Catalysing Change How to finance environmental and energy security Kate Hampton

1. Catalysing ChangeHow to finance environmental and energy securityKate Hampton 11/05/04

2. Issues • Why sustainable energy is a security issue • Good renewables policy • Clean energy ventures • Fossil fuel subsidies • Decarbonisation • Carbon trading • Headline recommendations

3. Energy security • Need to move away from hard energy security to designing resilient energy systems (focus on use) • Clear advantages of renewables and efficiency/conservation • Clear disadvantages of fossil-based energy: • Fuel supply disruption (vulnerability) and price volatility • Militarisation of supply routes e.g. BTC, Equatorial Guinea • Corruption, poverty, loss of livelihoods (cf. EIR, Global Witness, Oxfam, FoE…) • Scarcity of oil and gas (not an issue for coal) • However, must be honest about problems e.g. intermittent supply and build in resilience over time • Need to move away from finding least-cost options to adopting a minimum-cost portfolio approach (risk mitigation) • Achievement of the MDGs will require the provision of energy services to the poorest • Distributed energy services provide resilience for vulnerable communities (e.g. adaptation to climate change)

4. Key elements of good renewables policy • LEGAL: Adopt a legally based approach with a robust compliance regime • LONG: Introduce stable rules with a time horizon that reflects the financing horizons of projects - pick a system and stick to it! • LOUD: Send a strong price signal and communicate it widely • Support new technologies • Reduce subsidies for conventional energy • Minimise barriers to market entry • Tackle grid infrastructure issues e.g. distributed generation, offshore • Implement a clear process for planning and approval

5. Key elements of good renewables policy contd • Feed-in tariffs provide price certainty and result in higher deal flow, especially for newer technologies and small-scale projects • Tradable certificates are more cost-effective but riskier for investors so they favour parties that can already manage risk and access capital (i.e bigger utilities) • International tradable certificates: capital would flow to where the resources are (subject to verification) • Emerging markets/developing countries present additional challenges: • creditworthiness • lack of access to capital • absence of financing in local currencies • lack of finance-ready business plans • business models eg linking to productive use • Capacity building and support of local intermediaries

6. Clean energy venture market • Energy sector spends, proportionally, about a tenth of the pharmaceutical industry on R&D • Large energy companies v. SMEs • In 2003, investment in clean tech ventures rose 8% while overall venture capital investment fell 14% (CTVN, 2004) • Energy generation and storage saw a decline, but energy infrastructure and efficiency saw an increase. Overall, energy investment was lower. • Energy – need government support to accelerate the process of bridging the gap between wind and next generation (offshore wind, marine) with demonstration projects, investment for commercialisation • Biofuels and biomass face technical, land-use and transport issues • Pension funds beginning to move: California’s Public Employee’s Retirement System (largest US pension fund) voted to invest $200 million in clean energy start-ups and $500 million into environmentally responsible stocks and mutual funds

7. Decarbonisation • Avoiding warming above 2C requires a global emissions peak within the next 20 years • Technology lock-in is created by every new investment (cars, buildings, power stations, urban development) so change must begin now • ‘Enabling environments’ for technology transfer must be created (push and pull) • Power sector reform is providing new challenges and opportunities: a level-playing field must be established • Fuel-switching is an interim measure only

8. Fossil fuel subsidies • National fossil fuel production subsidies: • In 1998, $9 billion was spent on coal production subsidies in 4 countries: Germany, Spain, Japan and France (OECD) • A similar amount was spent on fossil fuel subsidies in 4 developing countries: Indonesia, Iran, Venezuela and Algeria (OPEC) • National subsidies to conventional energy: $250-300 billion/year in the mid-1990s (G8 Renewables Task Force) – usually benefit industry and wealthier populations • R&D: conventional energy still gets more public money everywhere • Multilateral subsidies: BP said the BTC pipeline project would not economic without IFI and ECA support (“free public money”) • Since Rio (1992), the World Bank has provided $20 billion for fossil fuel projects (IPS, 2002) • Between 1994 and 1999, ECAs supported $103 billion of fossil fuel intensive investments in developing countries compared with $2 billion for renewables. 70% of all ECA financing goes to fossil fuel power generation and oil and gas projects (WRI) • In 2000, the World Bank Group’s renewables portfolio totalled $636 million with GEF co-financing of $230 million (expected to leverage $2.3 billion from other sources) • Question of carbon capture and storage/hydrogen

9. Carbon trading • Two markets: government-to-government and business-to-business • Kyoto flexibility mechanisms: IET, JI, CDM • EU Emissions trading scheme (CO2 only) • Common currency: CDM credits (incl. non-CO2 gases) • International linking of domestic schemes (verification) • Reinvention of Kyoto doesn’t make sense: • Kyoto is the driver for domestic GHG regulation • Reinventing the wheel: mandatory tradable caps backed with an international compliance regime, sinks, science-policy interface • Sunk human capital and capacity building • Less than 20 years to bend the emissions curve • Need to overcome race to the bottom (CDM, ETS) and free-riding (US, Australia)

10. Emissions Trading: Background • Europe has many Directives that reduce GHG emissions • Renewables • CHP • Burden Sharing Agreement • Europe on track to overshoot objective by 7% • Additional measures are forecast to reduce overshoot to 1% • Labelling • Energy Efficiency of Building • Biofuels • Trading should close the gap European Greenhouse Gas Emissions Source: European Environment Agency, November, 2003

11. Burden sharing agreement Allocation of “pain” GHG emission performance at 2001 mtCO2e

12. EMISSIONS TRADING: OPTIONS • Generators can:- • Increase output from existing CCGTs • Convert coal/oil stations into CCGTs • Refire coal/oil with gas • Build new CCGTs • Build Renewables • Abatement actions depend on expectations of allowance prices, relative fuel costs and existing plant mix • Allowance prices will depend on number of allowances issued by member states and demand for them. Trigger Allowance Prices for Abatement Options in Power Generation Burn gas in coal stations Build new CCGTs Refurbish coal into CCGTs Increase CCGT output Current 04 forward gas price

13. Domestic sinks 19 Trading ? Allowance availability Member States will not seek a reduction of more than 64 mtCO2 reduction from traded sector unless other sectors or flex mex fail Existing & additional measures 2010 1990 2001 Hot Air 4204 251 4183 4108 ~1200? 158 64 Cap or additionality rules 3868 Gap? ~360? CDM MtCO2e Kyoto Sources: EEA, CCC, RIIA

14. Conclusions and recommendations • What does the environmental security lens add to the sustainable energy and climate change debates? • Supports reprioritisation of objectives, reallocation of resources – sustainable energy becomes more important but access to energy increases in importance • Not just about renewables – efficiency and fossil fuels must be tackled • How can energy be deployed to support poverty eradication, failing and post-conflict states? • Remove the division in the climate change debate between adaptation and mitigation – focus on human and ecosystem resilience • Move debate from energy security to one about energy systems • Policy-led markets are essential but policy risk must be minimised to attract private capital • Long, loud, legal: good renewables policy • Begin a multi-level dialogue on global decarbonisation