Scaling Private Finance for Global Solar Growth

A recent working paper from the World Resources Institute, the International Solar Alliance, and Bloomberg Philanthropies, finds that $1 trillion must be invested into solar energy by 2030 if global warming is to be kept within the limits of the Paris Climate Agreement. 

Yet global investment in solar today is just half of what will be required. Massive amounts of financial capital, much of it private, must be available to ramp up solar development, particularly in developing regions of the globe where political and economic risks may otherwise present barriers to investment.

Laura Van Wie McGrory, WRI’s Global Engagement Lead for Scaling Up Solar and a co-author of “Our Solar Future: Roadmap to Mobilize USD 1 Trillion by 2030,” explores strategies to de-risk solar investment and scale private capital toward the $1 trillion goal.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. A recent working paper from the World Resources Institute, Bloomberg Philanthropies, and the International Solar Alliance finds that one trillion dollars will need to be invested into solar energy by the year 2030 if global warming is to be kept within the limits of the Paris Climate Agreement. The paper states that solar power is going to be crucial to decarbonization and to extending access to electricity to the nearly one billion people who live without it today. By the middle of this century, solar power must become the largest global source of electricity, yet global investment in solar today is just half of what’s going to be needed by the end of this decade. Massive amounts of financial capital, much of it private, will be needed. And much of that finance will be directed toward developing regions of the globe, where a lack of clearly defined energy policies, as well as financial and political risks present barriers to investment.

On today’s podcast, I’ll be talking with Laura Van Wie McGrory, one of the co-authors of the working paper about the challenge of scaling global solar investment and about strategies that could serve to de-risk investment and crucially, attract private capital. Laura is Global Engagement Lead for the World Resources Institute’s Scaling Up Solar Initiative, where she coordinates efforts to mobilize investment for global solar power. Laura, welcome to the podcast.

Laura Van Wie McGrory: Thank you, Andy. I’m very happy to be here.

Stone: So Laura, the scaling up of solar investment is critical if global climate goals are to be met. Give us an introduction to the scale of investment we’re talking about and where that investment will be needed.

Van Wie McGrory: You laid it out pretty well that we need to dramatically increase solar energy investment and deployment around the world if we’re going to meet global climate and development goals. So the partnership with World Resources Institute, with the International Solar Alliance and Bloomberg Philanthropies to create this working paper, this solar investment roadmap, grew out of this recognition. That’s based on energy and climate scenarios by the International Energy Agency, the Intergovernmental Panel on Climate Change, International Renewable Energy Agency and others. What all these scenarios show is that if we’re going to be able to limit greenhouse gas emissions to a level that keep us under 2 degrees Celsius of warming, and hopefully under 1.5 degrees, which are the goals agreed to at the climate conference in 2015 in Paris, all these scenarios show that solar energy has a huge part to play, and that it needs to be growing at a much faster pace than it is now.

There is some good news, and that’s that over the last decade, there’s been a lot of progress in solar investment and deployment. Since 2010, the amount of money invested in solar around the world has more than doubled, and during that same period, the global installed capacity of solar PV, which is the number of total gigawatts at capacity installed, has increased 20 times. But the problem is that this pace still isn’t fast enough. And so to keep up with the trajectory that the scenarios show we need to be on, annual investment in solar needs to more than double from current levels, and it has to stay at that level every year through 2050.

But even more critically, I’d say, solar investment is not reaching those countries and the communities that need it most. So if you look at developing countries and emerging economies where two-thirds of the world’s population lives, energy needs are growing rapidly as a result of population growth, economic development, and efforts to expand energy access to those who don’t have it. These areas of the world receive only 20% of total global investment in renewable energy. So the real challenge is that while investment in solar needs to double overall, and that’s hard enough, investment in solar and other renewables in developing countries needs to increase more than seven times to put the world on track to meet our climate goals.

Stone: I assume there are regional differences in the levels of investment that are going to be needed. Is that right?

