Renewable Energy and Energy Efficiency: What’s it good for? 4 th Poverty Reduction Strategy Forum

The Scorecard Economic Competitive -ness ? EnergySecurity? Environ- ment? Energy Efficiency √√√ Renewable Energy ?√√

Energy Security Benefits

Accounting for Fuel Price Risk and Diversification Value n Modern finance theory: Don’t put all your eggs in one basket! (Capital Asset Pricing Model) n Investors divide assets between high return but volatile investments (e.g., equities) and low return but stable investments (e.g. bonds) n Adding bonds to an all-stock portfolio increases the risk-weighted rate of return n Similarly, adding RE/EE improves the cost/risk proposition of any energy portfolio

Optimal Energy Portfolio Analysis (Mexico)

Optimal Energy Portfolio – Summary Results n BAU in 2010 is 75% fossil based n Renewables intensive optimal portfolio: –Wind increases from 0% to 9% –Geothermal from 2.4% to 11% n Fossil share declines to 60% n Risk-adjusted cost of generation declines by 25%…even though wind at 5.1 cents/kWh costs 2 cents/kWh more than gas

Environmental Benefits

Energy Consumption and Air Pollution

Contribution to Local and Global Environmental Damages Average for six Central/Eastern European cities

Carbon and Income: Inflexible Link?

“Continued global warming is in nobody’s interest, but the simple facts of the matter are that developing countries will suffer the most damage, and their poor will be at an even greater disadvantage. James Wolfensohn UNGASS June 1997

Impact of Environment on Renewable Energy

Impact of Carbon Finance n Qualitative impact: High quality cash flow and contract value –Verified Emission Reductions (bankable) –OECD buyers (investment-grade, creditworthy payers) –$ or € denominated –Long-term contract with fixed price (no fluctuation) –Payments abroad eliminate currency convertibility and transfer risks n CF revenue streams + Financial engineering allow access to capital markets and boost project bankability (borrowing against ER streams)

Barriers to Renewable Energy n Subsidized conventional energy prices n Failure to address RE service provision as part of the energy sector reform process –Lack of market recognition of diurnal and seasonal characteristics of RE n Lack of recognition of energy diversification and environmental benefits n Small RE project size and high development and transactions costs n Lack of long tenor commercial financing

Barriers to Energy Efficiency n Subsidized conventional energy prices n Utility regulation that rewards investment and sales, not efficiency n Lack of information at end-user level n Small EE project size and high development and transactions costs n Relatively low significance of energy in total company cost structure n Split incentive problems n Lack of off-balance sheet financing n Banks unfamiliar with EE project appraisal

Thank you!