The Intersection of Renewable Energy Finance and Governance: Solutions to the Multi-Trillion Dollar Challenges

The Intersection of Renewable Energy Finance and Governance: Solutions to the Multi-trillion Dollar Challenges

Joel Russell Krupa

A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy Department of Geography & Planning University of Toronto

The Intersection of Renewable Energy Finance and Governance: Solutions to the Multi-trillion Dollar Challenges

Joel Russell Krupa

Doctor of Philosophy

Department of Geography & Planning University of Toronto

2019 Abstract The International Finance Corporation (IFC) estimated in 2016 that the 2015 Paris Agreement could drive demand for tens of trillions of dollars of new climate-related investment between

2016 and 2030. Assessments suggest that at least some percentage of these funds will need to be mobilized from private investment sources. Renewable energy, the primary supply-side decarbonization tool, stands poised to capture a significant portion of this number, yet numerous technical, economic, and governance questions loom large in any discussion of renewable energy sector deployment. This thesis focuses on the question of financing all stages of renewables, as well as the ability of finance-linked entities to implement energy governance structures designed to drive a substantial level of renewables integration. We start by presenting case studies on both the United States and the Gulf Cooperation Council (GCC) countries. This study of contrasts is followed by a synthesis of insights on key renewable energy governance challenges from one perspective; specifically, the perspective of individuals with connections to the private finance sector that will be responsible for some of the financial flows for renewables deployment.

Derived from extensive time in the field (including unstructured interviews, semi-structured interviews, and ethnographic work), this thesis critically examines the perspectives of leading renewable energy financiers (as well as academics and other knowledgeable market observers from around the world) on how best to improve the financial flows to, and governance of,

renewable energy finance. Given the difficulty of offering definitive prescriptions in the inherently idiosyncratic political, economic, social, and environmental context guiding each nation, the thesis starts by offering region-specific prescriptions, followed by general directions.

In the final substantial chapter, it draws on a geographically diverse set of key stakeholder interviews to tease out common lessons that can be shared across borders. These lessons include the importance of a carbon tax, the criticality of appropriate policy structure and market design, the urgency of pursuing low-cost options (such as applied research), and the need for encouraging new capital sources into the space. Further research on the role of private sector and public sector capital in the renewable energy space is encouraged.

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Acknowledgments

A thesis is a massive effort that extends far beyond the individual writer. I am indebted to my supervisor Danny Harvey for his incredible and unrelenting support over the course of my PhD. Danny is hard-working, bracingly intelligent, methodical, and unwilling to accept anything that is second-tier. In short, he is the perfect mentor.

I am also very grateful to the members of my committee – Walid Hejazi, Christian Abizaid, and Susannah Bunce. Whether it was hosting a directed studies course for me (Susannah), allowing me to pursue an independent research project applying Islamic Finance to the renewables sector (Walid), or providing detailed feedback on my thesis (Christian), all of these individuals played a critical role in this final result.

Finally, I am greatly appreciative of my immediate family (Mom, Dad, Jeff, JoyAnne, and Tim) for their love and support, as well as non-biological (but still awesome) family members Garnet, Kate, and Josh. Special thanks are owed to my mother - not only for bearing the obvious burden of bringing me into the world, but also for providing encouragement during the inevitable hurdles that needed to be jumped during this PhD process. Extended family and friends (too numerous to name individually!) also deserve my warmest thanks.

For Chapter 2, I benefited from discussions undertaken at financial centres across the United States - Seattle, San Francisco, Los Angeles, New York, and Washington, DC - as well as attendance at current industry events and visits to several of Europe's and Canada's financial capitals. I would like to thank the many respondents, including some from the world's most important and influential organizations, for giving my questions considerable time and thought. I would like to extend special thanks to Christopher Kaminker of the University of Oxford, Luke Bevan and Charlie Donovan of the Centre for Climate Finance and Investment at Imperial College Business School, and Nathan Serota of Bloomberg New Energy Finance for offering detailed written comments, as well as to three anonymous peer reviewers for their written and oral comments. Additional thanks to Alexa Hildebrandt for consistently amazing editing and formatting assistance.

Chapter 3 also benefited from discussions with individuals located in financial centres around the world, as well as comments from a range of readers on a previous working paper (Krupa & Poudineh, 2017). I sincerely thank these individuals for being patient with our questions and offering thought-provoking insights and feedback. I would also like to thank three anonymous reviewers for offering further suggestions.

Chapter 4 required discussions with dozens of individuals around the globe. I would like to thank the many respondents to our research - all of whom gave generously of their time to ensure that this paper combined academic rigour with real world relevance. Special thanks are due to Susannah Bunce and Christian Abizaid for offering detailed feedback on an earlier draft of this paper.

I would also like to thank the Oxford Institute for Energy Studies for hosting me as a Visiting Research Fellow. During my time at this institution, I had the pleasure of working with Rahmat Poudineh, and we developed a paper on the GCC that was first published in working paper format as Krupa & Poudineh (2017). This was later substantially revised and published as Krupa et al. (2019). Krupa et al. (2019) is the basis of Chapter 3, while the companion paper (Krupa & Harvey, 2017) serves as the basis for Chapter 2.

In addition, Imperial College Business School’s Centre for Climate Finance and Investment was kind enough to host me as a Visiting Researcher. Chapter 4 will be published in a condensed form for a forthcoming text on renewable energy finance from that institution.

Finally, this thesis is dedicated to two individuals. The first is the late Byron Joseph LeClair (1967 - 2017) – a true leader and visionary who fanned my initial renewable energy and climate change spark of interest into raging flames. I miss him greatly and feel incredibly grateful for the time I got to spend learning from him. I would also like to dedicate this thesis to my new niece, who hopefully will one day benefit (in some very, very small way) from the findings contained here. Love ya kid.

Any errors, however, are those of the author.

Table of Contents

Abstract ...... ii

Acknowledgments...... iv

Table of Contents ...... vi

List of Tables ...... xii

List of Figures ...... xv

Meeting the challenges of financing renewable energies at scale ...... 1

2.1. Introduction ...... 12

2.2. Trends, ﬁnancing, and policies ...... 14

2.2.1. Status of renewable electricity deployment (global) ...... 14

2.2.2. Status of renewable electricity deployment (U.S. only) ...... 18

2.2.3. Financing introduction ...... 19

2.2.4. Common policies ...... 24

2.2.4.1. Tax credits ...... 25

2.2.4.2. Quotas...... 26

2.2.4.3. Subsidies...... 26

2.2.4.4. Financial de-risking tools ...... 27

2.3. Prominent historical delivery mechanisms for renewable electricity ﬁnance ...... 28

2.3.1. Corporate ﬁnance ...... 30

2.3.2. Banking and ﬁnancial institutions ...... 33

2.3.3. Private equity/venture capital, family ofﬁces, and hedge funds ...... 35

2.3.4. Institutional investors ...... 37

2.4. Emerging opportunities for mainstream renewable electricity ﬁnance ...... 38

2.4.1. Securitization through asset-backed securities ...... 39

2.4.2. Pools and trusts ...... 42

2.4.2.1.1. Master Limited Partnerships and Real Estate Investment Trusts ...... 42

2.4.2.1.2. Yieldcos ...... 44

2.4.3. Green Bonds ...... 46

2.4.3.1. Bond types ...... 46

2.4.3.1.1. Supranational and sovereign green bonds ...... 46

2.4.3.1.2. Innovative corporate bonds……………………………………………………46

2.4.3.1.3. State and municipal bonds…………………………………………………….47

2.4.4. Green banks ...... 48

2.4.5. Ramping up institutional investor involvement...... 49

2.4.6. Other innovations covered in the literature ...... 50

2.5. Government involvement? ...... 51

2.6. Conclusion ...... 52

3.1. Introduction ...... 54

3.2. Financing renewables in the GCC ...... 59

3.2.1. What makes a project ﬁnanceable? ...... 59

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3.2.1.1. Business model adequacy ...... 65

3.2.1.2. Grid connection and management ...... 67

3.2.1.3. Risk mitigation issues ...... 70

3.2.1.4. Other factors...... 72

3.2.2. Finance: what has been done to date? ...... 74

3.2.2.1. The experience with renewable energy ﬁnancing in the region ...... 74

3.2. Case studies of clean electricity development in the region ...... 76

3.3.1. Case study #1: Mohammed bin Rashid Al Maktoum Solar Park ...... 76

3.3.2. Case study #2: Masdar's Shams 1 solar power station ...... 79

3.3.3. Case study #3: Saudi Arabia's KACARE renewables initiative ...... 81

3.4. Measures to improve the ﬁnanceability of renewable energy projects ...... 82

3.4.1. Continue to explore the ostensible efﬁcacy of cost-effective auction procurement models ...... 82

3.4.2. Commit now to a large-scale buildup of renewable electricity supply with export potential, as partial replacement for declining oil revenues in a decarbonizing world ...... 85

3.4.3. Broaden the capital base ...... 86

3.4.3.1. Issue green bonds ...... 86

3.4.3.2. Explore solutions with international partners ...... 87

3.4.3.3. Create national or regional green investment banks ...... 87

3.4.3.4. Harness the power of institutional investors, with a special emphasis on the Sovereign Wealth Funds ...... 88

3.4.3.5. Harness competitive advantage...... 90 viii

3.4.4. Continue to enhance, stabilize, and clarify policy and regulatory frameworks ...... 91

3.5. Summary and conclusions ...... 91

4.1. Introduction ...... 94

4.2. Background and literature review ...... 97

4.2.1. A 100% renewable energy future?: Assessing the current landscape ...... 97

4.2.2. Background on energy governance: Defining and contextualizing a complicated term ...... 102

4.3. Methodology ...... 105

4.4. Results and Discussion ...... 109

4.4.1. Issue 1 - Flaws in the policy and regulatory frameworks governing renewables investments ...... 110

4.4.1.1. Addressing the absence of carbon pricing while simultaneously removing subsidies ...... 110

4.4.1.1.1. Background and overview of current situation ...... 110

4.4.1.1.2. How to proceed: ...... 113

4.4.1.2. Avoiding start-stop policy approaches...... 113

4.4.1.2.1. Background and overview of current situation ...... 113

4.4.1.2.2. How to proceed: ...... 115

4.4.1.3. The need for policy simplicity ...... 116

4.4.1.3.1. Background and overview of current situation ...... 116

4.4.1.3.2. How to proceed: ...... 117

4.4.1.4. Mitigating system-level barriers and re-considering coordinated planning ...... 118 ix

4.4.1.4.1. Background and overview of current situation ...... 118

4.4.1.4.2. How to proceed ...... 120

4.4.2. Issue 2 - Hurdles to increasing the supply of private sector capital to renewables ...... 122

4.4.2.1. Support general growth in equity financing or debt financing (depending on the context) ...... 123

4.4.2.1.1. Background and overview of current situation ...... 123

4.4.2.1.2. How to proceed: ...... 124

4.4.2.2. Target scarce government dollars to areas that would have a high return for minimal initial outlay ...... 126

4.4.2.2.1. Background and overview of current situation ...... 126

4.4.2.2.2. How to proceed ...... 129

4.4.2.3. Encouraging new capital sources that can bring down the cost of capital ...... 132

4.4.2.3.1. Background and overview of current situation ...... 132

4.4.2.3.2. How to proceed ...... 134

4.4.3. Issue 3 - The need for understanding non-financial barriers to renewable energy investment ...... 139

4.4.3.1. Resist the psychological trap of policy inertia as the world ramps up renewables 140

4.4.3.1.1. Background and overview of current situation ...... 140

4.4.3.1.2. How to proceed ...... 141

4.4.3.2. Be aware of, and try to mitigate against, investor psychology limitations ...... 143

4.4.3.2.1. Background and overview of current situation ...... 143

4.4.3.2.2. How to proceed ...... 146 x

4.5. Conclusions and policy implications ...... 147

Synthesis and Conclusion ...... 150

References ...... 162

Appendix 1: Update on renewables trends since the time of writing, Thoughts about the future, and Research Ethics Board Protocol ...... 199

List of Tables

Table 1: Variation of the cost recovery factor with interest rate and project lifespan. Source: Authors.

Table 2: Type of supportive policy and example(s). Source: Authors.

Table 3: Type of capital, overall volume, and estimated costs. Primary Source is Martin (2016), with gaps filled from Brandt et al. (2016), Business Council on Sustainable Energy (2017), and Lowder & Mendelsohn (2013), as well as author discussions with sector participants. Respondents to our queries emphasized that cost of capital is a competitive advantage (meaning that many will be reluctant to disclose it), so costs are generally estimates.

Table 4: Key emerging methods for financing and delivering finance to renewable electricity. Sources: Authors; Clapp et al., 2015; Leonard, 2014; Lowder & Mendelsohn, 2013; Mormann & Reicher, 2012; Urdanick, 2014.

Table 5: Solar asset-backed security characteristics of two US solar companies. Source: Adapted by the authors from Bloomberg New Energy Finance (2015). (1) Tenor, spread and coupon correspond to the senior tranche of each securitization. (2) Tenor is the weighted-average life for the senior tranche of each securitization. (3) Spread is the basis point spread (bps) over the 7- year interest rate swap. (4) S&P rating for SolarCity 2013, 2014-1, and 2014-2; KBRA rating for Sunrun 2015-1 and SolarCity 2015-1 ABS.

Table 6: Examples of Green Bank tools. Source: Adapted by the authors from Leonard, 2014.

Table 7: Price changes for various solar technologies from 2010 to 2017. Source: Adapted by the authors from US-based data in Fu et al., 2017.

Table 8: MENA renewable energy capacities (MW) at the end of 2016, broken down by total RE, solar, wind, and off-grid, along with total installed capacity as of 2015. Source: Renewables- related information adapted from IRENA (2017b), along with Wogan et al. (2017) for GCC

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country total capacities and the United Nations Statistics Division (2017) for remaining country total capacities.

Table 9: Components of LCOE for a 100 MW fixed solar photovoltaics array under three cases, assuming a 99% availability factor and a 20.5% capacity factor. Source: Authors using representative regional data.

Table 10: Components of LCOE for a 100 MW onshore wind park under three cases, assuming a 99% availability factor and a 35.0% capacity factor. Source: Authors using representative regional data.

Table 11: Components of LCOE for a 100 MW Concentrating Solar Power project with no storage under three cases, assuming a 99% availability factor and a 26.6% capacity factor. Source: Authors using representative regional data.

Table 12: Access to grid in key MENA countries. Source: Authors.

Table 13: Components of LCOE for an 800 MW fixed solar PV array – base case versus possible actual model, assuming an availability factor of 99%. Source: Authors using representative regional data.

Table 14: Components of LCOE for a 100 MW fixed CSTP facility – base case with no storage versus possible actual model with storage, assuming an availability factor of 99%. Source: Authors using representative regional data.

Table 15: Evolution in PPA headline rates for major solar developments in the UAE. Source: Adapted by the authors from Proctor (2017) and Mahapatra (2016).

Table 16: Number of respondents, respondent industry type, and nature of interview.

Table 17: Sample of historical stop-start policy events and their impacts. Source: Authors; White et al., 2013; Potskowski & Hunt, 2015; Sen & Ganguly, 2017; Martin, 2017b.

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Table 18: Components of the LCOE for fixed solar PV array benefiting from a government debt incentive. Source: Authors; Krupa et al., 2019.

Table 19: 10 largest SWFs internationally – Country of origin, name, and the amount of assets under management (in USD billions). Source: Sovereign Wealth Fund Institute, 2018.

Table 20: 10 largest family offices internationally - Country of origin (including city), name, number of families involved, and the amount of assets under management (in USD billions). Source: Bloomberg Markets, n.d..

Table 21: The family offices with the largest number of venture capital deals - Name, number of deals. Source: Rowley, 2018.

Table 22: Potential growth areas for capital in renewables finance.

Table 23: Components of LCOE for a fixed solar PV array under different (simplified) interest rate scenarios. Source: Authors; Krupa et al., 2019.

Table 24: Select cognitive biases and impacts on renewable energy finance. Source: Authors; Taleb, 2010; Masini & Menichetti, 2013; Gaddy et al., 2017.

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List of Figures

Fig. 1. Variation in the global installed capacity of onshore wind and solar PV (left axis) and offshore wind and CSTP (right axis) from 2000 to 2015. PV = photovoltaic, CSTP = concentrating solar thermal power. Source: Authors.

Fig. 2. A scenario for the deployment of wind and solar electricity generation that continues from observed deployments up to 2015 and is consistent with elimination of electricity-related fossil fuel emissions by 2100 if strong efficiency measures are also taken in all end use sectors. (a) Capacity of individual solar and wind technologies, (b) rate of deployment of individual wind and solar technologies, (c) rate of deployment of total wind and solar generation capacity. Source: Authors.

Fig. 3. Annual global investment requirements for expansion of wind and solar electricity generation technologies for the illustrative deployment figure shown in Fig. 2. Source: Authors.

Fig. 4. Cumulative return for renewable stocks, conventional energy stocks, and the broader market between 2003 and 2016. Source: J.P. Morgan Asset Management, 2016.

Fig. 5. List of risks and example scenarios adapted by the authors from Mills & Taylor (1994).

Fig. 6. The private equity – venture capital continuum within the broader renewable energy space. Source: Adapted by the authors from Potskowski & Hunt, 2015.

Fig. 7. A simple asset-backed security demonstrating a waterfall distribution. Source: Authors.

Fig. 8. Ownership composition of an MLP. Source: Adapted by the authors from Fenn, 2014.

Fig. 9. Asset finance as a percentage of overall new investment in renewable energy, 2004-2016. Source: Adapted by the authors from data found in Frankfurt School – UNEP Centre/BNEF (2017).

Fig. 10. A typical renewable project finance structure. Source: Adapted by the authors from Groobey et al. (2010).

Fig. 11. Factors that generally affect the financeability of renewable projects.

Fig. 12. Sovereign Wealth Fund assets under management in GCC countries, as of January 2018. Source: Adapted from data found in Sovereign Wealth Fund Institute (2018).

Fig. 13. Global energy consumption between 1965-2017 (by energy source). Source: Adapted by the author from data found in the BP Statistical Review of World Energy (2019).

Fig. 14. Relative breakdown of global energy consumption between 1965-2017 (by energy source). Source: Adapted by the author from data found in the BP Statistical Review of World Energy (2019).

Fig. 15. The relative breakdown of global energy consumption between 1965-2017 (by energy source). Source: Adapted by the author from data found in the BP Statistical Review of World Energy (2019).

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Chapter 1 Meeting the challenges of financing renewable energies at scale

With every passing year, the challenge of responding to the threat of anthropogenic climate change becomes more acute. Emissions continue to rise steadily, and even mass adopters of environmentally friendly behaviours have not been immune from continuing to grow their emissions over time (such as Germany, according to Helm, 2017). In 2018, the United Nations published a landmark report which (among other grim prognostications) cautioned that the global community has approximately 12 years left to act if humanity hopes to have a good chance of avoiding catastrophe (Irfan, 2018), with the Intergovernmental Panel on Climate Change (IPCC) Summary for Policymakers (2018) noting on p. 20 of that report that “avoiding overshoot and reliance on future large-scale deployment of carbon dioxide removal (CDR) can only be achieved if global CO2 emissions start to decline well before 2030 (high confidence)”. Scientists have found that differential terrestrial environments are responding to the massive outpouring of carbon emissions that has followed the advent of the Industrial Revolution in an unnervingly erratic fashion; for example, in Australia, a substantial percentage of that country’s Great Barrier Reef was damaged as a result of a 2016 heatwave (Schiermeier, 2018). On the other side of the globe, the Arctic may remain ice-free for the entire summer within the next 20-30 years, as described by Screen & Deser (2019) - allowing, paradoxically, for an even greater mass of consumer goods to be shipped internationally (including many products derived from the hydrocarbons contributing substantially to the climate change problem). Other dramatic climatic changes seem to appear daily on the news - and the trend shows no signs of abating.

This situation has emerged in the context of a global distribution of resources that overwhelmingly favours a few wealthy countries (primarily based in North America, Western Europe, and East Asia) and the elites of the emerging nations (such as those in Asia, South America, and Africa). This path seems likely to not only not relent, but to grow as fast as possible. Those in emerging markets who have traditionally “gone without” are unlikely to adopt a path of voluntary restriction on their economic growth, while those in developed markets continue to find new desires that spur on additional economic growth above and beyond

comparatively high existing levels (that is, relative to developing countries). Multilateral attempts to stymie the seemingly endless onslaught of environmental devastation wrought by this ceaseless expansion have been ineffective (unsurprising, perhaps, given that they are full of loopholes for emitters - Helm, 2017). Self-imposed rules have also fallen short in relative terms, whether it is governments attempting to constrain their own emissions growth or corporations seeking to green their operations, even if absolute progress has sometimes been realized (such as in the case of Shell increasing renewable energy expenditures to $200 million out of a total capital expenditures budget of $80 billion, as highlighted in Zhong & Bazilian, 2018).

It is difficult to wrestle with the implications of “business as usual” in carbon emissions. However, to contemplate the path of “business as usual combined with explosive growth” is to ponder complete catastrophe. Yet that is where we stand collectively as a species, and barring a multi-pronged solution that involves supply-side transitions (e.g. clean electricity deployment en masse), demand-side improvements (such as energy efficiency retrofits of the building stock and enhancements to the building code), government regulations and policy changes (such as carbon pricing), and behavioural modifications by the broader public, serious trouble looms on the near horizon in terms of the impact of energy-related emissions.

Each of the aforementioned elements necessary to effect a comprehensive sustainability transition could fill an individual thesis (or, more plausibly, several theses). The focus of this work will be on the first of the pillars outlined in the preceding paragraph - the supply-side. More specifically, it will focus on how to finance renewable energy systems, such as solar photovoltaics and wind turbines, as well as some of the critical barriers that stand in the way of more private sector capital entering the space. Even though the cost of capital plays a central role in determining the rate at which renewable energy is deployed, it has not received extensive coverage in the academic literature. This work – which sits in the middle of a burgeoning literature on the financing of renewable energy systems (e.g. Egli et al., 2018; Geddes et al., 2018; Steffen, 2018) - aims to provide a partial remedy to this, and complement the multitude of works on energy technology, policy, and regulatory affairs. Another part of my contribution is that I provide further refining of the general support for renewables that is found in academic literature. While this support is necessary in the context of the climate crisis and has been justified empirically for some time (see, inter alia, Harvey, 2010b), I contextualize it with an

awareness that there are complications in raising the requisite private sector finance that is needed.

Private sector capital appears, at first glance, to be a peculiar source of capital to draw on for renewables at scale. Invariably, a criticism will be that these actors will bring a higher cost of capital than public counterparts. I agree to some extent, and a concept emphasized time and again in this thesis is the urgent need for more public sector leadership in financing the supply- side component of a climate change response. Yet while public involvement remains the normative goal, pragmatism prevents excess optimism regarding the prospects for far-sighted political leadership on this front, as society is simply not demanding the changes that are essential. Barring a large-scale movement towards either a) population-level pushes for sustainability or b) financial support for the clean technology sectors from monied entities, politicians will continue to endorse fossil fuels because of their corporate or individual backers. Echoing Tirole (2017), I believe it is essential for societal commentators to move away from castigating politicians. Tirole points out that politicians are usually just reflecting the will of the people (or a select sub-set of the people, if money is involved).

Of more relevance to this thesis, in such a political economy, private financiers may have a unique opportunity to address the climate challenge while pursuing their own self-interest. The private sector often brings a higher cost of capital, but it appears that these actors – especially in the institutional investment realm - represent a viable option at the scale (i.e., trillions of dollars) that is necessary to avoid climate catastrophe (Kaminker & Stewart, 2012). It is astonishing that - especially as renewables cost fall to new lows - governments continue to sit on the sidelines of the renewable energy revolution (although, to be fair, a portion of their expenditures to date have been allocated towards higher-risk projects that may not have otherwise received private sector support). The International Energy Agency’s (IEA) World Energy Investment report (2018b) found that the share of government/state-owned enterprise ownership for 2017 renewables and energy efficiency was less than 25% (versus approximately 50% for oil and gas and electricity networks and storage). So while it is imperfect, this thesis endeavours to explore what might be done to make the best of a bad situation as it explores the entire spectrum of renewable energy financing options.

This thesis contains 3 core chapters (2-4). In terms of situating this work within the broader literature, I defer to Schmidt (2014), who has contributed to many important recent pieces in the renewable energy finance literature (e.g. Geddes et al., 2018; Polzin et al., 2019). Schmidt (2014) notes that there is a paucity of good country-level financing information for renewables, including capital structure, cost of capital, and the maturities of loans. It is my position that country-by-country or region-by-region analyses can counteract this shortfall, and could ultimately be valuable contributors to the global database on financing costs called for by Schmidt. In addition, to some extent I address Schmidt’s call for more information on drivers of financing costs (which is closely linked to risks), as this thesis provides coverage of various contexts and scales - the US (Chapter 2), GCC (Chapter 3), and the world as a whole (Chapter 4).

I begin in Chapter 2 (published as Krupa & Harvey, 2017) by compiling information on the state of renewable energy finance in the market-oriented United States. This work was informed by a series of key respondent discussions with investment-related individuals based in several major financial centres (such as Chicago, New York, San Francisco, and Washington DC), as well as a detailed scan of the academic and practitioner literature on the subject. It presents an introduction on financing, followed by a description of several policy tools used by market participants. The United States is especially reliant on tax credits, as policymakers have opted to use the tax code for renewables production - a system that, while essential to supporting renewables growth so far, has some core deficiencies. I also assess quotas (represented in state Renewable Portfolio Standards), subsidies (such as feed-in tariffs), and financial de-risking tools. These latter instruments are especially attractive, owing to their low cost and capacity for leveraging a multiple of private dollars for every public sector dollar expended.

Still in Chapter 2, I present some of the key players involved in the renewable electricity finance market. Corporate finance is an obvious starting point, covering both debt and equity, followed by banking/financial institutions. Project finance is an area of special importance. Other players also play a role - albeit in lower absolute terms. These include private equity funds, venture capitalists, family offices (which are groups of either single- or multi-family investment vehicles for the wealthy), and hedge funds. Finally, I include discussion on institutional investors, which are entities, such as pension funds and university endowments, that collectively manage

(globally) funds of ~$100 trillion. While there are barriers to deploying their capital at the scale that may be most desirable, they are an exciting potential source of funds going forward.

New opportunities are a core emphasis of this chapter, as I am attempting to show how to increase overall cash allocations to the renewable energy sector (an “all of the above” strategy for renewables deployment). Accordingly, this section of the chapter deals with investment vehicles (both debt and equity) and types of entities that can provide support to the mainstreaming of renewables. Specifically, I cover securitization, pools and trusts, and green bonds for the former. In terms of entities capable of supporting ongoing renewables mainstreaming, I provide a case for green banks, increases in the involvement of institutional investors, and a range of other innovations covered in the literature (such as corporate power purchase agreements).

A key takeaway in this Chapter is that we must not remain captive to outdated modes of thinking. There is sometimes a perception that lingers in the economics and investment communities that there is a struggle to attract capital to the renewables space due to poor opportunities for strong risk-adjusted returns. Money chases returns, the reasoning goes, and therefore a lack of capital means that there are simply no returns to be had. Of course, isolated pockets of such sentiment have an empirical basis. Gaddy et al. (2016), for example, demonstrate that venture capital is a form of capital provision poorly matched to many facets of the renewable energy sector, and that investors who bet heavily in non-software approaches sometimes fared fairly poorly. For public companies developing renewables, results have also been mediocre (as I show in Figure 4, a graph comparing the S&P 500 with a basket of renewable energy companies’ performance).

However, the intent here is to show that there isn’t necessarily a challenge in raising capital in every sector. Private equity funds, for example, have been very pleased to enter en masse – including earlier on in the development lifecycle when risk is higher. Institutional investors - even those partially deriving their wealth from fossil fuels (such as Alberta-based pension fund AIMCo, who recently took a major stake in Spanish renewables developer Eolia - AIMCo, 2018) - have shown themselves to be keenly interested in the renewables space. Clearly, assessing the veracity of a perception that renewables have poor risk-adjusted returns would depend on which

sub-section of the renewable energy world we are referring to. The challenge is realizing capital at scale - which is why I am so optimistic on the role that institutional investors will need to take, as I highlight in Chapters 2, 3, and 4.

Another take away message here is that there are many nuances to the question of private capital in renewables - especially in a sophisticated financial market like the United States, where a variety of players and scales are present. It is overly simplistic to say it has no role, and it is overly simplistic to suggest that private capital can accomplish everything. I emphasize this throughout the piece - private sources of capital are only part of the solution to part of the problem (i.e., part of the renewables puzzle, which is only one part of the overall climate response given that electricity is only a fraction of overall global emissions).

Chapter 3 (published as Krupa et al., 2019) takes a new tack, zeroing in on a political economy of quite a different nature - the monarchies of the Gulf Cooperation Council in the Middle East. These countries - Saudi Arabia, Qatar, the United Arab Emirates (UAE), Kuwait, Oman, and Bahrain - bear minimal overlap with the political or economic characteristics of the (at least nominally) democratic and free market United States. Specific to this thesis, these countries’ utility sectors are largely monopolistic, and can be subjected to enormous political direction. No better example of this central political role exists in the renewable energy sector than the announcement of Vision 2030 by Saudi Arabia’s de facto ruler, Crown Prince Mohammed bin Salman - a change which would, among other initiatives, see the development of 9,500 megawatts (MW) of renewable energy and the integration of Saudi Arabia as a value-added manufacturer of renewable energy components into global renewable energy supply chains (as described in Krupa et al., 2019). For a historically dominant fossil fuel producer such as Saudi Arabia that has much to lose in any global weakening of demand for their dominant export product (i.e., hydrocarbons), this is a substantial change.

The chapter starts by briefly outlining progress to date in region-wide renewables development before moving to the key factors driving a financeable project structure. As alluded to earlier (and as encapsulated in that chapter’s opening figure showing that the percentage of overall new renewables investment from project finance has been between 60%-80% between 2004-2016), asset finance is globally dominant in terms of overall new investment flows. Accordingly, this

chapter assumes an emphasis on the optimal conditions for attracting private financiers capable of deploying project finance. This covers the obvious (such as evidence of a clearly viable project business model and access to the grid for the renewable generator) to the less necessary (but helpful) enabling contributors like a supportive financial environment in the destination country.

As an analytical framework, I divide these factors enabling renewable electricity financing into four key clusters: business model adequacy (e.g. the presence of a long-term power purchase agreement), grid connection and management (e.g. ensuring that the grid is competently managed), risk mitigation issues (e.g. facilitating low transaction costs), and other factors (especially allowing for high debt-to-equity ratios, as these amplify the equity returns for investors through investors capturing the differential between the lower cost of debt and the higher cost of equity). I then move to what has been done to date in terms of renewables financing in the region. I particularly note the contribution of Bounouara et al. (2015), who explains that independent power producers (IPPs) have been active in the region for a long time. I believe that renewables can benefit from this legacy of IPP fossil fuel generators by strategically leveraging a long history of public sector co-investment with private sector actors for renewables’ benefits.

I then move to three case studies elucidating a spectrum of historical outcomes from renewable energy financing efforts in the region. In doing so, I hope to show some defining characteristics of successful, moderately successful, and less successful initiatives that provide empirical evidence for the analytical framework that I described in the previous paragraph. I start this “descending levels of success” examination with the successful Mohammed bin Rashid Al Maktoum Solar Park in the UAE, a multi-phase initiative with projects ranging from a 13 megawatt solar photovoltaic array to a 700 megawatt concentrated solar thermal power development. I then move to discussion on the UAE’s Masdar Shams 1 concentrated solar thermal power project in Abu Dhabi, followed by Saudi Arabia’s KACARE renewables initiative.

Finally, I conclude this chapter with a list of measures that can continue to improve the financeability prospects of renewables in this region. These include maintaining an emphasis on

promoting sensibly designed auctions (which have served to substantially drive down renewables costs), as well as designing markets in such a way that clean electricity could be traded across borders and, possibly, exported further afield. I then move to the critical role of adding new capital sources, such as the issuance of green bonds and the promotion of green-oriented Islamic Finance. I also recommend exploring collaborations with international partners, as well as the development of green investment banks. This latter group’s benefits, such as the establishment of all-important “trust” among entities in the financial sector, are of an importance that is difficult to overstate.

Next, I strongly recommend accessing the considerable capital of the local sovereign wealth funds (SWF). I show that GCC-area SWF assets run into the trillions of dollars, and that even mobilizing the achievable capital allocations laid out in authors such as Nelson (2015) (0.25% of funds in more highly constrained institutional investment environments such as pension funds), the GCC could unlock approximately $7.5 billion per year in finance for renewables. This is a natural lead-in to the next recommendation - that the GCC focus on tapping regional competitive advantages, whether it is in finance or value-add manufacturing. Finally, I conclude this section with a reminder of the need to continually enhance, stabilize, and clarify policy and regulatory frameworks. Finance thrives on trust, and renewables financiers can deploy capital at scale much easier if the requisite frameworks are in place.

Chapter 4 draws from a lengthy period of ethnography-like immersion with those knowledgeable about renewables finance. It is especially concerned with the governance of renewables in a globally interconnected and interdependent economy, and it explores what measures could spur greater private sector finance flows. I acknowledge that governance is a sprawling term, so I define it as “policy and regulatory considerations, such as tax reform, financial flows, and energy market transitions, that would facilitate the flow of private finance into renewables energies (and related technologies)”. In particular, I am concerned here with eliciting the informed views of those “on the ground” and active in the sector (as I was fortunate to engage with leading thinkers in the space). While it is difficult to generalize across different political economies and geographies, I found that many of the insights contained herein were relevant to a world where finance is truly global.

To elucidate the findings of this chapter, I followed a format of listing a macro-issue, followed by breaking it down into sub-topics. These sub-topics were then dealt with in considerable detail, starting with a background/overview of the issue, followed by suggestions on how to address it. The first macro-issue involves the obvious - flaws in the regulatory and regulatory frameworks governing renewables. This is then broken down into addressing the absence of carbon pricing in most jurisdictions - an astonishing failure, given the ostensible market-orientation of the global economy. I also cover the need for policy simplicity and consistency, along with the need to improve how markets are designed.

Renewables, I emphasize, need markets that allow them to thrive. Governments can undertake basic measures, and no better example exists than removing the enormous subsidy provided to fossil sources, who are allowed to pollute the global commons at no cost. Davis (2014) notes that “coal, natural gas, and electricity” are widely subsidized, and calls for greater research into the impacts of subsidy in non-fuel energy markets. This is not to say that subsidies are uniformly negative, of course, as Sovacool (2017) has pointed out that while subsidies are generally deleterious to a society’s advancement, they can have positive social impacts. In the same article, Sovacool points out that disentangling energy subsidies from other elements of the economy (such as rail transport or roadways) can be difficult - making outright elimination highly improbable.

Of course, even if it were a solution with a clear implementation path, removing the enormous subsidy provided to fossil sources (Coady et al. (2017) estimate it at $0.6 trillion in the United States, second only to China at $1.8 trillion) would not necessarily be easy or socially palatable. Clearly and consistently communicating intentions is important, as is keeping the rules simple and as devoid of internal contradictions as possible (complexity creates uncertainty and increases the costs of getting things done). Renewables need stability, as well as markets that are planned in such a way that renewables’ contributions are maximized.

The second issue revolves around the importance of supporting capital deployment from the private sector at the maximum levels possible. This section is especially supportive of innovative options emerging from the private sector, such as the mission-oriented investors comprising the Breakthrough Energy Coalition (a consortium of socially-minded billionaires) seeking to fund

renewables with patient capital, as well as more involvement from institutional investors across the investment value chain. Governments, I stress, need to focus on the areas where as few dollars as possible are expended for maximum benefit. In that regard, I am strongly supportive of de-risking measures which reduce the cost of capital injected at scale from private sector players, as well as government funded research & development.

The second issue also repeats a recommendation from the second major chapter - the need to facilitate new capital sources that can help bring down the cost of capital. This largely involves removing barriers. Examples include monetary policy (such as through providing special favourable reserve requirements for banks that extend credit to low-carbon initiatives), regulation (such as avoiding unintended consequences which slow capital deployment) or in rules governing the capital requirements of banking systems (which can constrain the amount banks are able to lend to renewables projects). Other players - SWFs, family offices, and endowments - benefit from significant flexibility in their investment mandates, and also need to be engaged so their possible contributions can be maximized.

Finally, I assess the need for understanding non-financial barriers to renewables investments. I primarily focus on psychological issues, spanning the innate to the ideological, and this section is grounded in a frank realism (in the sense that imperfect humans are likely incapable of executing on optimized solutions). To that end, I advocate for minimizing psychological inertia as I present some common cognitive biases that delay action. I especially remind the reader that science is revealing that the fundamental cognitive architecture driving decision-making is often deeply flawed, with noted primatology expert and neuroscientist Sapolsky (2017) going so far as to call the frontal cortex an honorary member of the limbic system. Of course, such flaws present a double-edged sword - the same downsides can, if approached appropriately, be tapped for positive outcomes. A good example of such an outcome is the tendency for humans to exhibit herd behaviour (e.g. following current trends and the first movers perceived to be credible). This tendency can be accessed through supporting initial institutional investor involvement that can unlock additional investor dollars (with the double edge here being that it can also prompt volatile capital outflows as well).

