified in the NDCs submitted by OECS Member States. The NDCFI not only seeks to match financing to projects but it also provides support the technical elements in the early stages ofdeveloping bankable projects, as well as access to finance. Capacity-building and matchmaking services are made available to infrastructure projects including sustainable energy projects that advance and accelerate the implementation of the region’s NDCs.
The Caribbean NDCFI has been designed as a regional open platform welcoming active engagement (“plug-n’-play”) and contributions from interested countries, development partners, development banks and private and financial sector stakeholders. As financing for the NDCFI still under development, the initiative will start with efforts to get a small number of pilot projects to Financial Close. This is expected to attract additional funding, allow addressing key bottlenecks in exemplary pilots and set the stage for gradual expansion of the initiative.
The ultimate goal is for the NDCFI is to grow into a larger operation with the capacity to screen all potential infrastructure projects eligible for support. The second Investment Forum under the NDCFI is planned for March 2020 and development partners and Caribbean Governments are working towards highlighting some successful energy, water and other infrastructural projects under this initiative.
The Way Forward
As the energy sector worldwide undergoes a paradigm shift, new and innovative measures must be adopted to support the sustainable energy vision. Partnerships and synergies are a vital part of the needed strategy. Financing for sustainable energy, needs to be an integral part of the solution. Capitalizing on the resources mobilized to address climate change could be an underutilized strategy for the region. Sustainable energy makes sense for the Caribbean and the transition away from fossil fuels will support both climate and economic resilience. It is therefore logical that the financing for climate change can be successfully used to support the sustainable energy goals.
Refrences:
Green Climate Fund (GCF), 2019, About the Fund
Green Climate Fund (GCF), 2017, The Green Climate Fund’s Private Sector Facility
NAMA Facility, 2019, Concept and Approach
Link to Original Article in the CARILEC CE Industry Journal can be viewed here
Judith Ephraim is Programme Coodinator for the Sustainable Energy Unit of the Organisation of Eastern Caribbean States (OECS) Commission. She previouly served as Chief Energy, Science, and Technology Officer to the Government of Saint Lucia. She holds a BSc (Hons) in Environmental Geoscience from the University of Bristol, UK, and an MSc in Resources Engineering from the University of Karlsruhe, Germany.
