Growing the pipeline of energy transition investments
Global efforts to address climate change are off track. Without a significant, immediate course correction, the Paris Agreement goal of limiting the average global temperature rise to below 2°C above pre-industrial levels will not be reached. Decarbonising infrastructure is key to achieving these objectives, as existing infrastructure accounts for about 80% of greenhouse gas emissions and 90% of adaptation costs. The pledge made at the 28th Conference of the Parties to the United Nations Framework Convention on Climate Change to triple the global renewable power capacity and double the annual rate of energy efficiency improvement by 2030 demonstrates governments’ commitment to a sustainable energy transition. Transforming the global energy system will create new jobs, enhance lives and livelihoods, empower people, and foster resilient communities.
Keeping the global temperature rise to 1.5°C in line with the Paris Agreement requires accelerated action, ambitious policy implementation and exponential investment. To achieve universal access to electricity and ensure energy security and affordability, financing the energy transition – shifting from fossil fuels to cleaner energy sources such as
wind, solar, hydropower and new technologies such as green hydrogen – requires strategic partnerships and transformational investment, including using innovative financial instruments. The International Energy Agency estimates that low- and middle-income countries need to mobilise $1.9 trillion annually by 2030 to achieve their clean energy goals. This is a sevenfold increase from the current annual $260 billion.
Barriers to investment
Given the scale of financing needs, two-thirds of the capital needed is expected to come from the private sector. However, there remain significant barriers to private investment in energy transition. There is no shortage of private capital, yet attracting private investment in emerging markets and developing economies is often constrained by the slow pace of utility and market reform. This has led to restricted fiscal space to make catalytic investments, limited consumer affordability and inadequate access to affordable capital. The actual and perceived risks associated with energy transition investments directly increase the cost of capital, in turn raising the overall cost of the energy transition. Mobilising private resources at the pace and scale required to meet the investment needs and broader Sustainable Development Goals in EMDEs requires a systemic shift in approach.
Private finance for the energy transition starts with the availability of a shovel-ready investment pipeline. A significant obstacle in EMDEs is the scarcity of bankable climate-smart infrastructure projects and programmes, as governments in these regions often need more expertise to identify, plan, prepare, structure and negotiate such projects effectively.
Upstream, EMDE governments require capacity building and support in developing their plans to achieve their national determined contributions, creating the enabling investment climate and sector regulatory frameworks, and developing local capital markets to mobilise local investors. Midstream, they need support in identifying and preparing project pipelines, including transaction advisory services for feasibility studies, the preparation of bidding and contractual documents, and negotiations of commercial and financing documents.
Midstream project and programme development is the riskiest part, requiring a concerted effort to scale up resources dedicated to ‘the missing middle’, enabling transformative development by translating reforms in the upstream enabling environment into bankable project pipelines for downstream investment.
Downstream, innovative public-private financing solutions such as guarantees, blended finance or patient development capital can help meet the risk-return requirements of private investors. Multilateral development banks have provided longstanding support to EMDE governments to create the enabling investment climate and regulatory frameworks to facilitate private investment and have also anchored project preparation support for private capital mobilisation.
However, more work is required to translate these efforts into private investment from ‘billions to trillions’. At the same time, the project preparation ecosystem is rapidly evolving, including philanthropy, investor alliances, impact funds or dedicated partnerships providing additional models of support. A comprehensive and collaborative effort by all public, private, philanthropic, academic and civil society actors and initiatives at the global and country levels is needed to achieve exponential growth in pipeline creation.
Since 2014, the Global Infrastructure Facility has supported governments in EMDEs in preparing sustainable, climate-smart infrastructure projects for private investment. As the only global multilateral public-private collaboration platform dedicated to preparing sustainable, low-carbon, resilient and inclusive infrastructure projects and programmes, it supports EMDE governments in preparing for private investment at national and sub-national levels. The GIF provides its transaction advisory services through 11 MDBs and works in structured collaboration with the private sector through its advisory council members, which manage over $18 trillion in assets. The GIF has supported 178 activities in 70 countries across a diversified portfolio of infrastructure sectors and EMDE geographies. Every $1 provided in GIF project preparation support has mobilised over $100 in actual private investment – a highly efficient use of public funds – and 94% of supported projects over the past 36 months are climate smart. GIF-supported projects include climate change mitigation projects in renewable energy, energy efficiency, low-carbon transport or energy efficient social infrastructure, as well as climate change adaptation projects in sectors such as water management, and projects with strong adaptation and resilience components, such as hydropower or port sectors.
The GIF has created and supported innovative delivery mechanisms. The delivery approach for pipeline development needs to evolve from single projects to programmes to increase bankable investment opportunities for the private sector. Preparing programmes instead of stand-alone projects enables countries to overcome barriers to scale that can systematically and increasingly attract private capital. For instance, the GIF’s support of the Energy Efficient Street Lighting Program in Brazil through a comprehensive partnership with the International Finance Corporation, the World Bank and the Brazilian government led to structuring transactions in 12 municipalities with a standardised approach to attract private sector solutions – a replicable blueprint for adding in multiple municipalities.
The challenge also lies in rapidly mobilising funds via new avenues of private capital and for less mature low-carbon technologies, which struggle to attract private investment due to unfavourable risk-return profiles. Carbon markets are part of the solution by boosting the efficiency of energy transitions and raising money for clean energy projects, especially in the developing world. The GIF has provided technical and funding support in preparing projects to enable EMDEs to access voluntary carbon markets. At COP28, it supported the launch of the Carbon Action Forum, which connects potential buyers and sellers in identifying the challenges in carbon markets and collaborating on solutions to scale these markets.
Country platforms are useful for translating opportunities into action for the energy transition. The GIF has partnered with EMDE governments and investors in collaborative trilateral country platforms dedicated to identifying and maturing climate investment at scale. Bringing together government officials, international and national development banks, and local and foreign private investors to mature policy and regulatory frameworks and co-create public-private partnerships and investment solutions unlocks access to local and international private finance at scale.
As a G20 initiative, the GIF can act as an honest broker for transformative private investment in the energy transition in collaboration with the broader ecosystem. Its unique position and updated strategy provide a gate-
way to scale for private investment in climate-smart infrastructure in EMDEs via several strategic approaches:
1. With its global reach and sectoral breadth, the GIF can develop diversified climate investment portfolios across regions and infrastructure sectors, catering to the needs of private investors looking for scale and risk diversification.
2. The GIF has extensive experience in moving from preparing infrastructure projects to developing investment programmes based on standardisation, replication and learning across geographies,
sectors and partners. It can scale up
its country platform approaches to convene all relevant ecosystem partners at the country level to accelerate the development of bankable investment opportunities.
3. The GIF can broaden its technical partner base to leverage all ecosystem channels for investment pipeline creation, including regional and national development banks.
4. Through the G20 Infrastructure Working Group and as a collaborative public-private platform, the GIF contributes to knowledge exchange on critical topics of sustainable infrastructure finance, such as addressing foreign exchange risk in infrastructure.
As a public-private collaboration platform, the GIF can anchor a systemic ecosystem approach to transforming pipeline development and accelerate the creation of diversified global infrastructure portfolios for private investors. The G20’s Independent Expert Group 2023 report recognised it as a gateway to scale for private capital mobilisation and called for its role to be revamped and expanded.
