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CFI Newsletter #3: How Joe Biden's Climate Plan affects India
+ financing the EV revolution, insurance and worsening natural disasters, LEDs shining light, stock markets turning green, and CFI's 6-month roadmap
The Climate Finance Initiative Newsletter offers quick digests and insights around what is happening in climate finance. While the Climate Finance Initiative’s current focus of work is India-centric, we will capture a global perspective of climate finance in this newsletter on a fortnightly basis.
Dear reader, we, at CFI, wish you a very happy new year.
Like most of you, we spent the turn of the year watching our fair share of classic and middling movies and shows. One video that has been on a loop at CFI HQ has been Bill Gates’ New Years’ Day interview with The Economist on How to fund the green revolution. It might give away a bit on how we spend our downtime, but we found it a quite fascinating interview - and not just for how it validated some of our thoughts around the need for an innovation-first climate action approach and the nature of different types of financing at different stages of growth.
You can watch the video here and we do highly recommend it.
Climate Finance by the Numbers
USD$ 175 billion
Hurricanes, tropical cyclones, wildfires, floods, and even locust storms came together to make 2020 one of the most damaging and expensive years from natural disasters, keeping in tune with the sort of year it has been.
The main driver was secondary peril events - disasters perceived to generate small to mid-sized losses, such as flood, storms, or bushfires. Primary peril events, such as cyclones and earthquakes, may have a higher loss potential (and better catastrophe management), but the impact and frequency of secondary peril events have been increasing. The 2019 Australian bushfires is a case in point.
Climate change is a primary root cause of this, and secondary peril events are likely to get exacerbated as more humid air and rising temperatures create more extreme weather conditions, that lead to wildfires, storm surges and floods.
Another interesting insight is the lack of disaster insurance in poor countries, which makes recovery more expensive and has a more devastating economic toll than in richer countries. Of the $5.2 trillion in global natural disaster losses since 1980, more than 70% of these losses were uninsured.
Some countries, in Africa and Latin America, are making moves to correct this. With the knowledge that natural disasters are going to increase in impact and frequency, disaster insurance for developing regions is an activity that is likely to increase.
39 million tonnes CO2
366 million LED bulbs, 7.2 million LED tube lights, and 2.3 million energy-efficient fans have been distributed through the Government of India’s Unnat Jyoti by Affordable LEDs for All (UJALA) scheme, primarily focused on rural and semi-urban areas. UJALA addresses the affordability issue of the more expensive LEDs and energy efficiency products through a financing scheme that allowed consumers to purchase the item for a nominal price with the remaining amount recovered from their electricity bill over about a year. The benefits have been staggering:
48.13 billion kWh savings per year
Estimated GHG emission reduction of 39 million tonnes CO2 per year
Estimated cost saving of INR 19,228 crore (USD 2.5 billion) per year in electricity bills of consumers
The story here is to praise energy efficiency, which is an often-overlooked means for climate action. The GHG emissions savings achieved through UJALA were equivalent to about 1.5% of India’s total emissions. LEDs have been mooted to cut lighting’s emissions contribution by almost 50%.
One of the key issues with introducing energy-efficient alternatives is the friction of replacing an existing more energy-guzzling item, which often has a cheaper purchase price. Financing to make energy-efficient products affordable, in the way the UJALA scheme supports, is key. We look to explore this in a future report of our series on Improving Climate Financing Structures in India.
There is no better indication of an industry going from niche to mainstream than its flagbearer getting added to the S&P 500 Index. Tesla, the world’s leading electric car maker has already had a mindboggling run this past year, with its stock price going up by 7X. The company’s inclusion in the world’s most prominent equity index is noteworthy not just for its own success, but also as a leading indicator of the growing importance of renewables and climate-positive businesses in the financial markets.
Tesla is not alone. Nextera briefly became the most valuable energy company in the US when it surpassed its competitor Exxon in market capitalisation in October 2020. It continues to remain a close second. In Europe, the change is being led by fossil fuel based power suppliers pivoting towards renewable generation. Enel SPA, now Europe’s most valuable energy company by market capitalisation, has reduced its coal, oil and gas-based installed capacity to 40% of its asset portfolio. With a planned doubling of its renewable energy capacity over the next 10 years, Enel will become a renewable energy major rather than one supplying traditional power. Denmark’s Orsted has similarly shut down its fossil fuel based power plants in favour of expanding its renewable energy generation. Even the energy giants - Shell and BP - are making significant commitments to hydrogen and renewable power.
Whether it comes from new-age players or the existing stock market giants pivoting towards renewables, climate-positive firms will gain a significant share of equity markets around the world.
Analysts fear that Tesla will cause chaos and volatility in the S&P 500, given the Twitter antics of its founder Elon Musk. Instead, it only makes us hopeful for greener stock markets over the next decade.
THE BIG READ #1
What does Joe Biden’s Climate Plan mean for India?
Action on climate change is high on US President-elect Joe Biden’s policy agenda. Its carrots and sticks can have quite a significant impact on India.
