Accessing climate finance remains a challenge for developing and less developed countries. In this context, Closing the Gap between Finance and Climate Mitigation Actions aims to answer the following question: what makes a climate finance mechanism successful? Focusing on the energy sector, the report presents an in-depth analysis of the financial mechanism of three concrete renewable energy (RE) and energy efficiency (EE) programmes, all of which are geared towards households and (micro) small and medium-size enterprises, have been awarded implementation funding, and are currently under implementation. The analysis suggests that successful financial mechanisms have the following in common:
- They are designed to phase out international public sector finance and concessional (low cost) finance where appropriate.
- They are designed to make the programmes (and projects under programmes) scalable and replicable.
- They rely on financing structures that use public money to drive down the cost of capital or decrease risk for other investors, so as to ensure that private sector will find it easier to take some of the risks.
Based on these findings, the report makes the following three recommendations for building a successful financial mechanism:
Develop a business case that can be operational on the ground and with the right technical and financial features to solve the energy issue at hand—for example, the energy services that will be offered; the type of contracts between end users, energy companies, and financial institutions; and the profit’s size. The business case explains why it makes sense to do the programme based on the benefits, costs, impacts, etc.
Devise a financing structure that suits the needs of the programme with features such as the volume of financial flows from public and private funders, the sort of financial instruments that will be used, and the financial terms/conditions of each instrument. The financing structure explains how the programme is financed. It can include, for example, the share of equity and debt and specific instruments used (e.g. loans, grants, equity), the sources of funds (public and private), and the financial terms and conditions.