Mobilizing climate finance for grid investments

On July 18th, the Climate Parliament organised a virtual parliamentary roundtable on mobilizing climate finance for grids investments in collaboration with the Climate Compatible Growth (CCG) research programme. The session featured two leading experts in this field, Steve Pye, Associate Professor of Energy Systems at the UCL Energy Institute and Simone Osei-Owusu, Research Fellow in Energy Systems Modelling at the UCL Energy Institute. Members of Parliament from Botswana, Egypt, Gambia, Ghana, Liberia, Malawi, South Africa, Tanzania, Uganda and Zimbabwe participated in the roundtable.

Ahead of a Q&A with the MPs present, research underpinning the new paper “Mobilising climate finance for grids: Taking stock of current financing approaches” was presented. The paper was produced within the context of the Green Grids Initiative (GGI) working group on finance and is a follow up to the 2021 paper “Climate finance for grid investments in emerging and developing economies” which looked at the criteria for assessing whether grid infrastructure projects qualify for climate finance, finding that only 40% qualify despite grids being widely recognised as critical to the global energy transition.

What is climate finance?

Climate finance refers to funds for projects aiming to mitigate or adapt to the impact of climate change. There are different actors in this field with different perspectives:

• International finance institutions (IFIs) that must ensure a certain percentage of their annual investments go to green projects

• The specific climate funds that only provide investment to climate friendly projects (ex: GCF)

• The Climate Bonds Initiative which works to expand the green and climate bonds market that can help to drive down the cost of capital for projects with measurable emissions reduction

• Private finance organisations that often require concessional finance to de-risk investments in grid infrastructure projects in emerging markets and developing economies (EMDEs)

As climate finance is still a relatively new field there is a need to find a common methodology, definition and criteria to assess which projects are eligible for climate finance.

What is the current landscape when it comes to grid investments?

What are the current challenges to grid investments?

There are various challenges for investors in deploying capital for grid projects. With a shift of approach and methodology, climate finance could offer solutions to these existing challenges to allow for a greater flow of finance into grid infrastructure projects, helping to accelerate the global transition to renewable energy which is critical to keeping the world within a safe carbon budget.

What changes to existing climate finance methodologies could be made to achieve the necessary increase and allow capital to flow to green grids projects?

Can these new approaches be standardised or should they be country specific?

Methodologies for assessing whether projects qualify for climate finance need to be standardised to build trust amongst different actors, but they also need to be applicable to a range of geographical contexts in order not to restrict financing and recognize the diversity across EMDEs.

Current rule sets such as the EU Taxonomy and MDB Common Principles are often perceived as European centric and do not always take into consideration the specific needs of EMDEs. What can legislators do to create an enabling environment for investments in grids?

• Keeping grids on the political agenda

• Build capacities of decision-makers and other stakeholders on the opportunities offered by climate finance, the potential avenues for financing, the relevant institutions/ actors

• Facilitate concessional finance to build credit worthiness

• Build robust data sets that are publicly available to help accelerate due diligence processes

• Participate to regional fora and identify regional partnerships for energy interconnection

Following the presentation of current research into how climate finance methodologies are being applied by IFIs and climate funds and a short interview with the experts, the floor was opened to questions from the MPs present. Several key themes emerged:

• There is a lack of technical understanding of what climate finance is within parliaments, several MPs noted. There is a need for capacity building around climate finance in order for MPs to be able to exercise oversight of governmental action and make informed budgetary decisions. A need to share learnings, experience and best practice across countries was noted.

• Most African countries are in debt and have very urgent priorities to deal with such as food scarcity.

• Debt swap could be used to allow climate finance to flow into EMDEs and release the burden of debts.

• Several MPs noted the need to get more involved in regional forums such as the African Union Commission, the Southern African Development Community, amongst others, to facilitate regional action such as setting up standards, preparing model laws on climate finance or issuing resolutions calling for shifts in investment from fossil fuels to renewable energy.

• The social cost of decarbonization and resilience of grids should be taken into consideration when assessing if a project should be eligible to climate finance.

One resource, the Electricity Transition Playbook was raised as important in addressing many of the questions and concerns raised by MPs during the discussion. The Playbook is being developed by CCG and is designed to support decision-makers navigating the energy transition. A 4-page ministerial pack will soon be available, providing guidance on key principles for an electricity system transition and questions to support politicians in relevant decision-making processes. With thanks to our experts and all MPs who attended the roundtable for an excellent discussion with clear take-aways.

Expert contacts:

• Steve Pye, Associate Professor of Energy Systems at the UCL Energy Institute s.pye@ucl.ac.uk

• Simone Osei-Owusu, Research Fellow in Energy System Modelling at the UCL Energy Institute s.osei-owusu@ucl.ac.uk

You can find out more about the Climate Compatible Growth programme here: Climate Compatible Growth – Providing research and global public goods to help countries develop strategies, plans, and policies to attract investment into low-carbon growth opportunities. ANNEX The Climate Parliament's work on green grids and climate finance:

• The Green Grids Initiative (GGI) aims to increase the speed and scale at which green grids infrastructure, critical for a world powered by renewable energy, is built globally. The One Sun Declaration issued by the prime ministers of India and the UK together with other world leaders at COP26 in Glasgow has been endorsed by more than 90 countries. Through our work for the Climate Compatible Growth programme, we remain a core part of the global Secretariat for the initiative and a member of the GGI Ecosystem, working with legislators, civil society and business leaders to build the political will required to achieve the initiative’s goals. In 2023, we are focussing on a critical challenge for scaling green grids globally - investment.

• The Green Grids Investment Dialogue is a dialogue between legislators, regulators, government official and public and private investors, aiming to increase investment in renewable energy and grids on a massive scale. The Climate Parliament is currently engaging with both public and private investors through a process of consultation to find out what is needed to enable the massive increase investment required to meet the Paris Agreement goals. The Dialogue will be launched in an online event on November 27th, ahead of COP 28 in Dubai and national dialogues will be conducted starting in 2024.

• Parliamentarians for Climate Finance is a multi-country project being developed in collaboration with the GCF and UNIDO with the aim to attract massive green investment in each country by building capacities of legislators on climate finance. We are currently in the process of consulting the Nationally Designated Authorities (NDAs) in each country and found very positive responses in Botswana, Ivory Coast, Nigeria, Rwanda and Zimbabwe. We will be in touch with MPs in each country in the coming weeks with the aim of launching the project early 2024.