Joe Biden’s accession to being the 46th president of the United States is expected to shake up quite a few things and climate change is high on the agenda. He looks to position the US in a chief whip role of getting other countries to act on climate change. While Biden’s first priority will be to get his own domestic climate action plan in order and reverse the actions of outgoing President Donald Trump that have setback the action against climate change, there is plenty in his Climate Plan that can impact India.
Biden is committing the US to achieve a 100% clean energy economy and reach net-zero emissions no later than 2050.
40% of these GHG reductions rely on technologies that are not commercially deployed yet. Biden is opening up the largest market in the world to more climate-positive innovations, and opening up demand for products that are more impactful in delivering on climate action.
While the “Buy America” ethos will prioritise a greater focus on US-based solutions, such solutions will inevitably be reliant on new global supply chains. India has not always capitalized on the opportunity of being a hub for global supply chains, but climate tech may be one where we can capitalise on. (Two-wheeler electric vehicles seems to be one area of promise for India. Check the next story in this newsletter.)
Emission reduction commitments are likely to be a fixture in bilateral and multilateral trade deals with the US.
You might be tired of hearing us beating this drum again, but India’s target to only reduce emission intensity against GDP growth is not enough. Emission targets have largely been in the control of a country, but the introduction of such commitments in trade deals may be the driver to get India to start adopting absolute emission reduction targets.
The US will call for a global ban on fossil fuel subsidies.
Fossil fuel subsidies are seen to increase the barrier for cleaner energy solutions to enter markets, with a subtext that vested interests make this so. While a global ban is not feasible in the near-term, it is possible to rear its head in bilateral and multilateral deals, As we covered in our first newsletter, India is not doing well here: renewable energy subsidies reduced by 25% from 2017 to 2019, while fossil fuel subsidies increased 46% in the same time period.
A carbon adjustment fee (a tariff in another name) imposed on imports of carbon-intensive goods from countries failing to meet their climate and environmental obligations.
Countries that are not demonstrating action on climate, can mean a few things, including being a “Climate Outlaw” as Biden has threatened to label any country that does not act on climate action; Brazil mooted as the first.
India is expected to meet its Paris Agreement goals, which should put it in a positive light, but the country’s continued reliance on coal power will certainly be on the radar. We should remind you again, that even with an ambitious renewable energy target and commitments to getting the country to a low-carbon path, India is in the process of commissioning new coal plants.
Any emission reduction target on US companies could also account for how emissions from their global supply chains are mitigated.
This was admittedly only proposed by a member of Biden’s transition team and not part of his stated policy, but we found it very interesting as it would be a transformative step. Carbon emissions from U.S-based companies’ overseas operations alone would rank as the 12th largest national emitter. This would significantly influence the supply chain of factories and producers located in countries like India, who would need to spend to adopt more climate-positive technologies, making financing to green MSMEs imperative.
All these are intended to have the effect of getting countries to incentivize climate-friendly sectors and green more traditional industries. But this brings us to the traditional roadblock around a lack of financing.
Biden’s policy plan looks to address this as well.
Financing Climate Action
The US will be able to influence development financing institutions, mainly the World Bank Group through the weight of their contributions (the country holds 20% of total voting power), and their own new vehicle, the U.S. International Development Finance Corporation (DFC), to put climate action at the centre of the lending priorities of these institutions. In 2019-20, the World Bank Group disbursed $54 billion globally, with a significant 10% of that allocated to initiatives in India.
Also, in the context of needing more innovation, Joe Biden has pledged $400 billion in clean energy research and innovation over the next 10 years. In 2019, the total amount spent on this globally by governments was $30 billion. A significant part will undoubtedly go to developing US-based innovations, but R&D collaboration with other countries, like this in India, can be expected to scale to speed up adoption of technologies, especially likely in instances of contextualising US-developed solutions for export.
Finally, but significantly, Biden’s endorsement of climate-positive action combined with financing commitments has signalling effect that will potentially lead to higher investment commitments from other governments, private investors and businesses. Take the $2 billion contribution from the US to support the Green Climate Fund, withheld by Donald Trump, that Biden will sanction when the US rejoins the Paris Agreement. The $2 billion amounts to 20% of the latest pledged funding round of the GCF. While the amount is small, the GCF’s impact is wider as it unlocks co-financing from governments and other agencies - from $15 billion of co-financing has been raised from $5.6 billion of GCF funding.
Policy positions are often not realised, but Biden’s Climate Plan already seems to be having an influence. The latest US stimulus bill, Trump’s last, included $35.2 billion for research on carbon removal, renewables, energy storage, and other low-carbon technologies over the next 10 years.
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THE BIG READ #2
Who Will Finance The Electric Vehicles
Tesla may finally be coming to India, but the real EV story is rickshaws and two-wheelers; and everything we need to charge them.
Last week, India’s transport minister announced that Tesla will be officially launching in India in 2021. While nothing makes us Elon Musk fans happier, we would be the first to admit that India’s electric mobility story, unlike the US’, is not one of high-end electric cars.
