Occupied by Wall Street: world leaders grapple with clean energy finance, growth at Copenhagen Summit

October 11, 2011 |

 

Denmark's Crown Price Frederick whispers to Danish PM Helle Thorning-Schmidt as Republic of Korea Environment Minister Young Sook Yoo addresses the Global Green Growth Forum in Copenhagen

World leaders say new structures, public-private partnership, required to unlock clean energy, unleash economic growth.

Free-flowing discussion in Copenhagen shows directions that reform of clean energy finance might take.

You might have heard, in the broader media, about some of the discussion underway at the Global Green Growth (3G) Forum currently underway in Copenhagen.

Some of the highlights have been making the rounds.

UN’s Ban Ki-Moon, Denmark’s Helle Thorning-Schmidt, OECD’s Angel Gurría

That UN Secretary Ban Ki-Moon reiterated that sustainable development is the top priority for his next term at the United Nations. He said, “We need a different path. A sustainable path…Because we live in an era of three Fs: crises on Food, Fuel and Finance. So we need to enhance the three Es: the Economy, the Environment and global Equity…The old economic models are not working for the countries and companies that embraced them.”

That Denmark’s new PM, Helle Thorning-Schmidt, announced that her newly-elected center-left government aims to intensify the country’s renewable energy targets as a means of addressing both Danish growth and climate change.

That Thorning-Schmidt, at the same time, acknowledged that the relationship between government and the private sector on climate change is in need of urgent reform.

That the Secretary-General of the OECD, Angel Gurría, emphatically praised the EU’s commitment and affirmation of its carbon legislation, as a key component in restoring growth.

That the Danish government announced its attention to use its upcoming EU presidency to highlight green growth, that the Mexican governments intends to use its 2012 chairmanship of the 2012 to highlight the same. That the Korean government intends to highlight green growth in its G20 and climate summit roles.

That the Ethiopian and Kenyan prime ministers, Raila Odinga and Meles Zenawie, xplicitly linked climate change to the intense drought gripping Africa, with Zenawi saying that “for you, climate change impact is your future, but it is the present for us.”

SAS, Virgin announce new aviation biofuels deals

In the biofuels sphere, that Sir Richard Branson announced a partnership between Virgin, LanzaTech and Swedish Biofuels to commence renewable jet fuel-based flights by 2014. That Solena and SAS announced a partnership to develop a waste-to-jet fuel project at Arlanda Airport in Stockholm, with a goal of establishing similar projects in Denmark and Norway.

But I would like to draw your attention to a less headline-oriented series of developments underway.

Away from the Keynotes, a focus on finance

Away from the keynotes and the clicking shutters of the political paparazzi, it is in the smaller rooms used for breakout strategy sessions where, work worth knowing about is underway to forge a new consensus on the nature of public-private partnerships to restore growth in the developed world, and sustain growth in the developing world. Not to mention fostering clean energy technologies.

The Chatham House rules of the meeting forbid the mention of specific names and organizations in connection with proposals of the delegates – in order to foster freedom of thought and expression, idea making, tentative proposals, trial balloons. Suffice to say that a high-level group of NGOs, policymakers and private industry is in attendance.

Some of the proposals under discussion at the meeting are, to some degree, revolutionary – particularly with respect to finance, and deserve a wider discussion and review, even as they are scrutinized at 3GF.

Proposals and agreements hammered out at the forum – which may, but not certainly, include some of the financing proposals, will be fed into the climate change negotiations process at Durban this November, at the Rio+20 conference on sustainable development next year, and elsewhere as global leaders grapple with the challenges of restoring growth while tackling sustainability and climate.

And, as global leaders grapple with the fact that the style of climate negotiations — the we-governments-and-select-NGOs-will-decide-on-climate-and-inform-you-insignificant-private-sector-people-later approach — has failed.

That was Copenhagen then, in 2009, the place where dreams went to die. At Copenhagen in 2011, some new ideas have emerged.

Three are of special interest.

A new structure for clean energy financing

First, there is discussion on the problem of risk-measuring standards around the world. How in the world, leaders are asking, can we have a situation where green technologies can’t get a debt rating, owing to technology risk, that allows them to issue debt at affordable rates? When the entire regime of sub-prime mortgage paper went through at investment grade ratings, billions after trillions, until the weight of default nearly sunk the entire global credit system in 2008?

If the best that the current system of evaluating and spreading risk can do is foster recession and prevent the deployment of advanced technologies that can restore growth – reform is necessary. Think of it as a genteel version of “Occupy Wall Street”.

Second, it has been proposed that a new asset class be established that will permit $28 trillion in pension funds to include green growth and clean energy investments in their direct investment portfolios. in discussions at Copenhagen, leaders have expressed concern that pension funds need to accelerate returns in order to cover future obligations associated with an aging population, while at the same time unlocking an alternative investment stream for clean technologies that are finding difficulty in obtaining capital to accelerate to scale at the rates needed to sustain global carbon and growth targets.

Third, it has been proposed that – out of the ashes of failed sovereign loan guarantee systems – a new system be deployed to narrow the gap between the risk that the private sector can afford in deploying new technology, and the rates of deployment needed to meet the aforementioned global carbon and growth targets. There is a clear sense that clean technology is finding capital, and working through its scale-up, but that the pace of market forces (and fostering clean tech) is going to produce change at a rate far behind what is required for the material job growth and material carbon remediation that the industrial democracies and developing nations are seeking.

Specifically, there are discussions regarding technology risk insurance funds – operating like insurance rather than the project-picking, sovereign loan guarantee system, which has been subjected to charges of crony capitalism, widespread concern about speed-to-scale, and is expensive at a time of tight public purses.

Clean energy risk insurance, vs. Green Banks, Fannie Mae

Unlike green banks – which essentially are vehicles for directive state investment – these technology risk funds would, after appropriate due diligence, insure projects in order to reduce the cost of financing. Since not all projects fail, insurance (like loan guarantees) foster more projects per dollar than direct investment.

Unlike loan guarantees, such a system would be based in public-private partnership – that is, potentially sovereign governments could help to capitalize the privately-held, privately managed funds.

How is this different from troubled institutions like Fannie Mae? First, by ensuring that government ownership does not man government control. This isn’t Private Money + Government Management, but rather Government Money + Private Money +  Private Management. In other words, government sweetens the technology risk insurance pot to the extent that it wants to accelerate development. Sweeten very little, some projects get through. Sweeten more, more projects get through.

Key to that system is reform in due diligence. It has to be both better and faster. Everyone understands that some projects will fail – just as, sadly, some houses burn down, that’s the nature of insurance and why it exists. Striking the right balance between too much risk and too little risk, that’s the key, and strong due diligence is a key to that.

Given that, generally, about 10-20 percent of advanced biofuel project cost represents the core, innovative technology (the rest includes land, pipes, rail lines, power lines, out buildings, and other forms of standard equipment) – it is taking too long to review projects, or projects are not being able to get in the queue early enough in their development so that the due diligence can be carried out in parallel with other development activities.

Numerous other proposals are floating through the halls of the Moltke Palae in Copenhagen – and there is certainly no guarantee that these financing trial ballons will be incorporated into the final documents from the conference.

But they are ideas that have the merit of freshness, and deserve reflection, review, and improvement, in reforming a financing regime that has long gone stale.

Category: Fuels

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