Van Wie McGrory: Yes, absolutely. Disparity is particularly stark in Africa. There was a report that came out last year from Bloomberg NEF showing that of that 400 billion dollars invested in clean power around the world last year — and that’s for solar, wind, and other renewables — only 0.6% of that went to Africa. So if you think about that, Africa is home to 17% of the world’s population. Almost half, 44% of Africa’s population lacks access to electricity, and the continent has some of the best solar resources in the world, about 60% of the world’s solar resources total, given the amount of sunlight it gets. There really needs to be a concerted effort to do better and really look at what the barriers are that are existing and overcome those to direct more investment to Africa to take advantage of this resource.

In Asia as a region, there has been a huge growth in solar over the last decade, which is good news, but the vast majority of that investment goes to a small number of the larger, emerging economies like China and India. So there are a lot of countries still that have high levels of energy poverty, that are not receiving anywhere near enough investment. Cambodia and Myanmar come to mind. They have large energy access and energy reliability issues. And it’s important to remember in Asia, also, that most of these economies have more than doubled in size since 2000, so there’s this enormous surge of energy demand that’s happening, and it’s going to need to be met, hopefully, with clean energy.

In Latin America and the Caribbean region, there is already a high level of renewable energy use. Almost 70% of the region’s electricity generation came from renewable sources a couple of years ago, but the majority of this is from hydropower, which is getting less and less reliable as climate change changes weather patterns.

Stone: I’d like to take that a little bit further. You just mentioned hydropower and the overall importance of renewable energy, but the roadmap document is only about scaling up solar. Why did you focus on solar over all of the other renewables?

Van Wie McGrory: Absolutely, continuing to develop and scale up all types of renewables is important to meet global goals. Solar is not going to be able to be the best fit in every circumstance. A lot of the recommendations in the roadmap that we developed could help mobilize investment in other renewables, as well. But with this document, we really wanted to shine a spotlight on the unique role that solar energy needs to play in the future global energy system. And what makes solar such an important part of the mix is first, in many situations, it’s really cost effective, and that just keeps getting more true as the costs of solar technologies come down.

To install and operate either large-scale solar for power generation and/or decentralized solar, like solar home systems and community mini-grids, costs have fallen about 85% over the past decade. So not only can solar compete cost-wise with other renewable options, but it’s now also cost-competitive with fossil fuels for building new and reliable energy generation capacity in a lot of countries. The IEA, International Energy Agency, recently reported that for utility-scale solar photovoltaics, that’s the least costly option for adding new electricity capacity in a significant majority of countries worldwide.

I do want to know one thing. The simple cost comparison is not a perfect measure. For one thing, it doesn’t take into account the much higher cost of capital in developing countries, meaning that it costs much more to borrow money for a project in countries where investors consider it to be more risky, because clean energy equipment like solar and wind often has pretty high up-front investment costs, even though they then have lower operating and fuel expenditures over time. The high costs of capital can make these types of energy sources not as affordable as they would otherwise be. So this is one of the big issues that this roadmap aims to address by showing how investment risks can be managed, so to bring that cost of capital down.

What makes solar so unique is that solar technologies are really well suited to improve energy access in underserved and hard-to-reach areas of the world. So this isn’t just because they are increasingly cost effective, but they’re modular, so they can be scaled to whatever size is needed. And then the main resource they need, of course, is the sun, which is available in the majority of the countries where energy access is an issue.

Focusing on solar has so many benefits, not only in terms of climate mitigation, but it has the potential to provide affordable and clean energy to many of the now about 775 million people who currently don’t have access to electricity. So it can be used directly to power homes, schools, hospitals, transportation, industry, agriculture, and increasingly, water desalination, which is a big need.

Stone: As I recall from reading the report, much of this new investment into solar will be into grid-scale solar, as opposed to distributed solar. And obviously grid-scale solar, solar farms, don’t exist in a vacuum. There’s a lot of infrastructure that’s needed to make the most of that solar power, right? So to what extent are electric grids and electricity storage, for example, also a focus of investment?

