Finding the optimum contributions of renewable energy and energy efficiency for a least-cost pathway to NDCs

2019 Asia-Pacific Climate Week

Milou Beerepoot, UNDP

September 3, Bangkok

• A transition is needed towards long-term sustainable energy systems – requiring cost effective strategies and large volume of resources; beyond ability of public finance

• How to identify priority sectors?

• How to identify most cost effective technology contributions?

• How to redirect investment flows into sustainable energy in developing countries?

THE PROBLEM: COST OF FINANCE AND LACK OF MARKET PRICE SIGNAL FOR UPTAKE OF GREEN TECHNOLOGIES

Global Environment Facility (GEF), Green Climate Fund (GCF)

UNDPSmall Grants Program, Sustainable Energy

Program

HouseholdEnergy efficient

cook stoves

Photovoltaic (PV)

in rural areas

Biomass, Sri Lanka

Concentrated Solar Heat (India)

Indonesia

Wind Energy

Program

UNDP ENERGY, INFRASTRUCTURE, TRANSPORT, TECHNOLOGY PROGRAMS: EXAMPLE PROJECTS

4

I. Identifying sectoral contributions for NDC goals

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Sectoral GHG contributions in Asia-Pacific – APEC 7th Outlook

Source: APEC 2019 and IEA 2018)

APEC final energy demand by regional grouping in the BAU, 2000-50

• While energy demand in United States stabilizes and growth in China slows

down, energy demand grows rapidly in south-east Asia under the BAU

scenario

6

APEC final energy demand by sector in the BAU, 2000-50

(Source: APEC 2019 and IEA 2018)

• Industry has been the largest energy-consuming sector in APEC since 2005, buildings and transport come in second on equal level

• Under the BAU, industry remains the largest demand sector despite its moderate growth of 10% in 2050.

Analysing country GHG per sector – APEC 7th Outlook

7

Different angles to energy consumption – e.g. heat demand

• Heat dominates global energy consumption providing key services such as space heating, hot water and industrial process heat

• Heat has remained the Cinderella of energy policy, receiving relatively little attention from policy

• Warm climate countries have similar shares of heat in final energy consumption as compared to cold climate countries

Sources: IEA (2017a), World Energy Statistics and Balances 2017 (database), www.iea.org/statistics/; IEA (2017b), World Energy Outlook 2017

Heat in global total final consumption, 2015 Total global energy consumption for heat, 2015

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UNDP project examples – heat demand

• Concentrated Solar Heat producing steam used in a dairy factory in India

• Biomass heat producing hot water used in a hotel in Sri Lanka

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II. Identifying technology contributions for NDC goals

• MACC is a graphical representation of the extent of emission

reductions that can be achieved by investments in different

technologies across the economy, and the corresponding benefits

or costs per tonne of emissions reduced

Marginal Abatement Cost Curves – MACC

• Horizontal axis: Abatement (tCO2/y), vertical axis: Cost ($/tCO2)

• Options below horizontal axis present financial savings even after the upfront

costs of implementing them have been paid back (economically viable)

• Options above horizontal axis come at a net-cost per annum but CO2 saving

potential may be bigger

Marginal Abatement Cost Curves – MACC

UNDP project examples – MACC Sri Lanka

UNDP project examples – MACC Mongolia

• The majority of the six mitigation options (except for solar) have negative marginal abatement cost (MAC) = economically viable

• The most attractive investment option is the Efficient Ventilation System

• Triple-glazed windows • Improved insulation • High-efficiency boiler • Efficient ventilation

system • Efficient lighting • Rooftop solar

UNDP project examples – MACC Mongolia

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II. How to redirect investment flows into sustainable energy in developing countries?

CASE STUDY UNDP DE-Risking Renewable energy in KAZAKHSTAN

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Derisking Renewable Energy Investment:HIGH FINANCING COSTS PENALISE RENEWABLE ENERGY

Source: UNDP, Kazakhstan: Derisking Renewable Energy Investment (2017). See Annex A of the report for full assumptions.

All assumptions (technology costs, capital structure etc.) except for financing costs are kept constant between the developed and developing country.

Operating costs appear as a lower contribution to LCOE in developing countries due to discounting effects from higher financing costs.

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Derisking Renewable Energy Investment:APPROACH TO RISK AND RENEWABLE ENERGY

1. Analyse renewable energy (RE)

using LCOE modeling

Macr

o level

Tech

no

log

y/S

ect

or

level

1. Power Market Risk

2. Permits Risk

3. Social Acceptance Risk

4. Resource & Technology Risk

5. Grid/Transmission Risk

6. Counterparty Risk

7. Financial Sector Risk

8. Political Risk

9. Currency/Macroeconomic Risk

2. Define 9 risk categories from an

investment perspective

3. These 9 risk categories form part of the

cost of equity/debt for renewable energy

Objective: Reduce

RE LCOE

Best in Class

RE Investment

(Developed Country)

Cost of Equity/Debt

Risk #1 Risk #2 Risk #3

%

%

Pre de-risking

RE investment

(Developing Country)

Cost of Equity/Debt

4. Public instruments can reduce these risks

and thereby decrease cost of equity/debt

%

Pre De-Risking

(Developing Country)

Cost of Equity/Debt

%

De-risking

instrument

#2

Post de-risking

(developing country)

Cost of Equity/Debt

De-risking

instrument

#1

Current LCOE of

Renewable Energy

Target LCOE

Cap Ex/

Depreciation

Op Ex

Cost of Debt

Cost of Equity

US$

US$

18

16.0%

7.0%

1.3%

0.4%0.5% 0.4% 1.0%

1.5%

1.3%

0.8%1.7%

Co

st

of

Eq

uit

y

Best-

in-C

las

s C

ou

ntr

y

Po

we

r M

ark

et

Ris

k

Perm

its R

isk

So

cia

l A

cce

pta

nce

Ris

k

Deve

lop

er

Ris

k

Gri

d /

Tra

nsm

iss

ion

Ris

k

Co

un

terp

art

y R

isk

Fin

an

cia

l S

ecto

r

Ris

k

Po

liti

cal

Ris

k

Cu

rre

ncy

/Ma

cro

.

