Unlocking an economic boost by investing in renewable energy can be a pillar of the COVID-19 recovery, but will require significant work to align actors across the sector. Read more in this article, the second in a series on Renewable energy investments, from the Clinton Global Initiative and Resilience Capital Ventures.
Unlocking an economic boost by investing in renewable energy can be a pillar of the COVID-19 recovery, but will require significant work to align actors across the sector. From a technical point of view, financial mechanisms and instruments can be designed to de-risk projects and the region can expand its ability to attract investment dollars by utilizing private equity, outcomes-based financing, and bonds. Deploying innovative risk mitigation instruments will facilitate access to debt and equity financing by properly assigning risks to those with longer horizons for returns and shifting the burden away from constrained island governments. At this level, a focus on efficient approval processes, transparency in investment policies, and the waiving of import tariffs on low-carbon technologies and equipment, are important next steps. With proper coordination, islands can benefit from economies of scale for project construction and draw in larger investors.
One strategy for international actors, including multilaterals and non-profits, to ramp up the scale and sophistication of the renewables financing available to the region is through blended finance. Over the last decade, the energy sector has emerged as a priority focus area for blended finance, representing the largest sectoral share of global blended finance transactions since 2010. Many in the international community agree that leveraging blended finance to maximize private sector investment in renewables will be one of the most important strategies to meet the scale of the Sustainable Development Goals.
When coupled with regional coordination, blended finance frameworks can be catalyzing for both the pipeline of projects that are investment-ready, and the crowding-in of multiple financing partners at private, multilateral, bilateral, and impact investor levels.
Innovative financing in other parts of the world has shown that considerable time and effort are required to experiment, review and finetune the design of financial products and facilities. In regions where capital markets are not mature, moving towards ever increasing granularity of financial capital first requires intentional efforts to assemble other types of capital, including knowledge capital for investors. It is this type of non-financial capital that is urgently required to activate underperforming resources and assets. Resilience Capital Ventures (RCV) defines blended finance as an investment strategy that mobilizes and deploys a variety of forms of capital – knowledge, social, political, cultural, and relationship - in combination with financial capital.
This definition of blended finance is part of a “Triple B” framework developed by RCV, which directs us to focus our attention on bottlenecks, blind-spots, and blended finance. This approach places great importance on sequencing and suggests that actors such as DFIs and other international partners have a critical signaling role to play by providing the knowledge capital necessary to enhance market functioning. For example, if public auctions are preferable to international investors and give comfort in terms of stability, then there should be a pool of funds and expertise, compiled by international partners, made available to Caribbean countries on demand.
The COVID-19 pandemic has fundamentally destabilized macroeconomic fundamentals in the Caribbean at a time when fiscal space was already shrinking. These SIDS require solidarity and policy response from the international community. Prime Minister Mia Mottley of Barbados in communication with President Bill Clinton pointed to the need to ring-fence COVID-19 borrowing, to restructure existing debt and to provide for moratoria on repayments in order to allow breathing space. Likewise, Prime Minister Allen Chastanet of St Lucia called for a collaboration to navigate changes in travel and tourism and CARICOM Secretary-General LaRocque welcomed harmonization and functional cooperation in moving forward with renewable energy projects.
By including capacity building components such as workforce development and institutional knowledge sharing, regional and international partners can work to improve the system and at the same time work to attract greater investment in renewable energy in the region. A renewed focus on the creation of collaborative networks and new channels of communication across siloed sectors will be essential for creating alignment on language, priorities, and interventions. Blended finance goes beyond just financial capital – it requires a blending of diverse sources of knowledge capital and political capital, woven together by tissues of collaborative and action-oriented networks.