Van Wie McGrory: It’s a big focus. Energy storage, grid infrastructure — these are important parts of the whole clean energy picture. It won’t work without them. So battery energy storage systems, which can store the excess solar energy and let you use it at times when the sun is not out, is what makes solar systems more reliable, more a constant source of energy. And then for the solar energy that’s intended to go into the grid, you need to have a reliable grid system that’s modern enough to integrate the solar energy that’s generated, and to transmit it and distribute it where it’s needed.

So the good news is that the costs for battery systems are also coming down rapidly, and as we keep increasing storage capacity, that also lets us put off or even avoid altogether some of the need to upgrade electrical transmission and distribution equipment, since stored energy can be used to meet growing peak energy demands. In some cases, you can just add storage, instead of having to increase capacity of transmission and distribution equipment, but the overall investment in storage and grid upgrades globally, and especially in developing countries, still lags far behind what’s needed to keep pace with the dramatic increases in solar and other renewables that are hopefully coming.

Stone: So it’s clear that an astounding amount of finance is going to be needed here overall. Where is the money going to come from?

Van Wie McGrory: It’s a big mix. Of course governments invest directly in energy infrastructure, so working with them to help prioritize and plan their transitions to clean energy is important, but especially in the case of developing countries and emerging economies, a lot of additional funding is needed to make this happen at the pace we need. Other important sources of funds are international trust funds, like the Climate Investment Funds, and it has a Clean Technology Fund which helps finance both public and private sector renewable energy projects.

International financial institutions offer loans and grants and technical assistance, and these include of course multilateral development banks, like the World Bank and regional development banks, African, inter-American, Asian development banks, as well as the European Bank for Reconstruction and Development. Another important source is bilateral aid or official development assistance, so that often comes from wealthier countries that provide long-term loans or grants for technical assistance. And this is like the USAID in the US or Danish International Development Agency or GISAID in Germany. And there are philanthropic foundations that provide grants to support clean energy projects and planning.

But even with all these sources, to get anywhere near the levels of solar investment that we need, a huge proportion of future investment is going to have to come from the private sector, and that includes investors and private banks and manufacturers. There was a recent estimate from the International Energy Agency saying that over the next ten years, about 70% of total clean energy investment needs to come from the private sector. So the big challenge, then, is to attract private capital to achieve the scale we need.

Stone: What are the main challenges to scaling investment in solar and also private investment in solar, particularly in the context of developing countries?

Van Wie McGrory: Well, there are a lot of reasons why investment isn’t getting to so many countries that could benefit the most, at the scale and at the pace needed. The challenges are related to policy conditions, to market structures, to risk calculations that banks and investors do, and a lack of technical capacity at the local level. These types of barriers have been really well documented over the years by energy and international organizations, by solar industry associations and everything.

So our aim with our solar future roadmap report was to zero in on the biggest barriers that stand in the way of rapidly scaling up investment, and then to be able to identify what the priority solutions are that will have the greatest impact on overcoming those barriers. So just in terms of our process, we had a series of consultations with more than a hundred solar development and finance experts, in different regions around the world. The three barriers to scaling solar investment, particularly in developing countries that we focused on in these discussions were: A lack of enabling policies, a lack of bankable projects, and a variety of risk management challenges.

Stone: Let’s start with the enabling policies. What exactly does that mean? Does that mean local renewable energy targets, things of that nature?

Van Wie McGrory: It includes that, yes. A lot of countries don’t have clear targets, clear energy sector plans, or policies and regulations that encourage investment in renewable energy. So investors need to feel confident about the long-term market for clean energy in a country. And if they don’t see clear renewable energy targets or procurement policies, like renewable energy auctions, which are competitive processes for buying electricity generated by renewables. If they don’t see these things, it discourages private developers and investors from investing in that country.

Another example of what was often mentioned as a big enabling environment problem is when government ministries do not coordinate well together in permitting and other functions that can result in major project delays.

Stone: I think we’re going to talk about it a little bit more in just a moment, but if you could just give us a little bit of an introduction. What do you mean by “bankable projects” in terms of barrier? What are, I guess, the key risk management challenges that are found, particularly in developing countries?

