How to spend it: Making climate finance count

Welcome to this special COP26 edition of Lights On, a newsletter that brings you the key stories and exclusive intel on energy and climate change in South Asia.

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Every year, the UN climate talks see heated debates on how much finance there is to support developing countries and vulnerable communities cope with and prepare for exacerbating climate change. We hear that the money on the table is ‘too little, too late’, but too often that’s where the conversation stops.

We now know that the financial needs of a world already in the midst of a climate crisis are in the trillions, while climate diplomats are still squabbling over the $100 billion promise made in 2009. Businesses and banks understand the risks that a changing climate entails and are coming up with solutions to speed up the pace of mitigation and adaptation, but the money still falls short. So how can world leaders increase the impact of the little there is? I spoke with Jagjeet Sareen, Assistant Director General at the International Solar Alliance, which has come to this year’s COP with an ambitious plan to fast track solar uptake in the developing world.

Lights On: Can you tell us more about the International Solar Alliance (ISA) pitch for COP26?

Jagjeet Sareen: While the UNFCCC negotiators are discussing the $100 billion pledge, we at ISA have a broader mandate and target. As member countries join the framework agreement, they take the voluntary commitment to help mobilise a trillion dollars in solar investments by 2030.

And this is not a fund transfer from [global] north to south, it's all member countries joining ISA as a partnership, committing to work towards this $1 trillion mobilisation. We call this ‘a move towards 1,000’, that is 1,000 billion dollars mobilisation, which in turn would mean more than 1,000 gigawatts of new solar installed capacity, as well as helping 1,000 million people who don't have access to electricity, mostly in Africa. So broadly, our plan addresses the needs of countries in terms of energy access, energy transition, but also energy security. These three priorities of our member countries are aligned with the $1 trillion mobilisation goal.

There’s a lot of debate about how much money is on the plate, but we don’t hear much about how the available finance should and will be spent. What do you think would be the most effective way to use the public money that is available now, or could be made available soon?

We often hear that money is not moving, institutional investors are sitting on trillions of dollars and even multilateral development banks struggle to deploy capital. In our mind this is due to two issues. One is the enabling policy and regulatory environment in our member countries. Among our members we have about 57 Least Developed Countries (LDCs) and Small Island Developing States (SIDS), and the problem is particularly acute in the LDC group. There are political and security challenges, but overall, their regulatory environment meant to encourage investors to go big on solar is still weak. The second and related issue is that given the institutional capacity is weak, the project pipeline is not developed and there isn’t enough money for new ideas to develop on the ground.

How does ISA help countries tackle this issue?

We start with diagnostics, analysing the investment environment in our member countries. And then we work on three broad pillars: enhancing the capacity across the value chain, supporting project preparation, and dealing with risk mitigation.

To help build institutional capacity, we work on a series of initiatives across the entire value chain of solar, offering training to policymakers, bankers and technicians. We also assist countries in creating a pipeline of projects. In the last few years our member countries have applied for assistance on about 4.5GW of solar, ranging from water pumps to mini-grid solar rooftop and utility-scale solar parks. On our side, we are offering our finance and technical support, sending expert teams to turn these ideas into real projects where then multilateral development banks, private sector and big finance can come in. Then comes the risk mitigation part.

How does this stage work, and what kind of risks are there?

So if you have a project ready, do you have the funding required to get it built on the ground and sustained for another decade or two? At ISA we proposed a blended risk mitigation facility. The idea is very simple: You bring different kinds of funding, for example grant money, concessional money, private sector money, and deploy it at a ground level to absorb the risk which a project proponent or a financier would not want to take. We are currently designing the facility, and the ISA assembly recently approved it so it can go forward. We will start by focusing on Africa's private sector. This money will not benefit governments, it’s for direct project investment in the private sector.

Can you give us an example of what you described as a scenario in which there are some risks or governance issues that don't make investors feel confident they can safely put their money into a project?

Let's take the Maldives, one of our member countries. It's an island country, full of resorts, they import a lot of diesel to ensure continuous electricity supply to meet the industry’s and their own domestic demand. With the World Bank, we’ve been working to provide a guarantee structure.

Let's say you have invested $100 to put a solar rooftop in place in the Maldives, which provides electricity to a local community. Now let's say Covid hits them and their payment capacity goes down, they are not able to keep up with their monthly payments; this mechanism kicks in so that the investors don't lose their money. With a small amount of public money coming in, the investor’s money is safe, and soon enough, the communities who are using the electricity can start paying back. In case of any shock, this kind of structure absorbs it, and because the risk mitigation instrument has increased investor confidence, electricity prices have gone down dramatically. Now we are taking this model to other island countries like the Seychelles, as far as Fiji and Tonga as well.

What are the challenges to replicating this model elsewhere?

The process is very site specific. For example in West Africa we are currently supporting one large scale project. And there you have to see whether there are evacuation lines, whether the grid can absorb the power, what is the capacity of the utility and all the rest. So we start with a standard framework, then we do the country analysis to establish whether this framework fits and what modifications are required, we send expert teams on the ground. But at the end of the day, the proof of the pudding is in the eating, as they say: when you start investing in the project, when you start putting it all together, then you know what changes are required.

The business case for solar and other mitigation actions is very clear, but is there a role for businesses and private finance in adaptation?

In our mind the definition of adaptation is more comprehensive [than the conventional one]. For example, we have been pushing for a large programme on solar applications for agricultural use. In Africa, availability of water is a big issue for farmers, their income and how they manage the impacts of weather variability is affected by climate change. Through off-grid solar applications for farmers, we are helping them to get more water when they need it, so that they have better crops and manage weather variability rather than just depending on rain. So in a way, this is a mitigation programme or energy access programme, but it's helping their adaptive capacity too.

When I started working on climate way back in 2005, and I joined the UNFCCC Secretariat, we used to say that the best form of adaptation is development. Our way of addressing adaptive capacity is to help people meet their basic needs, so their adaptive capacity increases as a result, and in this process the private sector is coming along very well.

For the water programme, we have global majors at work to produce either the panels or the water pumps. Same for solar home systems, whether it's the Signify foundation, Schneider, other Indian manufacturers, Chinese manufacturers, everyone is coming along. Overall, you have 80 to 90 percent of the investments in solar coming from the private sector, and I expect that that will remain the case moving forward.

What do you hope to see coming out of COP26 in terms of climate finance?

It’s important to look at both what happens in the negotiations and around them. Outside the negotiations countries are announcing more stringent commitments towards addressing climate change, and that alone is a strong signal to all investors that the world is moving fast in that low carbon trajectory. Then there are the discussions within the UNFCCC, where we hope to get more clarity on climate finance, because countries can't hide behind the excuse that there is no money and they have to do more. But I think that the circle outside the UN is equally if not more important than what happens within the negotiations. Ultimately, country leaders, communities, stakeholders, the private sector, everyone is gearing [up], I think everybody is aligned. The only issue is speed. It's the speed that we have to dial up, but I am very optimistic about it.

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