Ris

k

Co

st

of

Eq

uit

y

Kazak

hsta

n B

AU

Cost of Equity (USD)

Derisking Renewable Energy Investment:KAZAKHSTAN (1) – FINANCING COST WATERFALL, WIND

Source: UNDP, Kazakhstan: Derisking Renewable Energy Investment (2017)

PRE DERISKING FINANCING COST WATERFALL

FOR WIND ENERGY INVESTMENTS

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Derisking Renewable Energy Investment:KAZAKHSTAN (2) – SELECTING PUBLIC INSTRUMENTS, WIND

Risk Category

Policy Derisking

Instruments

Financial Derisking

Instruments

Power Market

Risk

• Update transparent, long-term national renewable energy strategy

• Establish and run IPP bidding process, with bankable PPA

• Establish a renewable energy office in the regulator

NA

Permits Risk • Streamlined process for RE permits (dedicated one-stop shop)

• Contract enforcement and recourse mechanisms

NA

Social Acceptance

Risk

• Awareness-raising campaigns NA

Developer Risk • Technology R&D

• Support for industry associations

NA

Grid/Transmission

Risk

• Strengthen KEGOC’s grid management capacity

• Transparent, up-to-date grid code

• Policy support for long-term national transmission/grid road-map

• Take-or-pay clause in PPA

Counterparty Risk • Reform and maintain creditworthy Financial Settlement Centre structure

• Government guarantee for PPA payments

• Public loans to IPPs

Financial Sector Risk • Fostering financial sector reform towards green infrastructure investment

• Strengthening financial sector’s familiarity with renewable energy and project finance

• Public loans to IPPs

Political Risk NA NA

Currency/

Macroeconomic Risk

NA • Partial indexing of PPA tariff to hard currencies

Source: UNDP, Kazakhstan: Derisking Renewable Energy Investment (2017)

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16.0%

0.3% 0.1% 0.1% 0.0%0.6%

0.9% 0.1% 0.0%0.9%

13.2%

Co

st

of

Eq

uit

y

Kazak

hsta

n B

AU

Po

we

r M

ark

et

Ris

k

Perm

its R

isk

So

cia

l A

cce

pta

nce

Ris

k

Deve

lop

er

Ris

k

Gri

d /

Tra

nsm

iss

ion

Ris

k

Co

un

terp

art

y R

isk

Fin

an

cia

l S

ecto

r

Ris

k

Po

liti

cal

Ris

k

Cu

rre

ncy

/Ma

cro

.

Ris

k

Kazak

hsta

n

Po

st-

Deri

skin

g

Co

st

of

Eq

uit

y

Cost of Equity (USD)

-2.8%

Derisking Renewable Energy Investment:KAZAKHSTAN (3) – IMPACT OF PUBLIC INSTRUMENTS, WIND

POST DERISKING FINANCING COST WATERFALL

FOR WIND ENERGY AND SOLAR PV INVESTMENTS

Source: UNDP, Kazakhstan: Derisking Renewable Energy Investment (2017)

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5.7

9.2

7.1

Baseline(unsubsidised)

Wind InvestmentBAU

Wind InvestmentPost-Derisking

LC

OE

(U

SD

cen

ts/k

Wh

)

LEVELISED COST OF ELECTRICITY (LCOE)

Derisking Renewable Energy Investment:KAZAKHSTAN (4) – LEVELISED COSTS, WIND

Source: UNDP, Kazakhstan: Derisking Renewable Energy Investment (2017)

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Derisking Renewable Energy Investment:KAZAKHSTAN (5) – MEASURING IMPACT, WIND

Report’s 2021 (5 year) wind investment targets: 1 GW

If USD 275.6 million is invested in public derisking measures to promote

wind energy in Kazakhstan, this can have the following impacts:

Catalysing private sector funding

• USD 1.6 billion in private sector investment in wind

Generating economy-wide savings (over 20 years)

• USD 804.7 million savings due to derisking (lower wind costs)

• USD 310.6 million savings due to avoided fossil fuel subsidies

Better affordability for end-users

• Wind energy generation costs decrease from USD 9.2

cents/kWh to USD 7.1 cents/kWh

Benefit the environment

• Emission reductions of 56.3 million tCO2e over 20 years

Source: UNDP, Kazakhstan: Derisking Renewable Energy Investment (2017)

• Finding the optimum contributions of

renewable energy and energy efficiency

for a least-cost pathway to NDCs requires

a multi-layered approach

• Sectoral contributions for NDC goals

identified from status quo GHG emission

analysis and BAU & 2DC future scenarios

• Technology contributions for NDC goals

informed by Marginal Abatement Cost

Curves (MACC) for decision making on

mitigation strategies and options

• Redirecting investment flows into

sustainable energy needs de-risking

strategies: policy/financial de-risking is

most cost-effective; financial

compensation as last step

KEY CONCLUSIONS

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THANK YOU