Climate change is a problem of immense complexity and vastness, touching not only on the physical world, but also on human psychology, economic behaviour, social strata, and other chaotic systems. No single solution exists, and I do not pretend that private sector investment in renewable energy is either the sole or perfect answer. However, the private sector has shown a willingness to support the necessary growth in renewable energy technologies, even as government has been (at best) slow-moving. Further examination of their contributions is warranted. Diaz-Rainey et al. (2017) lament that finance-related research on climate stemming from more traditional sources has failed to engage with practice and policy implications. This thesis attempts to help close this gap.

Chapter 2 Renewable electricity finance in the United States: A state-of-the-art review

2.1. Introduction

Electricity from renewable energy sources such as wind, solar and biomass energy has gone far beyond its humble roots as a costly alternative to fossil fuel generation to become the fastest growing source of electricity in many regions. This rapid growth is especially pronounced in the United States (U.S.). The 2017 Annual Energy Outlook from the U.S.-based Energy Information Administration (EIA) envisions renewable energy growing rapidly as a result of dramatic decreases in the levelized cost of renewable electricity generation - particularly for photovoltaic (PV) electricity. This is part of a general phenomenon where some forms of solar, wind, and other renewable electricity are now competitive with fossil fuel electricity in terms of unit electricity costs (in what Sanzillo et al. (2017) refer to as a deﬂationary cost curve) and favourable policy environments continue to spur this trend along.

At the same time, there is increasing pressure to move away from fossil fuels in response to the threat of catastrophic warming of the climate due to anthropogenic emissions of greenhouse gases, as exempliﬁed by the evolving framework supporting the recent international Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC) (2016). Due to the combination of increasing economic competitiveness and policy push, continued rapid growth in the rate of deployment of renewable electricity generation is anticipated over the coming decades. Although the investment cost per unit of renewable electricity generation capacity is expected to continue to decrease1, the growth in deployment rates needed to meet climate policy goals is so large that the annual ﬁnancing requirements will continue to grow substantially2.

1 Again, solar photovoltaic modules are perhaps the best example of this potential for further declines. Their prices have dropped in cost by a factor of about 2330 since 1956, according to Farmer & Lafond (2016), with additional declines forecast. Richard Swanson, the founder of the US solar company SunPower, argued that a standard learning curve would lead to a 20% drop in panel cost for every doubling in total volume produced (Crooks, 2016). 2 The Organisation for Economic Co-operation and Development (OECDb) believes that over $50 trillion USD will be required in the near future for global energy supply infrastructure and energy efﬁciency. See, for example, the 2015 report Mapping channels to mobilise institutional investment in sustainable energy, which lays out a 20 year

Renewable electricity power plants have a host of financing options. This chapter reviews the various ways in which large-scale renewable electricity generation can be or could be financed privately by using the United States (a destination for $58.8 billion in direct and indirect investment in 2016, according to the Sustainable Energy in America Factbook (2017)) as a case study. The U.S. was chosen due to it a) being a deep and active market for financing, b) being a home to some of the world's largest financial centres (such as New York City and San Francisco), c) having a long history of renewable electricity deployment and technological innovation, and d) being the source of several new and innovative financing tools.

This chapter will contextualize emerging private financing opportunities within an awareness of historical financing mechanisms, delivery methods, and policies. While acknowledging that there is no “one size fits all” and that any mass renewable electricity deployment effort would be greatly abetted by greater government-provided direct investment, significant scope exists for private investment. Accordingly, this chapter constitutes a discussion on the private financing alternatives available in competitive markets, rather than a definitive “ranking” or hierarchy. Each renewable electricity developer's situation is inherently different, and determining the optimal financial structure for a renewable electricity project depends on a large number of factors that range from the size of the transaction to the risk appetite of the investor. This chapter reflects that diversity.

We do, however, see this work as a mobilizing effort. If we are to ensure the integration of an ever-greater percentage of renewable electricity into the supply mix and reach $1 trillion of annual investment in clean energy3, it is crucial that the outstanding past and present work in renewable energy ﬁnance (coming out of both the private sector and a variety of academic centres, national research laboratories, international entities, and government institutions) is tapped, implemented, and, where appropriate, modiﬁed to suit on the ground demands. This work, which is part of a broader research synthesis effort designed to outline the renewable

timeline for this cumulative capital expenditure if the world is to have even a small chance of staying below a 2 degree C warming limit. 3 The “Clean Trillion” was put forward by the non-proﬁt CERES (2010). 13

electricity ﬁnance environment of different regions (see, for example, Fink, 2014; Krupa & Poudineh, 2017; Ottinger & Bowie, 2015), attempts to facilitate this knowledge transfer.

2.2. Trends, ﬁnancing, and policies 2.2.1. Status of renewable electricity deployment (global)

Figure 1 shows the trend from 2000 to 2015 in the global installed capacity of onshore and offshore wind, solar PV, and concentrating solar thermal power (CSTP) - 4 dominant renewable electricity technologies.

The global capacity of wind and solar reached 552 gigawatts (GW) by the end of 2015, along with 1055 GW of hydropower, 93 GW of biopower, and 13 GW of geothermal power, for a total

2015 renewable electricity capacity of 1713 GW. By comparison, fossil fuel and nuclear capacity was 4277 GW by the end of 2015 (United Nations Statistics Division, 2016).

Jacobson and Delucchi (2011a) argue that all new energy could come from renewables by 2030 and all energy could be renewables-derived by 2050. The International Energy Agency (2016) argues that up to 45% penetration of variable renewable energy sources is possible, with minimal additional cost compared to a thermal-heavy electricity supply.

In our scenarios regarding theoretical deployment of renewables necessary to mitigate anthropogenic climate change, we have opted for an even longer time frame. Harvey (2010a; 2010b) constructed scenarios that achieve elimination of fossil fuel CO2 emissions by 2100. For the scenario with the most stringent application of energy efﬁciency measures and relatively low population and GDP/capita growth, a total deployment of wind and solar capacity of 15,000 GW is required by 2100 (at which point global energy demand is stabilized or falling slowly). Fig. 2a (created by the authors) shows an illustrative scenario for the growth in wind and solar energy that continues smoothly from the 2014-2015 trend to ﬁnal installed capacities of 4000 GW each for onshore wind, PV and CSTP, as well as 3000 GW for offshore wind. Fig. 2b shows the annual rate of installation of new capacity in this scenario; the rate of installation of new onshore wind and solar PV would need to increase by factors of roughly 3 and 5, respectively, by mid- century. Similar peaks in the rate of installation of offshore wind and CSTP occur, but about 20- 30 years later. Fig. 2c shows the total rate of installation of these renewable electricity sources.

5000

4000 Onshore wind

) Offshore wind W

G PV

(

y CSTP

i c

a 3000

r e

n 2000

l G

1000

175

150 Onshore wind Offshore wind PV

125 CSTP

)

r y

/ Additions (GW/yr)

G (

100 2014 Peak n

o Onshore 49 138

i t

i Offshore 2 177

d d

A PV 39 204

75 y

t CSTP 2 177

p a

C 50

500

400

)

(

n 300

i c

a 200

o T 100

0 2000 2020 2040 2060 2080 2100 Year Fig. 2. A scenario for the deployment of wind and solar electricity generation that continues from observed deployments up to 2015 and is consistent with elimination of electricity- related fossil fuel emissions by 2100 if strong efficiency measures are also taken in all end use sectors. (a) Capacity of individual solar and wind technologies, (b) rate of deployment of individual wind and solar technologies, (c) rate of deployment of total wind and solar generation capacity. Source: Authors.

The maximum rate of installation peaks at about 430 GW/year in the late 2030s - about 4 times the rate of installation in 2015.

Given these rates of deployment and future investment costs, the total investment requirement for the scenario can be computed. For example, according to the Global Wind Energy Council 16

(2016), 63.3 GW of new wind capacity were installed worldwide in 2015 at an average cost of $1947/kW, while 39.2 GW of solar PV were installed in 2014 at an investment cost of $149.6 billion, giving an average cost of $3820/kW (Ren21, 2015). We used the following costs in 2015: $1880/kW for onshore wind, $4000/kW for offshore wind (which recovers the $1947/kW global average cost), $3820/kW for solar PV, and $6000/kW for CSTP. We assume that these costs approach mature costs of $1200/kW, $2000/kW, $1500/kW, and $2000/kW for onshore wind, offshore wind, PV, and CSTP, respectively4. Fig. 3 shows the resulting variation in the annual investment requirements for expansion of these four renewable electricity sources.

Fig. 3. Annual global investment requirements for expansion of wind and solar electricity generation technologies for the illustrative deployment figure shown in Fig. 2. Source: Authors.

This variation is a product of annual capacity expansion and a declining cost per unit of capacity.

Annual investment peaks at $740 billion per year, or about 3 times the investment in 2015. This is a purely illustrative scenario, but indicates the magnitude of investments that would be needed to expand renewable electricity supply in a scenario consistent with stabilizing atmospheric CO2

4 (P(t)- Specifically, we use a modified learning curve, whereby cost in year t is given by C(t) = Coo + (C2015 - Coo) PR P2015)/P2015 , where Coo is the final cost and PR is a progress ratio (assumed to be 0.8 for all technologies).

concentrations at a level that could limit global mean warming to 1.5-2.0 degrees C - the internationally-agreed target in the Paris Agreement (United Nations Framework Convention on Climate Change, 2016) - if also accompanied by large negative emissions5 from mid-century onward. Additional investments would be needed for an expanded transmission grid, as well as for measures in other sectors - such as deep retroﬁts of the pre-existing building stock over a period of 40-50 years (Harvey, 2014) and investment in urban rapid transit infrastructure (Harvey, 2013a). Combined, these measures would easily bring the peak required annual investment to in excess of $1 trillion/year.

2.2.2. Status of renewable electricity deployment (U.S. only)

Total U.S. renewables installed capacity stood at 244 GW as of the end of 2016 (Business Council on Sustainable Energy, 2017) compared to a total installed US electricity generating capacity of over 1100 GW (U.S. Energy Information Administration, 2016). According to the EIA (2017), renewable generation capacity made up over half (63%) of U.S.-based utility-scale generating capacity additions in that year. This is the third consecutive year where renewables made up over 50% of the new installed capacity additions, as 22 GW of new renewable generating capacity was added to the grid (Bloomberg New Energy Finance, 2017). Solar made up the bulk of this renewable capacity (12.5 GW total, of which 8.9 was utility-scale), with wind at 8.5 GW (Bloomberg New Energy Finance, 2017). The EIA (2017) envisions an additional 70 GW added between 2017 and 2021.

Of course, we acknowledge that installed capacity in electricity differs from overall contribution to energy supply. While impressive gains continue to be made, renewable energy's share of primary energy is approximately 10% (J.P. Morgan Asset Management, 2016). This will almost certainly rise substantially in the near future across all segments, as the aforementioned learning curve has dramatically reduced renewable generators' costs to the point where they are often competitive with conventional generators. Overall, a strong future appears to exist for steady renewables growth nation-wide.

5 Examples of large negative emissions, according to Harvey (2010b), include capture of carbon from biomass combustion and its storage in the deep ocean or deep aquifers, direct air CO2 capture and storage, or buildup of biomass and soils carbon. 18

2.2.3. Financing introduction

We turn now to a brief financing introduction. There are two basic sources of finance for any project that requires upfront funding but generates a long-term revenue stream: equity and debt (Lazard, 2015; National Renewable Energy Laboratory, 2015). Equity refers to direct ownership in the project or company and, as such, a claim to some portion of the profits generated by the project or company. Debt, on the other hand, refers to money lent to a project at a specified rate of interest, which is paid irrespective of whether or not the project generates a profit. Debt payments might be subtracted from the taxable profits (whereas equity would not be), in which case the effective rate of the fixed debt obligation will be reduced6. The cost of equity and after- tax cost of debt are combined with the proportions of equity and debt financing to give the weighted average cost of capital (WACC), which is computed in Equation 1 as:

WACC = (CE * PE) + (CD * PD * (1-t)) (1) where:

CE = Cost of Equity (%/year)

PE = Percentage of Equity (out of 100)

CD = Cost of Debt (%/year)

PD = Percentage of Debt (out of 100) t = tax rate

Computing the cost of debt is straightforward - it is simply the rate offered by the lender. At the time of writing, interest rates are at historic lows. The US Federal Reserve has consistently demonstrated a remarkable willingness to maintain unconventional monetary policy, which is likely to hold inﬂation fairly consistent and keep debt relatively inexpensive for renewable electricity developers in an age of ‘secular stagnation’ (Summers, 2016a). The US has been in a sustained period of growth for many years and unemployment has fallen dramatically, but

6 Modigliani and Miller (1963) famously argued that the tax shield beneﬁts of debt will lead to an increase in ﬁrm value while decreasing the debt service costs. 19

historical market cycles suggest that a decline is likely to arrive eventually. Any scenario involving reduced economic growth would further entrench a lower cost of debt for renewable electricity developers, even though it may have negative consequences in terms of availability of capital providers, liquidity, and other ﬁnancial contributors to renewables viability.

To compute the cost of equity, companies must determine what the shareholders of their company will expect as their return. In developed countries, the cost of equity is commonly computed using the Capital Asset Pricing Model (CAPM). According to the CAPM, the expected cost of equity is given in Equation 2 by:

CE = Rf + Ba (Rm – Rf) = (Ba * Rm) + ( (1 - Ba) * Rf) (2) where:

CE = Cost of Equity

Rf = Risk-free rate

7 Ba = Beta, a weighting factor for Rm that serves as a measure of an investment’s risk

Rm = Market rate of return for the investment in question

Rm – Rf = Expected risk premium attached to the equity in a low-risk jurisdiction

The WACC8, therefore, is determined by a combination of the market and an investor's perceptions. This is important for renewable electricity developers, as Ondraczek et al. (2015) found that realizing favourable economics for renewable electricity generators is highly

7 Beta is calculated through regression analysis, with 1 being an investment that moves with the market (Russell, 2014). This would make an investment with a beta of 1.5 50% more volatile than the market (a measure of covariance relative to benchmark variance). 8 Helms et al. (2015) explain that in cases where the cost of capital is determined by an investor, the WACC can also be called the discount rate (if an investor is using a Net Present Value (NPV) ﬁnancial analysis) or a hurdle rate (if an investor has opted for an Internal Rate of Return (IRR) ﬁnancial analysis). Either type of assessment - NPV or IRR - tries to ascertain an investor's opportunity cost of capital; that is, what the investor could earn in the market for other investments, and whether the investment under consideration exceeds other investments in terms of the return. Obviously, the discount rate and hurdle rate involve a level of subjectivity, and different investors may arrive at differing discount rates depending on their assessments of risk and relative opportunity. 20

dependent on the cost of capital.

The levelized cost of electricity (LCOE) constitutes the single ﬁxed cost of electricity that would recoup all costs, including return on investment but excluding transmission, distribution, and grid services. It is computed (according to the International Energy Agency, 2015) in Equation 3 as:

(3) where:

It = Investment in year t ($/kW/year)

O&Mt = Operations and maintenance (O&M) ($/kW/year)

Ft = Fuel cost ($/kW/year)

E = Electricity output (kWh/kW/year) r = discount rate t = year (running from year 1 to year N)

Considerable insight into the role of different cost factors can be obtained if the initial investment cost is annualized; that is, if it is converted into a fixed annual payment that is sufficient to exactly pay back the initial investment plus interest on the unpaid (but diminishing) principle at an interest rate i. The fixed fraction of the initial investment that must be paid back each year is called the annuity factor or cost recovery factor (CRF), and is given in Equation 4 by:

(4) where:

N = lifespan of the project (years)

Assuming the annual O&M costs and annual electricity generation to be fixed, LCOE is given in Equation 5 by:

(5) where:

INS = insurance rate (year-1)

O&M = annual operation and maintenance cost (as $/kW/year)

8760 = number of hours in a year

CF = capacity factor (the annual production as a fraction of the production that would occur if the plan ran at peak capacity all the time)

PC = plant capacity

fa = availability factor (the fraction of time that the plant is available; that is to say, not out of service due to routine maintenance or failures)

The denominator in Eq. (5) is the annual generation of electricity, equivalent to Et in Eq. (3) but assumed to be ﬁxed in the simpler Eq. (5).

Table 1 shows how the CRF varies with the cost of capital and the lifespan of the project.

Table 1: Variation of the cost recovery factor with interest rate and project lifespan. Source: Authors.

Interest rate Project Lifespan (years)

20 25 30 35 40

0.03 0.067 0.057 0.051 0.047 0.043

0.04 0.074 0.064 0.058 0.054 0.051

0.05 0.080 0.071 0.065 0.061 0.058

0.06 0.087 0.078 0.073 0.069 0.066

0.07 0.094 0.086 0.081 0.077 0.075

0.08 0.102 0.094 0.089 0.086 0.084

0.09 0.110 0.102 0.097 0.095 0.093

0.10 0.117 0.110 0.106 0.104 0.102

0.11 0.126 0.119 0.115 0.113 0.112

0.12 0.134 0.127 0.124 0.122 0.121

0.13 0.142 0.136 0.133 0.132 0.131

0.14 0.151 0.145 0.143 0.141 0.141

0.15 0.160 0.155 0.152 0.151 0.151

For shorter project lifespans, CRF is signiﬁcantly larger than the interest rate. For a given project lifespan, increasing the cost of capital from 3%/year to 15%/year multiplies the required annual payments by factors of 2.4 and 3.5 for 20- and 40-year project lifespans, respectively. As noted earlier, the cost of capital is an important factor in the overall cost of renewable electricity - Table 1 shows why this is the case.

A typical lifespan for solar and wind electricity generators is 25 years, while an average rate of return is 7.5%/year in OECD countries and 10%/year in non-OECD countries (where perceived risk is greater) (International Renewable Energy Agency, 2015). Many governments, especially in OECD countries such as the United States, can borrow at 3%/year or less, resulting in a CRF of 0.043-0.067 for project lifespans of 40 (low CRF) to 20 (high CRF) years. For a capital cost of $2000/kW, a CRF of 0.05-0.10, and a capacity factor of 0.2 (all characteristic of solar PV in a sunny location), the contribution of the capital cost to the cost of electricity is 5.7-11.4 cents/kWh. O&M of $30/kW/year would add another 1.7 cents/kWh to the cost of electricity.

2.2.4. Common policies

The rapid expansion in the rate of deployment of renewable energy sources outlined in the preceding section can be attributed in large part to government policies that have stimulated or mandated their deployment9. In the United States, tax credits (especially Investment Tax Credits (ITCs) & Production Tax Credits (PTCs)) and quotas are the two most common tools, with tax credits acting as the crucial anchor for renewable electricity developers. Other forms of policy support, such as subsidies and ﬁnancial de-risking tools, are less common, but have nevertheless helped attract additional sources of capital to U.S. clean power projects10. These are laid out in Table 2.

Table 2: Type of supportive policy and example(s). Source: Authors. Type of policy Example(s) Tax credits Investment Tax Credit (ITC), Production Tax Credit (PTC), Accelerated Depreciation Quotas Renewable Portfolio Standards (RPS), Renewable Energy Certificates (RECs) Subsidies Feed-in Tariffs (FiTs)

9 Increasingly, this is changing as renewable electricity deployment is driven by economic competitiveness rather than tax policy. 10 For those seeking additional information on U.S. supports, DSIRE (n.d.), a database funded by the U.S. Department of Energy, provides comprehensive, state-by-state information on the policies and incentives that are currently available. As of the date of writing, over 2600 programs and incentives are in place in the U.S. alone, including rebates, standards, easements, and purchasing. 24

Financial de-risking tools Grants, Loan Guarantees, Loan Concessions

2.2.4.1. Tax credits

ITCs and PTCs are key federal tax-related renewable electricity policy measures that have been widely used in United States electricity markets11, and the evolution of the industry has been inextricably linked to their availability (or, in some years, lack of availability). The two credits provide tax advantages at different stages - ITCs at project inception, PTCs throughout the life of the project. The ITC (which has proven especially useful for solar facilities) is realized in the same year as project commissioning and is returned to the investor in a linear fashion over 5 years. Credits earned during the initial 5-year period are subject to Internal Revenue Service (IRS) “recapture” if the project is sold to a third party prior to the conclusion of the vesting period (Bolinger et al., 2009). The PTC, meanwhile, provides a 10-year, inﬂation-adjusted production tax credit for generation by select renewable electricity types (such as wind, biomass, geothermal, landﬁll gas and municipal solid waste, certain hydropower, and a range of niche technologies).

In the United States, tax law provides for these tax credits to be paired with accelerated depreciation. Straight-line depreciation is an accounting tool that recognizes wear and tear on an asset, leading to a reduction in the annual taxable profits associated with a given asset. Accelerated depreciation, by contrast, allows renewable generators to capitalize on the time value of money and benefit from tax credits earlier in a project's operational history. Accelerated depreciation simply allows for these benefits to be recognized sooner, and is primarily undertaken over 5 years through a system known as Modified Accelerated Cost Recovery System (MACRS). Other depreciation rates are available and determined by the IRS (n.d.), covering a range of years and rates depending on the technology type involved.

11 Other tax credits are sometimes available, such as in the form of sales tax exemptions, manufacturing tax credits, and excise tax exemptions. 25

PTCs and ITCs share some shortfalls. For one, most project developers cannot fully take advantage of (that is, ‘monetize’) the credits, requiring them to depend on expensive and sometimes difficult to secure tax equity strategies (a financing strategy detailed in Section 3.2. of this chapter). Second, tax credits are potentially of little use to institutional investors who maintain a tax-exempt status (such as state pension funds for retirees). Finally, the credits require approval and renewal from U.S. lawmakers. Political issues have sometimes led to the tax credits being allowed to lapse, only to be reinstated at a later date (or in some cases, reinstated retroactively). This creates significant uncertainty that harms market sentiment12.

2.2.4.2. Quotas

Quota-driven systems involve political mandates wherein utilities are required to generate a certain percentage of their output from renewable energy sources. The popular Renewable Portfolio Standard (RPS), which is currently available (in various forms) in 11 American states (DSIRE, n.d.), is an example of a quota-driven system, and there are multiple variants of RPSs (certain call for distinct technologies, while others maintain geographical restrictions). Market participants such as utilities can directly comply with their clean power procurement requirements, or compliance can be purchased through a tradable mechanism known as Renewable Energy Certiﬁcates (RECs)13. RECs represent the environmental attributes associated with the generation of a unit of renewable electricity in the U.S.

2.2.4.3. Subsidies

Subsidies are another useful tool, of which Feed-in Tariffs (FiTs) - wherein a power off-taker (usually a major procurer such as a government or utility) speciﬁes a guaranteed premium price for all renewables output over a speciﬁed time period (such as 20 years) - are the most prominent. Globally, FiTs have been proven highly successful in bringing new renewables capacity online (e.g. Germany saw installed renewable electricity capacity (excluding

12 Randall (2015) explains that this latter barrier's significance has been reduced by the U.S. Congress initiating a five year extension of the tax credits - a move which was tied to a new bipartisan agreement that also reversed a ban on oil exports. The implications of the tax credit extension are significant, as the same article estimates that nearly $75 billion in new renewables investment will be unlocked before the credits are permanently phased out at the end of the extension period. 13 RECs are only one of the products in the environmental markets, which also include credits for carbon (compliance, offsets), sulphur oxide, and nitrous oxide. 26

hydropower) grow from 8% to 34% of net electricity consumption from 2005 to 2015, according to Wirth, 2015). As of the time of writing, utilities or governments in four US states (California, Hawaii, New York, and Indiana) as well as the U.S. Virgin Islands maintain FiT electricity policies (DSIRE, n.d.).

FiTs can spur economic behavior. Price digressions (enacted through stable declines in the tariffs offered for new projects) can ensure that investors receive reasonable rates of return commensurate with the increasingly lower risk levels associated with a technology's advance in maturity. Shrimali (2015) identiﬁed long duration and high revenue certainty as key considerations for developed country investors; unsurprisingly, FiT schemes are tremendously attractive to investors in developed countries such as the United States.

The premiums associated with FiTs can create ﬁnancial burdens on electricity ratepayers, utilities, and/or states. In such circumstances, a more economically sustainable FiT variant involves a FiT premium. Under such a scheme, renewable power producers receive a top-up on the wholesale price. Traditional FiT projects are given priority dispatch at all times (in which the price received for power generated remains constant), but a FiT premium provides no such assurance. This has the beneﬁt of reducing wholesale market price distortion (which inevitably arises in a FiT scenario that sees generators being paid different prices and FiT-secured renewable electricity projects receiving guaranteed dispatch rights) but with the downside of substantially increasing risk for the power producer (Potskowski & Hunt, 2015).

2.2.4.4. Financial de-risking tools

Less costly tools can be used by public sector actors seeking to entice greater private investment. For example, replacing tax credits with one-time grants can be a particularly useful tool for matching subsidies with the substantial upfront capital expenditure needs facing renewable energy developers. In the American Recovery & Reinvestment Act (ARRA), a stimulus enacted by the Obama Administration in response to the 2008 credit crisis, the Section 1603 cash grant program allowed for tax credits to be realized early in project development (Auerbach, 2011). The program drove the installation of 16.9 GW of new renewable electricity capacity. The program's popularity stemmed from the fact that the beneﬁts gained by the developer were

immediate, as they were not required to incur costs associated with tax equity.

Another low-cost tool involves subnational or national states leveraging their own creditworthiness. Two methods include providing loan guarantees14 (which constitute a promise by one party to assume the debt of a defaulting borrower in the event of a missed payment) and loan concessions (which involve a state using their borrowing power and creditworthiness to reduce a smaller borrower's cost of capital by allowing them to leverage the more creditworthy party's credit). Loan guarantees are particularly effective for supporting innovation and promoting the inclusion of non-traditional generators, as even loan programs with unsuccessful investments can have strong returns (Doom, 2014a).

2.3. Prominent historical delivery mechanisms for renewable electricity ﬁnance

This section will cover examples of dominant renewable electricity financing structures in the renewables markets to date. Fundamentally, financing can be arranged at the scale of an individual project, or at the scale of the organization carrying out the project. In the former case, only the risk of the specific project would be taken into account when determining the WACC, whereas in the second case, the overall risk of the corporation or other entity involved would be the relevant risk parameter - the assumption being that if the project fails to perform as expected, the corporation can draw upon its wider financing resources to honour its commitments to the creditors of the particular project in question.

To give a sense of overall commitments in the sector, we have compiled Table 3:

14 Bolinger et al. (2009) reference the aforementioned ARRA's expanded loan guarantee program's ability to support between $60-100 billion in loans to renewable energy projects as a useful stimulator of renewables deployment. 28

participants. Respondents to our queries emphasized that cost of capital is a competitive advantage (meaning that many will be reluctant to disclose it), so costs are generally estimates.

Type of capital Overall volume ($ 2015) Cost

Tax equity $11.5 billion 7-18% (varies significantly)

$5.1 billion ($2.6 billion rooftop solar, $2.5 billion large-scale & commercial and industrial (C&I))

$6.4 billion (wind)

Bank Debt $17 billion - Short-term construction - L + 1.5- 1.75% London Interbank Offered Rate - Term debt – L + 1.75-2%

(LIBOR =L = 2.4%) - Back-leveraged – L + 2.25-2.75%

- Corporate revolver (funds for drawdown, repay, and re-draw) – L + 3.25%

Public Market ~$10 billion Varies (Yieldcos – 5-7%)

Term Loan B $3.3 billion in overall power L + 4.25-6% sector (much less in renewables)

Venture ~<$2 billion Varies Capital/Private Equity

Distributed $8.7 billion 4-7.5% (Depending on tranche) Generation (Solar)

Project bonds Unknown L + 2-3%

2.3.1. Corporate ﬁnance

Perhaps the simplest method of financing a renewable energy project is through the balance sheet of a corporation – an approach known as corporate finance. This can be done through projects driven by electric utilities or non-utility generators (such as independent power producers (IPPs)). The basic accounting equation that defines a corporate balance sheet can be described as follows in Equation 6:

A = L + E (6) where: A = Assets L = Liabilities (or “debt”), where L > 0 E = Equity

Corporate equity is primarily found in publicly traded securities (also known as shares). If the market demand and exchange mechanisms for trading these securities are strong, investors will call such a market liquid. Individual investors (called retail investors) can purchase shares, as can larger investors (such as institutional investors, which are covered in later sections). Equity is also held by founders or management, and can be offered to managers by shareholders as an incentive for managers to achieve strong returns.

The shares of many leading renewable energy companies (including manufacturers, utility-scale developers, and residential-oriented developers) are traded on public exchanges globally. The

United States is home to the two largest stock exchanges by total market capitalization15 - the New York Stock Exchange (commonly abbreviated as the NYSE) and NASDAQ Stock Exchange (commonly abbreviated as the NASDAQ). For those looking for greater diversiﬁcation within a single investment, equity can also be found in yieldcos (covered in-depth in a later section), the aggregation vehicles known as clean energy exchange-traded funds (ETFs, which can combine a mix of small, mid-capitalization, and large-capitalization domestic stocks with foreign stocks), and clean energy mutual funds.

Even if a variety of publicly-traded options exist, challenges remain. At the time of writing, the renewable energy sector has performed poorly relative to broader energy stocks and the market as a whole since 2003. Figure 4 compares the Wilderhill Clean Energy Index with returns from other sectors to demonstrate that renewables show an overall negative return over the last 13 years, while both energy-speciﬁc and general indices have earned large and positive returns.

Fig. 4. Cumulative return for renewable stocks, conventional energy stocks, and the broader market between 2003 and 2016. Source: J.P. Morgan Asset Management, 2016.

Corporate debt can come in a variety of different forms. The cost of debt is dependent on a large number of factors, including the creditworthiness of the borrower and the anticipated use of the funds. A common source used in the renewable electricity sector is back-leveraged debt, which is a loan structure used late in the construction cycle (that is to say, at the ﬁrst available entry point where the risk level is perceived to be suitable for lenders) as a way to replace higher-cost equity

15 Total market capitalization simply refers to the total value realized when adding up each piece of the constituent ﬁrm's value. Individual ﬁrm market capitalization can be calculated by multiplying the number of shares by the current share price. 31

with lower-cost debt (Berger, 2014). Back-leveraged debt has proliferated in the US in order to accommodate the particular demands of tax equity investors (i.e., those providing useful capital to the renewable energy sector in the United States, as further outlined in 2.3.2.).

Corporations have other debt-based options as well. They can issue corporate bonds, which involve long-term bonds rated by ratings agencies like Moody's or Standard and Poor's. There are also convertible bonds16 and high-yield debt (with the latter also known colloquially as “junk bonds”). Debt can be short-term, as in the case of short-term debt securities called commercial paper (a form of debt that is usually repayable within less than 9 months and is used to meet day- to-day corporate expenses such as payroll). Those with a higher risk appetite can initiate leveraged loans, which is a type of lending to highly indebted companies (Kim, 2015).

Strictly speaking, the simple equation (i.e., Equation 6) for corporate finance presented at the start of this sub-section does not allow for off-balance-sheet financing (i.e., financing that does not appear on the previously introduced balance sheet formula), even though corporations are capable of holding assets off-balance-sheet through accounting conventions. This leads to the primary disadvantage of corporate finance: that lenders have recourse (meaning access in the form of collateral) to the other assets of the borrower. This can distort the WACC, as the assigned risk profile of a project becomes dependent on a corporation's overall holdings or activities. Therefore, a project's cost of capital may not reflect the risks associated with that specific project; a corporate WACC may, for example, incorporate a project pool covering different regions, political contexts, and technologies. Helms et al. (2015) contend that this shortcoming has hindered renewable electricity expansion, as utilities have utilized valuation techniques that use discount rates attached to greenfield17 fossil facilities. This tendency may make ownership of greenfield or brownfield renewable electricity facilities appear less attractive, even though greenfield fossil fuel facilities are arguably riskier than greenfield renewable energy facilities due to fuel-related uncertainties (such as future climate policies, where the liability may be substantially more than governments or companies are expecting (Ricke et al., 2018).

16 Convertible bonds are hybrid bonds that have debt-like characteristics (such as yields) but also maintain the potential for conversion to equity, such as integrated energy company Tesla's $600 million 2013 offering (Tesla Motors Inc., 2013). 17 Greenﬁeld is a common industry term that refers to a project that is in some stage of construction, as opposed to an operational (or brownﬁeld) site. 32

2.3.2. Banking and ﬁnancial institutions

Banking institutions comprise commercial and investment banks18, both of which can extend loans to de-risked and mature renewable electricity technologies19. Tax equity is a type of upfront capital provision in which renewable electricity developers partner with select institutions capable of taking advantage of the credits associated with a renewable electricity project (often a financial institution with significant tax liabilities). The three main tax equity structures include the most popular version (known as a partnership flip), as well as the sale- leaseback and inverted flip (Lutton, 2013; Martin, 2015b). Tax equity is a domain in which banking institutions have been very active, as these institutions possess specialized legal and financial staff who can structure the prospective renewable electricity deal in such a way that government-directed tax advantages and accelerated depreciation benefits are maximized.

Tax equity has some challenges. For one, the number of tax equity providers is somewhat small (approximately 20 as of the time of writing), a problem which is exacerbated by the fact that there is a distinct rationing to the largest developers (Kauffman, 2014). Predictably, this somewhat illiquid market leads to the second concern - expensive capital (Lowder & Mendelsohn, 2013). Third, regulatory hurdles stand in the way of tax equity use optimization20.

Banking institutions are active in non-lending facets of the renewable electricity sector, such as acquiring operational assets with stable cash flow profiles (Motyka et al., 2015), and have been active in other project finance (that is, the direct financing of individual projects) transactions besides tax equity investment.

18 International banks (e.g. Spain's Banco Santander) and domestic banks (e.g. J.P. Morgan) are active in the space. 19 An example would be a post-commissioning refinancing of an operational solar array whose risk profile meets the bank's risk management standards. These banks typically specialize in providing construction debt for infrastructure projects of all kinds (e.g. toll roads and liquefied natural gas export terminals, in addition to renewable electricity projects). 20 For example, the Community Reinvestment Act (CRA) incentivizes depository institutions to invest their limited capital in projects within communities where they operate. More specifically, it endeavours to facilitate credit extension to communities (including low-to moderate-income neighbourhoods – Board of Governors of the Federal Reserve System, 2014). Specific projects are supported through it; however, it cannot be used with renewables tax credits such as the PTC and ITC. Until measures are undertaken to ensure that investors can access renewables- focused tax credits within the CRA, it is difficult to tap into the significant potential pools of capital that banks allocate to the CRA. 33

Project finance is among the longest serving types of financing method in renewable electricity, having been used extensively since the 1980s (Wiser, 1997). In an early analysis of renewable energy project finance, Mills & Taylor (1994) provide several common motivations for sponsors to seek to use project finance:

1) It improves debt-to-equity ratios by allowing debt to be carried “off-balance-sheet” (that is, a debt-heavy renewable electricity project will not show up on the corporate balance sheet); 2) It can allow for increased levels of comparatively low-cost debt in a project's capital structure; 3) It is useful in joint ventures that have sponsors of uneven ﬁnancial strength; 4) It facilitates better risk allocation between sponsors; and 5) It is often the only tool available to less ﬁnancially sound sponsors.

Non-recourse project finance is usually dependent on the creation of a special purpose vehicle (SPV) that is bankruptcy-remote (that is, the creation of a dedicated asset holding instrument that, in the event of a bankruptcy, would not allow for the creditor to have recourse to other assets of the parent company). Such a vehicle is distinct from the asset's corporate holding vehicle - in this case, renewable energy project developers and/or their venture partners - and involves repayment of a loan that is tied to the contractually derived cash flows from the project's output. Project finance can involve only one lender, or can be a syndicated loan that involves multiple institutions. The risks and benefits of the project are solely tied to the aforementioned SPV, with project financiers evaluating the feasibility of a proposed project through an assessment of a variety of factors (a sample of which are outlined in Fig. 5).

Risk Type Example Scenario Sponsor Risk Sponsor of the transaction goes bankrupt. Technology Risk Insufficient historical irradiance data for a solar array. Completion Risk A wind project is not completed on schedule. Input/Supply Risk Fuel for a biomass project is constrained due to supplier issues. Operating Risk O&M is higher than expected. Environmental Risk Toxic substances are found at the build site for a new project. Approvals Risk A project does not receive a timely approval. Off-taker Risk A purchasing utility defaults on its obligations

to purchase all power.

Fig. 5. List of risks and example scenarios adapted by the authors from Mills & Taylor (1994).

2.3.3. Private equity/venture capital, family ofﬁces, and hedge funds

Private equity21 and venture capital funds are pooled investment vehicles that raise money from wealthy individuals and large investors (such as pension funds) to make targeted investments. In contrast to public securities, these types of investments are private. Bringing a long-term bias and investing in illiquid assets, immature technologies, and/or cash-poor companies, these funds are generally managed by practitioners who possess some sort of advantage (typically ﬁnancial or managerial) that can allow them to earn superior returns. An outline of the continuum of private equity and venture capital vehicles is presented in Figure 6:

Fig. 6. The private equity – venture capital continuum within the broader renewable energy space. Source: Adapted by the authors from Potskowski & Hunt, 2015.

21 Private equity refers to a project not traded on a stock exchange (that is, public equity), which should not be confused with public spending/ownership (which is controlled by the government). 35

Private equity was a crucial driver of growth in the U.S. renewable electricity industry over the last decade. Some of the capital came from major investment banks, which used private equity funds to launch public companies22 (Auerbach, 2013). Later, large mainstream funds launched dedicated funds23.

