Making finance flows consistent with a low carbon economy

Ingmar Juergens | Senior Economic Advisor, European Commission | Representation in Germany

With inputs from N.Anger (ENER), R.Doubrava (CLIMA), M.Feith (ECFIN), F.Gagliardi (CLIMA), M.Koch (FiSMA), N.Quental (RTD), M.Rosenstock (ENV)

What do we need (to know)?

• Understand the investment flows, needs and the gaps

• Understand drivers and barriers

• Political level vision/agreement and targets

• Policy objectives and instruments

• Implementation and co-operation processes

• Right mix of demand-side and supply-side measures

• Right mix of regulatory, information and finance instruments

2010 German Climate Finance Landscape

Source: Juergens et al. 2012

Investments and investment needs for power transmission infrastructure in Germany

Source: European Commission 2015, Country Report Germany 2015 http://ec.europa.eu/europe2020/pdf/csr2015/cr2015_germany_en.pdf

Investments and investment needs for renewable electricity (left) and heat (right) in Germany

5 Source: European Commission 2015, Country Report Germany 2015 http://ec.europa.eu/europe2020/pdf/csr2015/cr2015_germany_en.pdf

Scale of the investment challenge toward 2030

EUR 177-209 billion per year in 2021-2030 in key sectors

Buildings

40%

EE

Indust. 15%

Power 23%

Grids 23%

One third related to the 2030 targets

Modernisation of the power sector remains key. Large impact of 2030 targets on

building sector

Need to bring more innovative solutions into the market

Financing Energy Efficiency

Financing Challenges:

• Lack of knowledge and information

• Lack of performance data

• Fragmentation/transaction costs

• High upfront investments

• Imperfect foresight

• Complexity of financing

• Sometimes long payback periods

• Etc.

Key areas of relevance for green finance, where the EU is very active

• EU regulatory framework “demand-side”:

• Energy Union

• EU regulatory framework “supply-side”: • Capital Markets Union (CMU): Includes commitment to develop an overarching

EU strategy on sustainable finance; creation of a High-Level Expert Group on sustainable finance

• Better information and awareness about Environmental, Social and Governance (ESG) issues (Directive on non- financial reporting; IORP 2)

• International Co-operation:

• G20; UNFCCC; …

• EU financial instruments to support green investments: • European Structural and Investment Funds; European Fund for Strategic

Investments (EFSI); Horizon 2020 InnovFin; Natural Capital Finance Facility (NCFF); European Energy Efficiency Fund (EEEF); Private Finance for Energy Efficiency (PF4EE)

1. EU regulatory framework “demand-side”: Energy Union

Agreed headline targets 2030 Framework for Climate and Energy

2020

2030

New governance system + indicators

-20 % Greenhouse

Gas Emissions

20% Renewable

Energy

20 % Energy

Efficiency

- 40 % Greenhouse Gas

Emissions

27 % Renewable

Energy

27%* Energy Efficiency

10 % Interconnection

15 % Interconnection

* To be reviewed by 2020, having in mind an EU level of 30%

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2016 - the year of delivery for energy policy to implement the Energy Union Strategy and fulfil the commitments under COP-21

July

LULUCF, Transport Effort Sharing

Decision

December

Energy Efficiency Package (EED, EPBD)

+

Smart Finance for Smart Buildings

December

Renewables Market Design and

Energy Security Energy Union Governance

February

Heating and cooling strategy Security of gas supply

EnEff-Package: Smart Finance For Smart Buildings Initiative

e.g. Project development assistance

Aggregation

De-risking e.g. Performance data, risks/benefits implications, market evolution & benchmarking

Market-based culture e.g. financial instruments, better use of public finance

Impact of the 189 INDCs on global emissions

(GtC02e, total excluding sinks) and percent change in emission intensity per unit of GDP

13

Source: POLES – JRC Model

2. EU regulatory framework: “supply-side”

Capital Markets Union Action Plan (CMU)

Increase and diversify the funding sources for Europe’s businesses and long-term projects

Enable long-term and infrastructure investments

Harness finance to deliver environmental sustainability

Commitment to develop an overarching EU strategy on sustainable finance; creation of a High-Level Expert Group on sustainable finance

Better information and awareness about Environmental, Social and Governance (ESG) issues (Directive on non- financial reporting; IORP 2)

Public Consultation on long-term and sustainable investments

12/2015-3/2016: public consultation on long-term and sustainable investments

Investment decisions are still taken with a predominantly short-term view.