Van Wie McGrory: In terms of bankable projects, it’s just hard for a country to build momentum for scaling up solar investment if there’s not a strong pipeline of projects that investors and banks feel confident will be profitable, so that they can get financing for them. It’s difficult to get to that place, since banks and investors are often unfamiliar with solar technology, and they’re uncertain about regulatory environments, and often there are not resources available to build that pipeline through market studies or project feasibility studies.

And in terms of risk management challenges, there are a lot of different kinds of risk that can discourage solar investors and developers, to mention a few: Political risk, which is related to policy or regime instability in a country, so that investments are not secure over the long-term. There are foreign exchange risks, which are related to potential fluctuations in exchange rates that could cause an investor to lose money on a project. And I think one that is mentioned most often by the private sector experts we consulted is creditworthiness of the off-taker or the entity that buys the power from a project developer. So this is an issue in markets where, for example, utilities are not strong financially, or they have a history of reneging on contractual agreements. These and all these other kinds of risks that are outlined in the paper, that’s what creates such a high cost of capital for projects in developing countries.

Stone: You know, it strikes me when we’re talking about political risk, we’re talking about it in the context of developing countries. But that’s something that’s very familiar here in the United States, as well. The history of renewal of tax credits to support wind and solar power in this country really have been at the whims of who is running things in Washington at any given point in time, right?

Van Wie McGrory: Absolutely. It’s not a risk that is only a problem in developing countries. You’re right.

Stone: So then the next question becomes: How do we create an environment that is conducive to the scale of investment that’s really going to be required?

Van Wie McGrory: There are a lot of actions that can be taken now, at the country level by governments, by commercial banks, or even by development finance institutions. But to address the thornier issues that can’t be solved at the country level, and really scale up investment around the world, there needs to be stronger coordination by international institutions and governments.

But let me talk about the country-level solutions a bit first. These often differ a bit, depending on the solar market segment you’re talking about. So if you’re looking at off-grid and decentralized solar versus utility-scale solar, these will be a little bit different. But I’ll just provide some general examples. In terms of enabling policies, it’s important for national governments, as we said, to publicly announce their targets for solar development, and then they can put in place long-term tax incentives for solar development. The combination of these two things sends clear demand and price emails to the investors, to suppliers, and to the consumers. It’s also very effective for governments to strengthen local markets for solar by adopting net metering or net billing policies.

I’ll give an example of that. The government of Mexico set a public target that the country would produce more than a third of its electricity from clean energy by 2030, and they said a large portion of that would come from solar. But then they then adopted a net metering and net billing scheme which let customers install rooftop solar to meet their own energy needs, but then sell any excess solar power to the grid. So in return for that, they receive credit to pay for their own future energy consumption. And the result from this program was in just two years — and this was 2018-2019 — rooftop solar capacity in Mexico grew 22%.

Stone: Over that two year period?

Van Wie McGrory: Yes.

Stone: That’s amazing.

Van Wie McGrory: I know. They had support from the Inter-American Development Bank for financing the solar installations, but it just shows what an impact it can have when you’re a well designed program. Another example is to help mitigate risks and develop project pipelines. National development banks have a really important role to play. These are banks that are created by a country’s government to provide financing for economic development in the country. They can allocate a percentage of loans for solar projects. Now many banks tend to avoid lending for these kinds of projects because they don’t understand the technology, or they consider it to be too risky. So creating a mandate for these national development banks gives them a big incentive to develop the expertise, and it also tends to have the effect of encouraging them to make use of programs that exist that are underutilized. There are subsidized loans and technical assistance programs that the World Bank and other multilateral institutions offer to governments for this kind of purpose, so that national development banks can un-lend, do sub-loans to solar home system businesses and suppliers in the country.

And I would say a final example of sort of country-level action is that regional development banks — the Asian Development Bank, African Development Bank — can partner with utilities in a country to develop mini-grids that eventually pay for themselves. And this happened to very good results on the Pacific Island country of Tonga, where Asian Development Bank worked with the utility to develop a mini-grid solar facility for one of the outer islands. And now that utility sells electricity to all the residents at subsidized rates. And local residents receive training to operate and maintain the equipment, so it’s a very sustainable project. There are lots and lots more solutions and examples in the roadmap.