For earlier-stage renewable electricity company financing, venture capital has been disbursed through both diversified partnerships and dedicated clean energy investors. Modern venture capital is defined by many factors, including the high rate at which target companies consume cash, the types of business that attract the bulk of investment interest (mainly early-stage technology companies), the higher risk profile of target investments, and the clustered locations of much of the capital (Silicon Valley in California being the most prominent). A venture capitalist leverages sector expertise and financial resources to not only provide capital, but also to optimize the investee company's operations. Valuation techniques in the venture capital industry differ considerably from those found in cousins like buyout private equity, as limited financial modeling of past returns is available. Venture capital firms must rely on assessments of a potential investment’s management team, product markets, and other qualitative and quantitative factors identified by a venture capital firm's leadership.

In alternative investing (that is, investment styles outside of mainstream equities and bonds), two other groups are also worth mentioning: non-public family ofﬁces, which are dedicated investment professionals making investments on the part of high- net-worth (HNW) individuals, and hedge funds, a multi-purpose private investment vehicle that uses active investment strategies to earn returns above a passive benchmark (“alpha”). These private investment entities have played a small but noteworthy role in renewable electricity investing. Most notably, hedge funds buy and short the equities of ﬁrms (which may indirectly support renewables through

22 For example, Goldman Sachs helped launch First Solar. This higher-risk move, described by a former employee as a major investment in a ﬁrm which “went on to become the most successful solar company in the world” (Auerbach, 2013), represented a seed of things to come for Goldman Sachs. In 2015, the powerful bank committed $150 billion to the renewable electricity sector by 2025 - nearly quadruple the bank's original 2025 goal of $40 billion. 23 For example, Riverstone Holdings, the largest solely energy-focused private equity investor, has dedicated $4.1 billion in equity capital to 18 companies (Riverstone Holdings LLC, 2016).

measures such as improving the management team of a publicly traded renewables company)24. Hedge funds have also directly purchased stakes in developing wind and solar assets (Doom, 2014b). Family ofﬁces are also operating in this space, with some making attempts to amplify their inﬂuence25.

2.3.4. Institutional investors

Institutional investors26 (a term that encompasses actors as diverse as pension funds, insurance companies, sovereign wealth funds, university endowments, and charitable foundations) are crucial anchors in global capital markets. Institutional investor holdings in OECD countries alone approach $100 trillion in assets under management (OECD, 2015b), with U.S. investors comprising $45 trillion of that total (Segal, 2015). Of course, this theoretical availability of funds would never be entirely directed to renewable electricity in practice, but even a relatively modest $250 billion annual allocation to climate-protecting direct investment would nearly double the annual clean energy investment figures of approximately $300 billion found in recent years (such as in Bloomberg New Energy Finance, 2016). The feasibility of reaching 0.25% of $100 trillion (the $250 billion referenced in the previous sentence) in new institutional investment is backed by research found in Nelson (2015). Between the various investment vehicles available (indirect investments into corporate equities and bonds or pooled investment vehicles, as well as direct investment into projects themselves), Nelson argues that such an allocation (with some combination of debt and equity) is reasonable given the liquidity, diversification, and investment scope of institutional investors. Nelson (2015) also finds that direct investment has the most potential to drive down the cost of capital for renewable electricity generation27.

The ﬁrst way that an institutional investor can invest in renewable electricity infrastructure is through direct investing, although this market is not a major constituent of portfolios (current

24 This shorting has had impacts on yieldcos, as well as publicly traded firms such as (now-bankrupt) SunEdison and SolarCity (now Tesla). 25 One notable example of this magnification attempt is the CREO Syndicate, which is working to enhance deal flow and deploy capital by aggregating family offices together to reach capital allocation thresholds (at least $2 billion by 2020 – Collins, 2015). 26 These entities fall on the buy-side. Buy-side refers to firms that purchase assets in the markets, as opposed to firms that facilitate transactions (sell-side). 27 For significant capital cost decreases to be realized, Nelson (2015) proposes two necessary prerequisites. First, the institution must be actively involved in designing the deal so that overall portfolio risk is reduced and asset- liability matching is possible. Second, competition must be present in the market, so that comparable institutions can compete to offer the best terms to developers. 37

total allocations to the broader asset class of infrastructure are less than 1% of total assets under management). Another common method for investing is through Term Loan B markets, which are higher yield securities available to institutional investors. Institutional investors can invest through bond channels as well; private placement project bonds are one such option.’

2.4. Emerging opportunities for mainstream renewable electricity ﬁnance

To maximize cash available to the sector, the reﬁning and evolution of existing approaches will need to continue (the “all of the above” capital strategy discussed previously). Public market ﬁnance - that is, capital provided and subsequently transacted through public markets - is among the most promising options, as it involves tapping into new sources of capital and practicing better risk allocation. In Table 4, we provide examples - vetted and discussed with industry practitioners - of some of the most important options.

Securitization The process of pooling illiquid assets into liquid and readily tradable securities. One example - asset-based securities (ABSs) - represents rights to cash flows derived from portfolios of real asset loans. Master Limited Liquid, tax-advantaged limited liability partnerships that have been Partnerships popular in the conventional energy industry. Hold significant potential for (MLPs) application to renewable energy, but legislative changes are required to allow renewables to reach their full potential. Real Estate Publicly traded entities (companies or trusts) used on several Investment Trust international exchanges that typically own, operate, and—to a limited (REITs) extent—develop income-producing real estate property. These hold significant potential for application to renewable electricity, but require definitive tax rulings from the IRS or legislative changes. Yieldcos A dividend distributing publicly listed company, yieldcos combine different operational assets that have predictable cash flows. These structures are already common in the market. Green Bonds Standard (or ‘plain vanilla’) bonds applied to environmentally friendly projects. Green Banks A model that leverages a set amount of public monies to attract greater sums from the private sector. 38

Institutional Corporations or other legal entities that ultimately serve as financial investors intermediaries between individuals and investment markets. Examples include pension funds, insurance companies, sovereign wealth funds, and university endowments. Corporate Power Contracts inked by corporate entities with renewable generators to Purchase provide renewable energy generation. An example would be Google Agreements procuring power for a data centre. Crowdfunding Websites that allow the public to fund causes or businesses. Community energy Non-profit generators, such as communities.

In the following Sections, 2.4.1. – 2.4.3. cover public market debt and equity vehicles that are either currently available or likely to contribute to shaping the future of renewable electricity ﬁnance, while Sections 2.4.4. – 2.4.6. cover delivery entities capable of encouraging greater renewable electricity investment activity.

2.4.1. Securitization through asset-backed securities

As previously stressed, operating renewable electricity facilities maintain a relatively low risk profile with stable long-term cash flows. This inherently robust structure lends itself well to the process of securitization, wherein illiquid but cash generating assets are pooled, bundled, and then transferred to limited liability corporations. In turn, these corporations create structured products, which earn their name from the financial engineering required to build them. Structured products take many different forms; of particular relevance to this chapter are asset- backed securities (or ABSs). Renewable electricity variants, such as those for distributed solar photovoltaic projects, are increasingly viable, with Brandt et al. (2016) noting that solar securitizations are emerging as a mainstream financing option.

A simpliﬁed example of an asset-backed security (containing an assortment of different but standardized renewable electricity assets) is presented in Fig. 7:

Fig. 7. A simple asset-backed security demonstrating a waterfall distribution. Source: Authors.

There are numerous benefits to this profit and risk allocation structure, which is known as a waterfall distribution due to the fact that individual levels “spill” in sequence. The composition of an ABS is based on the riskiness of the assets contained within each level; for example, as shown in Fig. 7, the lower tranche would be more speculative and “equity-like”. It would likely contain the fewest number of securities, and in the event of default, it would be the first source of investors to incur losses.

There are signiﬁcant beneﬁts to an ABS. First, this structure expands the pool of potential investors. Each of the tranches would receive a different credit rating from a third-party agency. The senior tranche(s) may be investment-grade, meaning those institutional investors (and others) with investment mandates that restrict their investments to only high-quality assets are able to access them.

Second (and related to the first paragraph of this section), an ABS provides investors with risk management benefits. In the event of a default occurring in the underlying pool of assets, the first-loss tranche holders will incur the first set of losses. This tranche provides a sort of credit enhancement28, and the “tranching” process allows for return expectations to be the inverse of risk ratings. As each tranche assumes more risk, holders are compensated with progressively

28 Credit enhancement refers to the fact that holders of equity tranches voluntarily enhance the creditworthiness of the senior and mezzanine tranches, thereby allowing senior tranches to secure the higher credit ratings from credit agencies. 40

higher returns. Lower-risk senior tranches receive returns below the average return of the pool as a whole. This gives the senior tranches more of a debt proﬁle, while lower tranches behave more like equity.

ABS can also allow for capital to be released from corporate balance sheets that cannot hold them “on balance sheet” for reasons such as regulatory limitations or capital constraints. An illiquid asset may be worth more when it is transferred off a balance sheet, as it is now more liquid. Further coverage of the origins of the securitization process can be found in Giddy (2001).

Finally, ABS proliferation would allow multiple projects to be aggregated together, even if this brings some transaction costs29. This is obviously useful for individual solar assets, wind farms, and others facilities that may not meet the typical $100 million (or more) investment minimums required to attract the low-cost capital typically associated with an ABS. Very small projects, such as distributed solar arrays, would be especially well-suited to aggregation through securitization processes, provided that satisfactory measures could be undertaken to ensure standardization of the underlying contracts and homogenous creditworthiness of the generators. Table 5 provides details on two ABSs of leading distributed system installers - SolarCity (now Tesla) and Sunrun - with information on the nuances of their solar ABS launches. This table provides evidence of each of these pieces - note the strong credit ratings (i.e., at or around investment grade), the very large number of solar systems financed (ranging from 5033 - 16,400), and the substantial amount of capital raised ($54.4 - 201.5 million).

Table 5: Solar asset-backed security characteristics of two US solar companies. Source: Adapted by the authors from Bloomberg New Energy Finance (2015). (1) Tenor, spread and coupon correspond to the senior tranche of each securitization. (2) Tenor is the weighted-average life for the senior tranche of each securitization. (3) Spread is the basis point spread (bps) over the 7-year interest rate swap. (4) S&P rating for SolarCity 2013, 2014-1, and 2014-2; KBRA rating for Sunrun 2015-1 and SolarCity 2015-1 ABS.

29 Transaction costs in the renewable electricity sector includes items such as legal fees or “ﬂotation costs” - the latter being charged by investment bankers as fees associated with the underwriting and issuance of a new security. 41

Issuer SolarCity SolarCity SolarCity SolarCity Sunrun Deal 2013 2014-1 2014-2 2015-1 2015-1 Amount raised 54.4 70.2 201.5 123.5 111.0 (millions) Tenor (1, 2) 7.05 years 6.60 years 6.89 years 6.04 years 7.07 years Spread (1, 3) 265 basis 230 basis 180 basis 230 basis 230 basis points points points points points Coupon (1) 4.80% 4.59% 4.02% 4.18% 4.40% PV Systems 5,033 6,596 15,915 16,400 7,893 Total capacity 44 MW 47 MW 118 MW 108 MW 50 MW Residential portion 71% 87% 86% 100% 100% Overcollateralisation 38% 34% 27% 32% 24% Tranches Single Single Senior/Sub Senior/Sub Senior/Sub Rating (4) BBB+ BBB+ BBB+/BB A/BBB A/BBB Tax equity structure Sale- Sale- Inverted Partnership- Inverted leaseback leaseback lease flip lease Underwriter Credit Credit Credit Suisse Credit Suisse, Credit Suisse Suisse Suisse Bank of America Merrill Lynch

2.4.2. Pools and trusts

Like securitization, pools and trusts are public capital vehicles. However, unlike securitization, pools and trusts can beneﬁt from a lack of corporate taxation application if speciﬁc criteria are met. Two of the most promising opportunities for expansion in this regard, as well as an example already available in the markets, are provided below.

2.4.2.1. Types of pools and trusts

2.4.2.1.1. Master Limited Partnerships and Real Estate Investment Trusts

Master Limited Partnerships (MLPs) are a type of financing instrument that has successfully increased the number of investors in the oil and gas sector in the United States. It could be extended to the renewable energy sector. Investors in MLPs benefit from the advantages of a publicly traded corporation, such as limited liability for shareholders (meaning an individual cannot lose more than the principal of their investment) and corporate governance (such as a Board of Directors to oversee management), as well as the added benefit of a tax advantage. Indeed, the primary value proposition of an MLP is predicated on favorable tax policy. So long 42

as MLPs adhere to a set number of restrictions on revenue ﬂows, investors can avoid double (i.e., corporate and individual) taxation.

This beneﬁt is based on the fact that substantial majorities of tax-free yearly revenue are disbursed to external shareholders. The revenue must “pass through” to the shareholders, and to maintain this preferential treatment, external shareholders typically retain a 98% ownership interest. The “general partner” of the partnership, meanwhile, owns the remaining 2% (Toson, 2015). A typical MLP structure, wherein the Limited Partnership (LP) would hold an operating company that holds assets and maintains relationships with lenders, would resemble Fig. 8.

Fig. 8. Ownership composition of an MLP. Source: Adapted by the authors from Fenn, 2014.

The extension of MLP coverage to renewable electricity technologies would be a natural transition in the context of an MLP sector where the bulk (i.e., over 80% percent) of the capital is allocated to qualifying energy and natural resource projects in sectors like electricity transmission, gas pipelines, and upstream oil and gas projects (Coons, n.d.). Simple legislative changes (e.g. a 200-word change to the tax code) could open MLPs to the renewable electricity industry in the United States (Mormann & Reicher, 2012), with Feldman & Settle (2013) calling particular attention to the term “qualiﬁed income”. Recent actions are encouraging. Representative Ted Poe, a Republican, introduced the H.R. Master Limited Partnership Parity Act in June 2015 to the House of Representatives (United States Congress, 2015), building on previous work presented by Senator Chris Coons (the Democratic legislator that reintroduced an MLP expansion bill at the same time, according to Martin, 2015b). A precedent even exists for rapid extension of MLP coverage; in the 2008 Emergency Economic Stabilization Act, Toson (2015) explains that the deﬁnitions underlying MLP were expanded to include the storage and

transportation of ethanol, biodiesel, and other fuels.

Like MLPs, Real Estate Investment Trusts (REITs) are publicly traded entities (i.e., companies or trusts). These organizations typically own, operate, and - to a limited extent - develop income- producing real estate property. Common REITs include equity and mortgage REITs for the housing sector, while more specialized types that focus on sectors like hospitality or storage can also be found. REITs have been in use since 1960, primarily as a method of aggregating illiquid real estate equity and debt investments into real estate securities available to the capital markets that can distribute revenues back to investors (Martin, 2013). They are accessed by many different investors, and are prized for their liquidity and price discovery (meaning that the market determines their share value on an ongoing basis).

Like MLPs, a REIT relies on a tax-advantaged “pass through” to shareholders from the parent company's real estate revenues, thereby constraining the amount that can be reinvested into company operations (but allowing income to be taxed only once at the shareholder level). 3 key criteria must be met to maintain this pass through: at least 75% of gross income must come from rent or interest payments, at least 95% of income must be from passive sources (real property rent, interest, dividends), and - of particular relevance to renewable electricity - at least 75% of assets held must be “real property” (Martin, 2013). In the United States, IRS rulings on the term “real property” will be required for REITs to be applied to renewable electricity (which the agency has proven reluctant to offer). Legislative changes could also help.

2.4.2.1.2. Yieldcos

Urdanick (2014) has noted that yieldcos can sometimes be described as “synthetic MLPs”. A dividend-distributing, publicly-listed company, yieldcos combine different operational assets (with predictable cash ﬂows) into a single vehicle. The operational assets within a yieldco are often dropped down from a well-capitalized parent - typically a utility such as NRG Energy or Florida Power & Light - that beneﬁts from the cash received to re-invest in the parent company's operations (Motyka et al., 2015). Indeed, this parent company can act as a sort of funnel, with assets still under development held in the parent's structures until the construction or post-

construction period has elapsed and an asset has been suitably “de-risked” for downloading into the yieldco (Martin, 2013).

With an ability to access public markets, a generally lower risk proﬁle, and the potential to broaden attractiveness to investors through integration with the fossil fuel assets of the parent company, yieldcos distribute their relatively stable cash ﬂows by offering yearly or quarterly distributions to investors in the form of cash available for distribution (CAFD). A generalized CAFD calculation, adapted from Urdanick (2014), is presented below in Equation 7:

CAFD = QE – (I&TP + M&CE + PP) – R (7) where: QE = Quarterly Earnings I&TP = Interest & Tax Paid M&CE = Maintenance & Capital Expenditures PP = Principal Payments on Existing Debt R = Reserves for prudent conduct of business

It should be noted here that this cash distribution structure differs slightly from the MLP or REIT in that any earnings of the yieldco are taxable. However, through clever usage of depreciation and loss carryforwards, a yieldco can avoid taxation at the corporate/entity level, as well as - in some cases - at the investor level (further description of the nuances around this can be found in Martin, 2013).

It is important to note that yieldcos do not signiﬁcantly reduce ﬁnancing costs for new renewables projects (Nelson, 2015). A number of reasons explain this shortcoming, including the presence of high costs and fees when a yieldco is launched and the fact that investors tend to price yieldcos closer to equity rather than debt as a result of the inclusion of a premium in the publicly traded stock price for anticipated future equity appreciation (Nelson, 2015). As a result, yieldcos have recently fallen short of expectations and, in the discussions we undertook to shape this review, one of our respondents called for re-imagining a Yieldco 2.0, given that impactful public market vehicles must ultimately reduce the cost of capital.

2.4.3. Green Bonds

Bonds, also known as ﬁxed income investments, are long-term instruments used to allow for the extension of debt from creditors to borrowers. Green bonds are used for environmentally sustainable projects (including renewable electricity). No compulsory standards currently exist for Green Bonds, making the term subject to some interpretation. The International Capital Market Association (ICMA), an international self-regulatory ﬁnancial organization, has formulated voluntary Green Bond Principles (GBP). The Principles emphasize transparency and disclosure (ICMA, 2015) by following 4 key principles: i) Reporting on the use of proceeds; ii) Having a clear process for project evaluation and selection; iii) Ensuring traceability of proceeds within the issuer; and iv) Reporting of annual proceeds.

2.4.3.1. Bond types

2.4.3.1.1. Supranational and sovereign green bonds

At the macro-scale, large “green bond” offerings are becoming increasingly common. Supranational organizations such as the Washington, D.C.-based World Bank (which focuses primarily on developing countries) have been at the forefront of this movement (World Bank Green Bonds, n.d.). Clapp et al. (2015) observed that demand for many offerings exceeds supply, and strong interest has been expressed by both investors with socially and/or environmentally responsible investment preferences and mainstream investors that are focused on the yield of their investments. Such popularity suggests that a Treasury-directed green bond - that is, a bond offered by the U.S. government - is an intriguing opportunity. To date, however, there has been little movement on this front.

2.4.3.1.2. Innovative corporate bonds

Innovation can be a nebulous concept, but for bonds, we take it to be those bond offerings that go beyond the routine conventional corporate bonds of Vestas, First Solar, and other renewable electricity companies. These start with businesses that do not include electricity generation among core business functions but offer bonds earmarked for ﬁnancing their own renewable electricity initiatives. This opens up a pair of increasingly important segments in the renewable electricity; speciﬁcally, commercial and industrial customers, many of whom are well-positioned to act as alternative procurers for renewable electricity supply30.

2.4.3.1.3. State and municipal bonds

Municipal bonds are another avenue for funneling capital into the renewable electricity space. The $3 trillion dollar U.S. municipal bond market has traditionally funded community infrastructure (roads, sewers, and buildings), and this history can serve as the foundation for extension of debt to renewable electricity projects (Milford et al., 2014). Numerous schemes - taxable and tax-exempt - are currently in operation31. One scalable opportunity for distributed generation can be found in Property Assessed Clean Energy (PACE) financing. Under this scheme (which has been found in other iterations, such as land-secured financing districts), municipalities would initiate a bond issuance whose revenue stream is backed by a municipality's ability to charge property taxes (Ameli & Kammen, 2012). Building owners, in turn, repay their upfront loan for a renewable electricity installation (and/or energy efficiency and/or water conservation measures) through their annual property tax assessments, with a PACE assessment being a debt of property (meaning that the debt is tied to the property itself as opposed to the potentially changeable tenant – U.S. Department of Energy, n.d.).

30 Apple Inc., one of the most valuable companies in the world, recently undertook one such offering for $1.5 billion (Volcovici, 2014). This green bond will allow Apple to undertake company-wide renewable electricity initiatives, such as for electricity supply for data centers, and could allow for the avoidance of purchasing electricity from other suppliers. Through an adherence to the aforementioned GBP, the company's plans allocate the proceeds towards “expenditures related to new and ongoing renewable energy projects, such as solar and wind projects, or associated energy storage solutions”, as well as other initiatives such as material and energy efﬁciency (Apple Inc., 2016). 31 In 2013, the state of Massachusetts launched a $100 million dollar issuance that represented the ﬁrst state or local government Green Bond issuance. The State's Green Bonds Investor Impact Report called it a replicable success, as the offering was oversubscribed by 30% and received a bond rating (AAþ, Aa1, AAþ, depending on the rating agency) that matched the state's other general obligation bonds (State of Massachusetts, 2014). 2014 and 2015 saw substantial follow-up, with $10.5 billion USD being issued in 2015 as the U.S. surpassed supranational institutions such as the World Bank to become the largest single country source of green bond issuance in the world (Climate Bonds Initiative, 2015). 47

2.4.4. Green banks

Green banks work to close financing gaps and bring down the cost of capital - largely by taking advantage of the low-cost borrowing and risk-taking capabilities of governments (Leonard, 2014). The approach to a Green Bank can be tailored to the context of the region in which the Bank's mandate is concentrated. There is no uniform solution, and the banks in operation reflect this flexibility. For example, U.S.-based Green Banks are located in states (such as New York), with one smaller-scale region in the form of a county (Montgomery County in Maryland – OECD, 2015a). While models exist for the federal government (e.g. the (recently privatized) UK Green Investment Bank, the Japanese Green Fund, and the Australia Clean Energy Finance Center are national analogues – Schub, 2015), as of the date of writing no entity exists at the U.S. federal level.

The Green Bank model is intended to inspire investor confidence with public sector efforts that are specifically designed to be additive and inexpensive32. As such, it is a politically viable appeal to both the fiscally-minded and environmentally-oriented. To reach their goals, Green Banks can deploy a variety of different mechanisms. So far, credit enhancements, guarantees, and risk transfer have been some of the most favoured options. Some examples of potential Green Bank tools are provided in Table 6:

Table 6: Examples of Green Bank tools. Source: Adapted by the author from Leonard, 2014. Loan loss reserves A risk management arrangement that involves the repayment (by a Green Bank to the private sector) of a certain percentage of a loan in the event of a default. Subordinated debt A risk management tool that involves the bank taking a loss before the private sector financiers in the event of a default, thereby “subordinating” their creditor claim to assets in the event of a loss. Residential Programs (such as CT Solar Lease in the state of Connecticut, which products leverages insurance, loan losses, and other measures) that use the Bank’s tools to support renewable electricity deployment in residential settings. Warehousing A process that involves the aggregation of numerous loans into more readily investable “pools” of capital that possess more appeal for investors.

32 For example, in the case of the state of Connecticut, Leonard (2014) contends that a ratio of 10:1 is achievable (i.e., 10 units of private capital invested for every 1 unit of public capital expended). 48

Technology A form of credit enhancement that involves facilitating the extension of Guarantees credit to renewable electricity technologies that are incapable of attracting private finance on their own (perhaps owing to a limited operational history). Creation of Allows for the introduction of new funds tailored to the specific needs of specialized funds investors (e.g. tax equity funds). 2.4.5. Ramping up institutional investor involvement

Cost of capital considerations are central to renewable electricity, and tapping into the vast capital stores of institutional investors will be essential. But while institutional investors have a key role to play, barriers to their involvement are very real. Kaminker & Stewart (2012) identiﬁed several barriers to institutional investment: problems with infrastructure investments more generally, renewable electricity-speciﬁc issues, and a lack of appropriate investment vehicles.

The first problem begins with general infrastructure investment. Institutional investors operate on a total portfolio approach that emphasizes diversification. Direct allocations to infrastructure are less than 1% of current portfolios (OECD, 2015b), as infrastructure is simply a part of a broader institutional mindset that tends to look at how an asset behaves (as opposed to the asset itself) in an effort to ensure asset-liability matching and optimal returns. Moreover, institutional investors must adhere to the prudent person standard. This is a notion of fiduciary responsibility which holds that trustees of the fund must assemble their portfolio in the model of a ‘prudent’ investor. This emphasis on diversification and liquidity often limits the investments that institutional investors can make in renewable electricity projects.

Institutional investors are also concerned about the attributes of renewable electricity in particular. Investors may be required to pick between holding transmission and generation assets due to regulatory concerns. In addition, it is sometimes believed that the anticipated yields associated with renewable electricity are not commensurate with expected risks.

The ﬁnal issue pertains to a lack of acceptable investment vehicles. For example, institutional investors need liquid markets with strong ratings, but these have proven elusive. REITs, MLPs, and other options discussed in this paper hold some potential, yet their integration has been hamstrung by legislative and tax policy barriers. Yieldcos were believed to hold the solution, but 49

uptake has not been as sustained as the market had originally anticipated. Other issues pose a threat to viability. For example, Nelson (2015) ﬁnds that ﬁnancial regulations around solvency and accounting standards favour short-term holdings over longer-term plays like renewable electricity.

So what can be done to address these issues? Researchers from the OECD (2015a) found that financial de-risking (e.g. debt subordination, wherein particular lender types are repaid before others) and credit enhancement (e.g. wherein the creditworthiness of bonds is enhanced by a third party) tools are useful for bringing in institutional players and assuaging concerns around technology risk. Increasing co-investment, perhaps through partnerships with infrastructure funds or private equity firms, would also help better apportion risk. Non-financial drivers (e.g. socially responsible investing) may grow to play an increasingly significant role, even as risk- adjusted returns remain the core priority for the majority of investors.

2.4.6. Other innovations covered in the literature Increasingly, corporations are getting involved through voluntary renewables-oriented corporate PPAs. A survey by PricewaterhouseCoopers (PwC) of US companies investing in solar found that the most common reason for investing in renewables was to reduce the company's greenhouse gas emissions and meet sustainability targets (PricewaterhouseCoopers, 2016). Encouragingly for the trend's long-term sustainability, over 75% also identiﬁed the strong returns available in the renewable energy sector as a driver.

Mechanisms that harness technological means to democratize the spread of renewable electricity finance are a relatively recent transition, and they represent a useful method to access smaller retail investors. Crowdfunding models, which can be adapted to a range of project sizes (Lam & Law, 2016), possess advantages beyond their obvious ability to tap smaller contribution amounts from retail investors, as noted in a Deloitte report by Motyka et al. (2015): “[crowdfunds] do not require the extensive underwriting and filing processes of a typical public offering, and they provide a simplified, automated due diligence process…”. Community energy projects, such as

non-proﬁt co-operatives33, are also available. Recent U.S. tax rulings make further ownership of community-owned solar systems even more accessible going forward (Lemay & Wade, 2015). 2.5. Government involvement?

A preference for private property and capitalistic endeavor permeates the U.S. political and economic systems. Accordingly, this paper has mostly focused on large-scale private schemes, even though we have discussed distributed solar generation (which has the potential to be securitized into large transactions). Of course, the required investment levels could be readily absorbed by ramping up government direct investment. For example, government procurement of new renewable electricity, such as for publicly owned buildings, would be a relatively straightforward method to increase overall capital allocation to the sector.

In 2015, US Gross Domestic Product (GDP) grew 2.4% to nearly $18 trillion (International Monetary Fund, 2016). Nearly a third of this amount was directly related to government expenditures ($5.65 trillion – Office of Management and Budget, 2016). Single states (such as California) maintain government-related GDPs similar to entire countries, making individual state decisions important as well. Indeed, state-level governments are getting involved, such as in New York's push to develop various funds and technology catalyzers (Ottinger & Bowie, 2015).

All levels of government could do more. At the federal level, efforts backed by the full credit of the United States government need not be excessively burdensome. If federal debt were required to support renewable installations, the U.S. government benefits from extremely low borrowing costs; as of the date of original writing, 20-year Treasury yields are currently around 1.7% (U.S. Department of the Treasury, 2016). A Keynesian stimulus involving moderate additions to existing deficits (akin to the promise of investing $20 billion over 10 years by neighbouring Canada's Prime Minister Justin Trudeau – Liberal Party of Canada, 2015) that would allow renewable electricity infrastructure to be prioritized for government investment would be a fiscally prudent pursuit.

33 In the nearby Canadian Province of Ontario, SolarShare has over 1000 members (including one of the authors) investing in large-scale solar energy installations through short and long maturity Solar Bonds (SolarShare, n.d.).

Another excellent starting point would be to simply remove fossil fuel energy subsidies34 and re- allocate these dollars to renewable electricity deployment or innovation. Other options include changes to tax laws (especially the closing of tax loopholes or charging carbon taxes) or ﬁscal measures (such as tax increases and/or the use of government debt35). Harrison (2015) argues that many of the key tax subsidies for fossil fuels should be amended to include renewable electricity, with an especially intriguing option being subsidies that encourage the installation of renewable electricity in difﬁcult environments (similar to upstream exploration incentives for the oil and gas industry).

2.6. Conclusion

This article has sought to introduce private renewable electricity financing, as practiced in the United States, by reviewing a range of financing and policy drivers, as well as some of the most important potential opportunities on the horizon. The renewable energy sector continues to evolve, pushed forward by the same combination of policy, technology, and economics that has defined other energy transitions. Future research will face a new normal; for example, demand for electricity storage technologies may explode (with concurrent increases in demand for private finance), while regulators may curtail the growth of distributed electricity generation business models (Motyka et al., 2015). Natural gas prices may stay low, potentially inhibiting renewables growth, or they may rise (making renewable generators the clear low-cost option). In the absence of coordinated planning and funding by relevant energy agencies, it will be necessary for flexible financial innovation to help in meeting potential volatility.

A number of changes should be implemented to ensure that the positive momentum for private renewables ﬁnance in the United States is maintained. Over the course of preparing this review, we engaged with numerous industry and academic experts, who not only provided additional considerations for the many sections of this paper, but also proffered recommendations for change. In particular, they emphasized the following:

34 These domestic subsidies are conservatively estimated by the U.S. Department of the Treasury (2014) at $4.7 billion, or approximately 1% of the International Energy Agency's (2015) global estimate of $490 billion. 35 The Congressional Research Service has exhaustively compiled a list of energy tax policies in the United States, found in Sherlock & Stupak (2016). 52

1) There is no shortage of demand for capital - this represents an opportunity for less conventional players to get involved in the space, as is already happening in the corporate PPA market. This incessant demand in the face of limited supply calls for more innovation in the capital markets than has been seen to date. 2) Simplicity may be key, as respondents in our discussions routinely emphasized the importance of streamlining information flow (a good heuristic being “the easier the deal, the lower the cost of capital”). 3) Uncertainty disturbs the growing renewable sector financing opportunities (especially retroactive changes, such as the recent changes in net metering rules in Nevada), given that they occur in an era that already maintains legal risk (The Economist, 2016) and unpredictability around additions to the generation fleet. Policy stability is essential, as Davies & Diaz-Rainey (2011) have shown empirically. 4) Tracking performance-related data (such as degradation, soiling, and operational issues for solar photovoltaics) is essential to easing lender or tax equity concerns.

Non-financial research can help here. Policy specialists need to work in concert with economists to ensure that policies are not susceptible to the start-stop mentality that, all too often, has defined the renewable electricity space in the US. Minimizing unintended consequences can help; policy designers in other spheres (economic competition, financial regulation, environmental planning) should ensure that their proposed solutions do not impede renewable electricity financing viability. System planners need to enhance the current system of planning and coordination. Engineers and other technical researchers have a special role to play; for example, Stadelmann et al. (2014) draw attention to the importance of continuing to develop dependable and long-term solar irradiation databases for concentrated solar thermal power plants.

Overall, interdisciplinary mindsets will be essential to solving these challenges, as ﬁnance is only one piece of the broader puzzle. These matters take on a special urgency when considering anthropogenic climate change and the collective duty to address our most pressing environmental challenges.

Chapter 3 Renewable electricity finance in the resource-rich countries of the Middle East and North Africa: A case study on the Gulf Cooperation Council 3.1. Introduction

This paper reviews options for financing the deployment of renewable energy in the Gulf Cooperation Council (GCC) nations (consisting of Saudi Arabia, Qatar, the United Arab Emirates (UAE), Kuwait, Oman, and Bahrain), which are part of the broader Middle East and North Africa (MENA) region. It is a companion to a similar review of renewables financing in the United States (US) (Krupa & Harvey, 2017), which is also published as Chapter 2. The motivation for deploying renewables in the resource-rich countries of the MENA region is multi-fold. Major reasons include addressing increasing domestic energy demand (El-Katiri & Husain, 2014), freeing up domestic oil/ gas resources for export (Lahn & Stevens, 2011), shaving off the need for additional peaking plants (which are sometimes operating at, or close to, maximum capacity) through the integration of solar technologies (which produce energy at the same time as demand spikes for air- conditioning), and reducing the need for grid capacity enhancement (given that renewables can be situated closer to load). Other benefits that are linked to renewable energy include more sustainable trade balances (as a result of harnessing an endogenous energy source36), economic diversification (a priority in recent years after the oil price collapse – see Griffiths, 2017), creating high quality jobs, achieving energy security, spurring new business enterprises (Sarant, 2015), reducing risks associated with climate-altering greenhouse gases (Wagner & Weitzman, 2016), reducing the burden associated with fossil fuel energy subsidies (Coady et al., 2015), and addressing the crippling air pollution affecting the region's urban areas (El-Katiri & Husain, 2014).

Perhaps the most critical recent development inﬂuencing renewables penetration can be found in the drastic capital cost reductions that renewables have experienced. Estimates vary (largely depending on which estimation approach is used - total reported costs or aggregated component costs - according to Marcy, 2018), but the undeniable overall trend is sharply downwards. The

36 It is often assumed that MENA states do not import oil and gas, but this is not the case. Kuwait and the United Arab Emirates - two of the world's largest hydrocarbon exporters - rely on LNG imports for electricity (El-Katiri & Husain, 2014). 54

National Renewable Energy Laboratory (NREL) provides illustrative inﬂation-adjusted data for solar photovoltaic (PV) installations (in US dollars, or USD) in Table 7.

Table 7: Price changes for various solar technologies from 2010 to 2017. Source: Adapted by the authors from US-based data in Fu et al., 2017.

Solar technology configuration Price change ($USD), 2010-2017 Residential PV (5.7 kW) $7.24 W DC to $2.80 W DC Commercial PV (200 kW) $5.36 W DC to $1.85 W DC Utility-scale PV, fixed tilt (100 MW) $4.57 W DC to $1.03 W DC Utility-scale PV, one-axis tracker (100 MW) $5.44 W DC to $1.11 W DC

While other renewable energy technology costs have not dropped as low or as quickly as solar photovoltaics, learning rates industry-wide are clear. The International Renewable Energy Agency (IRENA) (2018) contends that wind turbine prices (a significant component of total installed costs) have fallen by approximately half over the same period, leading to a nearly 25% reduction in onshore wind cost, with 2017 costs of $0.06/kWh (USD). Dykes et al. (2017) argue that advances in supercomputing technologies and sophisticated atmospheric measurement capabilities will spur further advances, and that multi-pronged levelized cost of electricity (LCOE) reduction pathways show that the floor (possibly $0.023/kWh, with an estimated range of $0.019/kWh to $0.032/kWh, by 2030) has still not been realized. IRENA (2018) also finds that, while Concentrating Solar Thermal Power (CSTP) trends are more difficult to precisely lay out (largely arising from complications around market and project-specific conditions), CSTP will be increasingly competitive with lower-cost fossil fuel facilities by 2020. A current CSTP tender in the GCC - $0.073/kWh - provides a proxy of the current state of that sector, and will be covered further later in this review.

With an eye to taking advantage of such trends in the short-term, several of the states in the MENA region initiated modest plans out to 2020. Qatar, for example, intends for renewable electricity to meet 16% of total power generation by 2020 through the deployment of 1800 megawatt(s) (MW) of solar power capacity (Smiti, 2016), while Kuwait is seeking 5% renewables in the generation mix by 2020 (Oxford Business Group, 2015). Iran's government plans to integrate 5000 MW of installed capacity of renewable power into the current 74 GW (gigawatt(s)) system in the next ﬁve

years37. The Emirate of Dubai in the UAE is aiming for 7% of energy from clean sources in the broader energy mix through the Dubai Clean Energy Strategy (Everington, 2016). A full listing of on-grid MENA renewable energy (RE) capacity (along with a further breakdown of grid- connected solar and wind), as well as off-grid renewable energy capacity, can be found in Table 8. Total installed capacity is also included in Table 8 for comparison.

Table 8: MENA renewable energy capacities (MW) at the end of 2016, broken down by total RE, solar, wind, and off-grid, along with total installed capacity as of 2015. Source: Renewables-related information adapted from IRENA (2017b), along with Wogan et al. (2017) for GCC country total capacities and the United Nations Statistics Division (2017) for remaining country total capacities.