We have not talked much about our views on electric vehicles (EVs) thus far, mostly because of our pet peeve: EVs powered by dominant fossil fuel and coal-derived power do little to benefit our planet. But there is no doubt that electric mobility is gaining traction and mindshare in India. While we await true benefits of an EV transition backed by renewable power, this seems like a good time to take stock and talk about how we see the EV market and financing ecosystem playing out in 2021 and beyond:
Cars are not the main story.
The first image that comes to mind when you hear electric vehicle is a sleek, battery-driven car. Not so in India. The country’s EV adoption so far has been led by two and three-wheelers, a trend that is likely to continue with the government proposing that all two-wheelers below the engine capacity of 150cc sold in the country after March 31, 2025, and three-wheelers sold after March 31, 2023, should be EVs.
We expect sales of electric cars will eventually pick up, but as a recent Castrol study showed, the tipping point for widespread adoption will be reasonably priced cars (less than INR 23 lakh, around USD 30,000) that can charge in under 35 minutes and run for 400+ kilometres. With all of these factors in place, the study estimates that electric car sales will become a USD 2 billion market by 2025, a small fraction of the USD 70 billion of the overall automotive market in India.
Instead, we expect adoption to grow rapidly in the two segments that are solving real problems. E-rickshaws are replacing handcarts and cycle rickshaws in many towns, creating increased income and livelihood opportunities. E-bike sales and rentals are being driven not just by the young, climate-conscious set but by thousands of e-commerce delivery people. If these two and three-wheelers also end up reducing India’s pollution and carbon footprint, that is a bonus!
Charging Infrastructure will both be a catalyst and a challenge as EV markets scale.
We recently spoke to a restaurant owner who had rented several e-bikes for last-mile deliveries but, despite the lower operating costs, switched back to diesel bikes this month. The key factor, he said, was the time it took to recharge e-bikes and ‘range anxiety’: concern that their delivery staff would run out of charge midway during peak hour deliveries. Charging infrastructure seems to come up as a challenge every time we talk EVs in India. And for good reason too. While private charging infrastructure is starting to build up - Ather and Hero Electric are both ramping up their charging station capabilities - it is only with widely available and publicly usable fast charging facilities that a larger number of users will have the confidence to switch from petrol and diesel vehicles to EVs.
And just like with CNG, petrol pumps seem to be the logical places to position this charging infrastructure and the government has announced plans to set up e-charging kiosks at 69,000 petrol stations around India. But data shows that setting up these charging stations, with an initial investment ranging from INR 10 to 20 lakh (USD 13,500 to USD 27,000), is not a viable proposition unless investors are willing to accept payback periods of more than 10 years.
The entire EV financing ecosystem needs to evolve
Widespread EV adoption needs more than just car or bike manufacturing capabilities. Over the next ten years, we also need to build charging infrastructure, distribution network, vendors and suppliers for repairs/spare parts and possibly even a used vehicle market. All of this will need varied forms of financing. There are several aspects of this funding we would not worry about: large carmakers and battery makers will find a way to get their projects financed, and new success stories like Ather will get backed by willing venture capitalists and corporates. Similarly, car customers, especially the ones buying the USD 80,000-100,000 Teslas are likely to be good credits and will find willing lenders for their car loans.
Two funding gaps concern us.
One, charging infrastructure, as we previously pointed out, needs high upfront investment that has low returns and long payback periods. Some private charging stations will get set up either by well-funded bike manufacturers or end-customers (like Amazon) running whole fleets. But the public utility - the charging stations on roads and highways and petrol stations - will need state subsidies and affordable, patient capital. And quite significant sums of it.
Two, the customers for the bulk of our EV sales are individuals not traditionally considered creditworthy. Viable, affordable funding options will need to emerge for both e-rickshaws and privately owned e-bikes for adoption beyond delivery fleets. Here, solutions that go beyond traditional vehicle finance - leases and rentals in particular - would go a long way towards meeting the high cost of acquisition relative to the income of these EV buyers.
CEEW estimates EVs to be a USD 206 billion opportunity by 2030. For this to be realised, significant work would need to happen rather quickly on building infrastructure and building financial ecosystems.
Engaging with CFI
We have spent the past couple weeks fleshing out the roadmap for CFI from Jan - Jun 2021. Our main activities for the 6 month period are below.
We are inviting you or anyone who you think might be interested to work with us on these activities. If you are interested to know more, just reach out to us through the form below!
Research and Thought Leadership:
Actionable research to provide thought leadership and improve the conversation around climate finance in India:
Research Series on Improving Climate Financing Structures in India
The CFI Newsletter
New Climate Finance Structures Pilots:
Pilot 3 models of financing and innovation structures to improve climate finance access in India.
Innovation Scale-up Fund
Climate Asset Financing Facility
Finishing School for Climate Data Analytics
For a more detailed look at these, check out the deck here.
It looks like we have started off this new year with quite a long edition of the CFI newsletter. It can probably be chalked down to a feeling of promise we have for 2021.
As always, send all feedback, compliments and brickbats our way. And of course, we do appreciate you spreading the word about this newsletter.
Simmi Sareen and Shravan Shankar