LED, or “light-emitting diode” lighting, is by far the leading energy-saving technology currently on the market. And as with most cost-saving technology, the developing world would stand to benefit most from an LED transition. Yet roll-out in these markets has been disappointing for reasons that experts and donors told Devex mostly down to politics: Emerging markets can’t get the affordable loans necessary to fund the switch.
“Cities in India, Brazil, Nigeria, they want this technology. The governments are on-board, companies like Philips are on board,” said Peter Curley, a technologist from The Climate Group, a nonprofit that works with businesses to scale-up climate-smart solutions in the developing world.
The hold up, he said, is the initial buy-in. The up-front costs of LED technology may require replacement of old lighting infrastructure, and costs of replacing every light in a municipality can get high. The costs are often made up, sometimes in the first year, but developing cities are struggling to clear the first hurdle, and often don’t qualify for good lending terms for loans from financial institutions.
“Cities like [L.A.] had the reserves to fund the roll-out, and other cities, say New York or London, even if they didn’t have the money, their credit ratings are high enough to get loans on favorable terms, with interest rates based on savings,” he told Devex on the sidelines of the Business & Climate Summit in London on Thursday. By contrast, when Brazil approaches the World Bank or International Finance Corp., he said, the lending terms are higher.
Multilateral development banks, governments, individual cities and potentially foundations are now looking into a host of innovative financing mechanisms that could be able to get LED transitions off the ground. But the biggest challenge remains which of these stakeholders will step up first in providing the initial investments that will give confidence to fellow financiers.
A potential payoff
On a global scale, LED is an affordable alternative to traditional lighting sources at a time when energy costs are soaring, particularly in resource-poor countries. An estimated 1.2 billion people will gain access to a power grid by 2030, many as a result of urbanization and the movement of the rural poor toward economic hubs, often into slums.
The payoff from switching to LED is clear. The U.S. Department of Energy predicts LED penetration in the U.S. to reach 74 percent by 2030, saving consumers $250 billion and reducing greenhouse gas emissions by 1.8 billion tons of carbon. LED also lasts longer than traditional technology, on average living around 20 times longer than traditional, incandescent lighting. Reports show that an overnight conversion to LED in the U.S. alone would save 735 million tons of carbon emissions, enough to replace 250 coal-fired power plants.
The city government of Los Angeles, California, which scaled up LED replacement four years ago, reduced energy costs by more than half in only a year, and serves as the gold standard by which many cities in the developing world hope to model their own LED revolution.
Many developing cities would like to follow suit. At the recent COP21 Paris climate talks, companies Philips and Ikea alongside government officials from China, India, South Africa, Indonesia and the U.S. pledged to install 10 billion LED bulbs worldwide by 2030, in an effort to offset the 5 percent of global emissions currently produced by lighting.
Doubling down on risk
Yet if the political will is there to make the switch, many developing cities lack the capital to get started due to budget constraints and competing priorities in other critical sectors, such as health.
Multilateral development banks so far haven’t been able to plug that gap. “Even the MDBs have limitations in terms of the risks that they can take,” said Mafalda Duarte, manager of the World Bank-housed Climate Investment Funds.
The CIFs are among the least risk-averse at the bank, and the largest, the Clean Technology Fund, is investing $5.6 billion in rolling out technologies such as LED in the developing world, albeit at a large scale. The CIFs are expected to unlock more than $58 billion in co-financing by 2025. “That’s where mechanisms like ours come in, to allow them and others in the market to be able to participate in these investments,” Duarte told Devex.
Still, even the CIF is limited by capacity. “We need more of this risk capital available in the market,” Duarte said.
“Investors unfortunately would probably prefer to wait and see what happens before they get involved in the riskier markets,” she told Devex. “But we need to find ways of doing both. We need to demonstrate to private sector markets by offering first, second and third investments.”
Donors such as the U.K. are also potential risk guarantors, particularly as the definition of overseas development assistance, as outlined by the Organization for Economic Cooperation and Development’s Development Assistance Committee, is increasingly pivoting toward private sector investment.
“In Britain, we can use our aid budget for de-risking those technologies in least-developed countries,” Sir David King, U.K. special representative for climate change at the Foreign Commonwealth Office said during a panel discussion when asked about the LED dilemma.
“That means [the technologies] are on trial, and you have to treat them really sensitively, but at the same time I think you might be running into another problem that a banker might refer to, the problem is, even with World Bank funding and other subsidies coming in, the interest rates the banks are charging is 16 or 17 percent,” he said.
While developing countries have made significant progress in terms of policy and unlocking domestic resources, more is needed.
“We are already beginning to see more contributions from developing countries,” Duarte said.
New strategies are emerging to combat some of the risks surrounding climate investments, beyond MDBs. Curley said many stakeholders working on climate tech have their eye on other, as-yet untapped strategies for getting risk guarantees.
“Yes, the World Bank is exploring guarantees, but to get an asset manager interested, he or she doesn’t want to see one city, he or she wants to see a group of 50, because it has to be done at scale,” he told Devex.
Curley explained that together with companies such as Philips, the Climate Group is collaborating with a group of Brazilian cities eager to roll out LED. They are pooling together to form a package of investments that will satisfy an asset manager and mitigate risk.
“The paperwork could be standardized, the transaction costs reduced, and then the institutional investment is much more attractive,” Curley explained.
Asked if the pooled cities idea solved the CIFs need to invest at scale, Duarte said, “Yes, definitely.”
But who goes first?
Curley pointed out that while the pooled cities idea solves the problem of scale for the medium-to-long term, rolling out LED in an emerging city would still require a first guarantee “to be the cornerstone of future LED investment,” he said.
Figuring out the right model could have payoffs beyond just one technology. The LED model could set the tone for the next generation of technology, once it’s ready to scale.
“For transport, for infrastructure we’ll have the same [financing] problem,” he said, “So what we’re looking at now is whether foundations could play a role in helping to mitigate that risk,” he said.
A donor such as the Bill & Melinda Gates Foundation or the Rockefeller Foundation, he said, could provide the flexible financing necessary for first guarantees. Still, he said, philanthropic organizations might hesitate to invest in a commercial venture, despite the climate reduction mandate. “It’s not to say the foundations are there to pay for somebody defaulting. It’s purely there to provide confidence to a loan provider, like the World Bank, in very risky circumstances.”
Philanthropies are also high on Duarte’s list as potential resources for investment, whether as a donor to funds or for risk mitigation.
“We will reach out to them, we’re certainly very interested in getting the philanthropies and foundations involved,” she said. “I haven’t seen an estimate of how much risk capital will need to be invested among those trillions, but we have to be prepared, there will have to be billions in risk capital.”
Unfortunately, Duarte said, philanthropies are not immune to risk and seem to struggle with the question of who is best-suited to front guarantees for initial investments.
“I remember having conversations with one foundation some time ago who I think wanted to do more on renewable energy on small island states,” she said. “But basically they wanted somebody like us to provide the guarantee for them.”
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