MENA On-grid Solar Wind Capacity Off-grid Total Country RE Capacity Capacity RE Capacity Installed Capacity Algeria 536 250 10 234.9 20,687 Bahrain 6 5 1 0 2800 Egypt 3660 59 750 44 39,544 Iran 10,606 32 117 2.9 74,185 Iraq 2291 17 0 17.8 31,111 Israel 852 822 6 0 17,221 Jordan 493 295 185 0 4455 Kuwait 41 31 10 0 18,300 Lebanon 303 11 1 0 3533 Libya 5 5 0 5 9455 Morocco 2309 205 798 21.3 8155 Oman 1 1 0 0 7800 Palestine 14 14 0 0 140 Qatar 44 6 0 0 8600 Saudi Arabia 48 48 0 0 80,500 Syria 1572 0 1 0.6 9122 Tunisia 348 37 245 1.5 5447 United Arab 139 138 0 0 29,000 Emirates (15,500 in Abu Dhabi) Yemen 30 30 0 0 1519

While we will occasionally reference general MENA examples, our paper will be focusing on the GCC. Comprised of the six resource-rich monarchies of Saudi Arabia, Qatar, UAE, Oman,

37 Due to past economic sanctions, renewables growth has been slow in Iran. 56

and Bahrain, these countries include the global swing producer (Saudi Arabia) and several of the world's largest fossil fuel deposits. These fossil-oriented nations are increasingly attracted to renewable power deployment and, given the signiﬁcant amount of renewables-related activity recently undertaken in this region (as discussed later in this paper), a case study on the ﬁnancing underpinning their renewables expansion seems overdue.

In the near-term, Table 8 shows that, while relative momentum is strong, current renewables generating capacity represents a small fraction of the total installed capacity (both in the GCC countries specifically and in the MENA region as a whole). Planned longer-term action is significant and more ambitious. Iran hopes to expand its current total installed power capacity from 74 GW to 120 GW by 2025, with a great portion of this growth coming from renewables (Hubeaut et al., 2016). Saudi Arabia (the only GCC state to register in the top 40 of a recent iteration of the global Renewable Energy Country Attractiveness Index (RECAI), according to Ernst & Young (2015)38) is planning large manufacturing facilities for solar components, while that country's state-owned oil giant Saudi Aramco intends to build numerous renewable electricity projects to complement the 9500 MW of renewables deployment (likely from a combination of private sector and public-private investments) called for in a document entitled Vision 203039. The United Arab Emirates plans to expand the existing Mohammed bin Rashid Al Maktoum Solar Park from the current 213 MW capacity40 to over 5000 MW by 2028, according to Proctor (2017) (a significant increase from the original 2028 target of 3000 MW - see Bkayrat, 2016). Kuwait, meanwhile, has declared similarly ambitious targets (4500 MW of solar and wind energy by 2030, according to Bkayrat (2016)), which represents enormous growth from the current 31 MW solar capacity and 10 MW wind capacity.

While there is little doubt about the beneﬁt of renewable electricity for the region, renewable integration will probably not be straightforward. This is mainly due to a limited history of

38 Although it was present on the RECAI in 2015, Saudi Arabia is not found on recent iterations of this industry report (Ernst & Young, 2016; Ernst & Young, 2017b), even as the 2017 iteration saw the addition of resource-rich Algeria. 39 This calls for a revamping of industrial policy, the partial privatization of state-owned energy producers, and - of particular relevance to this piece - a wide array of renewables-related measures, including the localization of the renewable energy value chain in Saudi Arabia, the initiation of public-private partnerships, and the gradual liberalisation of fuel markets (Al-Arabiya, 2016). 40 We note that this constitutes only a small percentage of a national portfolio which includes solar projects such as Masdar's 10 MW plant and the Shams 1 100 MW plant concentrated solar thermal plant (discussed later in this article). Further expansion is planned. 57

renewable electricity development in the region, as well as the risks (technical, policy-related and ﬁnancial) involved with sustained buildouts. To unlock private investment, the issue of ﬁnance needs to be addressed - not least because the capital cost constitutes the bulk of renewables' total costs (primarily due to non-existent fuel costs, which keep operating expenditures to a minimum once a renewables project is running).

Yet despite the centrality of ﬁnancing in ensuring greater private sector involvement in renewable electricity in the region, the topic has been conspicuously under-represented in the literature. To address this shortcoming, this paper presents some key issues for consideration when examining the future financeability of new renewable builds in the region. Specifically, at the root of our inquiry lies a simple pair of questions: what makes a renewable energy project ﬁnanceable, and what can the nations of this region do to create vibrant financing markets for renewables?

We will be focusing here on the key measures that entice private investors (rather than straightforward direct government investment) as we anchor our analysis in the GCC countries to draw out implications for the resource-rich nations of the broader MENA region. At this juncture, it is worth offering our support for Sgouridis et al. (2013), who contend that deployment could be fully or partially met in select instances through directly allocating fossil fuel export revenues to renewable electricity capital expenditures. If debt needed to be raised, governments are able to borrow at remarkably low cost, and could funnel substantially more capital into the clean energy space if the political will is present. However, from a global perspective, the public sector has historically shown a reluctance to fund climate finance at the necessary scale (including renewables), with a total allocation in 2016 of 34% of total climate finance flows, according to Buchner et al. (2017). It seems unlikely that the GCC will deviate from this well-trodden course.

Therefore, we assume that, while private finance may not always be able to obtain financing rates equivalent to those of direct government investment, this trend of greater private finance will continue. Similar to the OECD, we assume that private sector capital will be necessary to meet the scale of the requirements for clean electricity supply (OECD, 2015b). The next section outlines the factors affecting renewables finance and discusses the experience of the region in this respect. Section 3 reviews three case studies on recent renewables-related investment initiatives in the region. Section 4 offers a set of policy recommendations to improve financeability of renewable projects in the GCC. The chapter concludes in Section 5.

3.2. Financing renewables in the GCC

3.2.1. What makes a project ﬁnanceable?

The finance structure of a particular renewables project is a combination of debt and equity. Debt is the portion of the project that is provided by external lenders and supported by either the creditworthiness of the corporation as a whole or a specific project's financial flows, while equity (direct ownership in the project or company) gives access to profits from a given venture (Krupa & Harvey, 2017). If the state utility company (or another large energy firm) develops the renewable energy project, these actors may decide to use corporate finance (wherein a company uses a combination of access to debt and its own internal resources, with as much as 100% ownership being possible when sufficient assets are present on a company's balance sheet41). Although corporate (or balance sheet) finance is usually more straightforward, the parent company sometimes may not have a strong balance sheet to use as collateral, or for some other reason it may not want lenders to have recourse to its capital and assets. In this situation, project finance, wherein financing is tied to the cash flows associated with a particular project, is the alternative method of choice. Over the last ten years, project (or asset) finance has become increasingly popular in the renewables industry (see Fig. 9)42.

41 A balance sheet is defined by the equation Assets = Liabilities + Equity (given in Chapter 2 as Equation 6). It is a financial statement that presents a comprehensive picture of the financial position of a firm at a given time. 42 See Steffen (2018) for a detailed examination of the criticality of project finance for renewable energy technologies. 59

Fig. 9. Asset finance as a percentage of overall new investment in renewable energy, 2004- 2016. Source: Adapted by the author from data found in Frankfurt School – UNEP Centre/BNEF (2017).

There are other methods as well, such as green bonds, but their share in global asset ﬁnance for new renewable energy is negligible. In this discussion, we will focus primarily on asset ﬁnance.

Financing renewable projects requires securing the right conditions. As demonstrated earlier, costs for renewables have fallen to such a level that investment in renewable energy is appealing (and particularly so when anticipated further digressions that result in lower costs at the time of actual construction are taken into account). If a favourable economic environment complements technology-driven changes in costs, mobilizing the necessary capital is not difﬁcult - money tends to follow the right conditions. However, putting every requisite component in place to ensure that sufﬁcient capital is allocated to the renewable energy sector can be challenging.

Generally, several key criteria must be met to ensure ﬁnancial sector interest in the non- liberalised electricity markets (i.e., those markets that do not have a range of competitors vying to supply a market with electricity) found in the countries of the GCC43. First, a renewable

43 Typically, in energy finance fuel supply agreements would also be relevant, but as previously noted, a major benefit of renewables is that there is no fuel input requirement (except for biomass, a technology generally not heavily deployed in the GCC). 60

project needs to have a sustainable stream of revenue (that is, clarity around business model adequacy, which can be guaranteed by a long term power purchase agreement (PPA)), grid access (that is, guaranteed grid access, priority dispatch (if necessary), the technical capability of system operators for grid operation, and favourable network codes44), the ability to provide appropriate documentation (such as an Engineering Procurement Construction (EPC) agreement, a site lease agreement, an Operations and Maintenance (O&M) agreement, an equipment supply contract and a technology license agreement) and, ﬁnally, a level of risk which is proportional to the return on capital (supported by access to risk mitigation instruments). Figure 10 presents a typical renewable project ﬁnance structure and all the associated agreements that would need to be in place before a project can proceed. We note that the analytic framework provided here does not cover all the areas highlighted in this Fig. 10 (which covers the spectrum of requirements in project finance). However, we have included it here to show the requirements generally inherent to project finance - the dominant form of renewables financing.

Fig. 10. A typical renewable project finance structure. Source: Adapted by the author from Groobey et al. (2010).

44 By network codes we refer to the technical requirements of renewable integration, including dispatch rules, balancing obligations, and ancillary service provision requirements (among others). 61

The appropriate business model for renewable projects is a function of a government's renewable policies (that is, how it incentivizes renewable investment and whether these incentives are attractive enough for investors), ﬁnancial market pull (due to cost-competitiveness), or a combination of the two. For a detailed discussion of these concepts, see Poudineh et al. (2016). Other factors, such as a supportive ﬁnancial infrastructure, the presence of creditworthy EPC contractors, and access to the site, are also important.

Perhaps the most useful method for conceptualizing the criticality of ﬁnance to renewable electricity can be determined with reference to the denominator of the simple equation used to determine the levelized cost of electricity (LCOE). Although the LCOE is a somewhat crude measure for determining electricity cost (for example, it does not incorporate all costs of ﬁnal delivered electricity, including back-up generation, ancillary services and transmission and distribution (T&D)), the equation for the LCOE covered in Chapter 2 as Equation 3 is illustrative for our purposes:

(8) where:

O&Mt = Operations and Maintenance (O&M) ($/kW in year t)

Ft = Fuel cost ($/kW in year t)

Et = Electricity output (kWh/kW in year t) r = Discount rate n = Lifespan (years) of the project

This equation gives the LCOE as the ratio of the discounted present value (“present” being the time of initiation of electricity production) of initial and all future costs to the discounted present amount of all electricity generated. The denominator within each summation term reﬂects the discount rate - a factor which is reliant on a proportionately weighted combination of returns required by equity investors and the lending rates of creditors. For fossil fuels, It may be relatively small and largely in year 1, while Ft is nonzero but spread over the project lifespan. For renewables,

It may be large and mostly in year 1, while Ft 0. Thus, there will be little to no discounting of the

total costs of renewable energy. For both fossil and renewable electricity, future electricity production is discounted.

Thus, as shown by Ondraczek et al. (2015) and Helms et al. (2015), small changes in the discount rate (a variable dependent on a wide mix of assumptions on risks, sources of funds, and policy or political frameworks) can have large impacts on the cost of renewable electricity generation. Tables 9-11 lay out this impact using GCC-speciﬁc data, starting with a baseline discount rate.

Table 9: Components of LCOE for a 100 MW fixed solar photovoltaics array under three cases, assuming a 99% availability factor and a 20.5% capacity factor. Source: Author using representative regional data.

Table 10: Components of LCOE for a 100 MW onshore wind park under three cases, assuming a 99% availability factor and a 35.0% capacity factor. Source: Author using representative regional data.

A simple heuristic is that the lower the cost of capital, the better the prospects for an investment's ﬁnancial attractiveness and, in turn, execution. However, arriving at the lowest possible rate requires an understanding of the factors ﬁnanciers assess when determining whether to invest in a project.

Overall, the factors that affect the ﬁnanceability of renewable electricity projects in the countries of the GCC can be categorised as business model adequacy, grid connection and management, risk and uncertainties, and other factors related to project development (see Figure 11 for more detail).

Fig. 11. Factors that generally affect the financeability of renewable projects. Risk and uncertainties are major barriers to financing renewables, as these directly affect the cost of capital and financeability. The risks of renewables projects include political risk, policy and regulatory risk, counterparty risk, currency and liquidity risk, and technology risk. In the following section, we further explain the factors affecting renewable electricity financing in the context of GCC countries.

3.2.1.1. Business model adequacy

As renewable energy generation is competing with end-user energy prices that are heavily subsidized in the oil-rich countries of the GCC (albeit less so going forward)45, investment will

45 The International Monetary Fund (IMF) (2017) has prepared a detailed list of the enormous range of energy price adjustments that have been undertaken across the GCC (and MENA more broadly). Notable GCC examples related to fuels and electricity include 100% price increases during January 2015 for diesel, kerosene, and other fuel

not take place based purely on price signals and market incentives. Poudineh at al. (2016) ﬁnd that a renewable support policy for GCC countries needs to satisfy a set of criteria such as compatibility with the single buyer structure of the electricity system in the region (further outlined in the next paragraph), harmony with the existing institutions, suitability for the scale of the project (i.e., where a project falls on the size spectrum of small-scale residential solar to utility-scale with tracking capability), coverage of economic risks, and the provision of efﬁciency.

There are various potential support schemes that government can adopt. These are appropriate for governments seeking to further promote a maturing renewables industry (e.g. a feed-in tariff (FiT) or renewable portfolio standard (RPS)), or those looking to incentivize early-stage innovation (e.g. government grants for venture-like renewables investments). While a critical enabling function that governments can serve is to support the early stages of a technology's maturity, it is worth noting that the public sector's involvement can extend beyond higher-risk nascent technologies. In a description on how different ﬁnancial actors in both the public and private sphere can possess differing willingness to invest in renewables, Mazzucato & Semieniuk (2018) argue that public actors have an important role to play “downstream” in the renewable energy deployment process. This is, as we will show later, a process already well underway in the GCC, with companies such as Masdar ﬁnancing the deployment of established technologies at scale.

The structure of the power sector in almost all countries of the GCC is a variant of single buyer, in which the state utility is the counterparty (i.e., the entity on the opposite side of the transaction from the private sector actor) for electricity supply contracts with the private sector. Under this structure, there are two ways to engage private sector actors. One model involves the utility company owning the renewable generation facility and contracting a private sector developer to construct and/or operate and maintain the system. The second approach involves a private sector

products (as well as increases for petroleum) in Kuwait, continual price increases in gasoline and diesel (as well as consumption-linked electricity price increases) in Qatar, gasoline and diesel price increases in Oman, gasoline and diesel price increases in Saudi Arabia, gasoline and electricity tariff increases in Bahrain, and a new fuel subsidy termination in the UAE (with a formula that is linked to world prices and subject to automatic monthly adjustment). In some instances, specific user groups were targeted (such as foreign nationals living in Kuwait), or only certain regions received an increase (such as the 40% increase implemented in Abu Dhabi, one of seven Emirates making up the UAE). 66

developer owning and operating a generation facility, and then selling the energy to the utility company.

The latter approach, which is known as the independent power producer (IPP) model, is becoming increasingly popular in the region. The reason for this popularity is simple; namely, that the IPP approach brings in private sector skills, management and resources for investment in renewables generation. At the same time, it avoids the need for the government to pay the upfront capital cost, and thus reduces pressure on the public budget. If the IPP model is the method of choice for renewable electricity promotion, a systematic comparison of different incentive models by Poudineh et al. (2016) shows that the most efficient scheme that satisfies all the aforementioned criteria for support policies is an auction that awards a PPA (potentially linked to a pre-defined escalator over time) to the lowest cost developer.

The aforementioned single buyer structure found in the GCC electricity industry does not support incentive models that require a liberalised electricity market with many buyers and sellers (such as the renewable portfolio obligation model based on Renewable Energy Certificates (RECs), the approach favoured in the US), and renewables investment is still considered too risky without a long-term guaranteed purchase agreement. A PPA alleviates issues (especially higher risk) associated with market price fluctuations if power markets in the GCC region become liberalised during the lifetime of the project. The term of the PPA should exceed that of the loan (typically 20-25 years into the future) and provide the comfort that enforceability and contract security provisions are in place. This allows private investors to feel confident that, in the event of a policy shift or other such change, the off-taker's (i.e., buyer's) willingness to honour the contract will not be compromised.

3.2.1.2. Grid connection and management

Grid access guarantees are important, as they provide assurance that the project will not be hindered at the connection stage. In relation to the network, there are two important questions from the IPP entity's perspective: ﬁrst, identifying who is responsible for grid interconnection and grid reinforcement, and second, identifying who bears the costs. Under the scenario that a given power buyer does not have sufﬁcient resources or wants to avoid paying damages in the

case of a construction delay, the IPP may be required to pay transmission costs (necessitating competitive tendering to guarantee the best price). In general, the network connection costs can be paid by the project developer (i.e., the IPP), covered by the off-taker (e.g. state utility or government), or shared between the two.

The most important point for IPP entities, however, is whether they can recover grid connection costs through tariffs. This is because the method of allocation for network connection costs has an important impact on the incentives to investors. A deep connection charge describes a situation where an IPP pays for connection to the grid (and all the necessary network reinforcement stemming from this generator connection), whereas a shallow connection charge is found when an IPP pays only for connection to the nearest grid point. Depending on whether deep or shallow connection charge methods are adopted, the cost of the project to the IPP can vary.

The other important grid issue that can adversely impact the revenue stream of renewable electricity generators is curtailment. This happens when the power system does not have sufficient flexibility and resiliency, or grid operators lack the competency to manage variable generation. Therefore, evidence of competently managed and stable grid systems that are capable of handling voltage fluctuations and other inherent by-products of intermittent renewable energy generation is beneficial46. For non-dispatchable generators such as wind and solar, the PPA should have a provision that when their energy is not needed because of either market conditions (for example, demand changes, infusions of energy supply from other sources, or inaccurate forecasting) or grid issues, the off-taker compensates the IPP47. Furthermore, depending on the type of renewables incentive (production-based or investment-based) and stage of market liberalisation, priority dispatch and a favourable network code (with stipulations such as exemption from balancing responsibility) may be necessary.

Currently, all GCC countries allow for third party access to the electrical grid, and there are dedicated agencies to authorize such licenses. For example, Kuwait's Ministry of Electricity and

46 In certain instances, this can be managed through risk allocation processes that pass risk to the off-taker in the event of a controllable grid disruption. 47 If the generator is dispatchable, such as in the case of hydroelectric generators, then the tariff structure usually includes a capacity charge and an energy component based on the amount dispatched. 68

Water (MEW) authorises connection to the grid for renewables and provides a guideline regarding design and procedural requirements (as well as safety features, experience, and responsibilities). In Qatar, Qatar General Electricity & Water Corporation (known by the acronym KAHRAMAA) facilitates grid connection. Unlike Qatar and Kuwait (where connection rules are relatively straightforward), MENA countries such as Algeria (and, to some degree, Iran, UAE and Saudi Arabia) possess more detailed network codes that are developed to facilitate the connection of renewable electricity generators. Connection rules, including those relating to cost sharing, priority access and priority dispatch, vary from country to country.

In Saudi Arabia, National Grid Saudi Arabia (NGSA) applies a shallow connection charge approach, but does not provide priority dispatch and/or priority access. In the case of Iran, the developer pays the cost of connection to the nearest grid point, and the regional distribution company provides guaranteed access when a generator needs to become connected to low voltage systems. The grid code of Algeria provides guaranteed access and priority dispatch, as well as grid cost sharing in a more generator-friendly way. Under Algeria's model, the IPP is responsible for the grid costs only after the first 50 kilometres (km) of grid connection lines (in the case of a transmission network) and after the first 5 km (in the case of a distribution network) (Clyde & Co., 2014). Such an approach is helpful for competition because renewables are more constrained by their location than thermal generation (for example, consider the requirement of placing on-shore wind farms in windy locales compared to the geographic indifference of a gas- fired generation plant). A summary is provided below in Table 12.

Table 12: Access to grid in key MENA countries. Source: Author. Country Third Authorising agency Grid connection rules/regulation party grid access? Saudi Yes National Grid Saudi A full set of grid connection rules has been Arabia Arabia (NGSA) developed. It applies a shallow connection charge approach, but does not provide priority dispatch and/or priority access. Kuwait Yes Kuwait’s Ministry of Recently, a set of grid codes has been Electricity developed covering transmission, and Water (MEW) distribution and metering. These determine the requirements for connection to, and use of, the existing electricity network infrastructure.

UAE Yes Abu Dhabi Water and There is a detailed set of connection Electricity Authority conditions which specify the minimum (ADWEA) and Dubai technical, design and Electricity and Water operational criteria which must be complied Authority (DEWA) with by the Transmission Network Operator at connection sites and by users connected to, or seeking connection with, the transmission system. Qatar Yes The Qatar General Some rules for connection to, and operation Electricity & Water of, the transmission grid have been Corporation developed. (KAHRAMAA) Algeria Yes Algerian Electricity and The grid code of Algeria provides guaranteed Gas Regulation access and priority dispatch, as well as grid Commission (CREG) costs sharing in a more generator-friendly way. IPPs are responsible for the grid costs only after the first 50 km of grid connection lines (in the case of a transmission network) and after the first 5km (in the case of a distribution network) Oman Yes Oman Authority for Some rules for connection to and operation of Electricity Regulation the transmission grid have been developed. (AER) Iran Yes Ministry of Energy There is a full grid connection rule. The & Iran Power Generation developer pays the cost of connection to the and Transmission nearest grid point, and the regional Company (TAVANIR) distribution company provides guaranteed access when a generator needs to become connected to low voltage systems.

3.2.1.3. Risk mitigation issues

There is a range of risks facing renewable generators for which appropriate risk mitigation instruments are required - some of which are linked to the type of technology being deployed (Agrawal, 2012). Political risk mitigation measures are a central consideration for MENA (Komendantova et al., 2011), although the degree of exposure of investors to political risk varies from country to country. The same applies to policy and regulatory risks. Perceptions of high- risk - such as policy inconsistency, gaps in the development lifecycle, or the potential for abrupt regulatory revisions - increase the equity returns that investors demand and the interest rates charged by lenders. In principle, any change in policy, law or regulation must not alter the ﬁnancial position of the IPP during the term of its PPA. Any changes would require a tariff

adjustment (a mitigation mechanism which may be required to neutralise the effect of policy change), with the additional caveat that policymaking perceived as unreliable will likely discourage investment altogether. Sending indications of policy stability, such as multi-year policy directions with reasonable digressions or step-downs over time, is a must for ensuring sustained private sector involvement.

Additionally, clarity and simplicity in defining key policies (such as local content needs) are also essential. In the GCC, states are understandably keen to bring lasting benefits to their citizens, and have explicitly stated that they wish to enhance the capacity of locals. However, investors must be confident that a project will not be blocked by a lack of access to domestically produced parts, a shortage of qualified local human capital, or other similar barriers that stem from a national interest in domestic capacity-building.

Moreover, the presence of a creditworthy counterparty buyer in each renewable energy transaction that will ensure reliable purchase of all generated electricity (along with timely payment) remains one of the single most important factors. Ideally, this would be enhanced by a government guarantee, or other similar credit enhancements. In terms of risk allocation, the off- taker should bear the risk of energy generation not being needed or being curtailed for technical or market reasons, while at the same time not paying for capacity that is not made available by the IPP.

Another key issue is foreign currency exchange risk mitigation. This is a problem in the wider MENA region, although we note that it is currently not a serious concern in the GCC due to a monetary policy that pegs local currencies to the US dollar48. In certain countries (such as Iran or Algeria) that exhibit currency risk, appropriate risk mitigation instruments need to be provided. This includes the implementation of ﬁnancial instruments that can be rooted in a track record of successful extra-jurisdictional implementation, such as using derivatives, future currency swaps, or currency hedges that can mitigate against sharp devaluation risks (Shrimali & Reicher, 2017). In addition, investors and lenders expect the payment currency to be easily convertible to the

48 In the broader MENA region, this has been a key point to address. As an example, in Morocco this potential barrier to investment was mitigated through the introduction of US dollar-denominated power purchase agreements. Currency risk may one day emerge as an issue if the GCC nations opt to let their currencies float. 71

debt currency (for example, a developer would be able to set up a reserve off-shore account to service debt backed by government assurances on currency convertibility) with no limitation on the transfer of funds abroad.

Furthermore, ease of transactions is critical. Most renewable energy assets are illiquid, meaning that they cannot be easily sold to secondary market buyers. Conditions for the transfer of obligations need to be clearly speciﬁed, and transaction costs should be kept low through ensuring that there are mutually beneﬁcial avenues for asset sales in the event an initial investor wishes to dispose of a given asset. While many investors are willing to hold illiquid assets, they expect not only to be compensated with higher returns for holding these slower-to-transfer assets, but also to have readily accessible routes for an exit.

A strong pipeline of projects with a lengthy operational history is another core consideration. Investors are concerned about technology risk, preferring well-established technologies backed by years of pre-construction testing for solar irradiance or wind speed. Solar photovoltaics, for instance, have been used (albeit in mostly smaller and niche applications for the ﬁrst few decades) since the 1960s, making that technology a prime focus for the sunny GCC region. A robust potential deal ﬂow could entice investment organizations to set up teams in the region and allow for service providers along the value chain to strategically ramp up their product offerings.

3.2.1.4. Other factors

There is a range of other factors not directly related to business model, grid connections or risk issues that nevertheless affect the financeability of renewable energy projects. For example, the presence of a network of renewables-friendly financial institutions, ideally backed by proximity to a range of supporting services (consulting, accountancy, legal), is an important consideration. Steffen (2018) draws attention to the importance of insurance providers. Such factors can support developers maintaining a high debt-to-equity ratio. A high debt-to-equity ratio greatly improves the economics of renewable electricity generation technologies (which often do not have large profit margins), as it allows developers to amplify the returns on their equity by using significant debt (which usually bears a lower cost than equity). Substantial debt incorporation serves to

multiply equity returns as a result of the ability to earn returns on the project as a whole, but only having to repay the debt slowly over time.

Moreover, active banking teams led by ﬁnanciers who are knowledgeable and comfortable in the sector can offer debt on attractive terms - especially if certain funds are partially backed by the state. Familiarity with the documentation underlying a project reduces lender transaction costs, and can decrease the associated perceived level of risk. Moreover, high activity levels in the renewables sector will allow creditors to offer the most competitive terms on debt. Finally, the availability of specialists in the local renewables industry can help avoid some of the educational pitfalls (such as misconceptions about technology risk) that could hinder deployment (Geddes et al., 2018).

An EPC contract with a creditworthy counterparty (such as a well-rated international construction ﬁrm) helps to ensure that the project will be built in a timely manner and at the agreed price. The availability of a strong O&M framework is also essential. Once a project has been commissioned, investors need assurance that there will be entities in place who are capable of ensuring that the project remains seamlessly operational. In addition, developers require site control, and the ability to access the site freely for the entirety of the pre-construction, construction, commissioning, and post-commissioning stages. Although securing land use is often the responsibility of the IPP, the permitting process needs to be straightforward in instances where governments are responsible for granting access to land.

The viability of sponsors (i.e., the entities spearheading the development of the project) is an important emerging consideration. Recent high-profile financial problems at certain developers (e.g. companies linked to SunEdison) have caused some trepidation in energy markets around the stability of companies developing new projects. Lastly, the process for resolving disputes between developers and off-takers needs to be clearly specified. The best approach is to use international arbitration; possible international bodies for this process include the International Chamber of Commerce, the World Bank International Centre for Settlement of Investment Disputes, and the United Nations Commission on International Trade Law. Dispute settlements coordinated through national bodies run the risk of bias; therefore, disputes should be assessed in international fora (as discussed in Patrizia et al.'s (n.d.) analysis of renewables-related arbitration under the Energy Charter Treaty for feed-in tariff adjustments made in Spain, the Czech Republic, and Italy).

3.2.2. Finance: what has been done to date?

The development of utility-scale assets (or aggregated bundles of smaller-scale projects pooled together through a process known as securitization) usually involves IPPs, private equity firms, or utilities. Corporate finance is often available at this stage. Power producers may be willing to develop or acquire projects on the strength of their balance sheet, as small-capitalization to large- capitalization firms have access to the capital markets for debt and equity financing. Operational and mature technologies, such as monocrystalline solar photovoltaic arrays or utility-scale wind farms, can access a broad array of financing options (for example, commercial banking can provide debt, while institutional investors or infrastructure funds can act as buyers of commissioned projects). If company-wide debt access is constrained, project finance or project bonds tied to the contractual revenues of a specific project can be raised.

3.2.2.1. The experience with renewable energy ﬁnancing in the region

As evidenced by the low renewable electricity deployment numbers outlined in the introduction, the MENA region (as well as the GCC) has lagged behind many parts of the world in financing renewable energy projects for domestic purposes. Even as recently as ten years ago, renewable electricity financing was not an important consideration in the region - in no small part because overall regional renewable electricity activity was limited by constraints ranging from weak legal and policy frameworks to a lack of human capital to the (historically) high cost of renewable energy technologies (Patlitzianas et al., 2006). Any renewable electricity developments were largely confined to R&D, originating primarily from multilateral institutions or state research institutions (still found today in institutions such as the universities of technology in Iran, the King Abdullah University of Science and Technology (KAUST) in Saudi Arabia, or the Kuwait Institute for Scientific Research (KISR)49. Until recently, renewable electricity's contribution to the electricity generation mix was essentially nil (with some inter-country variations), as policymakers opted to maintain a power sector reliant on the abundant (but subsidized) fossil fuel sources in the region. As highlighted earlier in this piece (Table 8), absolute deployment figures realized to date remain low, even as relative growth in installed renewables capacity is emerging.

49 Mondal et al. (2016) present a complete list of GCC R&D facilities conducting research into sustainable energy. 74

Interest in increasing the generation mix beyond oil and natural gas has expanded dramatically for the reasons already outlined. Some of the capital to build projects has been internally generated: for example, corporate equity from the National Oil Companies (NOCs) - including Saudi Aramco, Qatar Petroleum, and others looking for renewables investments for their own electricity needs - has been mobilized. The NOC counterpart (the international oil companies, or IOCs) could do more, as IOCs could apply their scale, capital, and business expertise to renewables. This is a trend already gathering speed, according to Zhong & Bazilian (2018), even as seemingly positive numbers (e.g. Shell's $200 million in renewables-related capital expenditures in 2016) are small in the context of gross spending (e.g. Shell's overall $80 billion in capital expenditures during that same time period).

International banks have also been providing some capital, but any initial international private sector banking dominance has diminished with the increasing attractiveness of investing in renewable electricity. Regional commercial banks, some of which are state-backed, are beginning to see the sector as an important source of growth50. Multilateral organizations are present within the broader MENA region, with a range of bond issuers, insurers, supranational organizations, and development entities currently active, including the IMF, the World Bank, the International Finance Corporation (a member of the World Bank Group), the Islamic Development Bank, and the Arab Bank for Economic Development in Africa. However, these multilateral agencies do not have a signiﬁcant mandate in the (generally) wealthy GCC countries. Consequently, their activity to date has been limited.

It should be highlighted that private investment in the electricity sector in the GCC is nothing new, as private investments in fossil-based power are long-standing. According to Bounouara et al. (2015), IPPs have been successfully operating in the region since the late 1990s. A similar opportunity has now emerged for renewable energy generators, given that solar and wind energy are now competitive with fossil sources in the region. The fossil-based ecosystem of public sector co-investment with private sector actors provides the baseline for what can be done. Meeting the needs of private (and, to some extent, quasi-public) sector investors - both for equity and debt - is

50 IRENA (2016) noted that these institutions seem to be offering loans with long tenors and reasonable interest rates. 75

all that is needed. The following case studies support the various contentions we have highlighted thus far.

3.2. Case studies of clean electricity development in the region

Three case studies provide useful lessons as the GCC begins to explore a renewable energy transition. The first example, based in the UAE, presents a well-designed template that, properly replicated and adapted to the idiosyncrasies of related regions, is likely to attract significant private sector interest. The second case study, also based in the UAE, was partially successful, with some room for improvement. The third (from Saudi Arabia) provides informative opportunities for amelioration. Throughout this list, we apply our four-part financing framework (business model adequacy, grid connection, risk mitigation issues, and other factors), and find that the successful example met all four conditions.

3.3.1. Case study #1: Mohammed bin Rashid Al Maktoum Solar Park

The Mohammed bin Rashid Al Maktoum Solar Park is an ongoing solar array development that has been considered as an example of best practice. The ﬁrst phase of 13 MW (of an eventual 5000 MW facility) was implemented by the Dubai Supreme Council of Energy and commissioned in October 2013. The project was developed in partnership with US-based solar photovoltaic systems provider First Solar, who not only completed the EPC work, but also received a post-commissioning O&M contract. 50% of the project's cost was incurred in the UAE - a proportion of total cost that is of interest to governmental entities intent on creating local beneﬁts. Built in less than 30 weeks, it was (at the time of commissioning) the largest such facility in the region (First Solar, 2013).

Phase 1 was plagued by some minor controversy, with commentators questioning the process through which it was accorded to First Solar. Nevertheless, the rollout of Phase 1 set the stage for an IPP-focused 100 MW tender in Phase 2. In total, 24 consortia were pre-qualified for this bidding process, with ten ultimately submitting bids. The final bid - 5.98 cents per kWh - was attractive to financial institutions, as the tendering process (well-established in regional thermal

generation procurement) was slightly modified to suit the specific needs of PV technology (Borgmann, 2015). Borgmann calls such an achievement the confluence of “rock-bottom EPC cost, optimized O&M concept and low-cost finance”, as the debt involved a consortium of local lenders (National Commercial Bank, First Gulf Bank, and Samba) working in partnership.

Finally, Phase 3 led to the ultra-low capacity bids of 2.99 cents per kWh for 800 MW. This was a result of a public-private partnership called Shuaa Energy 2, wherein the Dubai Electricity and Water Authority (DEWA) and the Abu Dhabi government's Masdar took a 60% stake (with the remaining 40% being owned by the French company EDF (Dubai Electricity and Water Authority, 2017)). The financing parameters of Phase 3 - a loan tenor (or term) extending out 27 years and an interest rate of 4%, leading to an elevated debt-to-equity ratio of 86% - underpinned a record-low auction price for solar photovoltaics. It is difficult to determine what specific LCOE assumptions went into this price, but we lay out in Table 13 a plausible set of assumptions that yield the 2.99 cents per kWh figure.

Table 13: Components of LCOE for an 800 MW fixed solar PV array – base case versus possible actual model, assuming an availability factor of 99%. Source: Author using representative regional data.

The keys to this low-cost scenario include a low capital cost ($841/kW), a low discount rate (4%), a long project lifespan (27 years), and a high capacity factor of 27% (at the upper end of the possible range).

Phase 4 emerged in 2017 within a CSTP conﬁguration (Proctor, 2017). This plant will have a high capacity molten salt storage unit that provides 15 hours of storage, and will include 600 MW of

parabolic trough technology and 100 MW of power tower technology (ACWA Power, 2018). With a contract rate of 7.3 cents USD/kWh for 35 years of firm capacity, dispatchable CSTP is now competitive with combined cycle gas power when meeting night loads. Remarkably, the CEO for the firm that was awarded the tender (Paddy Padmanathan of Saudi Arabia-based ACWA Power) commented a few months later that this was higher than subsequent tender offers will be. Much of this “higher cost” is attributed to Dubai's direct normal irradiance, as well as high equity financing costs (Kraemer, 2017). We can only speculate, but Table 14 shows a possible configuration that would yield a comparable LCOE.

From a ﬁnancing perspective, this project was successful for many reasons. The project's second phase has a viable business model according to our earlier framework, in the sense that it covers most market risk and includes revenue certainty through a 35 year PPA with DEWA. Moreover, the developer will be provided guaranteed access to the DEWA grid upon completion. The necessary grid reinforcement, along with protection, automation, control and communication systems, was awarded to ABB Group. The risk issues were mitigated through simply borrowing from what worked in the 13 GW of fossil capacity deployed in a similar manner. The generation technology adopted (solar PV) has a proven track record of successful operation in the region. Finally, political risk was low, as the UAE is a relatively stable country (especially compared with the wider Middle East region). The government has shown that it has genuine political will and commitment to promote renewable energy in the generation mix.

The PPA in this project was denominated in US dollars, and the process was supported by a creditworthy counterparty (a structure modelled on what has worked in the fossil sector). As a result, the project provided a great deal of comfort for prospective developers and made the outcome bankable. The capacity bidding structure allowed investors to work to gain a toehold in the region, but simultaneously maintained a level playing ﬁeld through an emphasis on cost reductions and an absence of favouritism to certain ﬁrms. The project's evolution culminated in the eventual emergence of a less-established solar technology (CSTP) through the evolution from intermittent photovoltaics to reliable storage-equipped CSTP. This occurred in a 700 MW Phase 4 (see Table 15 below).

Table 15: Evolution in PPA headline rates for major solar developments in the UAE. Source: Adapted by the author from Proctor (2017) and Mahapatra (2016).