Market and regulatory barriers discourage investors to take long-term, sustainability risks and opportunities into account

Mainstreaming sustainable investment needs further support!

Non-financial Reporting (NFR)

On 6 December 2014 the EU Directive 2014/95/EU on disclosure of non-financial and diversity information by large undertakings and groups entered into force

Transposition into national legislation by December 2016.

By 6 December 2016 the Commission will provide "non-binding guidelines on methodology for reporting non-financial information”

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• The work of the FSB Task Force on Climate-related Financial Disclosures (TCFD) is complementary to the G-20 group.

• Objective: to develop consistent voluntary climate-related financial disclosures of the sort that investors would find most useful (with a one year term).

• On 1 April the TFCD published its first phase document which focused on developing the scope and objectives for the proposed work and a set of fundamental disclosure principles

• In the second phase, the TFCD will focus on delivering specific recommendations and guidelines for voluntary disclosure by identifying leading practices to improve consistency, accessibility, clarity, and usefulness of climate-related financial reporting. A consultation will take place at the end of 2016, and the Final Report will be published in Q1 2017.

Industry-led Task Force of the Financial Stability Board (FSB) on Climate-related Financial Disclosures

(established in December 2015)

industry-led Task Force of the Financial Stability Board (FSB) on Climate-related Financial Disclosures

industry-led Task Force of the Financial Stability Board (FSB) on Climate-related Financial Disclosures

Institutions for Occupational Retirement Provision (IORP)

On 27 March 2014 the Commission adopted a legislative proposal for new rules on occupational pension funds (IORPs) proposing for these funds to cover in their risk evaluation "a qualitative assessment of new or emerging risks relating to climate change, use of resources and the environment." (Article 29, 2 (h)).

Trilogues started in February 2016 and a political agreement was reached in July 2016.

The political agreement on IORP2 requires occupational pension funds to consider taking into account Environmental, Social and Governance (ESG) factors in their investment decisions.

New Commission study on green bonds

The need to support EU green bond standards was highlighted in the CMU

Action Plan.

"Study on the potential of the bonds market for resource efficiency finance" will

be published any day now, covering:

development and functioning of the green bonds market;

key bottlenecks limiting the development in specific countries and sectors;

possible public sector measures to overcome these bottlenecks; and

The regulatory feasibility and expected impacts of setting standards on the

liquidity and size of the market.

• Key objectives:

• Help develop an EU strategy on sustainable finance that (1) mobilises capital market resources while (2) ensuring financial market stability

• Identify areas of reform of the financial policy framework to increase sustainable and green finance

• Propose clear and operational policy recommendations on how to better align the financial system with EU policies in support of sustainable growth and investments

• Focus of work:

• Key segments of the sustainable/ green investments and finance market (e.g. infrastructure; financial products; public support mechanisms)

• Key bottlenecks hampering increase of sustainable finance (financial legislation; absence of definitions etc.)

• Framework conditions (information disclosures; capital requirements etc.)

• Risk exposure and mitigation of risks for the EU financial system

High-Level Expert Group on sustainable finance

Further Measures

To further facilitate investments in infrastructure assets by institutional investors, the Commission will adopt an amendment to the Solvency II Delegated Act to reduce the capital charges attached to investments by insurance companies in infrastructure corporates.

In parallel, the Commission will as part of the review of the Capital Requirement Regulation and Directive before the end of the year, propose to expand the favourable capital treatment for loans to SMEs and to reduce the capital requirements attached to investments in infrastructure.

setting up a platform for financing the circular economy.

EEFIG Bericht: Finanzielle Maßnahmen zur „Förderung“ von EnEff-Investitionen

Entwicklung standardisierter Verfahren für die Vergabe von Fremd- und Eigenkapital für Energieeffizienzinvestitionen;

Anpassung des jeweiligen Finanzordnungsrahmens zwecks: Stärkung Kapitalmarktinnovationen, Anpassung der Risikobeurteilung für langfristige Energieeffizienzinvestitionen und die

entsprechenden Eigenkapitalanforderungen, und Ausweiten des Marktpotenzials grüner Anleihen, Bürgerfinanzierung, Factoringfonds

für Energieleistungsverträge und andere, innovativere Finanzierungsquellen für Energieeffizienzinvestitionen.

