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Barriers and Gaps to Mobilising Investment in Low Carbon Energy Technology
Eric Usher, Manager Seed Capital Programmes, Energy Branch United Nations Environment Programme
IEA Workshop on Forging Intl Finance Collaboration
Stockholm, June 21, 2012
UNFCCC Technology Mechanism (TM)
Technology Mechanism
Climate Technology Centre and Network
(CTCN) Operational arm
Technology Executive Committee (TEC) Policy and strategy arm
Advisory Board of CTCN
Establishment of the CTCN
COP17 (Durban) in 2011: guidelines to select the host of the CTC 16 January 2012: call for proposals for host of CTC 16 March-April 2012: evaluation of proposals SBI 36 (Bonn) in May 2012: UNEP consortium ranked first
Next steps UNFCCC Secretariat in discussion with UNEP on host agreement COP 18 (Doha): agreement on CTC host and CTCN advisory board
CTCN responses to NDE requests
Country driven technology transfer process
Technology Frontier
Technology Development, Manufacture & Deployment Processes
5
Research & Development
Tech. Dev.
Proof of Concept
Tech. Dev. Pilot Plant
Adoption: Initial Commercial
Plants
Deployment / Diffusion
Scale-up
Continuous R & D
Initial Manufacture & Component Sourcing
Manufacture Scale-up
Maturity, Econ. of
Scale
B. Supply Chain Development
A. Technology Development
C. Project Development Activity
Source: UNEP, AEQUERO
Developed Countries
Developing Countries
Transfer Tr
ansf
er
Financial Actors and the Gaps
6
Initial Manufacture &
Component Sourcing
Manufacture Scale-up
Maturity, Econ. of Scale
B. Supply Chain Development
Research & Development
Tech. Dev.
Proof of Concept
Tech. Dev. Pilot Plant
Continuous R & D
A. Technology Development
Venture Capital
Private Equity
Entrepreneur
Angel Capital
Corporate Investor / M&A
Public Markets
Innovator / Entrepreneur
R&D Grants
Venture Capital
Private Equity
Angel Capital
Corporate Investor / M&A
Public Markets
“Valley of Death financing gap”
“Pre-profit financing
gap”
Source: UNEP, AEQUERO
Project Development and Allocation of Project Capital Spend
Pro
jec
t C
ap
ita
l C
os
t
Project Development Lifecycle
Early-stage Mid-stage Late-stage Development Construction Commissioning Operation Financing
Early Stage Project Development Activity
Late Stage Project Development Activity
Approx. 1% of Total Project Cost
Approx. 4% of Total Project Cost
Construction Finance
Approx. 95% of Total Project Cost
Esta
blis
h F
easi
bili
ty
Fin
anci
al C
lose
Risk
Source: Aequero, UNEP
Catalysing Early Stage Investment
3
Source: UNEP, Aequero
Project Development Lifecycle
Corporate & Compliance Investors (15-20%)
Fun
din
g So
urc
e (
and
In
dic
ativ
e
Ret
urn
Req
uir
emen
ts)
Sponsor / Developer (30-40+%)
Early-stage Mid-stage Late-stage Development Construction Commissioning Operation Financing
Fin
anci
al C
lose
Private Equity & Infrastructure Funds (18-25+%)
Capital Markets (generally driven by P/E and other comparables rather than return)
Mezzanine Capital (12-15%, somewhere between debt and equity return)
Carbon Finance (20-25+%)
Debt Finance (Project Finance) (Indicatively, e.g., 7-8% in US$; 11-13% in INR) Early Stage
Financing Gap
Development/Transaction Costs
Where are the financiers along the project cycle ?
Why is it hard to get capital into this space ?
• ‘First mover’ low carbon projects have higher development costs.
• In addition to costs, development cycles are typically 2 – 3 times longer.
Different risk/return paradigm is a mismatch with conventional developers.
More of a VC risk profile than infrastructure development finance.
Catalysing Early Stage Investment
4
Inve
stm
en
t
Ap
pro
ach
es
No
n-I
nve
stm
ent
Ap
pro
ach
es
Gap - Early Stage Financing
Lesson 1 – Grant and Non-Grant Approaches are Needed to Address All Gaps Challenging to Address Early Stage Financing Gap with Only Non-Grant Approaches
Early Development Construction & Operation
Mid Development Late Development / Financing
Fin
anci
al C
lose
Project Development Lifecycle
Early-stage Public Non-Investment Interventions
Early-stage Public Investment Interventions
Late-stage Public Interventions
Seed Capital Incentives (e.g., SCAF)
Transaction Cost Sharing (e.g., ACAD, CDM Loan Scheme)
Coaching, Mentoring & Advisory (e.g., CTI PFAN)
Gaps - Equity, Long-Term Debt
& Risk Mitigation
Publicly-backed DevCos (e.g., InfraCo, SN Power)
Philanthropic / Publicly-backed Social Venture Funds (e.g., Acumen)
~ $3
.9 b
illio
n /
yea
r
Guarantee Products
Direct Private Equity Investments
Loan Facilities Through Funds / Credit Lines
VC, PE & Infrastructure Funds
Source: UNEP, Aequero
~ $1
8 m
illio
n /
yea
r
Catalysing Early Stage Investment
13
www.scaf-energy.org 6
SCAF Cooperating Fund Agreement (CFA)
CONCEPT
www.scaf-energy.org 7
Contracted Fund Managers Asia Africa
FUNDS
PE Funds
VC/PE Hybrid Funds
www.scaf-energy.org 9
Armstrong Asset Management Investment Strategy
Asia Fund Focus
PROJECTS Africa
Name, Country
Tech. Size (MW)
Stage
Kouga South Africa
Wind 80 Financial closing
Mapembasi Tanzania
Small hydro
10 Financial closing
Kinangop Kenya
Wind 50 Financial closing
Akiira Kenya Geo. 35 Feasibility
Baringo Kenya Biomass 12 Feasibility
DSI Rwanda PV 20 Feasibility
Lubilia Uganda
Small hydro
5.4 Feasibility
SITI I/II Uganda
Small hydro
22 Feasibility
KVTC Tanzania
Biomass 4 Pre-feasibility
SL2
SL
1
Asia
Name, Country Tech. Size (MW)
Stage
Philippines
Wind 48 Financial
closing
Philippines Small hydro 25 Financial closing
Philippines Biomass 30 Feasibility
Philippines Small hydro 24 Feasibility
India Small hydro 13 Feasibility
India Small hydro 48 Feasibility
India Wind farm 230 Feasibility
SL2
SL
1
www.scaf-energy.org 11
PROJECTS Example Seed Financed Projects
Name, Country
Tech. Size (MW)
Stage Financing Co-finance Ratio; Leverage Ratio
CO2
(MT)
Kouga South Africa
Wind 80 Financial closing
Total: R20mn dev.; R380mn equity; R800mn debt Fund: R10mn dev. (20%SCAF); R90mn equity
4x co-finance 50x fund; 600x total
6.1
Mapembasi Tanzania
Small hydro
10 Financial closing
Total: $720K dev.; $8mn equity; $19mn debt Fund: $350K dev.(20%SCAF); $3.5mn equity
4x co-finance 55x fund; 400x total
0.6
Seed Financed Development Loan - soft quasi equity investment, interest free and convertible to equity at financial close
$70K of SCAF Support For: - EIA and technical verification studies. - covers max 50% of any activity
* Figures in italics are still to be realised
www.scaf-energy.org 10
Thank You!
www.scaf-energy.org