Project Name Generation Storage Capacity Commissioned Contract Technology Price (US cents/kWh) Sheikh Maktoum Concentrating Yes 700 MW 2020 7.3 Solar Park Phase IV Solar Thermal Power Sheikh Maktoum Solar No 800 MW 2020 2.99 Solar Park Phase III photovoltaic Sheikh Maktoum Solar No 200 MW 2017 5.84 Solar Park Phase II photovoltaic Sheikh Maktoum Solar No 13 MW 2013 Unknown Solar Park Phase I photovoltaic

Finally, ample involvement from state-backed institutions offering low-cost debt over favourably long tenors helped provide an incentive for exploring new technology such as CSTP.

3.3.2. Case study #2: Masdar's Shams 1 solar power station

The development of Masdar's Shams 1 project remains part of a broader Abu Dhabi drive to support renewable energy. This transition, described in-depth in Mahroum & Al-Saleh (2016), is a movement that encompasses renewable energy sector activities ranging from R&D (including academic research collaborations) to international investments to world-leading conferences. Shams 1 involved the design, construction, operation, and maintenance of a 100 MW

concentrating solar thermal power plant (Shams Power Company, n.d.). Based on parabolic trough technology that follows the Solar Electricity Generating Systems (SEGS) in California, it was the first utility-scale renewable energy facility in the Emirate of Abu Dhabi, with ownership divided between state-backed Masdar (80%) and the French company Total (20%). The project gave the UAE private and public sectors learning opportunities and first mover prestige in a technology with significant implications for the region (that is, CSTP with storage), facilitated by the backing of the UAE state.

The financial parameters of this project finance structure are noteworthy. The final cost was $600 million (Shams Power Company, 2011), or $6000/kW. It involved ten regional and international lenders, and the project was oversubscribed (with more interest from third-parties than needed debt) (Shams Power Company, 2011). It achieved a strong debt-to-equity ratio (80%), as well as a lengthy loan tenor of 22 years (International Renewable Energy Agency, 2016a). Clearly, it met all conditions of a suitable PPA and grid connection.

According to recent coverage of Shams 1 performance history (Casey, 2016), the engineers responsible for Shams 1 appear to have mitigated some of the most serious hurdles facing the project (which did hold technology risk). First, the region's weak supply chain for CSTP - which led to a majority of components being sourced from Europe, rather than developed domestically in industrial facilities - was complicated by the fact that the extant CSTP technologies were not necessarily specially designed for the GCC's climate. Design innovations were crucial; a giant wall was constructed that would facilitate protection for the facility from dust storms, and the equipment contained safeguards to reduce wind damage. Water scarcity and temperature-related equipment malfunctions needed to be controlled (answers were found in the use of advanced robotic machinery and sophisticated performance monitoring systems, respectively).

However, from a financing perspective, there were some problems with the initiative. For one, while some financial parameters were made public, no transparent data on costs were released. This makes replication difficult, as investors have no benchmark (either general or specific) for the cost of developing a highly useful (in that it could potentially provide firm capacity) but technologically risky large-scale project involving CSTP technology. The necessity of seeking

cost efﬁciencies is especially crucial for CSTP - a technology which has not beneﬁtted from the same level of cost digressions as solar photovoltaics.

Second, there was no inclusion of storage capabilities due to risk perceptions (Casey, 2016), even though CSTP has the potential to be dispatchable. As a result, investors do not have the benefit of an existing MENA storage-equipped facility for benchmarking further CSTP deployments. Finally, the project did not necessarily lead to clear reductions in cost, as it involved a complex series of inherently project-specific steps. So long as state-backing is required, a sustained self-supporting financial infrastructure to support the renewables sector is unlikely to arise at scale.

3.3.3. Case study #3: Saudi Arabia's KACARE renewables initiative

The ﬁnal case study we discuss here can serve as a cautionary example of a model to avoid. This initiative did not ultimately emerge into any concrete outcome, but nevertheless illustrates the dangers to renewable energy ﬁnance posed by governments failing to execute on a proposed mandate.

An extremely ambitious solar buildout plan was announced by Saudi Arabia's leadership in 2012. The work was to be overseen by the King Abdullah City for Atomic and Renewable Energy (shortened to KACARE), an agency set up in 2010 to administer the procurement program. In total, 41 GW of solar (25 GW of CSTP and 16 GW of PV) and 21 GW of nuclear, wind, and geothermal were to be deployed over two decades (Mahdi & Roca, 2012). An aggressive timeframe for tendering was initiated, and a white paper was produced that provided a framework for the power procurement process.

While KACARE's leadership role was initially announced to great fanfare, there was no formal execution of their mandate. The lack of commitment damaged market conﬁdence, as no bankable PPAs were issued and no grid access for prospective projects was provided. The post- announcement action appeared to represent an absence of policy delivery, as KACARE seemed unable to coordinate a wide array of organizations competing in the renewable energy sector (Borgmann, 2016). This could have unintended consequences for investors weighing the

prospect of the new renewable energy launch that the Kingdom is undertaking. Today, KACARE is not leading the discussion, as targets for renewable electricity are managed under the guidance of a new ministry entitled the Ministry of Energy, Industry, and Mineral Resources (Mahdi & Razzouk, 2016). This shift sends confusing signals to the market over how best to prepare, and makes it difﬁcult for supportive ﬁnancial infrastructures to take root.

Furthermore, the project appeared to be too ambitious and reliant on government budgets, which have come under considerable strain with the prolonged low oil price environment. Indeed, ﬁscal sustainability was compromised after the 2014 oil price drop caused the government to push back the timeframe of the project from 2032 to 2040. Additionally, there was dramatic disharmony and contradictory claims to ownership over the program among various government entities within Saudi Arabia. In summary, it provides a cautionary tale which other states can learn much from as they prepare their own renewables deployment plans.

3.4. Measures to improve the ﬁnanceability of renewable energy projects

3.4.1. Continue to explore the ostensible efﬁcacy of cost-effective auction procurement models

Traditional mechanisms to promote the deployment of renewable energy, such as FiTs or RPS mandates, have been shown to (at least historically) hold a signiﬁcant advantage for supporting renewable technologies (Couture & Gagnon, 2010). However, these methods do not harness the power of economic incentives and, in the case of FiTs, developers will not compete on price. For mandates, lower-cost technologies could be favoured over higher-cost ones - even if these deployments are not optimal for the system as a whole. In both cases, government subsidies may be perceived by key stakeholders as too costly or are (sometimes unfairly) blamed for broader structural costs in the evolving electricity market. This leads to a particularly troubling prospect for investors; namely, that such premium policies (especially if generous) will be subject to political interference. The chilling effect that this uncertainty imposes on future investment

interest is signiﬁcant, as was spectacularly demonstrated after Spain's retroactive cuts to that country's FiT rates (Potskowski & Hunt, 2015).

Therefore, given the remarkably low bids from a varied bidder pool found in the UAE case study referenced earlier, it appears that the auction model is likely to be the most attractive option for both investors and government in rapidly ramping up renewable electricity investment going forward. Such a model allows the private sector to develop bankable business models that ﬁnd efﬁciencies and drive down costs, while providing electricity ratepayers (in the case of the GCC, both governments and citizens) with low-cost and low-risk power sources. Renewable electricity technologies are likely to fare best if they can compete with fossil fuel alternatives on their own merits. Auctions - a model long-used for cost-effective procurement of wind energy in Brazil (de Jong et al., 2016) - have increasingly replaced premium price schemes for solar energy and wind energy in places such as Canada (Independent Electricity System Operator, 2016) and the United Kingdom (Downing, 2015). Mills (2019) notes that favourable financing conditions and auction models have made renewables cheaper than both oil and gas (including the less expensive variants of the latter). So significant is this shift that, according to Mills, solar is now “unstoppable”. He points to the displacement to fossil fuels likely to occur; for example, the intended renewables (along with some gas) pushes in Saudi Arabia alone could reduce that country’s demand by 1 million barrels per day for diesel, fuel oil, and crude.

Other region-speciﬁc issues of relevance support the case for auctions over FiTs in the GCC. First, FiTs could potentially add a public liability (albeit, at current renewable energy costs, a limited liability (if any)), but there is a widespread regional belief that fossil fuels endowments deserve to be redistributed to the populace (Reiche, 2010). This makes any overt public support for renewables potentially more challenging - and all the more so in the structurally low oil price environment described in Harvey, 2017 (as low oil prices reduce the opportunity cost to GCC countries of foregoing oil exports). Second, regulatory risk is sometimes perceived by investors in the case where any policy exists at all. As Chassot et al. (2014) contend, investors do not equally weight all risks, and can over-weight certain ones (especially the possibility for negative revisions outlined in the previous paragraph). Finally, optimizing FiTs and other tools is best done with a strong basket of policy, market, and regulatory supports - factors which may be

missing in certain GCC (and certainly MENA) contexts (see earlier discussion on risk mitigation issues and other factors for more detail on this point).

Of course, there are some inevitable complications with adopting the auction model. It is worth mentioning at the outset that auctions only work in those instances where a technology has reached a certain level of maturity. Our recommendations therefore apply to mature renewable energy technologies (e.g. solar photovoltaic arrays or onshore wind), but less so to emerging innovations or higher-risk configurations. Designing the appropriate auction model is not a trivial task and needs to be taken seriously by policymakers in the region. For example, SunEdison bid aggressively on projects, but (famously) subsequently went bankrupt. This should serve as a warning on the cost of inadequate auctions - a risk of non-completion that Kreiss et al. (2017) identify as the most serious challenge in renewable energy auctions. Although useful for driving down costs and finding efficiencies, auctions could spur on an unsustainable race to the bottom when strategic underbidding is not prevented at the inception of the procurement process through sensible auction design. Developers may sacrifice equity returns and take on ultra-low margin projects to gain market share, but ultimately be unable to execute due to poor profitability and unexpected cost overruns.

Further issues warrant consideration. Atalay et al. (2017) assess the viability of auctions as a tool to support renewables deployment in the GCC. They note that, while auctions are more promising that FiTs in the GCC context and have the chance of achieving adequate conditions in the short- to medium-term, additional issues (outside of fundamental auction procurement design) can arise. These result from either the nature of the government itself or from other government policy goals that are added to auction programs and which, left unaddressed, create barriers for private sector participants. Speciﬁcally, Atalay et al. (2017) draw attention to points that are essential for private sector support, including the need for overcoming local content requirement difﬁculties (as previously alluded to, nation-states have an understandable desire to spur local industrial capabilities), the criticality of integrating auctions with other policy support, and concerns around the penalty and incentive mechanisms used to ensure private sector compliance. It is important that policy-makers undertake measures, such as implementing penalties that prevent the “low-balling” of bids and applying initial due diligence to verify the solvency of developers, to ensure that the auction model proceeds smoothly.

Finally, another limiting feature of auctions is that they are driven by political decisions made by decision-makers, rather than impartial assessments of the optimal amount of renewables to integrate into the system. This means that renewable energy systems could be introduced either too quickly or too slowly. If the rate is considered too quick by special interests, it could introduce problematic lobbying at a later date, as incumbent entities could argue that the process of auctioning was catalytic of a stranded asset situation.

3.4.2. Commit now to a large-scale buildup of renewable electricity supply with export potential, as partial replacement for declining oil revenues in a decarbonizing world

A pervasive sense that the status quo must change can be found across the region (Boersma & Griffiths, 2016). State budgets - currently heavily dependent on revenues from the export of oil (Dale & Fattouh, 2018) - had been predicated on high oil prices. However, it is increasingly recognized that fossil fuel prices may never return to their 1979 ($39 US per barrel in nominal terms, which is equivalent to approximately $140 US per barrel today) and 2008 ($147 US per barrel in July of that year) levels (Helm, 2016). Indeed, Harvey (2017) shows that, with a concerted global effort to comply with the Paris target of limiting global mean warming to no more than 2⁰C, global oil demand will be so constrained (through energy efﬁciency measures and the development of alternative transportation energy sources) that the price of oil need not rise above, in today’s dollars, $30/barrel, and could stay below $50/barrel (also today’s dollars) with far less successful efforts to limit global warming through climate policies.

However, the precipitous drop of the cost of electricity from solar and wind energy in recent years not only makes it economically feasible for the GCC (and broader MENA) nations to meet their own electricity needs through wind and solar (especially given the attractiveness of 24 hour per day solar electricity from CSTP), but also raises the possibility that the GCC nations could supply (via high voltage transmission lines) solar electricity to nations that have a less plentiful solar resource. In line with this, Saudi Arabia recently announced a plan to build 200 GW of solar PV capacity at a projected cost of $200 billion (Mills, 2018). Mills (2018) has argued that some possibility exists for Saudi Arabia to sell power to countries such as Egypt or other GCC

nations in the near-term and to South Asia or Europe in the longer-term, but signiﬁcant commercial and political hurdles exist (not to mention broader questions such as the manufacturing cost of PV panels which are dependent on Chinese manufacturers - see Werbos, 2018).

Complications aside, this would create a new source of export revenue that could partly replace the loss of oil export revenue due both to falling prices and decreasing export volume. We note that the alternative strategy - to seek a larger market share by maintaining or increasing production - would simply serve to drive producer prices even lower. However, if export potential ends up being minimal, a Saudi Arabian deputy economic minister (Ibrahim Babelli) has remarked that there is still important potential in exploring concentrating solar thermal power, photovoltaics, and storage, noting that such a combination can provide the appropriate baseload and peaking capabilities to meet the region's needs (Graves, 2016).

3.4.3. Broaden the capital base

A large array of financing mechanisms could be deployed to finance the massive buildup of renewable electricity that we see as both desirable and necessary (a sentiment echoed in a review by Ottinger & Bowie, 2015). Over the course of our time preparing this review, we engaged with numerous individuals directly involved in renewables finance (both in the GCC and in other markets). In the following, we present what we consider to be some of the most promising mechanisms for financing renewable electricity in the GCC, taking into account the opinions of a broad range of financial practitioners.

3.4.3.1. Issue green bonds

The ﬁrst option is to encourage the issuance of green bonds. Green bonds represent a growing market segment that can meet some of the long-term capital needs of the renewable electricity market. The World Bank (n.d.) - the longest-running issuer of these debt vehicles - has posted a list of select investors in their international issuances (including large investment houses, notable asset managers, and institutional investors) that demonstrate investor appetite. Of particular relevance to the region is the green sukuk, an Islamic green debt-like instrument that is compliant with Shariah law. This investment structure recently saw the ﬁrst sovereign offering (with

Indonesia's 3.75% $1.25 billion green sukuk – Dunkley, 2018). The characteristics of Islamic Finance - such as the need for ties to a real asset (rather than a ﬁnancial asset), the prohibition on speculation (maysir) and uncertainty (gharar), and the encouragement for long-term asset holds - all match well with the region's nascent renewable electricity sector needs.

3.4.3.2. Explore solutions with international partners

Second, creative solutions could be initiated by engaging international lenders with fewer constraints. For example, Japanese banks are not subject to the same capital constraints as other international ﬁnancial institutions (such as US-based entities, who may not have the capability to invest in renewable infrastructure due to regulatory constraints, as discussed in Krupa & Harvey, 2017). These entities could supplement shortcomings in local bank ﬁnancial resources or provide the capacity for scale as the renewable electricity sector grows.

3.4.3.3. Create national or regional green investment banks

Third, a national or regional green investment bank could be created. This is an increasingly popular method to introduce a market multiplier effect and use financial de-risking tools. The basic premise is that a Green Bank works by harnessing the creditworthiness of the state to de- risk financing through measures such as changing the order of losses in the event of a default, subsidizing funds for economically viable (but non-financeable) technologies, or finding other means to plug gaps in the clean energy financing ecosystem. Leonard (2014), in a study on state green banks in the US, has outlined the many benefits that can be realized through a green bank investment model. Specifically, she notes that the primary benefits stem from being capable of increasing private capital allocations (primarily through de-risking with public dollars), enhancing partnership offerings, and increasing the extent of standardization. Individual countries of the GCC region could learn from the positive and negative experiences of national governments (e.g. the United Kingdom or Australia) to create a country-based bank. Alternatively, countries could band together to create a one-of-a-kind regional clean energy bank (funded in proportion to a metric such as GDP that is mutually agreeable to each country) that was not limited by specific country boundaries. While at least one expert we spoke with voiced skepticism of this approach, Geddes et al. (2018) argue that state investment banks focused on low-carbon technologies can have a broad range of positive impacts that extend beyond the 87

aforementioned specifics to include learning benefits to the financial sector, the creation of trust among financial sector participants, and the ability to take a higher-risk “first mover” position that facilitates entry for other groups.

3.4.3.4. Harness the power of institutional investors, with a special emphasis on the Sovereign Wealth Funds

Finally, institutional investors seeking investment-grade securities (that is, those that meet certain credit rating standards that are acceptable to the investment criteria of the fund) could also play a valuable role in any mass buildout of renewable electricity systems in the region. While it is essential to be realistic about their potential (including the fact that developed country institutional investors with infrastructure allocations often have no ﬁnancial incentive to move outside of the developed countries – Reicher et al., 2017), enhancing the involvement of these investors - who are a natural ﬁt with the sector owing to their need for long-term asset-liability matching (meaning a linking together of the periods when new assets will be generating cash and the period when liabilities will be due) and their interest in tapping into regulated assets with low risk - should be a long-term priority.

Especially important are well-capitalized regional Sovereign Wealth Funds (SWFs). These asset managers include organizations such as the Kuwait Investment Authority (KIA) or the Abu Dhabi Investment Authority (ADIA), which (at $524 billion USD and $828 billion USD, respectively) could play a much larger role than they are currently playing in meeting sustainable infrastructure needs (Sharma, 2017). Encouragingly, some movement in SWF capital toward renewable energy is underway. The UAE has set up Masdar - an investor in, and developer of, renewable energy - distinct from the assets of ADIA (the region's largest SWF). Meanwhile, Ambavat (2015) notes that ADIA has already shown interest in signiﬁcant co-investments in private renewable energy developers operating in non-developed markets (although no activity has been undertaken domestically due to diversiﬁcation mandates that prevent domestic investment). The aforementioned KIA has been active in innovative stages of the renewable energy lifecycle, taking stakes in both Kuwaiti and overseas energy solutions companies (ACAL energy wins further investments, 2011).

The traditional role of Middle Eastern SWFs was as a source of stabilization that could smooth capital flows associated with natural resource development (mainly fossil fuel extraction) and facilitate overall macroeconomic stability - a role shared by other funds around the world (Sharma, 2017). Recent years have seen them transition into other roles. Given that SWFs do not face the constraints facing other institutional investors (such as investment restrictions, regulatory capital minimums, and solvency ratios) and have an obligation to ensure the sustainability of their countries, there is no reason for the role of the SWF in renewables finance to cease growing. Indeed, renewable electricity finance is a natural place for these institutions to explore owing to SWF features such as a focus on increasing inter-generational wealth, investment structure flexibility, and an enormous capital base of nearly $3 trillion dollars (Sovereign Wealth Fund Institute, 2018).

Even a small fraction of this wealth could mobilize signiﬁcant capital for either equity or debt in regional renewables projects. Nelson (2015) found that institutional investors as a whole could relatively easily deploy ~0.25% of their aggregate capital in a manner that would further drive down capital costs for renewables. Applying these ﬁndings to the total available capital data for the GCC (as outlined in Fig. 11) would lead to nearly $7.5 billion per year deployed in the region.

Fig. 11. Sovereign Wealth Fund assets under management in GCC countries, as of January 2018. Source: Adapted from data found in Sovereign Wealth Fund Institute (2018).

This would serve to drive down costs for producers, so long as they could meet the institutional investor needs for provision of a low cost of capital (such as actively involving the investor in structuring the project and having a competitive landscape of prospective capital providers) (Nelson, 2015). Indeed, the costs for the SWF could be non-existent; for example, simply extending sovereign-backed risk mitigation guarantees has a nominal cost of zero, but can promote virtuous feedback cycles as developers use this signal of conﬁdence to attract capital from private entities.

3.4.3.5. Harness competitive advantage

Recognizing more specific domains in which the countries of the region could hold a competitive financing advantage will be crucial. Initial suggestions we offer include the creation of dedicated internal investment teams who could, among other actions, initiate direct project equity renewables investments, as well as securing the services of renewables-focused outside managers capable of identifying attractive risk-adjusted return investment opportunities in both the private and public markets. The SWFs could offer patient capital to fund local initiatives and overcome some of the problems that have historically plagued VC investments in the space (as outlined in Gaddy et al., 2016). Non-SWF actors can be involved as well; for example, while it is unlikely that regional manufacturers will be able to compete with Asian manufacturers on mainstream solar panels, countries in the region may be able to compete on financing the manufacturing of bulky wind turbine towers less amenable to containerization (especially given that, as Usher (2019) has pointed out, larger towers bring significant additional power generation benefits). O&M providers that can provide expertise and support for developers are essential for optimizing the performance of renewable electricity assets51 (Insider PV, 2014), and the countries of the region can develop expertise in financing their operations. Ongoing research on renewables in the region (e.g. Akash et al., 2016; Mas'ud et al., 2018; Jamil et al., 2016) should be further expanded, with an eye to training local expertise that can complement the large-scale deployment of solar energy (as well as other relevant generations option, such as wind energy) in the region.

51 This is because a short downtime (such as in the event of a production interruption) can have substantial impacts on output and, consequently, debt coverage ratios. 90

3.4.4. Continue to enhance, stabilize, and clarify policy and regulatory frameworks

Investors require predictable policy and regulatory frameworks. Energy markets are the result of very carefully planned processes. Giving renewables time to compete on their own merits will enable them to emerge as viable competitors, but a viable market structure is an obvious prerequisite to success. Enhancing extant frameworks (such as through greater interconnection with nearby electricity systems or facilitating renewables integration into the grid through shallow connection charges) is an obvious initial starting point for policymakers to address.

The second key point is stability. Time and again, private investors speak disapprovingly of stop- start and/or uncertain policy and regulatory environments (see, for example, Potskowski & Hunt, 2015). Given the apparent stability of the GCC political environment and the monopolistic nature of GCC energy markets, a pattern of continuity should be relatively easy to ensure. Related to this point is the concept of maintaining clear political support, as investors are seeking a reliable energy policy when assessing potential investments.

Finally, developing clear long-term plans is essential52. Ensuring straightforward, long-term energy planning and coordination between all relevant entities (e.g. going beyond generation and involving transmission, storage, and load shifting entities) is crucial. Where multiple (and potentially overlapping) agencies are present, it is crucial that each position be clariﬁed53.

3.5. Summary and conclusions

We have discussed ways for the GCC countries to expand their renewable energy supply through support for a critical barrier to deployment - renewable energy finance. However, while much

52 The United States provides a solid model for replication. After years of start-stop policy incentives for new renewable energy builds, the U.S. Congress passed an ‘unexpectedly generous’ 5 year subsidy extension through a government funding bill that will unlock an estimated $73 billion in incremental renewable electricity technology funding (Bloomberg New Energy Finance, n.d.). Among other advantages, this bill provides a measure of certainty for investors and gives a timeframe for step-downs in incentives before a phase-out (such as a 100% deprecation bonus for assets that enter service by 2022, with a subsequent phase-out - see Martin, 2018). 53 As discussed in 3.3., Saudi Arabian renewable electricity sector stakeholders encountered issues when KACARE's mandate shifted. 91

positive momentum exists, rapid expansion of renewable electricity is by no means guaranteed within the resource-rich countries of the GCC. Substantial uncertainty is still present in the region's renewable electricity outlook. Ongoing unrest within the broader MENA region - and the possibility of pernicious spillovers from less stable to more stable regions - increases political risk. Efforts at overcoming technical challenges, such as a lack of storage and concerns with the potential for dust to inhibit electricity output in some of these countries, have shown promise, but may take longer to address than anticipated.

Nevertheless, while we remain wary of potential inhibitors to successful GCC ﬁnancing of renewables, the trends described in this paper generally suggest that there will be a vigorous future for new renewable electricity builds in that region. States do not want to miss out on the inevitable decarbonization of the global energy system. Renewables are likely to be a winner in this political economy.

First, we have cautiously noted the usefulness of auctions to date, and highlighted the importance of maintaining stability at the policy level. It is especially crucial that the mistakes that beguile investors - especially a lack of certainty or clarity - are not repeated, while positive trends (including strong political will, the opportunity to act decisively in a “new normal” of lower fossil fuel prices, and the presence of effective and clear procurement systems) are maintained. In addition, accessing the enormous pools of capital in the SWFs and adopting best practices of renewable energy ﬁnance that have been used elsewhere present promising options. We also remain intrigued by the possibilities associated with green banks, which can de-risk assets, create multiples of private sector investment, and even generate a return for the government (Geddes et al., 2018; Leonard, 2014), as well as green bonds (or sukuks). A mix of policy responses is essential, and further options could be implemented in tandem with the various partial solutions contained herein.

Within this context of great potential, we note that altruism need not be a driver of greater renewable energy integration. Although relatively little action has been undertaken to date in renewables ﬁnancing of the region, this tabula rasa in the context of a region with a growing, energy-intensive economy presents a tremendous opportunity to implement best practices from the inception of developing the industry. Financing can hold up progress, but - as we noted

earlier - capital tends to follow the right conditions. Policymakers in the region have the chance to usher in a sustainable future, with some estimates suggesting that at least $750 billion in net beneﬁt could be realized by the broader MENA region by 2030 (Middle East Online, 2016). Getting the “money” questions right would be a great start to achieving this ambitious goal.

Chapter 4 Improving renewable energy governance: Insights from low-carbon investment community stakeholders 4.1. Introduction Social and economic infrastructure are integral to maintaining a society’s quality of life. Infrastructure remains one of the few topics for which unanimous political support seems plausible, and every year, approximately $2.7 trillion are spent worldwide on infrastructure projects such as ports and bridges (Authers, 2015). Yet this seemingly enormous sum masks an infrastructure expenditure gap (i.e., the difference between what is spent and what should be spent) of at least $1 trillion per year - a number which may grow in the coming years. This is due to ongoing contributors such as exploding population and economic growth in emerging markets54, historical underinvestment in infrastructure, and misalignment of the interests and needs of the private sector, the public sector, and civil society in infrastructure-related decisions (Authers, 2015).

The following is the framework within which I approach the climate problem. Anthropogenic climate change adds an additional layer of (sometimes unquantifiable) infrastructure need, as any future infrastructure builds should not only be financially sustainable, but also low-carbon (Wagner & Weitzman, 2016). Leaving aside the large scale of the climate-related demand ($23 trillion for certain emerging markets between 2016-2030, according to the IFC (2016)), it would be difficult to overstate the urgency with which we must address climate change. Climate change brings not only the well-known and well-described acceleration of various adverse consequences (sea level rises, acidification of the oceans, water shortages in areas reliant on glacier meltwater, and species loss, to name only a select sample cited in Harvey, 2010a), but also – especially when combined with other forms of environmental degradation or other instabilities – threat of civilizational collapse, as has occurred in the past (Diamond, 2006). More specifically, climate change is categorically different from other issues facing humanity for three distinct reasons:

1) Long-term, it is an existential risk that brings the very real prospect of catastrophe.

54 The International Finance Corporation (IFC) arm of the World Bank estimates that $4 trillion per annum is needed in developing countries alone (Kerr et al., 2016). 94

2) In the near-term, climate change impacts not only current generations (with a disproportionate burden on younger individuals), but also shapes the lives of those not yet born. 3) At this moment (and going forward), climate change brings substantial impacts on non-human animals, in the sense that other sentient beings (who have evolved over millennia and have legitimate claims to moral standing) are harmed by changes to their habitats and environments. Harari (2016) has described the growing scientific awareness of this sentience. He notes that at least one country (New Zealand) has passed a law requiring that in cases such as animal husbandry, there must be a recognition of this sentience.

Access to capital is arguably one of the biggest determinants of infrastructure growth, both writ large and in the related renewable energy space. An obvious solution in cases where deployment lags potential is for government to increase its financial support. The arguments for doing so are economically sound; according to Summers (2016b), the returns on government investment in infrastructure (even under conservative scenarios) dramatically exceed the long-term real costs of borrowing. Moreover, the International Monetary Fund (2014) notes that debt-financed infrastructure investment spurs short-term and long-term productivity growth. This same report says that, in low interest rate environments, infrastructure investment is one of the few policy tools remaining that can spur growth (as policymakers are constrained by already very loose monetary policy). The underlying financing competitive advantage stems from the ability of governments to maintain access to extremely low-cost debt; as one example, the United States (U.S.) Long-Term Composite Rate remained consistently below 3% as of October 2017.

Climate-protecting renewable energy is a growing sector related to the broad infrastructure class, even though - to quote Mazzucato and Semieniuk (2018) - fossil investments still ‘dwarf’ renewable energy investments. Specifically, renewables are expanding to claim greater portions of installed electricity capacity as the world moves to decarbonize the electricity sector; 2016, for example, saw an 8.7% growth in renewables capacity, with the addition of 161 gigawatts (GW) of renewable power (International Renewable Energy Agency, 2017). Buchner et al. (2018) find that in climate finance writ large, private investments exceed public investment in the space. Given this context of growing renewables capacity and significant private investment involvement, we turn here to a plausible partial solution for increasing allocations to critical renewables infrastructure - incentivizing greater private investment in this space. This is an

alternative stratagem advocated for in existing research, such as in Granoff et al.’s (2016) observations that it will be politically difficult to raise the requisite funds from public sources alone and that the private sector has a role to play.

And yet, somewhat alarmingly, research shows climate change and climate finance have not received adequate attention from the mainstream finance journals which exert a strong influence on leading academics, policymakers, and investors in the financial communities. Diaz-Rainey et al. (2017) found that, out of 20,725 articles published in the leading finance journals since 1998 (shortly after the launch of the Kyoto Protocol), a mere 0.06% of articles dealt with climate finance and climate change. These same authors also found that broader elite journals (covering topics such as accounting, economics and operations) fared little better, with only 0.08% of papers covering climate finance research.

In the context of the imperative of climate-related renewables financing, we follow many others (e.g. Kameyama et al., 2016; Matthews et al., 2010) in arguing for a greater role for private finance options. Private finance is an admittedly broad designation, covering everything from funding new innovations to mainstream work at large financial institutions, so we will focus here on the needs of more advanced and sophisticated investors. Past works have sought to capture this “investor perspective” (e.g. Dinica, 2006), and this article expands on this legacy by outlining a range of energy governance-related barriers identified by leading subject experts as critical to address if the global community is to facilitate more low-cost private finance flows to the renewable energy sector. The primary contribution of this research stems from its focus on the needs of private sector financiers. While policy, market design, and other such considerations have long been rightly viewed as critical for assuring renewables deployment (e.g. Wiser & Pickle, 1998), renewable energy finance barriers from the perspective of those familiar with financial matters has received insufficient coverage in the literature to date. This is a reality that early commentators have bemoaned (Awerbuch, 2000) and which we hope to partially counteract. More broadly, we seek to also expand the much-needed social science presence in energy studies (see Sovacool et al., 2015).

4.2. Background and literature review

4.2.1. A 100% renewable energy future?: Assessing the current landscape

A 100% renewable energy future has been oft-discussed in the academic literature, with some of the most well-known foundational pieces being found in Jacobson & Delucchi (2011a; 2011b). In these papers, Jacobson & Delucchi assess the global capacity to absorb a completely renewables-powered system, including discussion on reliability, system and transmission costs, and material needs. More recently, Jacobson & Delucchi (2018) note that 28 peer-reviewed articles have corroborated their finding that demand and supply in a renewables-dominated world could be matched.

These international assessments have been complemented by others highlighting the renewables ramp up configurations that could theoretically emerge if renewables were adequately supported. Elliston et al. (2012) take a national-level approach in their examination of the possibility of a 100% renewable Australian electricity system, demonstrating the feasibility of a fully renewable electricity system in that country using - notably - only commercially viable technologies. More recently, Diaz-Rainey & Sise (2019) also assess Australia, along with neighbouring New Zealand, for a 100% renewable energy future, focusing on financeability. MacDonald et al. (2016) take a similar country-scale view, arguing for a buildout of a high voltage direct current transmission system that would allow the US electricity sector to reduce carbon emissions by up to 78% (with a range for 33-78%) at a reasonable cost (a 2012 price benchmark). Harvey (2013b), meanwhile, adopts a technology-specific approach when examining wind energy’s potential for displacing Canada’s fossil and nuclear generator fleet.

Some have urged caution when assessing the rate of change for any supply-side response to climate change. Clack et al. (2017), in a critique of a pair of articles by Jacobson et al. (2015a; 2015b), say we must opt for a broad spectrum of renewable energy responses. In their view, a portfolio of options - potentially including controversial options such as nuclear (which Jacobson et al., 2015 do not include) - is likely the best path forward. These same authors note that we 97

should not underestimate the scale of the challenge, as many assumptions embedded in studies such as the Jacobson et al. (2015) analysis (e.g. the implementation speed of a drastic overhaul) may fall short of any optimistic estimates.

Indeed, others have echoed this pessimism, adopting a view that the rate at which such transitions can take place is likely to be very slow (e.g. Smil, 2005). Figure 13, Figure 14, and Figure 15 are a time series graph, area graph, and segmented bar graph, respectively. They were created from data found in the BP Statistical Review of World Energy (2019), and show global energy consumption between 1965-2017, the supply mix driving global energy consumption between 1965-2017, and the relative contributions of different energy sources to the supply mix between 1965-2017.

Fig. 13. Global energy consumption between 1965-2017 (by energy source). Source: Adapted by the author from data found in the BP Statistical Review of World Energy (2019).

The supply mix driving global energy consumption betwen 1965-2017 (by energy source) 16000.0

14000.0 Total world nuclear consumption - 12000.0 Mtoe Total world coal consumption - Mtoe 10000.0

8000.0 Total world natural gas consumption - Mtoe 6000.0 Total world oil consumption - Mtoe 4000.0

2000.0 Total world hydro consumption - Mtoe - Total world non-hydro renewables

Consumption, Million Million Consumption, consumption - Mtoe

tonnes of oil equivalent oil of tonnes

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Year

Fig. 14. The supply mix driving global energy consumption between 1965-2017 (by energy source). Source: Adapted by the author from data found in the BP Statistical Review of World Energy (2019).

Relative breakdown of global energy consumption between 1965- 2017 100% 80% 60% 40% 20% 0%

Total world non-hydro renewables consumption - Mtoe Total world hydro consumption - Mtoe Total world oil consumption - Mtoe Total world natural gas consumption - Mtoe Total world coal consumption - Mtoe Total world nuclear consumption - Mtoe

Fig. 15. The relative breakdown of global energy consumption between 1965-2017 (by energy source). Source: Adapted by the author from data found in the BP Statistical Review of World Energy (2019).

These graphs demonstrate that changes in energy consumption patterns are moving slowly, with ongoing dominance from heavily polluting sources such as coal and oil. When examining the historical energy transitions that have taken place (wood to coal, coal to oil, and now oil to natural gas), Smil notes that they never occurred quickly. Dispersed renewables suffer from many disadvantages compared to fossil fuel sources: lower power density (energy production per hectare of land area), inflexible locations, intermittency, and losses and costs associated with converting renewables to high-density portable fuel (Smil, 2005). Renewables, Smil reasons, are likely to follow the decades-long, relatively slow pathway to widespread adoption that has faced past energy resource transitions.

Research from the International Energy Agency (IEA, 2018a) paints a similar - albeit nuanced - picture, broken down into renewable heat, renewable transportation, and renewable electricity. It supports the view that the renewables transition is occurring at a slower rate than may be desirable, with the share of renewables in the overall supply mix anticipated to achieve a somewhat paltry 12.4% by 2023 (up 20% from 5 years prior). While renewable heat and renewable transportation realize the penetration levels of 12% and 3.8% (from 10% and 3.4%, respectively), renewable electricity sees substantial gains - from 24% (2017) to 30% (2023) of power demand.

Recent trends support the thesis that renewables could realize adoption levels that are much higher than analysts such as Smil (and perhaps even the IEA!) expect. In the electricity sector, the biggest barrier to inherently intermittent renewable proliferation - storage - is seeing remarkable gains. The rates of deployment of energy storage have grown in recent years. While complications remain, future storage-related price digressions seem inevitable. Schmidt et al. (2017) project substantial price decreases for 11 energy storage technologies, including a range of lithium-ion configurations, fuel cells, and pumped hydro. Kleinberg (2018) foresees a future cost reduction curve for storage similar to those realized by renewables in recent years. Other complementary trends - such as ongoing price digressions in renewable generating technologies

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and increasing societal awareness of the seriousness of climate change - provide further momentum.

Looking broadly, we identify 3 specific clusters of issues related to renewables growth:

1) Technical concerns (such as addressing storage and improving performance) 2) Economic concerns (e.g. the rate at which price digressions for select technologies are realized) 3) Governance (e.g. directions that affect technology choices and policymaker or regulatory influences on economic choices)

It is this latter cluster of “governance” that we shall assess here. A rich and diverse literature exists for energy governance writ large, as all critical energy resources have received coverage in the governance literature.

Gunningham (2012) argues that a variety of tensions animate the decisions made in energy governance spheres. Energy law and governance, he reasons, are a critical enabling factor for addressing climate change. However, Gunningham holds that they do not receive adequate attention, even though they should be ‘front and centre’ (Gunningham, 2012, p. 120). No single level of actors (e.g. global, regional, or national) is able to resolve all problems, so governance enhancements must occur at multiple levels.