Stone: I think that’s really interesting. You just gave positive examples from Mexico, from Tonga. I think the question is: How is this all scaled up, repeated globally?

Van Wie McGrory: Well, that’s where we come to the need for this broader international collaboration. There are a lot of international organizations and initiatives that are working now, that focus on clean energy, on climate and sustainable development. To mention a few: Sustainable Energy for All. You’ve got UN agencies like the UN Environment Program and UN Development Program doing a lot of good work; the International Solar Alliance, Clean Energy Ministerial. But there are ways that these entities could work even more closely with each other and with multilateral development banks to accelerate the transition to solar.

In the roadmap, we outline several types of collaborative efforts that could deliver the attention and the resources that are needed to scale solar investments. One is closer collaboration on setting solar targets that are geographically specific and time-bound, to say that globally we want this region to reach this percentage of renewable or solar energy by a certain date. And then to track the progress and hold countries and organizations accountable for meeting these commitments. This is done in sort of a piecemeal way, but it’s not done across the board.

Another big need is to look at existing risk mitigation solutions and to replicate them and scale them up, where we see that they’re working. So investment risks, as we talked about in developing countries — they’re well known. A lot of facilities have been set up over the years to address specific types of risks, but they don’t currently have resources or reach to make the kind of rapid, widespread impact that we need globally.

I’ll give a couple of examples. For political risk, there are political risk insurance programs by the African Trade Insurance Agency. The World Bank Group’s Multilateral Investment Guarantee Agency and bilateral agencies.

Stone: Let me jump in. What does “political risk insurance” look like? Explain that.

Van Wie McGrory: It takes a lot of different forms, but basically it’s insurance that you’re not going to lose your money if things change politically. So you’re paying a premium to be insured against losing everything if the regime changes. There are different funds for currency risk, like the TCX Fund, which is by all accounts very successful, which lets investors provide their borrowers with financing in their own currency, so that they don’t get hit by big currency fluctuations.

And with these kinds of things, it would be really impactful to scale up the proven solutions that are offered by these types of entities, to coordinate them through multilateral institutions, maybe regional development banks. And then mobilize more capital to support their implementation, using the proven methods — capital from philanthropic organizations, bilateral donors, and global climate funds.

One important role that this could play would be to increase the availability of and coordinate the use of financial tools for mitigating the investment risks. There are a lot of different tools out there that I’ve alluded to that development banks already do. First loss guarantees, which take the first loss on a loan. Partial risk guarantees, which protect private investors from losses, in case a government fails to fulfill its commitments to a project.

And then what a lot of people talk about is blended finance, which is basically using public funds to mobilize private capital by accepting the early stage risk that the private sector is unwilling to absorb. So this can take a lot of different forms. It’s basically blending public and private finance, but it can be that public or philanthropic investors provide funds at below-market terms to lower the overall cost of capital. Or they provide guarantees or insurance against losses.

If we want to just talk about a couple more of the broad recommendations from the roadmap, one is to standardize solar financed processes and products by creating globally or regionally applicable contract structures and negotiation processes that could be widely used to try to speed up project development and lessen risks. So basically not making every country reinvent the wheel in what kind of solar finance they’re using and take a more global approach, providing top-down resources to help spread the kinds of processes and products that work.

And finally, one that I wanted to talk about is to support the global scale-up of vendor finance. So vendor financing is when the equipment seller gives credit to the buyer to purchase its equipment. This is something that’s done a lot in some industries like auto loans, right? It’s in the car industry, but it’s not done in the solar industry yet in any large way. But it’s a really useful way for large manufacturers to help expand their own market, especially when banks are not ready to lend to customers. And it also helps a problem that we’re starting to see, which is sort of a missing link in the supply chain for solar.

The solar market is going to keep growing rapidly. We’re looking at this explosion of solar, which means there needs to be more manufacturing of solar equipment. And then the vendors or the wholesalers of solar equipment need to be able to buy more of the equipment. Without them, there’s this weak link in the supply chain. So supporting the growth of vendor finance globally is one way that this could be addressed. Global manufacturers of solar panels and batteries could be encouraged and supported in helping the supply chain along by providing finance for inventory, by partnering with banks to support credit to end users, or setting up their own consumer finance in-house.

