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DERISKING DECARBONIZATION: Making Green Energy Investments Blue Chip

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DERISKING DECARBONIZATION: Making Green Energy Investments Blue Chip DERISKING DECARBONIZATION: Making Green Energy Investments Blue Chip PRINCIPAL AUTHORS CONTRIBUTORS Dan Reicher Jeremy Carl Jeff Brown Alicia Seiger David Fedor Jeffrey Ball Gireesh Shrimali October 27, 2017 Table of Contents Chapter 1: Introduction ......................................................................2 1.1 Challenges and Opportunities ..............................................................................................3 1.1.1 The Quantity Problem — A Yawning Gap in Funding .............................................4 1.1.2 The Quality Problem — A Big Mismatch in Risk .......................................................5 1.1.3 The Location Problem — Where the Money Isn’t ....................................................7 1.1.4 Implications for Successful Decarbonization............................................................8 1.2 Investment Risk ........................................................................................................................9 1.3 Approach to this Paper ........................................................................................................10 Endnotes – Chapter 1 ...................................................................................................................... 11 Chapter 2: Market Risk — Electricity Market Design ...........................12 2.1: Investment Risk .....................................................................................................................12 2.2: Solutions ................................................................................................................................15 Endnotes – Chapter 2 ...................................................................................................................... 16 Chapter 3: Market Risk — Fossil Fuel Prices .......................................17 3.1 Investment Risk ......................................................................................................................17 3.2 Solutions .................................................................................................................................20 Endnotes – Chapter 3 ...................................................................................................................... 21 Chapter 4: Policy Risk — Mandates and Carbon Pricing .....................22 4.1 Investment Risk: Mandates ..................................................................................................22 4.2 Potential Solutions: Mandates ............................................................................................23 4.3 Investment Risk: Carbon Pricing.........................................................................................24 4.4 Potential Solutions: Carbon Pricing ...................................................................................26 Endnotes – Chapter 4 ...................................................................................................................... 27 Chapter 5: Policy Risk — Government Subsidies ...............................28 5.1 Investment Risk .....................................................................................................................28 5.2 Solutions ................................................................................................................................30 Endnotes – Chapter 5 ...................................................................................................................... 32 Chapter 6: Project Development Risk — Innovative Technologies .....33 6.1 Investment Risk ......................................................................................................................33 6.2 Solutions ................................................................................................................................35 Endnotes – Chapter 6 ...................................................................................................................... 37 DERISKING DECARBONIZATION | Table of Contents i Table of Contents, continued Chapter 7: Project Development Risk — Government Approvals and Permitting .............................................38 7.1 Environmental Permits ........................................................................................................38 7.1.1 Environmental Permits — Risk ...................................................................................38 7.1.2 Environmental Permits - Solutions ...........................................................................39 7.2 Interconnection Agreements and Transmission Approvals .........................................40 7.2.1 Interconnection Agreements — Risk.........................................................................40 7.2.2 Transmission Approvals — Risk .................................................................................40 7.2.3 Interconnection Agreements and Transmission Approvals — Solutions ..........41 7.3 Power Purchase Agreements .............................................................................................42 7.3.1 Power Purchase Agreements — Risk .......................................................................42 7.3.2 Power Purchase Agreements — Solutions .............................................................43 Endnotes – Chapter 7 ...................................................................................................................... 44 Chapter 8: Investment Framework Risk — Rule of Law ......................45 8.1 Investment Risk — Overall Business Climate and Corruption ......................................45 8.2 Investment Risk — Rule of Law ...........................................................................................46 8.3 Investment Risk — Entitlements for Energy Projects .....................................................47 8.4 Solutions ................................................................................................................................48 Endnotes – Chapter 8 ...................................................................................................................... 50 Chapter 9: Investment Framework Risk — Tax Issues ........................51 9.1 Investment Risks ....................................................................................................................51 9.1.1 Limited Universe of Taxpayers and Uncertain “Tax Appetite” ........................................................................................................................52 9.1.2 The Tax Code Further Restricts Investor Base, Raising Financing Risk ..........................................................................................................53 9.1.3 Problems with Specific Tax Incentives .....................................................................54 9.2 Solutions .................................................................................................................................56 Endnotes – Chapter 9 ...................................................................................................................... 57 Chapter 10: Investment Framework Risk — Debt Regulation, Equity Disclosure, and Currency .......................................................59 10.1 Debt Regulatory Issues that Harm Clean Energy Borrowers ......................................59 10.1.1 BIS, Basel III, and the Net Stable Funding Ratio ...................................................60 10.1.2 Export Credit Agencies and “the Arrangement” ...................................................60 10.2 Equity Risks of High Carbon Emissions Not Adequately Disclosed ...........................61 10.3 Lack of Ability to Hedge Foreign Currency Risks ...........................................................61 10.4 Solutions ...............................................................................................................................62 10.4.1 Longer-Term Financing .............................................................................................62 10.4.2 Better Carbon Disclosure ..........................................................................................62 10.4.3 Improved Currency Hedging ....................................................................................63 Endnotes - Chapter 10 .................................................................................................................... 64 Chapter 11: Examples of Follow-on Research ....................................65 DERISKING DECARBONIZATION | Table of Contents ii Chapter 1: Introduction his framing paper for the launch of the Stanford Clean Energy Finance Initiative considers Tthe challenge and opportunity of dramatically scaling up global investment in clean energy deployment. Simply put, the International Energy Agency (IEA) reports that we are currently investing globally roughly one-third of the private and public funds necessary to have a shot at staying within the 2 degrees Centigrade warming threshold that could help avoid the most severe impacts of climate change. This paper takes a look through an “investor lens” at the risks that stand in the way of adding tens of trillions of dollars globally over the next 25 years to the current clean energy investment trajectory. The paper analyzes several different types of investment risk, takes an initial cut at the solutions that might address them, and identifies future research steps.
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