Supportive institutions, it is worth noting, are essential. Goldthau and Witte (2009), for example, tackle the question of rules in oil and gas markets, noting that institutions play a critical intermediating role in ensuring the smooth functioning of these liquid and deep markets (while acknowledging that continued reformation and refinement of existing institutional frameworks is essential). Van de Graaf (2013) picks up on this theme of optimizing institutional support in the renewable energy context through coverage of the International Renewable Energy Agency (IRENA). He identifies distinct pros and cons in the formation of a dedicated international renewable energy agency, rather than having it absorbed into the existing International Energy Agency (IEA). Notably, he observes that - much like in a competitive electricity market - the presence of dual energy-related international entities may prompt the IEA (traditionally a fossil-

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oriented institution) to be even more receptive to pushing renewables in policy fora, even if that organization is making remarkable gains in that regard anyway.

Finally, it is worth noting that a literature on the governance of energy finance is emerging. Sovacool (2011) points out that governance (including that pertaining to energy and climate) involves a range of scales, mechanisms, and actors - a finding mirrored in Newell (2011), who draws out the ongoing expansion of governance in three spheres. Specifically, Newell examines the domains in which energy finance is governed - the public governance of public finance, the public governance of private finance, and the private governance - and observes that there is often a “hybrid” nature to governance arrangements (in the sense that those who partake in governance arrangements can play several roles at the same time). We are cognizant of these imperfect arrangements, and provide solutions with an awareness of their “messiness”.

However, before I delve extensively into governance, additional background on this complicated term is required. The subsequent section provides this required additional information.

4.2.2. Background on energy governance: Defining and contextualizing a complicated term

Governance brings a history that has been contested both in energy studies and the general academic literature (Bazilian et al., 2014), with an abiding emphasis on transparent, fair, and inclusive decision-making. Lange et al. (2018) present a range of natural resource literature on governance and divide the term into domains (policy and regulation, industry development, public engagement), rule setters (state or non-state actors), and instruments (policies, laws, regulations). Pereira et al. (2017), in a discussion on energy efficiency governance in the European Union, describe governance as a flexible term.

In the context of the discussion here, we use the term energy governance to refer to choices that are driven by public sector actors and public institutions to facilitate the delivery of energy- related services to energy consumers. We focus on policy and regulatory considerations, such as tax reform, the direction of financial flows, and energy market transitions, that would facilitate a greater amount of private finance into renewable energies (and related technologies) - what

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Lange et al. (2018) referred to as “instruments”. Many of the governance issues here have already been alluded to in Chapters 2 & 3, and will be further unpacked in the following sections.

The choice to focus on the usefulness of mobilizing private finance is not presented without precedent. Matthews et al. (2010) note that private finance spearheaded many of the great infrastructure builds of the past (from European sewer systems in the 19thcentury to the US interstate highway network to the World War II resource mobilization). We concur with Matthews et al.’s argument that the dangers of anthropogenic climate change demand that similar initiatives be implemented in the renewables space, and we are keenly familiar with the importance of ensuring as broad a scope for investment involvement as possible to allow the maximum amount of funds to be raised in the shortest period.

Admittedly, this article scope comprises only a subset of the overall picture of energy governance (an interrelated set of areas spanning subjects as diverse as security to intellectual property rights to foreign assistance, according to Florini & Sovacool, 2011). Hall et al. (2018) have pointed out that energy finance research (including our past work in Krupa & Harvey, 2017) has had an abiding emphasis on significantly expanding aggregate capital flows to the renewables, with minimal attention paid to the ethical dimensions underpinning the process of substantially ramping up private capital allocations under the existing dominant financial norms. These authors note that broader dimensions of concern (such as the sociology and political economy of finance) warrant additional attention if significant capital mobilization is to be undertaken, and state (after examining case studies in the UK and Germany) that six principles lay as the cornerstone of ‘just’ energy finance: affordability, good governance, due process, intra-generational equity, spatial equity, and financial resilience. They justifiably celebrate studies such as Baker (2015) which both challenge the ‘financialisation’ of renewable energy project development and critically examine how the benefits of renewable energy are ultimately distributed.

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Indeed, the aforementioned Baker (2015), in a study on the quasi-developing55 nation of South Africa and their renewable energy project developments56, finds major problems with mainstream finance. Specifically, this article suggests that the financial benefits of renewable power do not accrue to the communities proximate to a given development. Certain policies advantage the powerful (i.e., corporations, financial firms, and others) over other stakeholders. This criticism of selectively prioritizing certain stakeholder interests over others in energy- related development recurs elsewhere in the literature (e.g. Bracking’s 2012 piece on private equity funds in Africa or Kennedy’s 2018 analysis of Indonesia’s solar photovoltaics growth).

Such research suggests that, while no universal and exhaustive list of ideal components to an optimal energy governance framework exists, there are several characteristics or features that might be included in the ideal framework. Examples could include the following:

1) Taking into consideration all stakeholder concerns (as energy governance legitimacy often rests on developing broad coalitions that do not solely prioritize financial considerations over social and environmental concerns), and thereby sharing risk and reward in such a way that those actors best suited to handle a given risk can do so; 2) Considering the perspectives of those who maintain a more peripheral role in traditional energy decision-making processes; and, 3) Ensuring an equitable distribution of impacts (e.g., not all costs are borne by one stakeholder group) and sustainability over varying time scales (in the sense that short-termism is minimized).

Of course, this list presents only a partial summary. While it is difficult to incorporate the entire spectrum of normative energy governance concerns in the findings here, an awareness of these considerations can contextualize this internationally-focused research.

55 We use the term quasi-developing to denote the fact that South Africa combines sophisticated financial markets, robust systems of check and balances, and a world-class legal system with extremely high levels of abject poverty and rampant corruption. 56 These renewables development were pursued under the Renewable Energy Independent Power Producer Procurement Programme (or RE IPPPP) - a programme designed to facilitate renewable energy deployment in that nation outside of the dominant utility Eskom. 104

4.3. Methodology

As an analytic backdrop to this piece, we prepared two peer-reviewed renewable electricity finance pieces (Krupa & Harvey, 2017; Krupa et al., 2019), drawing insights for this thesis and those two articles from a total sample size (n) of 37. These articles present detailed reviews on two different (but highly consequential) renewable electricity financing models – that of the free- market United States and that of the non-liberalized Gulf Cooperation Council countries. During the research period (detailed in the following paragraph), the thesis author took part in a range of activities to support the more formal interviews, including often-informal discussions with energy sector participants (primarily individuals from a climate finance background or broader energy specialists), completing visiting researcher assignments at international energy-focused institutes, and attending multiple leading renewable energy finance conferences (with attendance at the Renewable Energy Finance Forum in June 2016 and the Renewable Energy Finance Forum – West in October 2017).

Our views were especially heavily informed by a lengthy series of discussions and interviews undertaken with influential energy finance stakeholders from across North America and Europe. Researcher visits to European financial centres (Geneva, Paris, and London) and North American financial centres (namely the major financial communities of the San Francisco Bay Area and New York, as well as the regional hubs of Los Angeles, Washington (District of Columbia), Seattle, Calgary, and Vancouver57) ensured that a range of locales received representation in our semi-structured interviews, and complemented an assortment of respondents from sites accessed only through phone service. Respondents hailed from a range of specialties (ranging from investment banks to law firms to think tanks to institutional investment entities) and were generally first contacted between May 2016 and April 2017. Time expended on the interviews ranged enormously – from less than an hour to multiple hours in a single visit to multiple site visits over multiple trips. All research was completed after securing approval through the Social Sciences, Humanities, and Education Research Ethics Board at the University of Toronto.

57 We note that this list includes 3 of the world’s top 10 financial centres (in descending order, London (1), New York (2), and San Francisco (9)), according to the Global Financial Centres Index for 2018, and that all of these sites (with the exception of Seattle) are present in the aforementioned Index. 105

Table 16: Number of respondents, respondent industry type, and nature of interview.

# of Industry type # in-person / # by respondents phone

3 Alternative investments (e.g. private equity) 3 in-person

4 Banking (e.g. investment banking) 4 in-person

8 Legal 4 in-person, 4 by phone

13 Academic, think tank, research, international agency, 8 in-person, 5 by or similar phone

5 Industry (e.g. corporation, renewable developer) 2 in-person, 3 by phone

3 Government agency (e.g. international institutions) 2 in-person, 1 by phone

1 Investments (i.e., an institutional investor) 1 by phone

It is worth highlighting that many of the respondents came from organizations with an entrenched fossil fuel orientation. Indeed, the financial sector as a whole remains deeply intertwined with fossil fuels. A sobering 2019 report entitled Banking on Climate Change (Rainforest Action Network, 2019) notes that banks continue to fund fossil fuel assets at a rate far in excess of what is required to actively address the climate crisis. One of many telling facts in that report is that all six major US banking institutions are in the top 12 funders of fossil fuels. Even though we do not identify specific organizations here, this is the general institutional macro-framework within which many of our respondents are operating.

To select interviewees, we looked for some evidence of thought leadership (e.g. seminal written pieces for researchers, major deals for practitioners) or decision-making authority (e.g. a title such as Director). To secure interviewees, we were faced with a perplexing problem; namely, many of the desired respondents were not only employed at highly influential organizations, but also maintained senior positions at these institutions. Consequently, many of our target interviewees were extremely busy people coordinating travel schedules and managerial

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responsibilities. Their time would be highly coveted, yet their views would be highly relevant (in the sense that they would represent action “on the ground”) and would be rooted in the informed perspective of someone with either decision-making authority or close contact with decision- makers. Given the practitioner lens through which many of them viewed the world, they offered the chance to provide a perspective that could culminate in a uniquely “applied” research outcome - an attractive prospect to the author and supervisor, who have an established history of activist energy-oriented research (e.g. Krupa, 2012a; Harvey, 2010a; Harvey, 2010b).

A variety of strategies were deployed to overcome issues of barriers to access. In cases where a potential respondent evinced clear thought leadership, we contacted them through social media channels, cold-calling, and unsolicited e-mails. In cases where this approach was successful, we were generally capable of parlaying the contact with our initial interviewees into further conversations with other renewable energy finance experts. This was largely due to the “snowball” effect (successfully used in other sustainable finance research - see Bocken, 2015), which enables a researcher to opportunistically secure respondents whom the researcher may not have initially considered (even though the new respondent addition had a strong capability to contribute to the research outcomes) or been capable of contacting due to being “hard to reach” (Heckathorn, 2011). This is similar to using a ‘gatekeeper’ (e.g. helpful secretaries or colleagues). We also used existing energy community networks built up by the author.

In executing the research project, we attempted to tailor the structure of our interviews to each respondent’s situation. This required a unique engagement process on the part of the researcher (a process comprehensively outlined in W. Harvey’s (2011) work on interviewing elites). We adhered to many of the recommendations set out in W. Harvey’s piece, including building trust with interviewees, striking the right balance of scheduling adequate time for effective data retrieval while still respecting the time constraints of the interviewee, and providing varying question types (e.g. a mix of high-level and granular questions). We especially emphasized that all answers would be anonymous, as many respondents were unwilling to have specific perspectives attributed directly to themselves or their organizations.

Interviews were generally guided by a set of questions either tailored to the individual or very broad in nature (e.g. a facilitated discussion around general barriers to greater private sector

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involvement in the renewables space), but no structure was tightly adhered to. As the interviews proceeded, a pattern of variation in interviewee engagement emerged. In some cases, interviews were relatively short (that is, less than an hour), with minimal “additionality” in the sense that the data gleaned from the exchange was not used in any subsequent paper that resulted from the research. In other cases, the discussion extended far beyond the allotted time frame or, in at least one case, extended to multiple in-person visits over different trips. In still other cases, an initial meeting to simply meet and discuss related issues led to a solid future contact (but no interview was conducted with the initial point of contact) - such interactions are not included in the preceding Table. The focus in interview progression was not on achieving a predetermined quantity of interviewees contacted, but rather on finding additional value in each subsequent interview (primarily through assembling a diverse array of topical specialties).

In general, we observed no obvious “clustering of responses” (in the sense that London interviewees had markedly different answers than San Francisco-based ones). This is likely owing to several coalescing factors. Specifically, similarity in respondent education background (especially legal and business training), as well as a shared sector (renewable energy) and a shared approach (the intersection of renewables and business), potentially lead to some homogenization of views. While politics and economics are often national, it would appear that renewables is becoming truly global.

We were especially concerned with security and integrity of information. As a general rule, we again followed W. Harvey (2011), who noted that - particularly in instances where the research is dealing with confidential or proprietary information while simultaneously encouraging a free exchange of information between an elite respondent and a researcher - it is permissible to avoid recording the interview in favour of meticulous notes. This obviously poses the risk of certain components of the interview transcription being lost over the course of the exchange, but could facilitate greater frankness on the part of the interviewee. We did not record interviews.

It is worth noting at this juncture that our formal knowledge accumulation process occurred within the context of an anthropology-like ethnographic immersion process in the modern world of financing renewables. Ethnography involves the immersion of the researcher in the world of a coherent group of individuals to glean important information on group dynamics and propose

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action-oriented solutions (in the case of this paper, focused around policy recommendations). Unlike much of the climate finance literature, we opted for a primarily qualitative methodology. This concept of a non-quantitative ethnographic model (a relatively uncommon approach in financially-oriented or economically-based research) is somewhat rare, as there has been minimal qualitative work generally and even less ethnographic work in particular. However, there is a precedent for the former in work such as Bürer & Wüstenhagen (2009), and a precedent for the latter in past research conducted by the author in learning ‘best practices’ for accelerating sustainable transitions (Krupa, 2012a; Krupa, 2012b). There is additional momentum building around the use of qualitative research in finance, even though the field is generally quantitatively-oriented. For example, the Journal of Sustainable Finance & Investment has published work focused qualitative methodologies, such as that of Wagemans et al.’s focus on pension funds and ESG (environmental, social, and governance) issues (Wagemans et al., 2018).

More specifically, the chosen approach to dealing with these questions is akin to the idea of ‘multilocal’ ethnographies (a concept voiced in, inter alia, a 2003 piece by Hannerz). Multilocal ethnographies are contrasted to the exhaustive, (usually) single site research model that anthropologists have used extensively to thoroughly examine a specific group (e.g. the Trobriand Islanders). A multilocal ethnographer is attuned to the reality that we live in a globalized world, and attempts to assemble and synthesize data from a range of sites in a multi-dimensional way that will yield more relevant insights for increasingly complex 21st century theory and practice. This is especially useful in the highly interconnected and rapidly evolving world of modern finance, where individuals in the sector (as well as the money itself) move seamlessly between different centres of capital, and new modes of financial innovation are constantly being developed (Clark, 2005).

4.4. Results and Discussion

The following constitute the recurring themes that financiers (and similar constituencies) would like to see in terms of governance enhancements in renewable energy finance. We have grouped each of the findings under a broad macro-grouping of an “issue” - flaws in the policy and regulatory frameworks governing renewables investments and hurdles to increasing the supply of

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private sector capital to renewables. We have selected key discussion points that are corroborated by the literature, with special attention to recurring themes. For each sub-issue, we proffer both a background and overview of the current situation, as well as a discussion on how to move forward.

4.4.1. Issue 1 - Flaws in the policy and regulatory frameworks governing renewables investments

We address 3 problems with the underpinning policy and regulatory systems governing the integration of renewables into the grid - the absence of carbon pricing (Section 4.4.1.1.), stop- start policy issues (4.4.1.2.), and the need for policy simplicity (4.4.1.3.). These can have a negative impact on future investment and slow the pace of renewables adoption.

4.4.1.1. Addressing the absence of carbon pricing while simultaneously removing subsidies

4.4.1.1.1. Background and overview of current situation

Incumbent fossil fuel sources have been present long before renewables. They benefit from a complex network of supports, ranging from the obvious (such as the lack of costs incurred by those who pollute the air through the use of coal-fired electricity) to the less obvious (such as university research labs examining different combustion techniques). Coady et al. (2017) have divided subsidies into pre-tax subsidies (i.e., the narrow definition wherein energy users are paying prices that are below what the same resources could fetch in the market - the “opportunity cost”) and post-tax subsidies. The latter are broader, as they include the costs borne by society as a whole (including currently largely unaccounted for impacts such as habitat destruction or deteriorating air quality).

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Remarkably, in some cases energy producers are provided with incentives to accelerate their extraction of hydrocarbons58. At approximately $17-18 billion59 per year between 2011-2015, this direct support is large in absolute terms, but is small compared to overall subsidies of about $5 trillion per year r between 2013-2015 given by Coady et al. (2017) (of which 46% arises from non-payment of air pollution damage and 22% from crudely estimated climate impacts, both of which are implicit subsidies).

The next step lies in putting a price on carbon - either through a carbon tax or a cap and trade system. Carbon taxes are often supported by leading economists; among others, Murray & Rivers (2015) and Wagner & Weitzman (2016) argue for the effectiveness of taxation. The former pair, in a case study on the Canadian Province of British Columbia’s implementation of this tool in 2008, especially advocate for revenue-neutrality. Revenue-neutrality, they suggest, is the “purest form” of the economist’s prescription for how best to address the externalities of carbon pollution, in that sense that it can improve economic growth opportunities with minimal distortionary tax-related impacts. Burke et al. (2016) support this approach, calling carbon pricing a “first-best” solution due to its capacity to avoid economic distortions and internalize the cost of carbon emissions (which, as we described in the previous paragraph, are currently externalized into the global environment).

Carbon taxes also use the parlance of capital holders. Fabian (2015) notes that putting a price on a carbon is a redistribution mechanism that markets can comprehend. Of course, such clarity in description also brings an enormous downside, as the politics of a carbon tax are more difficult on the ground (given that voters are often adverse to new and/or highly visible taxes). Murray & Rivers (2015) observe that a carbon tax was initially opposed by a majority of British Columbians - including the opposition New Democratic Party of the time, who launched an “Axe the Tax” campaign (before reversing course in later elections). Gradually, however, these researchers note that carbon taxation moved away from being a political wedge issue - even though opposition from certain socioeconomic demographics persists.

58 These types of subsidy should be the first eliminated, followed by any incentives that maintain the status quo of fossil-related carbon pollution. 59 Note that we are referring here only to explicit producer subsidies - not the total subsidy of fossil fuels. The International Monetary Fund’s Coady et al. report draws from Organisation for Economic Co-operation and Development (OECD) (2013) to compile this figure from OECD member countries. 111

Krupp & Horn (2009), by contrast, argue for the merits of cap-and-trade systems, which involve the initial disbursements of credits to polluters. These polluters then trade amongst themselves in a finite (and shrinking) market for pollution allowances, with the trading of allowances setting the price for pollution. According to these authors, emission trading systems (the alternate name for cap-and-trade) are a chance to direct innate human proclivities (such as ingenuity and ambition) towards ameliorating the carbon issue. An example of the effectiveness, they say, can be found in the US Clean Air Act of 1990, in which a similar scheme was enacted to counter acid rain issues stemming from sulfur dioxide emissions.

The climate impact component of the subsidy can be removed through either a carbon tax or a cap and trade system. Wagner & Weitzman (2016) point out that, when implemented perfectly, either approach can yield the desired outcome. Indeed, they go so far as to state that “in a theoretical vacuum without uncertainty, the two approaches [carbon taxes and cap and trade] yield the exact same result”. In practice, the politically feasible solution would be entirely contingent on the specific political and economic situations of a given country or region. For example, a wealthy Scandinavian country faces an entirely different political economy (not to mention geography, set of human capital constraints, and other key variables) from a destitute central African nation, and it would be impossible to provide universal prescriptions across all contexts.

Taxes are generally anathema to citizens in both democratic and non-democratic states (including the two regions already covered in this thesis - the GCC and the US). The GCC maintains an extremely low tax environment (with only 16 percent of government coming from taxes, compared to 90 percent for the OECD - Ghoul et al., 2019). The US also maintains a relatively low tax environment, as evidenced through the large-scale 2017 tax cuts enacted by the Republican-controlled executive and legislative branches and a lack of acceptance for carbon taxation in even the most progressive American states (such as in Washington State, with voters repeatedly rejecting the implementation of a carbon levy in that state - Roberts, 2018). Therefore, at least in these two contexts, cap-and-trade solution is probably more likely to be acceptable to voters.

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4.4.1.1.2. How to proceed:

The obvious starting point involves eliminating the current implicit and explicit subsidies that exist for fossil fuels. This should span the entire spectrum of electricity development, encompassing everything from basic research to the commissioning of mature power plants. In cases where explicit subsidies for fossil fuels do exist, a logical starting pointing point is to simply remove them. Where fossil fuels are not explicitly subsidized, the introduction of carbon pricing (ideally rooted to the relevant social cost of carbon for that jurisdiction, while recognizing that the social cost of carbon is linked to its global impacts as well) would entail ensuring that a proper price is attached to carbon emissions. The social cost of carbon has been pegged by Wagner & Weitzman (2016) at $40 per ton - with the upper bound possibly being far higher (over $400 a tonne globally, with unbalanced distributions at the country level, according to Ricke et al., 2018). Attaching such a price would level the playing field between fossil fuel sources and their renewable energy counterparts.

Respondents repeatedly pointed to the relative imbalance in explicit subsidies between fossil fuels and renewables. Again, elimination of all fossil fuel subsidies, both explicit and implicit, is essential, and would also eliminate the need for explicit subsidies for mature renewable energy technologies such as onshore wind and solar photovoltaic electricity generation. Elimination of all subsidies, whether for fossil fuel or renewable energy sources, would in turn increase the attractiveness of energy efficiency, thereby reducing the required deployment of renewable energy sources – none of which is without adverse environmental impacts of some sort.

4.4.1.2. Avoiding start-stop policy approaches

4.4.1.2.1. Background and overview of current situation

Another recurring theme among the respondents revolved around the impacts that start-stop policies have on investor sentiment. This phenomenon occurs when a given region attempts to alter a previously implemented course of action on a going forward basis or - more deleteriously - retroactively changes an extant framework. This is a finding, as described earlier, that is captured in past empirical work by Davies & Diaz-Rainey (2011).

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Examples from the last decade are given in Table 17.

Table 17: Sample of historical stop-start policy events and their impacts.

Country Sample event Consequence of sample event affected by stop-start policies

Norway A new bioenergy facility was opened Private sector actors found it shortly before a significant policy increasingly difficult to allocate private change affecting renewable fuels was capital (owing to a perception of higher announced. risk).

Spain A generous and substantial subsidy Significant chilling effect on future regime was developed to incentivize investment, even as future procurement a rapid build out of renewables. plans from the Spanish government Retroactive feed-in tariff cuts were continue to be announced. implemented, with formal requests submitted to clean energy plants for repayment.

United Tax incentives for new renewable Development would follow a boom/bust States deployments have been approved by pattern as projects rushed to complete Congress on an annual basis, causing minimum requirements prior to credit considerable uncertainty around expiry. This changed after Congress prospects for renewal. granted a five year extension to tax credits, although future transactions will be impacted by the 2017 US tax reform.

United Nevada put forward net metering Investor trepidation around Nevada- States revisions, thereby impeding based investments. (state) distributed solar developments60. Source: Author; White et al., 2013; Potskowski & Hunt, 2015; Sen & Ganguly, 2017; Martin, 2017a.

60 Comello & Reichelstein (2017) provide an overview of how public utility commissions are dealing with the issues associated with net metering (a practice wherein generators can sell surplus electricity they generate back to the grid at retail prices). Critics have deemed this practice costly, as generators are paid retail prices without incurring costs related to grid services. The aforementioned authors note that different approaches have been taken by states dealing with net metering issues, with California largely maintaining business as usual, Nevada opting for reductions in tariffs paid, and Hawaii pursuing a middle-of-the-line strategy that offers a rate between wholesale and retail. 114

4.4.1.2.2. How to proceed:

At a basic level, clear communication of long-term intentions is critical (e.g. Jakob, 2017). One respondent specified that clear mandates from decision-makers are often lacking, making it difficult for investors to make capital-intensive investments with long time frames. Even more damaging, according to multiple respondents (and corroborated by practitioner literature such as Potskowski & Hunt, 2015), is the threat of retroactive revisions to frameworks already in place. Such an approach threatens to reduce investor allocations not only in the year that retroactive changes are made, but also in future years (catalyzing a chilling effect on future sentiment).

Therefore, policy should remain stable, consistent and predictable (Steckel & Jakob, 2018), with changes communicated clearly and well in advance. While it is an understandable temptation for governments to renege on past commitments or change course in tight fiscal situations, it is difficult to overstate the tremendous psychological damage that such actions exert on the collective finance community psyche. Stable finance relies on stable policy, and it is critical that every effort to preserve stability is made. Note that this is different from the change itself, as private sector capital can be open to changing conditions so long as it is done in a predictable manner.

Current governments face a perplexing dilemma. Many are at least nominally democratic, but voters today are tempted to defer capital-intensive investments today that have significant beneficial impacts on future generations. Given that legislation can be overturned by subsequent parties in power, perhaps the best option is to introduce policy and regulatory supports that are strategically oriented towards long-term multi-party approval. The United States, for instance, has long provided production tax incentives (called Production Tax Credits, or PTCs) for solar, wind, and other technologies that cover not only traditionally favourable Democratic states such as California, but also more conservative states such as Texas. Although fiercely critiqued as an example of pernicious government meddling (e.g. Hanson, 2014), the subsidy has had remarkable staying power. Similar to our previous advocacy for green banks’ capacity to catalyze bipartisan approval (Krupa & Harvey, 2017), such solutions should be explored in the context of ensuring policy durability over the long run.

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4.4.1.3. The need for policy simplicity 4.4.1.3.1. Background and overview of current situation

Related to 4.4.1.2. is the need for policy simplicity, rather than complexity. Complexity can occur in the form of excessive government regulatory hurdles or extensive documentation requirements during due diligence phases. Our respondents called for measures to combat it, with one of our respondents especially critical of interconnection procedures (complex processes, which are hamstrung by thousands of these processes).

Policy simplicity starts with the speed at which actors are able to navigate the patchwork of laws and regulations governing implementation – a process that can sometimes drag on for years. Regrettably, governments - who should be making renewable energies as easy to deploy as possible - sometimes have arduous requirements in energy-related processes such as transmission siting. Yonk et al. (2013) have compiled a series of case studies profiling a broader analysis of US legal, administrative, and sociopolitical hurdles to renewables deployment (as well as other alternative energy sources, such as oil shale). In one particularly memorable anecdote, the authors recount visiting a Utah-based geothermal generator. Noting that the transmission line departing the facility abruptly turned right and left as it crisscrossed the Utah Desert, they learn that it is more cost-effective to build a longer transmission line following state and private lands rather than adhere to the federal regulatory processes for crossing federal lands.

Another theme raised in our discussions involved document standardization, as those reviewing and approving renewables financing are often required to conduct due diligence on different projects with a diverse range of documentation across different jurisdictions. This finding aligns with existing literature, such as Steffen (2018). Lowering transaction costs and simplifying due diligence are likely to disproportionately benefit projects at the smaller end of the project size spectrum, as fixed transaction costs are spread over smaller revenues. Standardization and simplification measures would seem likely to be especially beneficial to community-owned projects, impact investment projects (i.e., projects supported by “impact” investors seeking returns beyond the financial, such as social or environmental returns), and other project types that incorporate altruistic drivers as part of their value proposition.

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Related to the concept of simplicity is clarity; for example, clarity around localization requirements which require a certain proportion of a project’s materials to be sourced locally. They have been found in both developed (Stokes, 2013) and emerging market (Baker & Sovacool, 2017) contexts.

Moreover, one respondent noted that even advanced markets contained instances of internal contradictions. This is apparent under the broader umbrella policy framework of “environmental policy” in the context of California, as evidenced in the tension between (important) endangered species preservation goals and potential sites for renewables project builds. Gridlock when trying to accomplish conflicting environmental goals (in this case, ensuring a livable habitat for wildlife and using desirable solar electricity generation sites) can slow deployment to a crawl - in a state with aggressive climate change alleviation goals and a history of climate advocacy. Compromises are needed when there are such contradictory objectives, but the pace of renewables deployment will be aided if decisions are made in a timely manner.

Yonk et al. (2013) describe such a tension with reference to Solar Energy Zones in land managed by the Bureau of Land Management in the United States. In that specific instance, a large solar development in the Mojave Desert in California has been hamstrung by poor initial estimation of tortoise populations in that area. The initial corporate survey found only 16 tortoises (Danelski, 2011), but a more detailed subsequent piece of research found over 3,000 tortoises would be disturbed. It is important to accomplish renewables deployment goals, but the question of how many living beings should be disturbed or killed in the process is a complex matter dependent on a wide variety of assumptions. Either way, the best course of action should be a timely decision – whether or not it is in the favour of the renewables developer (as biodiversity must be protected to some minimum extent).

4.4.1.3.2. How to proceed:

A variety of policy fixes should be implemented to address these issues. Simple standardized forms could be implemented for project finance opportunities within a given country, if not between countries, thereby reducing the administrative workload for those undertaking investment assessments. When implementing new laws, policymakers should ensure that there is

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minimal contradiction, ambiguity in wording, or overlap with existing frameworks in place. Similar to Section 4.4.1.2, intentions for change should be conveyed clearly and predictably well in advance. Ideally, the time frame to decisions being made would be short.

4.4.1.4. Mitigating system-level barriers and re-considering coordinated planning

4.4.1.4.1. Background and overview of current situation

The current configuration of electricity grids is not oriented towards utility-scale intermittent renewables deployment or the mass roll-out of smaller-scale distributed-generation resources. This sentiment is presented by Helm (2018, p. 224), who provides the following paraphrased summary (included in full for its clarity): “There never has been much of a ‘competitive market’ in energy. Its history is one of planning, monopoly and vertical integration. The myth of great capitalistic enterprises should not be confused with open competitive markets.”

Jacobson and Delucchi (2011a; 2011b), in a broader analysis of the policy issues and needs associated with converting the world’s energy to a wind, water, and solar power base, argue that the existing energy system was built to serve the needs of fossil fuel generators. Electricity markets, we therefore emphasize, are not structured appropriately to absorb massive shifts towards renewables supply.

Of course, the current system is not an organically produced accident. Electricity-related markets, one of our respondents stressed, emerged from a careful design. Accordingly, there is a (fossil-oriented) historical legacy that renewables must contend with, and our respondents were clear that the current energy delivery system penalizes renewables on a variety of fronts. One respondent emphasized that the original fundamental single-utility model supported centralized power generation, and was designed to incentivize dominant market entities that relied overwhelmingly on baseload energy sources such as coal and hydroelectric. These dominant utilities, which were often vertically integrated, would generate, transmit, and distribute certain reliable forms of fossil, nuclear, and (renewable) hydroelectric-derived energies to end-users for consumption. Smart grids, decentralized generation, and new innovations such as artificial intelligence - only now emerging in the electricity sector - were not envisioned. While there have been slow changes over time in utility-related incentive measures (Joskow & Schmalensee, 118

1986), the utilities of today are not necessarily designed to thrive in a world of dominant renewable energy generation.

The scale and complexity of the change are also daunting. At a macro-level, the large-scale integration of renewables into grids is a “major paradigm change”, according to Verzijlbergh et al. (2017), with a scale that is intimidating to tackle. It cuts across technology, policy, finance, and governance - all bound by politics. To cover some of the technical issues, the aforementioned authors describe issues such as how renewables come packaged across smaller sizes and can complicate distribution networks (e.g. due to large two way flows of power into local grids from solar photovoltaic arrays on buildings). Grid integration requires not only providing large amounts of energy from dispersed, small unit sources (such as thousands of 1-3 MW wind turbines instead of a few 200-500 MW gas or steam turbines), but it also requires the renewable energy sources provide various “ancillary services” (such as voltage and reactive power support, frequency-active power control, and fault-ride-through capability). Modern wind turbines can provide these services but at the cost of reduced energy output (and associated energy-related revenue) - see Fig. 8 of Rebello et al. (2019). In the absence of a vertically integrated power authority that can centrally plan and coordinate the provision of all these power system qualities, separate markets are required for each service, greatly complicating long range system planning.

Pricing is an especially serious issue. Pierpont and Nelson (2017) outline how electricity markets often tie pricing to marginal supply (i.e., the last unit supplied is what defines the price). Two serious issues are raised by this. First, it implicitly assumes an ongoing role for fossil generators - especially natural gas - in the electricity mix, who are well-equipped to plug any shortfalls in supply to the market (and therefore end up setting the marginal price). Conversely, strong winds at night can create an excess of supply over demand, leading to negative prices. Although negative prices would encourage shifting of demand from day to night (through, for example, pre-chilling of buildings prior to the next day) or stimulate new demand at night (such as charging of electric vehicles or electrolytic production of hydrogen for use during the day), it undermines the overall financial viability of wind energy.

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Some of the persistence of these unfavourable markets in the renewable energy space can be attributed to the institutional structure of the major power utility players in the market described in the preceding paragraph. Large entities - including electric utilities - can be prone to inertia. A similar plight can be found in the oil and gas sector. Like utilities, Helm (2018) observes that oil and gas companies face a looming carbon constraint (driving decarbonization of the energy system) and a host of new technologies (such as machine learning, an application of artificial intelligence) - along with an uncertain future as they adjust to a new normal. As Zhong & Bazilian (2018) have laid out, international oil and gas companies bring substantial energy- related skills and a global footprint to possible renewable energy pursuits - combined with core competencies that fall outside the purview of renewable energy deployment. These authors observe that internationally-oriented oil companies, when switching from petroleum to renewables, need to “...manage completely new supply chains, procure unfamiliar technical capabilities, and establish new delivery hubs.” Such outside-the-box approaches can be understandably difficult to deploy, and institutional inertias do emerge.

Finally, constraints in transmission and distribution systems have made it difficult for renewables to compete on a level playing field against incumbents. The best renewable energy sites are often both geographically dispersed and situated far from load centres; as a result, transmission lines are needed to transport the energy from where it is generated to where it is needed. MacDonald et al. (2016) have called for the construction of a high voltage direct current (HVDC) transmission backbone to facilitate the connection of renewable energies from production areas to load. This is often a governance question, for the financial questions are not necessarily central. Economies of scale favour very large transmission lines, according to Harvey (2013b), as transmission costs do not rise in direct proportion to capacity levels. However, these pieces of enabling infrastructure have not been implemented at the rate necessary to move towards a highly renewables-dependent electricity infrastructure.

4.4.1.4.2. How to proceed

Addressing this issue is an enormous project (and one that is potentially irresolvable, at least in the short-term). A first stop may be to consider a single utility that plans and coordinates the entire package of requisite measures, which will require combining amounts and spatial

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distributions of wind and solar supply that may not be most profitable for the last unit added but which leads to a more resilient system. This would be a reversion to the past in some cases, but a large institution can drive much better coordination of transmission, reactive power control, frequency control, and - of course - generation. Consider the case of Ontario Hydro which, as Stokes (2013) notes, was moved towards privatization after the passage of the Energy Competition Act.

Of course, some critical political and economic issues are raised by significant energy market power concentrated in a limited number of entities, as discussed in Yatchew (2014). He notes that while monopolies are sometimes more efficient (such as in the case of transmission or distribution), monopolies can lead to inappropriate political leverage, prices that are too high, or quantities that are too low. Rivard & Yatchew (2016) reference the same case as previously cited in Stokes (2013) - that of Ontario, Canada. These authors highlight that in cases of substantial centralization and government involvement, there should be some level of subsidiarity (i.e., devolution of decision-making to the lowest level capable of competently executing a specific mandate) and separation (i.e., political and regulatory systems are separate, which should improve independence and minimize the conflicts of interest that may arise).

Although a single utility may be optimal, it may not be politically feasibly in all jurisdictions. In such cases, a theoretical partial alternative solution to the problem of market structure can be found in a paper by Pierpont & Nelson (2017). As previously mentioned, these authors contend that electricity markets (as currently structured) are not designed to accommodate large amounts of renewables. Pierpont and Nelson note that many renewables-related electricity infrastructure issues could be remedied by the separation of one market into two. Specifically, the first division would include an energy generation market61, wherein commodity electricity production (driven by auctions for long-term energy contracts) would be enacted. The second division would involve a delivery market for the transmission of energy to locations where it is needed, and would be reliant on batteries or other storage technologies62. The delivery market would receive

61 Usually, “energy market” refers to the suppliers of electricity to a market, while delivery refers to the regulated natural monopoly of the transmission system. 62 Note that such a division would differ from existing attempts at unbundling electricity markets (such as the existing electricity market division in Ontario, Canada that we have previously mentioned, wherein different entities control system operation, transmission, and other electricity market functions). 121

a top-up in price above and beyond the wholesale-like energy market, which would be dominated by technologies such as solar and wind, whose costs are dominated by upfront capital expenditure requirements that can be paid back over defined time periods. The primary focus for delivery market actors would be on meeting the second-by-second variations in demand, as well as adhering to the standards of reliability expected by grid operators.

Such a structure may face challenges in implementation - not the least of which would be overcoming the institutional and market inertias described in 4.4.1.4.1. In addition, it is clear that the two markets would need to cooperate extensively to ensure complementarity (as Pierpont and Nelson freely acknowledge). Pierpont and Nelson propose solutions; for example, to ensure that a range of resources are procured for optimal flexibility, they recommend running separate auctions in the energy market that cover each technology useful to a given locale. In electricity markets, location and timing are critical considerations that procuring based on lowest-price does not cover. Therefore, forecasting plausible long-term scenarios can enable procurement agencies to secure the best mix of least-cost options.

Challenges aside, such a market composition would certainly provide much greater investor- friendliness than the status quo - simultaneously helping to develop incentives that are front of mind when investment decisions are assessed, while still enabling decarbonization of the energy system. Investors, it must be stressed, require markets relevant to the risk and reward profiles that they are seeking. Under the structure developed by Pierpont and Nelson, the appropriate actors would develop a role in clean energy markets that was most relevant to their respective strengths.