Stone: As you just said, also that would be a finance provided to the customers. Is that correct?

Van Wie McGrory: Yes.

Stone: We’re talking about smaller companies. Many of these companies, I imagine, are new companies. They’re not established corporations with access to their own capital. Having means to finance their customers would be very important in this, I would imagine.

Van Wie McGrory: That’s exactly right. And this is kind of a long-term suggestion, but it could really get in front of the supply chain issue that we’re seeing coming down the road.

Stone: For a second, I’d like to take a step back here and just take a larger perspective. International commitments through the COP process for one hundred billion dollars of annual climate finance have not been reached, but those are the commitments or the goals that are there. How does the financing that we’re talking about today, the one trillion dollars of solar finance — is it related to that one hundred billion dollars of development finance that we’re talking about within the climate framework?

Van Wie McGrory: It is. We’re talking about the same thing, basically. That hundred billion dollars that you mentioned is an example of how the international community recognizes that there’s a need for scaling up finance for clean energy. It makes well intentioned commitments, and then it runs into difficulty making good on these commitments because of all the challenges that we’ve been talking about.

In 2009, at the climate conference in Copenhagen, which was COP 15, the developed countries committed to this collective goal of mobilizing a hundred billion US dollars a year by 2020 to go toward climate action in developing countries. And then this goal was extended in Paris to 2025. There have been many efforts to track where these funds are being deployed and where they’re not. The OECD, the Organization for Economic Cooperation and Development tracks them and shows that between 2013 and 2020, we’ve never managed to hit that billion dollars a year. It’s getting a little better. Each year there was only about half, about 52 billion being deployed in any one year. And that amount has risen over the years. It’s now at about 83 billion per year. But there’s a lot of promised investment that has been left on the table over the years. And this is why we’re talking about the kinds of actions that we’re talking about today to help try to pave the way for reaching those goals.

Stone: Given the challenge in reaching the hundred billion-dollar per year goal that we just talked about, how optimistic are you that the bigger investment targets for solar alone can be met?

Van Wie McGrory: I’m fairly optimistic. There’s a lot of work that has to be done, but there are a lot of examples of exciting progress that’s being made. We’re talking at high levels of what needs to be done, but meanwhile, some of the countries are really getting it done. Argentina, for example, has this goal of reaching 20% electricity generation for renewables by 2025. They’ve been doing renewable energy auctions and government guarantees to reduce risk, and the country has really gone from — basically its installed solar capacity has increased more than a hundred times, just in the last five years.

Egypt — another example. They’ve been really successful at building large utility-scale solar and other renewable projects by being really aggressive in funding pilot and demonstration projects. They’ve put in place simplified permitting procedures for new projects that have attracted billions of private investment dollars. And Egypt is now using that solar capacity to build the world’s largest green hydrogen projects. And you probably know this, this is emerging technology a lot of people are talking about, where split water into hydrogen and oxygen, using renewable energy. Then the hydrogen can be used to store and potentially transport energy over long distances.

Stone: Are there any cautionary tales? I’m sure there must be in the experience of financing solar globally.

Van Wie McGrory: I guess I would mention Bangladesh. They had a lot of success mobilizing investment in solar home systems, and they were able to newly electrify 4 million rural households. So these were stand-alone systems for houses that didn’t have access to the grid. The government funded a public/private partnership that offered consumer subsidies and bought the equipment from local manufacturers and financiers — to 4 million rural households. But the problem was the government planners didn’t take into account or coordinate the program with its plans for grid expansion. So the electricity grid ended up pushing into areas where these suppliers of off-grid solar equipment were planning to expand, which made the suppliers back off, because they were afraid of installing equipment where eventually it would not be needed. So the program stalled.

I think overall it’s a great program. It benefited millions of people, but this example really underscores the need for planning and coordination of energy transition programs at the top level.

Stone: Laura, thank you very much for talking.

Van Wie McGrory: You’re welcome.