The Challenge of Low-Carbon Development - World Bank Internet ...

on average (Iyadomi 2010). (Reductions are smaller in hydropower-dominatedcountries such as Brazil.) Thus, carbon paymentsat $10 per ton (World Bank 2009) 8 would add roughly0.8 cents/kWh to the investor’s revenue—a relatively small incrementin many competitively priced power markets. Thesecarbon flows may offer greater security and less exchange raterisk than domestic payments from an uncreditworthy electricityoff-taker, and thus serve a kind of guarantee functionin some cases. However, as the formulas in box 2.1 show, theimpact of carbon on ROE and ERR is proportional to the capacityutilization factor. Thus, ironically, carbon payments areless helpful to economically mediocre projects than to goodones. Of course, the impact would be much stronger if CO 2were priced at the $30–$60 levels that many analysts suggestis necessary for effective global climate change mitigation.Figure 2.8Addition to ROE (%)3.02.52.01.51.00.5Impact of Carbon Payments onReturn on Equity0.00.0 5.0 10.0 15.0 20.0 25.0 30.0Initial ROE (%)Source: IEG.Note: ROE = return on equity.Carbon sales have not catalyzed wind andhydropower investments.Carbon market participants acknowledge that carbon saleshave generally not been catalytic in triggering wind andhydropower investments. But carbon can make a big differencefor projects that capture methane emissions anddestroy them or use them for energy, as noted earlier.Provide better loan termsLower interest rates and longer repayment periods makeprojects more bankable, though they do not affect the ERR.The financial model suggests that a change from a 5-year toa 10-year tenor could boost the debt service coverage ratiofrom 1 to 1.4. This is a very significant difference, whichmight well be sufficient to make a project bankable.Longer repayment periods make projectsmuch more bankable.Although IFC does not compete with commercial lenderson interest rates, it can and does offer longer tenors, oftenaround 10 years as opposed to 5 for commercial loans(with much variation). In syndicated loans, IFC terms areusually matched by other lenders. The IBRD can offer bothlower interest rates and longer tenors than commerciallenders.IBRD’s Turkey Renewable Energy Project (2004) is an exampleof the catalytic effect of longer loan repayment periods.This project loaned about $200 million to a state bankand a private bank. The funds were on-lent to 22 renewableenergy investments (mostly hydropower, with wind andgeothermal power plants as well) with total value of $774million and a capacity of 605 MW; claimed lifetime CO 2reductions are about 1 million tons. 9 One success factor wasthat the Turkish banks offered loans of 10 years’ duration ormore, compared to prior norms of 4 years. This precedentalso convinced other banks to offer lengthier repaymentperiods for renewable energy projects.Political risk insurance could be importantin catalyzing renewable energy investment.Mitigate risksRenewable energy investments can be risky. The investorputs a large sum into an expensive, immovable installationand must trust a utility to keep paying an agreed tarifffor many years. This risk is more acute than for fossil fuelplants, because renewable energy plants cost more per MW.In many countries, the off-taker is in poor financial healthor subject to external pressures.The use of feed-in tariffs (a producer subsidy) poses anotherrisk. Governments may promise 10 or 15 years ofthese premium payments for renewable power to makethe initial investment worthwhile for investors. But if a financialcrisis were to hit, governments might be temptedto eliminate these subsidies, because the marginal costs ofcontinued operation are low. Governments might also betempted to renege on feed-in tariffs if prices of coal, oil, orgas declined.These considerations suggest that guarantees and politicalrisk insurance could be important in catalyzing renewableenergy investment. In principle, MIGA can providepolitical risk insurance at lower cost than private agencies,because the WBG’s special relationship with client governmentslowers its risk. Both the World Bank and MIGA havein fact provided such insurance. Box 2.3 describes a MIGAexample. Mostert, Johnson, and MacLean (2010) explainhow WBG partial credit guarantees facilitated longer loanterms for a Philippine geothermal and a Chinese hydropowerplant, making them both bankable.Renewable Energy | 21