4.4.2. Issue 2 - Hurdles to increasing the supply of private sector capital to renewables

Addressing the climate crisis will require, under most scenarios, increasing the rate of deployment of renewably-based electricity generation capacity from about 110 GW per year in 2018 to 400 GW per year or more by mid-century (see Fig. 2). This includes increasing (context-dependent) debt and equity options (4.4.2.1.), targeting the best return per public dollar

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expended (4.4.2.2.), and encouraging new capital sources that can bring down the cost of capital (4.4.2.3.). A further description of each of these pieces is given below.

4.4.2.1. Support general growth in equity financing or debt financing (depending on the context)

4.4.2.1.1. Background and overview of current situation

Agrawal (2012) notes that limited financing can cause the abandonment of projects - even those that demonstrate a positive net present value (NPV) and, therefore, make economic sense! To arrive at an optimal renewable energy project, we must look at its “capital structure” - a term used to describe the relative contribution of debt and equity sources of project-related capital. The capital structure of a renewable energy project can vary significantly, depending on factors such as the type of project, the project location, and the time period in which the type of capital (i.e., the debt or equity) is being injected. Bean et al. (2017) demonstrate that, overall, higher quality projects tend to have higher levels of debt and less equity. This is because higher quality projects can attract favourable debt terms.

Debt maintains a lower cost of capital, and brings several advantages to a transaction. First, when used in the appropriate context (such as in the case of mature technologies including onshore wind and solar photovoltaics, where lenders can offer competitive terms due to a well- understood risk level), it can greatly improve the economics of a project. Low-cost debt amplifies equity returns; for example, if a developer can earn a 10% return on a project while paying only 3% to creditors, he or she can capture the favourable differential as an additional benefit to any returns she would glean from the equity investment. Agrawal (2012) notes that, in addition to improved economics, debt can bring the added benefit of improved fiscal management on the part of project managers (owing to the fact that a high percentage of free cash flow must be used for debt repayment and is therefore less easily wasted on unnecessary items). Finally, debt is often tax-advantaged, in the sense that interest charges incurred can be written off against tax liabilities.

Equity, by contrast, has a higher cost of capital (i.e., required rate of return), and depends on what shareholders (or another similar ownership entity) require for their return. However, it is 123

critical for spurring renewables deployment growth early in a project, when debt is more expensive to secure, and works in tandem with debt at strategic points in the lifecycle of a project. Investors sometimes seek to get the best of all possible scenarios; to paraphrase one respondent, there can be a sense that investors are sometimes seeking equity-like returns with bond-like risk characteristics (i.e., high returns from low-risk investments).

General interest rates have fallen over the last decade, and both creditors and investors are recognizing the maturity of technologies such as wind and solar, which further reduces the required rate of return and the levelized cost of electricity (LCOE). As just one example, Krupa et al. (2019) show that a 2% difference in the cost of capital can lead to a 4 cent/kWh difference for a representative 100 MW concentrating solar plant (i.e., using concentrating solar thermal power technology) – 0.278 $/kWh (discount rate of 0.04) versus $0.317/kWh (discount rate of 0.06).

In addition to capitalizing on favourable debt trends, it would be useful to bring new equity-side actors into the mix. These entities would take equity (ownership risk), and can bring in a multiple of debt dollars (owing to the previously mentioned high debt-to-equity ratios that define strong renewable energy assets63). More equity would allow more projects to be seeded – potentially displacing carbon-fueled projects that would otherwise go ahead. As of the time of the bulk of the interviews (mid-2016), multiple respondents emphasized the abundance of debt available to renewable energy projects (matched with a conspicuous absence of equivalent equity availability).

4.4.2.1.2. How to proceed:

In et al. (2017) note that large “valleys of death” define both technology and commercialization stages of a product’s lifecycle. They find that various risks (market, technology, team and management, and financial) plague renewable energy investors - and current markets are poorly equipped to handle them. To compensate, they offer a theoretical antidote - an intermediating

63 Since the conclusions of our interviews, positive signs continue to emerge. One member of a panel from the 2017 Renewable Energy Finance Forum - Wall Street opined that “there has certainly been an increase in the capital available in the market, especially on the equity side”. Another noted that “on the equity side...we are seeing countless new entrants”. See Martin (2017b) for the full transcript of the panel. 124

and trusted entity analogous to a smoothing air traffic controller. This intermediary would maintain an emphasis on promoting strategic provision of capital (e.g. first-loss capital, as further described in Krupa & Harvey, 2017) or in the form of patient capital which takes longer time frames than the average investor in investment decision-making) and it would also provide objective information on investment opportunities. This may be a structure for policymakers to consider.

Some modest positive movement in terms of growth in situation-dependent equity and debt is emerging, such as in the case of the Breakthrough Energy Coalition. This is an initiative which provides patient capital from a number of the world’s wealthiest individuals, including household names like Microsoft’s Bill Gates and Amazon’s Jeff Bezos. Renewables-related projects with long timelines to completion are slated to be among the beneficiaries of this initiative (Condliffe, 2016). It is part of a 20 year effort to mitigate climate change that (correctly) sees electricity generation as one significant piece of the broader climate mitigation. More such efforts are needed.

More straightforward fixes can be found. For example, Helms et al. (2015) simply urge utilities to re-think their capital allocation processes, as renewables bear distinct benefits (e.g. a lack of ongoing fuel costs, albeit with high capital expenditures) that require a differing risk appraisal than those sometimes deployed by utilities (and may lead to an assessment of renewables as lower-risk than often assumed). Helms et al. (2015) call renewables low-risk compared to their fossil counterparts, even though they are clearly not always perceived as such. Addressing this could be undertaken through an education process directed towards utility managers, industry consultants, and policymakers.

Institutional investors are particularly enticing funding sources, as we have highlighted in Krupa & Harvey (2017). They can make direct investments in projects (Nelson, 2015) or allocate capital to investment entities such as private equity and venture capital managers, who in turn make targeted investments in clean technologies. In addition, institutional investors can invest in a variety of listed (that is, traded on a public exchange) and unlisted (private) investment vehicles. The low-risk, long-term cash flow characteristics of contracted renewable energy assets, which are very attractive to (generally more risk-averse) institutional investors, allow for

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these well-capitalized intermediaries to facilitate the ongoing preference for high debt-to-equity ratios in project capital structures.

New investors, such as managers of post-secondary institution endowments, could be coaxed into the space in greater numbers. These entities not only maintain substantial funds, but also possess capital allocation flexibility, in the sense that they are less captive to specific rules around investment focus. Endowments have historically relied heavily on alternative investments (of which renewables infrastructure is one sub-class under this broad designation) for the bulk of their return benefit (Barber & Wang, 2013)64. Intriguingly, they may also be driven to invest in renewables by non-financial forces, such as the views of wealthy alumni benefactors or activist student populations that would like to avoid investments in carbon-intensive activities. We expand further on this theme in 4.2.3.2.

4.4.2.2. Target scarce government dollars to areas that would have a high return for minimal initial outlay

4.4.2.2.1. Background and overview of current situation

Governments need to deliver on public goods goals, but to do so, they need to go beyond their justification of the status quo. They should be a means to an end – rather than simply an end. Of course, an acknowledgment of their limitations is important. The present era of budget deficits, swelling pension obligations, and public support for the introduction of ever-lower taxation environments65 (among other factors) has led to a situation where public capital almost definitely cannot meet all renewable energy financing needs.

64 An instructive case to observe is that of the Yale Investments Office (YIO) at Yale University under the stewardship of David Swenson. Based on a pioneering strategy laid out in Swensen’s 2009 book Pioneering portfolio management: An unconventional approach to institutional investment, YIO has deployed a portfolio management approach that has resulted in returns that have consistently outperformed public equity benchmarks (albeit with a notable decline around the time of the financial crisis - Barber & Wang, 2013). 65 An ongoing recalcitrance is present in many countries - from Western liberal democracies to Middle Eastern monarchies - for initiating the substantial tax increases that could resolve this issue. The most effective is likely to be holistically accounting for externalities through measures such as carbon taxes, and there is some evidence that politically feasible resolutions can be found. For instance, a distinguished list of conservative commentators in the United States have founded the Climate Leadership Council (n.d.), a group which has argued that a potential solution can be found in their four pillars: a gradually increasing carbon tax, carbon dividends for all Americans, border carbon adjustments, and significant regulatory rollback. 126

Sometimes, it is simply a matter of eliminating a current inefficient practice. In one recent example, Canes (2017) describes inefficient US federal agency energy developments covering renewable energy and energy efficiency. They are inefficient because Congress has supported the use of private sources of financing, leading to plausible estimates of extra costs incurred of around $200 million per year (assuming that publicly financed dollars could be used instead). Beyond removing inefficiencies, Sen and Ganguly (2017) state that public dollars can perform other functions as well, and say that in the short-term, emphasis should be placed on supporting the planning phase of renewables developments. This could include, according to these authors, the promulgation of risk mitigation tools (e.g. targeted government guarantees that can backstop certain desirable project types), partnership development (such as with development finance institutions, which we discuss later in subsequent paragraphs of 4.4.2.2.1.), and providing risk capital (e.g. using small amounts of public dollars to spark a multiplier of private dollars).

In addition, Bodnar et al. (2018) have pointed out that subsidy interventions (such as in the form of grants) have not proven up to the task of driving private sector involvement at scale. These researchers specifically reference the inadequacy of past subsidies targeted at the most vulnerable (grants, concessional loans) and past policies implemented in high-income countries (fuel standards, feed-in tariffs) for driving renewables growth combined with effective carbon mitigation. Potskowski & Hunt (2015), as discussed in 4.4.1.2.2., have shown that governments providing subsidies have shown themselves to be unreliable in several instances (such as in Spain), and go so far as to call the possibility of abrupt change in renewables support policies (both for existing assets and those in the future)“the greatest threat to clean energy investors”.

In this political economy, private investors driven by market logics of risk and reward have a significant role to play. However, they are generally unlikely to support public goods for non- financial reasons (although a growing group of niche exceptions are attempting to link economic returns with social or environmental improvement - see Bugg-Levine & Emerson, 2011). In such an environment, limited public capital should be used to target high-value instances where small investments can yield disproportionate (or even transformational) beneficial impacts.

One example that has been put forward is that of public-private partnerships (PPPs). A sizable literature exists on the merits and disadvantages of public-private partnerships for financing

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infrastructure, including an emerging literature on the applications of PPPs to renewable energy (Sovacool, 2013). Sovacool draws on eight case studies from Asian and African countries to describe “pro-poor” PPPs (using the new abbreviation of “5P”), noting that properly coordinated PPPs share both the risks and rewards of any sustainable energy development. Conversely, some researchers have found that the substantial downsides of PPP arrangements require sober consideration. These include the residual risk absorbed by the public sector in case of the project’s failure and the fact that private financiers often build in an insurance premium to their project bids for unexpectedly higher costs or unanticipated delays - thereby calling into question the value of applying private sector efficiencies and management skills to the process (Boardman et al., 2016). Siemiatycki (2006) notes that PPPs can also have inadequate accountability, political interference, and limited technological innovation.

Arezki et al. (2017) offer a possible modification to future PPPs. It holds similarities to the description of a control tower offered by In et al. (2017) and described in 4.4.2.1.2. Under their vision, development banks would provide expertise, while institutional investors would provide capital. This would be a synergistic relationship focused on each institution harnessing its competitive advantage.

The capital mobilization potential here is significant. Arezki et al. (2017) note the enormous assets under management of over $100 trillion held by this latter group (which includes pension funds, insurance companies, and sovereign wealth funds). These authors then use the $100 trillion figure to contrast that amount with other substantial global economic figures, such as the US nominal GDP in 2015 (which, at $18 trillion, amounts to approximately one-fifth of the $100 trillion). They also note that the holdings of development banks are dwarfed by such figures.

Indeed, their overall institutional assets figure of $100 trillion is similar (i.e., $15 trillion higher) to a figure provided in earlier work by Nelson (2015). Nelson points out that the actual amount likely to be available to renewables is far lower (albeit still very substantial) - probably closer to $250 billion. To arrive at this much reduced sum, Nelson clarifies that we must take into account several constraints to arrive at the total amount available to actually invest directly in renewable energy projects (the most effective means of supporting renewables growth, as opposed to investing in corporations or pooled investment vehicles like infrastructure funds). These

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constraints include limitations on liquidity (a reduction of approximately $9 trillion), the ~$11 trillion reduction brought by the size and scale of the investment opportunities (some being too small for institutional investors, who may not have specialist in-house capacity to execute on renewable energy transactions), and diversification requirements (~$2 trillion). He argues that more of that type of investor in the renewables space will lead to cost of capital reductions due to competition for projects.

However, Nelson’s figure may be too low. The majority of the institutional investor assets are allocated to low-risk, low-return investments such as government debt fixed income securities - much of which could be exchanged for renewables. Moreover, Arezki et al. (2017) find that theoretical institutional investor assets sum to well over 2 orders of magnitude more than the borrowing arrangements of the development-focused World Bank (~$400 billion) and International Monetary Fund (IMF) (~$600 billion) during a recent pair of years (2015 and 2013, respectively). Even if all of these funds will not be used, this state of affairs presents an opportunity for each entity to deploy its respective competitive advantage, as the development banks could use their expertise in renewables technologies - rather than their limited capital (compared to institutional investors) - to facilitate the entry of capital-rich institutional investors into renewables at a significant scale. Otherwise, institutional investors may not pursue renewables opportunities over other options. They call this approach “originate-and-distribute”, with specialist development bank staff ushering institutional investors into the renewables space at scale.

4.4.2.2.2. How to proceed

Private sector investment such as venture capital is not the answer to early-stage research and development (R&D). Although venture capital has been critical to software and medical technology commercialization, Gaddy et al. (2016) find that it has had a poor track record in renewable energy, and so is often unappealing for renewable energy-oriented investors. Instead, government-funded Research & Development, as one of our respondents noted, is an excellent starting point. Basic research spanning decades holds especially significant promise. However, it must be supported by the government, as private sector renewable energy companies are often reluctant to expend dollars on research outputs that they cannot capture directly (despite the

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views of commentators such as Myhrvold (1998), who points out that such investments could ensure their long-term viability as a commercial enterprise). Corsatea et al. (2014) note that, although it only comprises approximately 15-20% of the total of private research investments, public R&D investments have “played an important support role for private initiatives”.

Research could have cascading positive impacts. For example, one of our respondents noted the potentially catalytic role of more investment dollars by catalyzing further developments in electricity storage that benefit mainstream renewables. Moreover, Taleb (2010) notes that many of the epochal technological advances of history have occurred without planning or foresight on the part of the originator/creator. This insight could be applied to early-stage renewables financing, as governments could set the fundamental parameters for inquiry and allow for serendipitous discoveries to emerge66.

Another available option is to provide early-stage risk capital. This can provide a strong incentive to renewable developers operating under conditions of uncertainty. As we have argued elsewhere (Krupa & Harvey, 2017), a useful intermediary is a green bank – an organizational configuration with a growing track record for best practices that has been assessed in the academic literature (see Geddes et al., 2018). Leonard (2014) demonstrates that these institutions can disproportionately affect renewable investment attractiveness, as a powerful leveraging effect can take place where minimal government dollars are provided to income-generating loans and risk reduction tools. A green bank does not have the same fiscal burden as a cash outlay for subsidies - effectively decreasing the aggregate political risk (e.g. policy changes due to a government change) and increasing the chance of broader public acceptance (e.g. through appealing to left-leaning and right-leaning constituents using different aspects of the green bank value proposition, who may appreciate the environmental benefits (in the case of the former) or the minimal government costs incurred (in the case of the latter)).

Perhaps the best way to envision this phenomenon is to demonstrate the sensitivity of the levelized cost of energy to the provision of a government de-risking measure. The discount rate

66 One participant in our interview process called for greater support for equipment prototyping, which could facilitate iterative learning by doing. However, the ultimate choice of focus could be determined by an independent third party providing recommendations to the decision-making authorities. 130

is equivalent to the weighted cost of capital (or WACC), given in the equation below (found in Chapter 2 as Equation 1) as:

WACC = (Ce * Pe) + (Cd * Pd * (1-t)) where:

Ce = Cost of equity (%/year)

Pe = Percentage of equity (out of 100)

Cd = Cost of debt (%/year)

Pd = Percentage of debt (out of 100) t = Tax rate

Assume our theoretical de-risking measure involves a tool that reduces the cost of debt from a private lender by 3-5%. We have simplified that to bring the discount rate down from 6% to either 4% or 5%.

Table 18: Components of the LCOE for fixed solar PV array benefiting from a government debt incentive.

Discount rate (i) 0.06 0.05 0.04

Lifespan (n) 20 20 20

Cost Recovery Factor (CRF) 0.09 0.08 0.07

Insurance (INS) 0.015 0.015 0.015

Initial Investment ($/USD) 90,400,000 90,400,000 90,400,000

O&M (fixed, $/kW/year) 600,000 600,000 600,000

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Number of hours in a year 8,760 8,760 8,760

Assumed availability factor 0.99 0.99 0.99

Capacity Factor 0.27 0.27 0.27

Plant capacity (kW) 100,000 100,000 100,000

Final LCOE Calculation 0.042 0.039 0.037

Source: Author; Krupa et al., 2019.

Another example of low-cost, high impact government funding could be for programs that facilitate better performance tracking history and assessment of wind/solar/other resource potential, as detailed histories and reliable estimates of resource potentials are necessary for facilitating the financing of new electricity generation projects. Providing publicly available tools to assist industry would assist with deployments, while support measurement tools could assess solar, wind, and/or other (e.g. geothermal) potential in sites where industry is reluctant to invest resources in exploration (e.g. remote areas or very poor countries). As the thesis author knows well from his previous role working at an independent power producer, project implementation is easier when a lengthy resource history upon which to base performance projections is available. Measures should be implemented to test a variety of technologies in a variety of locations, allowing for quicker introduction of projects into less-established territories. This appears to already be well underway (e.g. National Renewable Energy Laboratory, n.d.).

4.4.2.3. Encouraging new capital sources that can bring down the cost of capital

4.4.2.3.1. Background and overview of current situation

There is a need to bring down the cost of capital for the renewables space. Monetary policy is a useful starting point, as it influences private sector banking loan extensions (which tend to be below potential demand during periods of no or slow economic expansion). Campiglio (2016) has taken a macro perspective on this issue, arguing that green-oriented policies need to be

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implemented by those entities (i.e., commercial banks and central banks) controlling the supply of credit available to the market. This would allow for better private sector credit creation - especially in the poorer emerging economies, which tend to have a high degree of central bank involvement in credit extensions. To demonstrate the critical role played by regulation, Campiglio points to the current credit environment, wherein banks are reducing their risk exposures through curtailing loan provision as part of a defensive stance to preserve the strength of their asset base. This is sometimes even happening in cases where the extension of credit may make economic sense!

A major contributor to such constraints comes from the regulatory requirements of many banking systems. While these regulations are designed to reduce financial risks to the economy, setting minimum constraints that financial institutions must adhere to if they hope to meet regulatory minimums leads to cautious or unnecessarily short-term lending. Nelson (2015) draws special attention to EU Solvency II (an insurance regulation) and mark-to-market accounting. The former encourages European insurance entities to hold enough capital on hand to minimize the riskiness of their portfolio holdings, while the latter is designed to promote transparency in investments by requiring regular valuations to be undertaken. However, both deter potential investors from holding investments with long-term investment horizons - including renewables, which bring large upfront costs (and commensurately large upfront debt requirements).

Other times, renewables are competing with stipulations that allow for investment into either generation or transmission (but not both). An example provided by Nelson (2015) is the European electricity and gas market (the “third energy package”), which prevents those who maintain a controlling interest in an electricity transmission asset or a gas asset from holding similar controlling stakes in generation assets. This has the unintended consequence of requiring investors to choose between the two. Unfortunately, many already maintain a controlling interest in the former - thereby prohibiting renewables investments.

Yet other times, investors are incentivized to invest in a specific niche favoured by legislators; for example, one respondent highlighted the competition that results from the US Community Reinvestment Act (CRA), as investors are incentivized to funnel capital towards CRA projects rather than clean energy technologies. While the CRA has the admirable goal of encouraging

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more community-based investment (which is valuable in low-income situations), it has a similar unintended consequence to that given in the previous paragraph - investors are required to choose.

4.4.2.3.2. How to proceed

Shiller (2012) has called for new tools which could be tailored to meet the demands of socially beneficial initiatives (a designation which could conceivably include renewables finance). This may expand the available financing to renewables. For example, rather than simply applying tax- exempt status to certain debt issuances (e.g. municipal bonds), the national government could provide similar tax treatment to green bonds to encourage investors inflows. Another useful starting point would be to incentivize favourable market behaviours by, for example, removing government-sanctioned limitations on how much capital institutional investors can accord to renewables infrastructure (as discussed in Nelson, 2015).

From the macro-side, Campiglio (2016) finds that providing special reserve requirements for green projects could increase opportunities for low carbon finance to flow. This is described as green macroprudential regulation, and would involve reducing the reserve ratio (i.e., the ratio of capital on hand to total assets). More specifically, this approach reduces the amount of capital that banks must keep on hand if they invest in low-carbon activities and, since banks glean their revenues from lending, they can lend out more money (and hence earn more profit). Again, this approach is likely to be especially effective in emerging economies. Zeng et al. (2017), writing in the context of Brazil, Russia, India, China, and South Africa (known as the “BRICS”) argue that a monetary policy with favourable green regulations could assist with renewables financing, as those with renewable energy loan requirements could obtain easier access to debt financing. That being said, altering risk weighting should be approached cautiously, not least because it could have fewer benefits than anticipated and spur additional risks (Matikainen, 2017). The same author notes that alternative approach may be to penalize fossil fuel assets more heavily, although even this approach likely requires additional research to ascertain optimal policy solutions.

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Another avenue was emphasized by two respondents who highlight the helpfulness of securing new capital sources - including those that may not be subject to the constraints outlined in 4.4.2.3.1. One emphasized that sovereign wealth funds (or SWF), which typically handle the surpluses generated by countries with a valuable natural resource base, should be tapped. These major pools of capital may be able to circumvent some of the constraints identified in 4.4.2.3.1. Table 19 provides further information on SWFs.

Table 19: 10 largest SWFs internationally – Country of origin, name, and the amount of assets under management (in USD billions).

Norway Government Pension Fund – Global $1074.6

China China Investment Corporation $941.4

UAE (Abu Dhabi) Abu Dhabi Investment Authority $683.0

Kuwait Kuwait Investment Authority $592.0

China (Hong Kong) Hong Kong Monetary Authority Investment Portfolio $522.6

Saudi Arabia SAMA Foreign Holdings $515.6

China SAFE Investment Company $441.0

Singapore Government of Singapore Investment Corporation $390.0

Singapore Temasek Holdings $375.0

Saudi Arabia Public Investment Fund $360.0

Source: Sovereign Wealth Fund Institute (2018).

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These funds are beginning to pursue action. This is evidenced in the $3 trillion represented in the One Planet SWF Working Group’s (2018) presentation of the One Planet Sovereign Wealth Fund Framework, which encourages sovereign wealth funds to recognize the investment opportunities that will arise in a climate-constrained world. Sharma (2017) explains that different funds provide different mandates, depending on how it is set up. Stabilization funds may be called on quickly by the government in question, meaning that they will have a lower capacity to invest in longer-term and illiquid assets. By contrast, other types (such as reserve investment funds) may have more bandwidth. The ideal funds possess the ability to ramp up capital allocations quickly, exhibit a higher risk tolerance, benefit from a comparative lack of investment restrictions, and have been assigned strong long-term and intergenerational wealth creation mandates. We note that many of these features are found in endowments as well - a topic which we briefly covered in 4.4.2.1.2.

Yet another useful capital provider may be family offices. Family offices control the investments of wealthy individuals. Ernst & Young (2017a) outlines three major types of family office structure: a distinct legal entity form dedicated to a single family office (or SFO), an embedded family office (or EFO, where the family office operates somewhat informally under a broader business), and a multifamily office (or MFO, which is often part of a broader platform such as the wealth management arm of a financial institution). Like sovereign wealth funds, family offices are not subject to the investment restrictions or diversification mandates of many institutional investors. Intriguingly, the Economist (2018) observes that approximately a third of such investment managers practice some form of “impact” investing - sometimes as a response to the social conscience of the heir to the fortune. These vehicles can combine with the existing foundations of the same individual to have a significant capital base to draw from. Similar to the earlier discussion on SWFs, Table 20 provides further information on the largest family offices - the majority of which are in the United States and all of which are collections of multiple families.

Table 20: 10 largest family offices internationally - Country of origin (including city), name, number of families involved, and the amount of assets under management (in USD billions).

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China (Hong Kong) HSBC Private Wealth 340 $137.3 Solutions

United States (Chicago) Northern Trust 3,457 $112.0

United States (New York) Bessemer Trust >2,200 $77.9

United States (New York) BNY Mellon Wealth 400 $76 Management

United States (New York) Pictet >50 $57.3

Multiple (Switzerland - Zurich, United Kingdom UBS Global Family N/A $47.5 – London, Singapore, China - Hong Kong, United Office States – New York)

United States (Chicago) CTC Consulting | Harris 312 $35.0 myCFO (BMO Financial)

United States (Minneapolis) Abbot Downing (Wells 594 $32.2 Fargo)

United States (New York) U.S. Trust (Bank of 162 $31.1 America)

United States (Wilmington) Wilmington Trust (M&T 436 $24.6 Bank)

Source: Bloomberg Markets, n.d..

Rowley, using data from Crunchbase, has assembled a list of the top 10 family investment offices with the most venture capital deals - provided below in Table 21.

Table 21: The family offices with the largest number of venture capital deals - Name, number of deals.

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Omidyar Network 193

Kapor Capital 165

Webb Investment Network 107

J. Hunt Holdings 81

Hedgewood 78

Winklevoss Capital 74

Bezos Expeditions 60

ICONIQ Capital 59

The R-Group, LLC 56

Smedvig 50

Source: Rowley, 2018.

While energy is only a small portion of total venture capital investment, such a list provides examples of investors with a higher risk appetite and, in several cases, a passion for social change. This momentum could be harnessed for renewables. Like Table 20, the majority of these groups have a strong link to the United States. However, unlike Table 20, several of these organizations contained in Table 21 represent single families (such as Amazon founder Jeff Bezos and eBay founder Pierre Omidyar).

One respondent argued for even more esoteric strategies to bring in new sources of capital, such as the use of insurance-linked securities (a financial product which offers a method for matching capital to risk - Taylor, 2016). We define esoteric strategies as those financial products that are applied elsewhere in finance (often in niche areas), are based on financial innovation, and could be applied to renewables. Indeed, such approaches are already underway in parts of the world

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that are expanding their installed renewable energy capacity; prime examples of this trend would be the currency hedging facilities being developed for India (a part of the financial structure of a renewables project, especially in cases involving a less stable currency) or the development of public-private partnerships providing energy services for the poor, according to Farooquee & Shrimali (2016) and Sovacool (2013), respectively. Table 22 provides a sample of sources of capital that could grow in importance.

Table 22: Potential growth areas for capital in renewables finance.

Type of capital Theoretical Example(s) Reference/Source source that could be capital tapped for availability renewable energy financing

Sovereign Wealth $8.1 trillion USD Norway’s Government Sovereign Wealth Funds Pension Fund - Global, Fund Institute (2018) United Arab Emirates’ Abu Dhabi Investment Authority

Endowments Varies (e.g. Yale Yale University The Yale Investment Office Investments Office oversees $25.4 (2016) billion USD)

Family Offices $2 trillion + Bill Gates’ family office The Economist (2018)

Esoteric markets Unknown Insurance-linked Author securities

4.4.3. Issue 3 - The need for understanding non-financial barriers to renewable energy investment

It would be a mistake to assume that the many issues we have outlined here are simply a matter of implementation. There are distinct barriers that emerge from psychological inertia (4.3.1.) and

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hurdles related to the cognitive architecture of all humans (4.3.2.) which must be tackled in order for renewables financing by the private sector to be increased.

4.4.3.1. Resist the psychological trap of policy inertia as the world ramps up renewables

4.4.3.1.1. Background and overview of current situation

Renewables continue to become cost-competitive with fossil sources even without carbon taxation or subsidies, as technological development has increased resource output while attractive financing has driven reductions in the unit cost of electricity. Indeed, in many markets renewables are competitive with incumbent fossil sources. Renewable costs are predicted to continue to fall to 2025, with the levelized cost of energy (on a globally weighted basis) projected to decline to 59% of 2016 costs for solar photovoltaics, 43% for concentrating solar power, 26% for onshore wind, and 35% for offshore wind (International Renewable Energy Agency, 2016b).

In such a scenario, it would be tempting to refrain from seeking policy innovation and allow the market to continue in its current form. However, closer examination suggests it may still be too early to do so. Egli et al. (2018) find that macroeconomic conditions (specifically the interest rate) significantly impact LCOEs, and that if the current low interest rate environment does not hold, renewable energies may become less competitive. For example, Table 23 shows the sensitivity of the same project referenced in Table 18, albeit with a 1% and 2% rise in the interest rate (for simplicity, this is the post-tax rise). Recall that this is found in the discount rate, which is synonymous with the weighted average cost of capital.

Table 23: Components of LCOE for a fixed solar PV array under different (simplified) interest rate scenarios.

Discount rate (i) 0.06 0.07 0.08

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Lifespan (n) 20 20 20

Cost Recovery Factor (CRF) 0.09 0.09 0.10

Insurance (INS) 0.015 0.015 0.015

Initial Investment ($/USD) 90,400,000 90,400,000 90,400,000

O&M (fixed, $/kW/year) 600,000 600,000 600,000

Number of hours in a year 8,760 8,760 8,760

Assumed availability factor 0.99 0.99 0.99

Capacity Factor 0.27 0.27 0.27

Plant capacity (kW) 100,000 100,000 100,000

Final LCOE Calculation 0.042 0.045 0.048

Source: Authors; Krupa et al. (2019).

Policy frameworks may also need to be revised. In the United States, one respondent wryly acknowledged that tax equity (the current government incentive scheme) was the least effective of all possibilities for incentivizing renewable energy finance when one is permitted to select from options such as grants, feed-in tariffs, and carbon taxes (a suggestion supported by Bean et al., 2017). Mormann (2014) shows why a tax-based approach is suboptimal, arguing that it excludes tax-exempt investors and smaller retail investors, increase transaction costs and financing charges, and decreases liquidity for investments. Martin (2017a) highlights the additional complications that emerge when tax treatment changes - as it recently did in the United States under President Donald Trump.

4.4.3.1.2. How to proceed

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Action by legislative and tax entities within government is an excellent start, with the logical starting point being to simply adapt existing tools. We do not recommend this because we believe that the tools, as designed, are optimal, but rather because it is usually easier to modify something already in existence than to try to create something novel with which the relevant stakeholders may or may not be familiar. Unfortunately, many existing tools benefit from unfair loopholes, but this is another issue that will require a response to be catalyzed by legal theory, tax policy, or other such fields.

To that end, a cause taken up by numerous politicians concerns the broadening of Real Estate Investment Trust (REIT) and Master Limited Partnerships (MLP) public market vehicles to include renewable energy. Mormann & Reicher (2012) argues that this approach has been effective for oil, gas, and other historically dominant forms of energy infrastructure - and should be extended to renewables. This is because these investment structures enjoy, to quote the authors, “the fundraising advantages of a classic corporation with the tax benefits of a partnership”. Although this amounts to a subsidy (estimated at $1.2 billion in lost government revenue between 2011 and 2015, according to Mormann & Reicher), extending it to renewables would at least level the playing field with the fossil energy sources currently enjoying the benefit.

Of course, caution around the potential for fads should also be exercised. One respondent referred to the case of a once-popular publicly traded investment vehicle called a yieldco (covered in 2.4.2.1.2) that has fallen out of favour with investors (due to several unreasonable flaws in the design, including unrealistic growth expectations and high fees associated with sophisticated managerial staff involvement). Another respondent urged caution when estimating the long-term supply impacts of these voluntary programs, arguing that many corporations assuming new risks have not completed a full costing. Indeed, the models currently “in vogue67” should be carefully evaluated for effectiveness.

67 This term connotes the “moving target” nature of this designation. From yieldcos to energy storage to corporate power purchase agreements, a range of topics seem to assume the mantle of “de jour”. 142

4.4.3.2. Be aware of, and try to mitigate against, investor psychology limitations

4.4.3.2.1. Background and overview of current situation

Haidt (2012) has argued that humans rely on intuition prior to marshalling internal access to analytical and reasoning. We do not impartially process facts or systematically synthesize information in order to make decisions; instead, we often go with the proverbial gut. Astonishingly, leading neuroscientist Sapolsky goes further, stating that “we are constantly being shaped by seemingly irrelevant stimuli, subliminal information, and internal forces we don’t know a thing about” [emphasis added]. The implication is that we do not think logically (at least in terms of the collective well-being) on a species-wide level.

This is less understood than might be assumed. For example, a common misperception is that humans have evolved to the point where the frontal cortex can direct all action. However, as Sapolsky (2017) notes, the frontal cortex (responsible for higher thinking processes, such as logic, and long believed to hold firm control over emotion-rooted parts of the brain such as the limbic system and amygdala) is merely an honorary member of the limbic system - a part of the brain that is key to emotion expression. Emotion and reason, it appears, are firmly intertwined.

While this has been known even prior to the advent of scientific evidence (mathematician Pascal’s famous saying “The heart has reasons that reason will never know” being the archetypal example), the implications are so pervasive that they warrant discussion here. Indeed, knowing this bidirectional interaction between our emotions and rational thought, it is then not surprising that heuristics in our fundamental cognitive architecture - useful as humans evolved in comparatively simple environments - play out in the renewables space. Kahneman (2011) argues that humans are prone to cognitive shortcuts. In many situations, these shortcuts are helpful - but in other cases, they can have a deleterious impact. Investor psychology should be kept in mind at all times, said one respondent, as actual decisions on the ground can be stymied by perceptions (rather than reality).

Various cognitive biases identified by Kahneman (and others) hold distinct implications for the effectiveness of renewable energy governance enhancements and the rate at which capital is

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allocated to renewables. Table 24 provides a more detailed list of some common biases and their implications.

Table 24: Select cognitive biases and impacts on renewable energy finance.

Cognitive bias with Description of bias Example of implication for potential to negatively renewable energy governance impact renewable and/or investment capital allocations

Anchoring A tendency to establish a Using oil or natural gas investments certain baseline and remain as the benchmark for assessing ‘anchored’ to it (even in the renewables viability. face of evidence to the contrary).

Confirmation Bias A propensity towards Believing that renewables constitute holding an initial belief and the highest cost sources of new seeking favourable evidence supply and seizing on any finding to support it in subsequent favourable to this view when actions. planning energy allocations.

Availability heuristic Using what is associated Narrow investor scope of “energy with a given term as the investing” as equivalent to fossil benchmark for the term as a fuels (e.g. oil and gas) and seeing whole. renewables as something exotic or fringe.

Herd mentality Following the current trends; Venture capital investors pursuing specifically, pouring into select renewable energy investments something en masse after post-2006, but rapidly pulling out first mover(s) have initiated. after aggregate profits were lower than anticipated.

Source: Authors; Taleb, 2010; Masini & Menichetti, 2013; Gaddy et al., 2017.

Examples of each of these trends were unearthed in our interviews and, as highlighted above, have been found in real world settings. Renewable investors, one respondent commented, will naturally follow economic competitiveness. This leads to several outcomes. First, renewables will be plagued by herd mentalities; in such an environment, trusted first movers will be essential to sparking changes. It is important to clarify the purpose of these first movers, as their

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importance is less related to ensuring volume-based renewables deployment cost reductions, but rather to send unquantifiable (but valuable) signals to the market that renewables are a useful investment destination. Much of finance rests on trust, and when such a credible entity enters a sector in a meaningful way, others follow.

Another investor psychology limitation is that there will be investor trepidation around marked changes. Leaders will seek assurance that bold action will not cause harm to their companies or careers - one respondent spoke of the palpable fear associated with the proliferation of distributed generation (primarily solar), as a new grid configuration poses tremendous difficulty to regulated investor-owned utilities accustomed to working extensively with centralized fossil sources. Related to this concept of “anchoring” is that investors are prone to their own instinctive biases (“confirmation”). The move to new models, such as renewables as the de facto power source, will not be easy when many decision-makers have a lifetime of accumulated experience that points in a different direction.

Moreover (and perhaps most troublingly), some of the bedrock principles underlying much of financial decision-making are in need of revision, as the psychological orientations of many investors are based on finance-rooted theoretical perspectives. The most obvious gap is the absence of recognizing the massive externalities associated with the creation of carbon pollution (as discussed at length in 4.4.1.1.). More specific to the field of finance, an example of a flawed system is modern portfolio theory (MPT) - currently a core tenet of business education68. According to the seminal piece by Markowitz (1952) that laid the groundwork for this theory, there is a portfolio combination that can be constructed by an investor that will maximize return for an accepted level of risk.