Hindernisse für einen Ausbau des Markts für grüne Hypotheken beseitigen, u. a.

durch Prüfung der Frage, wie Energiekosten und Energieeffizienzpotenziale in die Tragbarkeitsberechnungen von Hypotheken einbezogen werden können.

Hinzu kommen konkrete Vorschläge für Marktmaßnahmen, Wirtschaftliche Maßnahmen und

Institutionelle Maßnahmen…

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• G20 Green Finance Study Group (Chinese presidency) on barriers and policy options to promote green finance (1st meeting was in 1/2016);

• Objective: to identify institutional and market barriers to green finance and, based on country experiences and best practices, analyse (voluntary) options on how to enhance the ability of the financial system to mobilize private green investment.

• Agreement to explore five topics: • 3 w. sectorial focus: banking, bonds and institutional investors • 2 cross-cutting: risk analysis and measuring progress.

3. EU involvement in supporting sustainable/ green finance: International work

The G20 Green Finance Synthesis Report identifies several challenges/barriers to green finance, such as: (a) inadequate internalisation of environmental externalities, (b) maturity mismatches, (c) lack of clarity in green finance definitions, (d) information asymmetries, and (e) capacity constraints. The Report suggests seven options for voluntary adoption: 1. Provide strategic policy signals and frameworks 2. Promote voluntary principles for green finance 3. Expand learning networks for capacity building 4. Support the development of local green bond markets 5. Promote international collaboration to facilitate cross-border

investment in green bonds 6. Encourage and facilitate knowledge sharing on environmental &

financial risk 7. Improve the measurement of green finance activities and their

impacts

Expanding low-C finance and investment requires demand and supply side measures; they need to be developed with the “other side” in mind;

On the demand side (for low-C finance) we know that we have sector specific market failures that need to be addressed with sectoral policies; cross-cutting instruments (like those generating a carbon price) are not sufficient;

But what about the supply (of finance) side? Findings from EEFIG (eneff. financial institutions group) suggest that also at the financial regulation side of things we need to carefully consider the specificities of the sectors/actors in question;

Regulatory, information and finance instruments need to be designed to be complementary, both at each governance level and between governance levels;

Take home messages

Danke

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4. Financial Instruments

• Additionality and provision of public goods (including addressing market failures) need to be further strengthened for public finance instruments, to best fulfill their role as complementary instruments for stimulating low-C investment

EU supporting the transition (1): Mainstreaming of climate action into EU policies and funds

• ESIF 2014-2020 total envelope €454.4 billion, 25% climate action 25% or €114 bn, 533 programmes (national, regional, territorial cooperation, rural…).

• For “Promoting efforts to reduce CO 2” in total in Germany in 2014-20 the envisaged ERDF funds: € 2.49 billion (23,1% of total ERDF funding)

• Example - Operational Programme Rheinland-Pfalz 2014-2020: Allocates € 40.4 mn or 21.7% of its support to climate mitigation (e.g. innovation-oriented approaches to establish new products with high potential to reduce CO2-emissions etc.)

EU supporting the transition (2)

• HORIZON 2020: 35% of the budget for climate-related

projects

o Search for open calls: https://ec.europa.eu/research/participants/portal/desktop/en/opportunities/h2020/search/search_topics.html

• LIFE fund: €3.5 bn (about €800 m for climate action

projects) in 2014-2020. Yearly Calls for proposals (open each

Spring)

o Natural Capital Financing Facility (NCFF) with EIB: leverages private funding for ecosystem based approaches

o Private Finance for Energy Efficiency (PF4EE)

Implementing the Paris agreement: ETS revision proposal

• Financing aspects: Low-carbon funding mechanisms:

• Innovation fund - 450 million allowances

• Modernisation fund - around 310 million allowances

• Free allocation to power sector in lower income Member States

ETS as an innovation driver: NER 300

• A programme for innovative low-carbon, first-of-a-kind, commercial-scale projects, funded by 300 million allowances from the new entrants' reserve (NER) of the ETS

• Two calls for proposals: the first one awarded in December 2012, the second in July 2014

• 38 projects in 19 EU Member States: 37 RES and 1 CCS

• €2.1 billion NER 300 grants, coming from the sale of 300 million ETS allowances

