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Renewable energy takes center stage among policies of multilateral lending institutions

By Vladimir Pekic, Frank Watson and David R. Jones

April 9 - Major multilateral financial institutions have long touted their support for individual renewable energy initiatives in developing nations.

Now international lenders are planning to channel substantial funds to renewable energy in response to market demand and as part of broad strategies to foster low-carbon economic development.

Renewable energy has proved a popular target in recent years for financing from multilateral financial institutions like the Inter-American Development Bank and the World Bank.

Until recently these banks and similar institutions supporting economic development in less developed nations have taken a largely ad hoc approach to renewables funding.

But now market forces and larger concerns about climate change are causing multilaterals to adopt broader strategies for supporting wind, solar and other renewable resources.

IADB, the principal source of multilateral financing in Latin America and the Caribbean, has unveiled a major shift in its lending policy that will favor development of renewable energy projects.

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The bank during an annual meeting of the IADB boards of governors in Cancún, Mexico, March 19-23 declared that four-fifths of its future energy loans will be approved for projects that use renewable sources of energy compared with 30% today.

This new emphasis comes in response to private-sector demand for renewable energy financing, which banks officials said is on the rise in Latin America and the Caribbean.

In another major boost for the region, the IADB board issued a declaration on the agreement reached by the 48-member countries to boost the bank's ordinary capital by US$70 billion, raising it to more than US$170 billion.

The capital increase, the largest in IADB's history, will enable it to double its lending capacity to $12 billion a year, IADB officials said March 23.

The bulk of the new energy financing for the private sector will be targeted at projects based on renewable sources such as wind, geothermal, biomass, solar and hydroelectric, said Hans Schulz, who heads IADB's structured and corporate finance department.

"Several countries in the region want to diversify their energy sources and have changed their regulatory framework to attract more investments in clean energy," Schulz said.

As a result, the market for multilateral financing is growing exponentially, and IADB is one of the first sources developers come to in search of capital.

While a typical commercial bank would offer a loan with a maturity of no more than 5 years, IADB often offers loans with maturities of up to 15 years.

"Whether it's a new kind of solar panel or a biochemical process that turns algae into fuel, breakthroughs in renewable energy are often portrayed as a triumph of technology and innovation," according to an IADB statement. "But when it comes to actually building a large-scale renewable energy project, the most critical ingredient is an unglamorous service that has been around for centuries. Loans or bonds with long maturities -- meaning that they can be paid back in five years or more -- are crucial for the success of start-up companies and infrastructure projects in general."

Long-term financing, the bank said, often spells "the difference between an idea that stays on the drawing boards and one that actually generates power."

In addition to providing long-term lending and guarantees, IADB also has a critical role as energy market catalyst because it helps mobilize resources from other lenders.

Schulz noted that these additional arrangements can also include syndicated loans and other financial transactions that allow flexible risk-sharing agreements, as well as the Climate Investment Funds, technical assistance and access to carbon credit markets.

Wind energy, which has become an important source of demand for IADB loans, is one of the likeliest beneficiaries of the bank's new emphasis on renewable energy.

Most green energy projects, such as wind farms, need long-term loans with attractive terms to generate returns that will interest investors.

IADB approved US$102 million in partial financing in December 2009 for two wind power projects totaling 318 MW that are being developed in Mexico's Oaxaca state.

The first involves a US$50 million loan and facilitation of a US$30 million additional loan for the 250.5-MW Eurus wind farm to Acciona Energía México.

The second is a US$21 million loan for a 67.5-MW wind farm under development by Eléctrica del Valle de México, an affiliate of France's EDF Energies Nouvelles.

IADB's role is poised to increase as energy demand in Latin America and the Caribbean is expected to jump 50% by 2030, requiring estimated investments of about US$1.5 trillion.

The bank continues to explore new ways to promote low-carbon economic development.

Its Sustainable Energy and Climate Change Initiative signed a memorandum of understanding with The Energy and Resources Institute to work together on efforts to make cities more sustainable and reduce greenhouse gas emissions and climate change vulnerability in Latin America and the Caribbean.

Work will include developing policies, building local capacities and conducting training on several low-carbon strategies, including renewable energy.

Other multilateral institutions also are setting aside funds specifically for low-carbon projects, in some cases with specific plans for renewable energy support.

The Scaling Up Renewable Energy in Low Income Countries, or SREP, sub-committee of the Strategic Climate Fund met for the first time in February.

The Japanese government pledged $40 million to the program, which was already supported by the Netherlands, Norway, Switzerland, the United Kingdom, and the United States. SREP, along with a fund for forestry management, are part of the $6 billion multi-stakeholder Climate Investment Funds.

The CIF includes the Clean Technology Fund, which last month approved a plan to help Kazakhstan shift from its heavily reliance on burning coal to generate electricity to low-carbon strategies, including efforts supported by the European Bank for Reconstruction and Development to develop the nation's substantial wind energy and small hydropower resources (RER 201/1).

An international Green Fund could be created with the capacity to meet the developing country climate financing needs identified at UN climate talks in Copenhagen in 2009, the International Monetary Fund said in a report released March 26.

The IMF outlined a scheme it said could deliver climate aid of up to $100 billion per year by 2020, as agreed in the Copenhagen Accord -- an agreement reached in the closing hours of climate negotiations in the Danish capital last December.

The IMF said the Green Fund would represent a unified resource mobilization that could deliver the funding and it could also facilitate progress toward a binding global agreement on reducing greenhouse gas emissions and allow developing countries to begin scaling up their climate change responses quickly.

The organization said to achieve the necessary scale, the fund would use an initial capital injection by industrialized countries in the form of reserve assets to "leverage resources from private and official investors by issuing low-cost 'green bonds' in global capital markets."

The IMF said governments would likely require new sources of fiscal revenue, including income from carbon taxes and expanded carbon trading schemes, which could take time to implement.

It therefore suggested interim measures to cover the fund's subsidy needs from bond proceeds, interest income on its reserve asset capital base, revenues from "other innovative international tax schemes," or some combination of the three.

"Launching a scheme along the lines described here would require a major political effort upfront by all participating countries. The potential payoff, however, is enormous," the IMF said.

It stressed that it did not propose to create, finance or manage the Green Fund itself, but was simply offering ideas for consideration by the international community.

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