However, such a perspective complicates the landscape, according to one industry leader, and makes renewables investments more difficult to execute. If climate considerations are not front and center - a critical failure, as we have already outlined repeatedly - renewables will become one among many options. Indeed, the strict application of the aforementioned theorem will entail an investment into a “diverse” array of different energy sources to minimize the risk associated

68 This term connotes the “moving target” nature of this designation. From yieldcos to energy storage to corporate power purchase agreements, a range of topics seem to assume the mantle of “de jour”. 145

with focusing on a single high-value investment opportunity (which may ultimately succeed, but could conceivably fail). If the full liabilities associated with energy sources producing carbon pollution are not clearly identified, pernicious outcomes can emerge from such a situation - including an over-allocation to declining incumbent fossil fuels (such as coal) or an underinvestment in mature renewable technologies with high-impact potential (such as solar photovoltaics).

4.4.3.2.2. How to proceed

At the risk of sounding trite, many of the solutions to such difficulties are at least somewhat straightforward. Revamping education to be more comprehensive, perhaps through expanding the sustainability learning opportunities in leading business schools and embedding climate- related teaching into the core curricula at earlier ages, could help. Reforming financial incentives is also key, such as through assessing portfolio managers of capital on the climate impact of their portfolio. Chassot et al. (2014) found that, when making investment decisions pertaining to clean technologies, investors will prefer policies that are framed in line with their ideological leanings. Therefore, using language that will resonate with them (e.g., framing opportunities in terms of risk/reward) is likely to be more effective. These changes would ideally be spearheaded by knowledgeable and respected entities within the financial sector, such as in the case of the leadership of financial, business, and government leaders Tom Steyer, Hank Paulson, and Michael Bloomberg in the Risky Business (2016) project (part of a process that advocates for deriving more energy from electricity and using low-carbon sources for economic growth to achieve an 80% reduction in carbon emissions across the U.S. and all major economies by 2050).

On the question of herd behaviour, engaging institutional investors is a logical starting point. They are major clients for many investment banks and other financial institutions. Moreover, their requirements influence the alternative investment groups (such as private equity) who are reliant on them to inject capital into their funds. This is a process which is already well underway, as Tutton (2018) highlights in a discussion of how leading pension fund manager Michael Sabia (of the $308 billion Caisse de Dépôt et Placements in the Canadian province of Québec) has called for trillions of dollars to be shifted into investments that counter climate change.

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It is worth noting that there can also be positive aspects to fallible human psychological orientations - fallibilities that, properly harnessed, would encourage investments in renewable energy. For example, there is a pervasive tendency to conform to rules, norms, and other such pressures. Changing the institutional culture of the institutions driving capital decisions would be another excellent starting point. Masini & Manichetti (2013) note that individuals tend to conform to the prevailing norms of the institutions in which they work - a process these authors refer to as “institutional isomorphism”. If sustainability is seen as critical to a corporation’s operations - a progressive lens that greater corporate financial disclosure on climate-related risk and other similar issues might promote - internal norms around valuing environment-related activities such as renewables development could be revised. The organizations capable of allocating or influencing financial flows to renewables typically employ many intelligent individuals who are cognizant of energy security, climate change, and related challenges. A focus on renewables investment could tap the altruistic sentiments of these individuals69 - more should be done to engage them.

4.5. Conclusions and policy implications

Polzin (2017) has provided a review of the literature that systematically lays out the barriers and solutions associated with catalyzing additional private finance flows into low-carbon investment (as mapped out in 173 peer-reviewed articles and seminal books). While several of our findings - laid out systematically in the following paragraph - mirror the synthesis provided by Polzin (including the need to recognize the underinvestment of private actors for overall renewable energy maximization and the importance of policy design), I have elicited the insights from those actually working in the field to create an applied piece of work. In compiling this chapter, I have focused on the concerns of stakeholders either directly or tangentially affiliated with the financial community. I believe that many of the suggested points raised here do not lead to a zero-sum outcome with ‘losers’ and ‘winners’; instead, some have the potential to be ‘triple-wins’ for economic prosperity, social betterment, and environmental improvement.

69 Shiller (2012) has argued that, even in financial careers, pure profit motives are not the sole motivation for individuals to pursue choices, as humans incorporate non-financial considerations into decision-making.

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Specifically, I have noted that some fundamental flaws exist in the underpinning architecture supporting renewables investment opportunities. Some simple takeaways were then expressed here. 4.4.4.1. made the case that carbon pricing must be implemented, which would naturally lead to the elimination of existing fossil fuel subsidies and implicit support for new renewables builds. To incentivize the private sector players likely to be critical enablers of rapid renewable energy diffusion (especially for mature technologies), policy should be consistent, simple, and underpinned by supportive market structures that recognize the unique challenges that renewable energies face (including inadequate pricing models under existing wholesale electricity markets, constraints in transmission and distribution, and poor coordinated planning).

In 4.4.4.2., I went on to argue that attempts should be made to encourage (depending on context) debt or equity provision, and relatively low-cost (and thus sustainable) but high impact government funding (especially for initiatives such as R&D) should be prioritized over more expensive government-related support options, as this may allow greater private financing to flow. New capital sources - especially institutional investors - need to be tapped. Policy measures such as lower reserve ratios for banks lending to renewable energy projects and exemptions or favourable treatment for green bonds (or similar instruments) should be considered, as the substantial capital availability in endowments, sovereign wealth funds, family offices, and similar other entities needs to be better engaged.

In 4.4.4.3. I put forth that non-financial factors (such as investor conceptions) should be recognized as one of the key low-cost opportunities and barriers for renewable energies. The potential barriers of ideology and psychological heuristics could be turned into enabling opportunities - perhaps through appeals to personal values, as is already occurring in the family office space (as briefly described in 4.4.2.3.2.). Psychology needs to be addressed through recognizing innate human biases that prompt policy inertia or irrational decision-making. Implementing pre-emptive measures, such as business education being reformed to recognize new climate and energy realities, would help ensure that future leaders are more cognizant of the urgency we have repeatedly referenced (even if, as already stressed, the windows for initiating meaningful acts are narrowing).

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Finally, both finance and technology itself (as one respondent reminded us, in the case of the latter) are not the sole consideration when determining how best to proceed. Holistic policy and regulatory views that support renewable energy finance will be essential in the coming years. This begins with coordination, such as collaboration between relevant entities to plan a sensible and capable grid that is economically and socially acceptable. Existing systems should be forced to adapt (whether that is through reversions to single utilities or the creation of new markets, with an excellent example of the latter provided by Pierpont & Nelson (2017)), and unfair direct or indirect subsidies to the fossil fuels must be removed.

Of course, the energy governance challenges identified here constitute only a portion of the overall renewable energy supply puzzle. We will, therefore, conclude with a reminder that no single answer exists. Top-level measures (such as monetary policy shifts), bottom-up measures (such as micro-level shifts in how individual investors approach energy market investing induced by the measures recommended here), and other solutions are needed. Areas of renewable energy financing governance where our analysis here is lacking (e.g. around social equity in risk and return, concerns around distributional impacts, and other critical areas) comprise fertile ground for future inquiry, as does further research into the question addressed here of ways that private finance might be involved in the inevitable clean energy transition (potentially broken down into regions or countries). Indeed, the interdisciplinary study of renewable energy finance needs to be accelerated if we hope to address the enormous threat of anthropogenic climate change in a timely manner.

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Chapter 5 Synthesis and Conclusion

This thesis has as its central aim to help reduce the paucity of research on climate finance (which is lacking in many influential sources of financial information, as noted by Diaz-Rainey et al., 2017). It provides context-specific information for those interested in the renewables financing needs of specific locales, as well as generalizable insights that straddle multiple geographies. I am intent on offering views “on the ground”, in the sense that I benefited from the input of many experts who deal with these issues on a regular basis in the real world. I intend for this work to reflect that basis.

I seek here to provide feedback to policymakers and academics on investor-related views. However, it is worth noting that - insofar as it is possible - I seek to be ideologically neutral on how renewables finance should look. There is no presumption of the eminence of free market ideologies here, as I am primarily intent on contributing to work on addressing the accelerating problem of anthropogenic climate change through one critical response channel - the energy (specifically electricity) supply-side. This thesis does not, as emphasized repeatedly already, assume de facto that private sector financiers represent a superior option to their public sector counterparts. However, it does argue that private sector finance probably has a role to play, and should therefore be carefully examined.

Accordingly, this thesis has sought to integrate findings across a range of disciplines, including finance, geography, psychology, and economics, to arrive at an empirically-rooted understanding of some of the barriers and solutions facing renewable energy finance going forward. This ranges from the contributions of early-stage venture capital injections to post-commissioning pension fund investments supporting the expansion of mature renewable energy sources. Given that my comprehensive review of structures amenable to renewables financing shows that much depends on context, I have attempted to equip readers with the ability to properly evaluate the nuanced situation in renewables financing for specific locales. Specifically, I have assessed a continuum of geographical scales (national, regional, international) and teased out a range of findings that are of relevance to both practitioner and academic audiences. I examined a country (in a chapter 150

reviewing renewable electricity finance in the United States), a region (in a chapter reviewing renewable electricity finance in the Gulf Cooperation Council (GCC) countries, a grouping that is comprised of Saudi Arabia, Qatar, the United Arab Emirates, Kuwait, Oman, and Bahrain), and the globe as a whole (with a chapter on possible options for improving the governance of renewables, according to expert elicitations in financial centres around the world). Together, this range of financing scales and geographies creates a case where the whole is greater than the sum of its parts - as elaborated in the following paragraphs.

The first reason the sum exceeds the parts is that this thesis is a study in contrasts that bear distinct differences, as well as a considerable number of similarities. The United States, as one of the leading global economic power blocs and an international trend-setter across many domains (from science to media to technology), is a (relatively) democratic and free-market economy. Chapter 2 therefore stands in contradistinction to Chapter 3’s focus on the GCC, with the latter’s focus on concentrated monarchical political power, unabashed state involvement in renewable power, and monolithic entities (such as the Sovereign Wealth Funds, or SWFs). Both, in turn, are contextualized by the findings of Chapter 4, which aggregates investment community stakeholders globally to offer a more generalizable identification of barriers to renewable energy financing (paired with options for resolution).

Some key similarities emerged across Chapter 2 and 3. First, despite the vastly different political economies that define the United States and the GCC, green banks seem to be an excellent addition to the institutional frameworks governing these regions’ electricity systems. Especially interesting is that green banks promote trust – a critical enabler for finance. Financial allocation decisions often rely not only on hard quantitative data, but also on softer qualitative factors. Therefore, even in clearly disparate markets, green banks can play a strong enablement role.

Another notable similarity is that institutional investors have a critical role to play in deploying their capital at scale towards clean technology solutions. Institutional investors come in a range of types (e.g. sovereign wealth funds, pension funds, or university endowments), locations (e.g. US, GCC, Europe) and sizes (spanning from Norway’s trillion dollar plus national fund to much smaller pension funds for individual organizations), but cumulatively represent a massive opportunity for facilitating renewables-related capital flows. Innovation may be necessary to

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maximize their involvement; for example, partnerships with development banks in the “originate-and-distribute” model could overcome the inevitable hurdle posed by any shortage of renewables investment specialists in the institutional investment environment. This latter concept of “originate-and-distribute”, proposed in Arezki et al. (2017), would see banks leverage their expertise - rather than their capital - to support new renewables investments. Institutional investors may also be able to target specific niches that tie in to their mandates, as in the case of family offices that seek out investments aligned with their founders’ values, or take a longer- term perspective (owing to the significant liabilities faced by these funds well into the future).

Yet another commonality is the need to maintain policy stability. Chassot et al. (2014) point out that investors do not weigh all risks equally (a perspective corroborated by practitioner literature such as Potskowski & Hunt, 2015). The US tax equity approach, while flawed, reformed and, eventually developed a multi-year plan that provides much more investor certainty. Extensive dialogue with those “in the field” confirm that a clear, stable, and long-term perspective is at the centre of successful policy-making for renewables financing. This is so obvious that it appears unnecessary to mention, but history shows that many nations (including developed ones, such as Spain) have not always adhered to this simple piece of advice.

Next, I would like to highlight the criticality of addressing the absence of carbon pricing. This came out in all chapters – the overwhelming failure of political and economic forces to account for the carbon emissions that emerge as part of fossil fuel usage. So long as renewables do not compete on a level playing field with fossil sources – whether it is through direct producer subsidies to fossil fuels or indirect subsidies that exempt fossil fuels from incurring the full costs of their actions – it will be difficult for renewables finance to reach its full potential.

And finally, the most pressing recurring finding (extending, inevitably, into Chapter 4) is that low-cost government dollars need to be recycled back into renewable energy ventures. The simple fact is that government can borrow at very low rates. As an example, a government could borrow at a few hundred basis points (perhaps 3%) from a range of creditors. Then, they could use those funds to develop a renewables project that would otherwise command a return of 10% from the private sector. Absurdities, such as the case of the US Congress supporting the use of private finance for new energy developments on government-affiliated properties or the

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subsidization of fossil fuel combustion in the GCC, must be halted immediately. R&D can also benefit; governments worldwide should be doing more to encourage exploration into refining existing technologies and promoting the discovery of new technologies.

Given the vastly different contexts, it is perhaps surprising that Chapter 2 or 3 bore so many similarities. Much of this can be attributed to the relatively homogenous nature of global finance. As alluded to in Chapter 4, finance is truly an international affair, and its lingua franca is present from Geneva to New York and London to San Francisco. Moreover, much like technology is dominated by Silicon Valley in Northern California, finance is dominated by New York and London. These two cities are inextricably linked to each other, and each, in turn, has strong linkages to the US (New York) and the GCC (London). This thesis has a strong rooting in those two trendsetting cities.

There are some differences, although these seem to pale in comparison to the similarities. For example, institutional investment will likely come primarily from funds situated in the respective region of origin (e.g. US institutional investors will generally have a bias towards developed country investments – Reicher et al., 2017). This need not necessarily prohibit progress; as I showed in Chapter 3, SWFs can mobilize capital for their regional needs. Political economy inevitably matters – certain countries will also receive more investment (even at the expense of others with high-quality and needed solar and wind resources). There are no real solutions for complex and multi-faceted issues such as these, but it deserves a mention.

In terms of a chapter-by-chapter breakdown of the findings, there are several pieces from this thesis that warrant emphasis. In Chapter 2, I presented a synthesizing literature review on the financing options available for renewables expansion in the United States. Chapter 2 outlines that the choice of the US as a case study is of benefit to the literature, as the US is a) a deep and active market for financing, b) home to some of the world’s largest financial centres (e.g. New York and San Francisco), c) a place with a long history in renewables, and d) the source of several new and innovative financing tools.

This synthesis model sparked several noteworthy contributions. First, I provided extensive background information on financing generally and renewables financing needs in particular - all

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supplemented by the unique Table 3 combining capital type, overall capital volume, and estimated costs of capital for different capital sources. Moreover, I presented multiple figures demonstrating risks, ownership structures, and other such factors shaping the renewables finance landscape in the United States. This required discussions with sector participants and literature inputs, as I attempted to cover the enormous range of debt and equity actors present in the markets (from those capable of driving risky initiatives, such as crowdfunding or venture capitalists, to those who prefer lower-risk assets, such as pension funds).

This framework allowed me to present some of the most promising methods for financing assets or delivering financing opportunities to the market on the horizon. I first emphasized the promise of securitization. Bundling large numbers of renewables projects - internally broken down into different classes that bear separate risk and return profiles - holds the promise of supporting further capital markets entry into renewables finance. For example, if a certain tranche can be rated “investment grade”, this will allow those with restrictive investment mandates to hold these securities. While Nelson (2015) reminds us that the biggest cost of capital reductions for institutional investors’ deploying capital to the renewables sector are likely to be gained from direct investment, there are still benefits to be had from lowering the cost of capital for energy companies (especially if there are no competing fossil fuel projects for investment dollars). On a related theme, I also discussed the potential of pooled investments. Besides being publicly listed (thereby opening them to a broader range of potential investors), a major benefit here stems from the preferential tax treatment instruments such as the Master Limited Partnership receive.

Given the high debt-to-equity ratios required by top-performing projects, I found that debt is ripe for investor participation. Green Bonds held considerable potential - even if volume is still relatively low and some definition concerns remain. At the time of writing, I noted that a bond offered by the US government (an entity which maintains low costs of borrowing) is an especially enticing opportunity. Innovative corporate bonds (i.e., those that go beyond the more conventional offerings of organizations in the renewable electricity sector), as well as state and municipal bonds capitalizing on tax-exemption and other opportunities, also have a role to play.

I then moved to some of the ways to bring the capital to market. While imperfect, I support Geddes et al. (2018), who say that Green Banks can serve several important functions. Notably,

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the aforementioned authors describe that Green Banks can build trust - a fuzzy-sounding, but all- important, factor in financing decisions. Trust can serve valuable purposes, such as crowding-in private dollars or facilitating private financing of projects of an innovative nature. I also covered institutional investors (who, as I have noted repeatedly throughout this thesis, have the capability to deploy capital at scale) and innovative new options, such as communities developing projects of their own.

Chapter 3 provided a broader renewable electricity financing synthesis - this time on the GCC countries. Renewable electricity is a compelling value proposition in that hydrocarbon-rich region for a variety of reasons, with a major reason being that it can offset domestic oil and gas consumption for electricity uses (thereby freeing up additional export capacity for higher value services such as transportation or additional capacity for petrochemical usage). Renewables costs continue to fall, I report, even as renewables still occupy a relatively small fraction of total regional installed capacity. Low current deployment levels need not frustrate optimism; GCC states have announced ambitious deployment plans, and the centrality of political will to realizing renewables integrations is difficult to overstate. Accessibility of private finance could support the realization of theoretical potential - especially in asset finance, which (as I show in Figure 9) consistently provided between 60-80% of overall new investment in renewables over the 2004-2016 time period.

Quantitative results for solar photovoltaics, onshore wind, and concentrated solar thermal power (CSTP) demonstrate the impact of finance on final levelized cost of energy (LCOE) figures. Using regional data, this analysis shows that even small changes in total financing costs can hugely impact the ultimate LCOE; notably, almost 4 cents/kWh in the case of a concentrating solar thermal power (CSTP) system! I then create a four-part analytical framework to assess the key factors influencing renewable electricity financing in the GCC - business model adequacy, grid connection and management, risk mitigation issues, and other factors. Key findings here include the criticality of a robust power purchase agreement, assurances of strong grid connection (especially the capability to recover grid connections costs through tariffs) coupled with the minimization of output curtailment, and the need for encouraging a range of supportive risk mitigation instruments and renewables financing complementarities (such as a proximate network of financial institutions and services such as insurance).

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I apply this framework for success to three distinct case studies in the GCC - starting with the multi-phase roll-out of the Mohammed bin Rashid Al Maktoum Solar Park. This facility, which is intended to reach over 5,000 MW by the conclusion of its construction, appears to meet all the conditions of our aforementioned framework. The auction process utilized by policymakers led to a series of increasing low capacity bids, culminating in contracts at 2.99 cents per kilowatt hour (kWh) for solar photovoltaics and 7.3 cents/kWh for CSTP. I presented a further series of quantitative analyses that showed plausible pathways for arriving at these remarkably low figures - numbers which, according to one influential local business leader, will continue to fall (Kraemer, 2017).

The second and third case studies (on Abu Dhabi-based Masdar’s Shams 1 solar power station and Saudi Arabia’s KACARE renewables initiative, respectively) helped to highlight gaps that could influence financing going forward. First, Shams 1 did not meet the need for transparency in financial parameters (as providing benchmark data allows investors to compete in a virtuous downward-facing provision of financing terms), nor did it clearly provide for standardized reductions in cost. In addition, Shams 1 lacked storage - thereby missing another opportunity for benchmarking, given the attractive potential for Shams 1’s CSTP system to provide firm capacity. KACARE’s main take-away was that ambitious claims need to be executed on, for a failure in policy delivery could harm market sentiment.

These are revealing insights, and provide some of the backing for the ‘measures to improve the financeability of renewable energy projects’ with which I conclude this chapter. Building on the success of the Mohammed bin Rashid Al Maktoum Solar Park, I emphasize the need to maintain the focus on sensibly designed auction procurement models. Auctions allows the private sector to find efficiencies while allowing the public sector to secure cost-effective and reliable clean electricity. Properly harnessed, such a system could allow for a massive build-up of renewable electricity - including for export to both nearby (e.g. Egypt) and distant (e.g. Europe or South Asia) areas - while serving as a replacement for fossil-related revenues that will be invariably be reduced through decarbonization efforts, poor economics, or other reasons (e.g. Helm, 2018; Harvey, 2017).

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I am especially interested in seeing a broadening of the capital base, and like Chapter 2’s discussion on the United States, I reiterate the need for green bonds (or the Islamic Finance counterpart, known as a sukuk) and support the creation of a national or regional green investment bank. I also advocate for exploring solutions involving international partners, as these institutions may have the financial wherewithal to play a major role in a renewable electricity transition. I am especially interested in the potential of the SWFs, as many of their desired investment characteristics match well with renewables (such as their penchant for seeking out low-risk and long-term assets). I summarize SWF assets under management in Figure 12 and, after applying the loosely transferable figures on institutional investor capital mobilization potential from Nelson (2015), suggest that nearly $7.5 billion per year could be mobilized for region-wide renewables investment from the SWFs alone.

Next, I recommend that the GCC nations focus on their competitive advantages. For example, SWFs could offer much-needed patient capital to renewables investments that cannot meet the typical investment requirements of a venture capitalist. Regional manufacturing hubs could be established - perhaps focused on areas where low-cost overseas manufacturers need to compete on more than simply the cost of the goods - or areas of niche expertise could be seeded. And finally, I repeat a message found throughout this thesis - clear, predictable policy and regulatory frameworks help to attract capital en masse. Planning for the long run can ensure that money flows smoothly, and allow for the necessary measures (such as greater transmission expansion and interconnection) to flourish.

Finally, Chapter 4 examines the views of investment community stakeholders on some of the most pressing issues to resolve in the renewables finance space. The question of when, where, and how much finance will flow to the renewables space is dependent on investment community perceptions; therefore, there is substantial value-add from querying sector-affiliated individuals directly on barriers and opportunities. I pursued an anthropology-rooted ethnographical immersion in the investment community to truly embed our knowledge in real world applicability. Governance is a natural starting point for such an inquiry, and after providing background and context for our use of the term ‘governance’ as relating to “...policy and regulatory considerations, such as tax reform, financial flows, and energy market transitions, that

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would facilitate the flow of private finance into renewable energies (and related technologies)”, I delved into a distillation of three key issues uncovered during our research period.

First is the major issue of defects in the existing frameworks. Perhaps unsurprisingly, the absence of carbon pricing was raised by our respondents. In certain political economies, this implicit subsidy is sometimes even paired with explicit subsidies for fossil extraction! Both of these trends should be reversed, given the current state of our understanding of the threat to the biosphere that fossil fuel usage presents.

Another major issue is the extent to which the configuration of electricity grids affects renewables’ viability. Renewables need to cope with the historical design of electricity markets, which means they must operate in an environment that does not maximize their contributions (most grids have - of course - emerged from a legacy of centralized, primarily fossil generation). Planning could be coordinated within a single utility (such as the former Ontario Hydro), but Yatchew (2014) has highlighted that problems emerge when there is a concentration of power within a single energy systems entity. Moreover, liberalized electricity systems have generally not allowed for optimal renewables-oriented transmission and distribution systems. Moreover, I found an abundance of institutional and market inertias constraining renewables’ growth.

To remedy such issues, I propose changes in the incentives for those making capital allocation decisions. A good example, I argued, could be taken from the work of Pierpont and Nelson (2017), who recommend breaking existing energy markets down into different risk and reward classes. This would allow a much broader range of players to enter the market (ranging from generators capable of offering pricing in long-term competitive auctions to storage providers that could enhance grid reliability). This would allow the investors wishing to participate in renewables’ markets to participate in the segments of electricity production and delivery in which they are best matched.

I then moved to advocating for boosting the quantity and quality available to the renewables space. As described elsewhere, institutional investors could play a much bigger role than they currently are playing - especially in terms of providing patient capital, as renewables investments

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sometimes have long-time periods to realizing a profit (i.e., they cannot necessarily offer the fast and vast returns software or biotechnology). Indeed, it is interesting to observe that the low costs of renewable energy sources (highlighted at length here) may make action on their part necessary to meet their fiduciary duties to their shareholders. New investors, such as university endowments and family offices, have capital to deploy and non-financial motivations for pursuing renewables (e.g. student activism or the values of wealthy families).

A recurring theme here is that scarce public dollars should be used as efficiently as possible; subsidies are not designed to last indefinitely. After the obvious starting point of removing inefficient existing practices (such as the US government entities financing renewables and energy efficiency through private dollars), I suggested greater public investment in R&D, green bank expansions (again, for the reasons already stated), facilitating greater historical data sets for industry use, and using publicly funded institutions such as the International Monetary Fund and the World Bank as “originate-and-distribute” entities for institutional investors (the latter suggested by Arezki et al. (2017) and discussed earlier in this chapter).

The next section focused on measures to bring down the cost of capital. This will require a multi- pronged effort, touching on monetary policy modifications and holistic-minded policy development. This could include mitigating unintended consequences (e.g. stipulations that block investors from purchasing both generation and transmission assets or social justice measures that inadvertently penalize renewables), as well as providing favourable regulatory frameworks for financial institutions that invest in renewables initiatives. Of course, it would also include introducing flows from insufficiently tapped capital sources. I draw special attention to the potential of the family office and the abovementioned SWFs, along with more esoteric options (such as insurance-linked securities).

Finally, our last issue identified the importance of understanding non-financial barriers to mass renewables uptake. I urged caution in simply assuming that increasingly cost-competitive renewables are now capable of competing without any support whatsoever - especially if interest rates rise. The existing policy frameworks in some countries (notably the United States) need ongoing refinement - they are far from the ideal. This could be done through adapting existing tools; I suggest, for instance, the broadening of fossil-focused MLPs.

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I also call attention to the investor psychology limitations that affect renewables investment. Some of these are innate, relating to the fundamental cognitive architecture of all humans, and others are heuristics (fueled, in some cases, by a mix of biology and culture). Still others stem from educational frameworks, such as Markowitz’s famous MPT. To combat such issues, revamping education at leading business schools to be more comprehensive, considering language that will resonate with investors when crafting policy (while not compromising the policymaker’s intent), and using credible first movers (such as former hedge fund manager Tom Steyer or ex-Goldman Sachs CEO Hank Paulson, in the case of Risky Business) are viable options.

In sum, this thesis has begun to further unpack the tricky question of private sector financing of renewables. To accomplish this goal, I have offered a large array of possible remedies. So what, given the totality of everything discussed in the thesis, should be done? Interestingly, innovation is not at the forefront of the recommendations here; instead, investment community stakeholders seem interested in well-documented and well-researched tools. Stability and clarity in policy frameworks. A coherent and global carbon pricing scheme (i.e., one devoid of leakage or non- virtuous “races to the bottom”) that reflects the fact that fossil fuels are not generally forced to incur the full costs they inflict on society. More capital provision from those who hold the bulk of it (i.e., institutional investors). These are what need to be deployed – and quickly.

One notable area that continues to require further examination is the role of institutional investors in spurring the clean energy revolution going forward. By virtue of their sheer size and the fact their diversified portfolios expose them to a broad swathe of the economy, they have the chance for leadership as “universal owners” (Urwin, 2011). The basic concerns of these entities - especially liquidity, but also fiduciary duty, diversification needs, and other potential barriers - have been covered here (and greatly expanded on in sources such as Kaminker & Stewart, 2012), but additional research should be undertaken. This could include detailed examinations of fiduciary duty (which would expand on notable early contributions such as the 2005 Freshfield Bruckhaus Deringer report for the United Nations Environment Programme (UNEP) Finance Initiative), further analysis of region-specific constraints, assessment of ways to improve disintermediation (i.e., allowing for more direct investment from the investors themselves, rather

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than relying on cost-inflating third parties), and options for optimizing deals for institutional investor needs (such as around deal size, which is an effort already underway in sources such as Arezki et al., 2017).

Yet another critical area for future critical examination could be a disaggregation of the policies that are present in a number of comparable countries (such as Canada and Australia or France, the United Kingdom, and Spain). This would allow for a temporally-linked analysis of the relative importance of different policy or regulatory measures to the capital flows underpinning renewables expansion. This is similar to a theme highlighted earlier in Schmidt (2014), who recommends further examination to advance our understanding of the correlations among risk drivers (which, in turn, impact financing costs).

Looking more broadly, there are additional implications that emerge from Chapter 3’s focus on renewables financing in the context of countries lacking liberalization of their energy sectors. Specifically, other international locales with comparable characteristics, such as the nations comprising the ASEAN (Association of Southeast Asian Nations) trade bloc, could provide fertile grounds for similar lines of geography-specific inquiry. While these nations generally have a lower average GDP (with the notable exception of the unique city-state of Singapore), many of them are undertaking drastic expansions of their power sectors. It is essential that these power systems are derived from renewables, so further research (perhaps leveraging the case study approach used here) on location-specific barriers is essential.

While renewable energy technology and renewable energy policy have received an enormous amount of coverage in the literature, there has been a comparative scarcity of coverage on finance. This is unfortunate, given the integral role that financing plays in driving the lowest levelized costs of energy for renewables (and, by extension, realizing the renewables-powered future the entire world so desperately needs). I hope that this work contributes in a small way to closing that gap, and I urge further examinations on the role of both public and private sector actors in financing the electricity systems of the future.

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Appendix 1: Update on renewables trends since the time of writing, thoughts about the future, and Research Ethics Board Protocol

Update on renewables trends since the time of writing:

As of May 2019, the landscape for renewables continues to evolve. In the US, President Donald Trump has withdrawn that country from the Paris Agreement of 2015. This seemingly devastating move has actually had fairly little impact “on the ground”, according to Bloomberg New Energy Finance founder Michael Liebreich, as momentum remains substantial at the state and local levels (Liebreich, 2019). The development of a Green New Deal (GND) - spurred on by the famous left-leaning Congresswoman Alexandria Ocasio-Cortez - has generated considerable voter and media attention, but as Liebreich also points out, the laudable vision of the GND document is short on financial details. Liebreich’s self-described “back of the envelope” calculation suggests that approximately a trillion dollars ($980 billion) in capital will need to be mobilized annually for investment, assuming that the other elements called for in the GND document (such as critical but hazy calls for social justice measures such as universal health care) do not significantly inflate that figure. The centre-right American Action Forum has emerged with a similar estimate ($6.7-8.1 trillion for a low-carbon electricity grid and net zero emissions transportation system), with the figure exploding to $94.4 trillion if measures around guaranteed jobs, universal health care, guaranteed green housing, and food security are also implemented (Holtz-Eakin et al., 2019). Redundancies (e.g. suggestions around retrofitting houses powered by 100% clean energy), complexities around assumptions (e.g. actuarial values of health care plans) and non-comparable aspects of the program (e.g. the fact that no comparable program exists like the GND food security guarantee), as well as the sheer scale of the suggested deployment, make analysis of the policy’s ultimate cost difficult, but these figures provide a sense of the scale of the vision.

In the GCC, Mills (2019) has called solar power unstoppable. Numerous countries are launching large-scale photovoltaic and concentrated solar thermal power procurements, while rooftop solar schemes are gaining popularity in places such as the United Arab Emirates. Although there has been volatility (such as in Saudi Arabia’s oscillations back and forth between different targets for 199

renewables deployment), the trends are generally towards more installed capacity at lower and lower prices. Note that this is not restricted to solar; Mills points out that wind may hit 31 gigawatts in the Middle East (including Egypt) by 2030, and that expanding needs for storage solutions will be ever-present due to the increasing number of solar projects region-wide.

And finally, global shifts continue to emerge. While this thesis has described the promise of private financiers driving the renewables revolution, this transition will inevitably need to be spearheaded by government action. A case in point is that banks continue to finance fossil fuels post-Paris - to the tune of nearly $2 trillion since 2015 (Rainforest Action Network, 2019). Clearly, the institutional frameworks within which these organizations operate need to move towards prioritizing low-carbon investments relative to fossil fuels (not simply in absolute terms, as clean technologies are starting from such a low initial base compared to fossil fuels). Governments - and the citizenry who drive them - will have to be front and centre in this process of addressing the issues at hand. Whether the action necessary to effect change will be undertaken before a serious climate-related dislocation makes action mandatory is debatable. I, for one, am not hopeful.

Thoughts about the future:

As I wrap up a challenging doctoral program focused on energy and the environment, I’m left in a conflicted place. On the one hand, I feel uniquely informed - ready to take on the world’s environmental challenges and change the only livable planet we know for the better. On the other, I am now privy to some terrible truths. Most of them climate-related, backed by boatloads of data. The Great Barrier Reef is disappearing. Hurricanes are becoming more intense, posing a challenge to many of the world’s most densely populated places. Wildfires pose a greater threat to places I love, such as British Columbia and Southern California. Through it all, the planet remains overwhelmingly powered by fossil fuels.

It leaves me feeling like a man watching a tragedy. We are the protagonists (humanity) in love with our rational creations (the tools of our Industrial Age) and stories (laws, regulations, policies), which have unknowingly been simultaneously set in motion to lead to our demise. We

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pretend that minor tinkering will suffice, when in fact that doesn’t even make a dent. We need comprehensive reforms. Large-scale changes. Big ambitions supported by even bigger dollars.

Despite an abundance of evidence for this need for change, we lack the collective honesty and courage to look at where we are with clear eyes. If we hope to summon a response proportional to the threat, we need to start with being honest with ourselves. Climate change is a threat unlike any other, and needs to be dealt with as such. Yet instead of facing up to this reality, we have chosen to place climate among many competing priorities - important, to be sure, but no more so than many other things (new park benches, for example). While alluring as an approach, this is the path of lies - a path which, as the 20th century showed us, always leads to horrible places.

I think that a big driver of this mass insanity stems from the fact that almost all the discussion on climate change in particular ignores two elephants in the room. First and foremost, the situation is worse than most people think. It isn’t just some stranded polar bears and hotter-than-average summers in France. It is the impending global scale disruption accelerating the breakdown of entire countries, as we’ve seen already in Syria. It is the destruction of animals and ecosystems everywhere. It is living in forest fire smoke, hurting the poor, and destabilizing the only living planet we know. It is, in a word, suffering.

Continuing and expanding the status quo is hopping on a rocket ship to the apocalypse for…a destination we don’t understand. A better place? Definitely for a lucky few, but not everyone. We work hard and long, often enduring brutal commutes that take us far from family and friends. New wants and desires are constantly created by market forces, and we are only too happy to oblige (I didn’t know I need separate kitchen utensils to cut an avocado and a lemon until a recent visit to a high-end kitchen store). Depression is still sky-high. And I haven’t even started talking about the developing countries. We are careening, oblivious to what we are doing and how we are doing it.

As a result of this (understandable) state of near-universal delusion, we are a generation living in ignorant bliss. Every day, we wake up, go on our merry way, and – more often than we would care to admit - make things intolerable for the next generation through our destructive actions. When I say the next generation, I’m not talking about someone else’s kid. I’m talking about

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yours. She is going to breathe (or is currently breathing) polluted air while running with her friends. He is going to be stricken (or is currently stricken) with preventable diseases - perhaps dying of cancer at a younger age than she would otherwise.

Second (and even more troubling), the only meaningful solutions to the energy and environment hurdles facing humanity are things that are completely unpalatable to most people. While admirable, attempts to recycle, efforts to go meat-free once a week, or other such token measures fall far short of what is needed. The actual answers bring a knot to the hardiest of stomachs: enormous behavioural modifications (tiny houses? fossil fuels used only for high-impact and absolutely necessary transportation uses?), a very costly revamping of our grid infrastructure, a total re-thinking of how we grow food…and that is only the beginning. Yearly trips to the Swiss Alps or weekend jaunts to Vegas are non-starters. Computer devices for every person, meat and dairy products every day, unlimited personal mobility - all out. Everything needs to be rethought.

If what I say is true (and let’s assume for a second it is)…then what? I wish I could offer a clear and readily adaptable answer. Nihilism isn’t a productive path, but neither is starry-eyed optimism. There is some low-hanging, relatively inexpensive fruit: expanded research and development for clean energy technologies, integrating vast energy efficiency improvements into building codes, drastically improving agriculture practices - but even these options are not going to be easy to implement.

What I do know for certain is that we can do something about is our honesty. Very few people are talking about the deep truths required to solve energy and environment challenges, as well as the existential threats these challenges pose to humanity’s stunning progress. This is partially because no one is really to blame for this systemic problem and partially because it is, well, really easy to just sweep it under the rug. This isn’t surprising, of course – the truth hurts, as it so often does. But the truth also has a funny way of winning in the end. To paraphrase an old adage, you don’t need to defend the truth – it can defend itself.

What I do know is that this is about us – not someone else. While it is great to recycle or take the bus, it is even better to support politicians who want to take meaningful action or causes advocating for systems-level transition. Not tinkering or minor modifications; high-reward

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transformations. Not small-scale stuff; big picture goals. Otherwise, we will likely be harmed. And we won’t be able to look our families and descendants in the eye (literally or metaphorically) and consolingly offer that we did our best.

It is also about “we”. By avoiding the painful truths that climate change is a) real, b) likely to be devastating, and c) will probably require some sacrifice to resolve, we postpone moments of action longer. By making the environment a partisan or divisive issue, we are causing real harm. And by failing to address the problem in a manner proportional to how bad the evidence suggests, we live in a world of untruth - a state which the 20th century has already shown us to be dangerous. We can’t change what’s already happened, but we can start to demand the truth. And that is no small thing, indeed.

Research Ethics Board Protocol:

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