• Almost 80% of the NER 300 awards went to highly innovative or even potentially game changing projects

NER 300 future the Innovation Fund

• Revised ETS proposal of 15 July 2015 (COM (2015) 337) proposed renewing NER 300 by an Innovation Fund to be endowed with 450 million allowances targeted at CCS, innovative RES and innovative energy-intensive industry

• Main objective: directing further revenues from the ETS towards the demonstration of innovative low-carbon technologies in the industry and power generation sectors

The Modernisation Fund

• ETS proposal adopted on 15 July 2015 suggested creating a Modernisation Fund funded by 2% of the allowances, i.e. ~310m€

• Support lower income MS: energy efficiency and modernisation of their energy systems

• All Member States will contribute to the fund, which will benefit 10 Member States with a GDP per capita of less than 60% of the EU average (in 2013). Eligible countries will be Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia.

European Fund for Strategic Investments (EFSI)

EFSI 2: what's next (I)

EFSI 2: what's next (II)

• The new EFSI is expected to make at least 40% of the available funding under the infrastructure and innovation window climate relevant and in line with the COP21 objectives

• The Council is expected to endorse the proposal in December 2016

• For the period after 2020, the Commission intends to put forward proposals to ensure that strategic investment will continue at a sustainable level. This should provide stability and certainty for investors and project promoters

European Energy Efficiency Fund

• Launched: 1 July 2011 with 265 M€ (EC, EIB, CDP, DB) as an Investment Fund (SICAV) + technical assistance fund

• Objective: Address specific needs of commercially viable EE, RES and clean urban transport projects for local/regional public authorities or private entities acting on their behalf

• Requirement: Min. 20% energy saving or CO2 reduction

• Tailor made financing: Senior/junior loans, convertible debt, equity participation, forfeiting loans (supporting EPC and ESCO) for up to 20 years.

• Overcoming the "valley of death" from demonstration to the market

Innovative clean energy technologies face a market failure on their way from

demonstration to the market. Risk finance is needed to bridge the gap - the

size of many projects is too large to support them with grants only.

EC pioneered innovative risk financing to address this need. In 2007, the

Risk-Sharing Finance Facility under FP7, which evolved into the existing

InnovFin instruments under Horizon 2020.

The InnovFin Energy Demo pilot facility (EDP) provides risk financing to

innovative renewable energy projects. Launched in June 2015 to

implement the SET Plan by facilitating the roll-out of innovative technologies.

EDP is demand-driven. EC and EIB are involved in a preliminary eligibility

check, after which EIB carries out a financial and technical due diligence.

Financial support is disbursed only when all financing sources are secured.

• Supporting projects during their riskiest phase

Designed for a higher level of risk than any other EU financial instrument

Eligibility criteria:

Scope

Innovativeness: first-of-a-kind commercial-scale demonstration (TRL 7-8)

Replicability

Readiness for demonstration at scale

Bankability

Commitment: promoters, sponsors and/or operators must be willing to

substantially co-fund the project

Renewable

energy

Fuel Cells,

Hydrogen

Loans covering up to 50% of project costs

EIB 100% risk

EU: 95% risk (first loss

piece, €150 m by

H2020)

EIB: 5% risk (residual

risk tranche)

Implementation

and

Performance

Risk

Design, Construction and

Early Operational Phase

Operating Risks and Market Risks

Operating Phase

Le

ve

l o

f risk

Time

EC loan guarantee is

released and "recycled"

≤ 15 years

EIB provides loans from €7.5m up to €75m with a maximum duration of 15

years and covering up to 50% of project costs

COM (via Horizon 2020) provides a guarantee on EIB's loan covering 95% of

the risk. Currently it amounts to €150 m

• Project portfolio / pipeline (June 2015 – August 2016)

• 4

~90 applications so far

of which 10 have been awarded NER 300 grants

55 considered "alive"

33 abandoned or not complying with criteria

1 signed (July 2016): Wave Energy Device

Located in Portugal, Finish technology, €10 m loan, project cost €19 m

7 passed already eligibility check / under due diligence:

Locations: DE, FR, FI, NL, PT and UK

Sectors: PV, CSP, electric mobility, ocean*, offshore wind* and geothermal

* 3 of these projects have been awarded NER 300 grants

If signed, projects above will exhaust the €150 m available from Horizon 2020 by the end of 2017!