During the last decade we have seen a dramatic transition in the climate change debate. The question has shifted from “Are these changes real, and are we to blame?” to “How can we avert further damage?” The first question has been discussed widely among researchers and scientists. Ultimately, society responded with a clear call for world leaders to take action. The second, more recent debate is much more difficult to resolve because it involves analyzing how and at what cost we can switch our fossil fuel dependency model to one that is renewable. The questions keep coming: who pays for renewables in a time when fossil fuel remains, in general terms, the most cost-efficient way to produce power?
There are no easy answers. This is why we see countries experimenting with different models to incentivize renewable energy generation and consumption. Some of these include tax credits, minimum fixed tariff guarantees for renewable power generation, or new regulations like “green” buildings. This also explains the broad range of opinions on the role that corporations, regulators, consumers, public entities, and development organizations ought to play in this process.
This issue of Handshake reflects the larger debate, presenting a diversity of views, proposals, and potential solutions to solve the problem of climate change. Editors cast their net wide to represent many different perspectives, showcasing broad theories, specific financial approaches, case studies, and the individual views of leaders and practitioners. Some approaches are culture-specific, as the interview with the head of Gujarat Solar makes clear; others may be widely applied, but lack support for different reasons, as we see in the article on geothermal energy.
As a society, we are still in the early stages of determining the scope of climate change, and therefore the only way to seize upon solutions is to consider many different sound, reasonable points of view. That is the objective of this issue, and it is backed by the understanding that finding solutions for climate change mitigation (measures to reduce greenhouse gas [GHG] emissions) and adaptation (measures to reduce vulnerability to climate impacts) will cost us. Therefore, innovation, cost efficiency, and regulation will continue playing a central role in the development of any new models.
Ready, Set, Go
Until a few years ago, businesses heard the word “climate” and considered it code for “What is this going to cost me?” In developing countries, the perception was even worse: introducing the climate agenda was sometimes seen as an attempt to throttle economic growth. Fortunately, policymakers and the public don’t look at climate that way anymore; they know climate issues must be addressed alongside economic growth.
There has been a parallel shift in how the private sector approaches the climate agenda. As the debate has been reframed, climate-friendly building, for example, is now considered a smart business move. This evolving understanding of the climate agenda has transformed the approach to infrastructure around the globe, underscoring the importance and ongoing relevance of public-private partnerships (PPPs).
Many of today’s climate-related infrastructure projects are PPPs by definition, even if the partnership is not explicit. In fact, addressing climate issues from a business perspective is by default a PPP, because there is almost always some kind of a regulatory connection. In many of the sectors that involve mitigation of greenhouse gas emissions—for example, renewable energy or energy efficiency—regulatory drivers initiate that process. The government isn’t necessarily mandating the approach, but the private sector needs incentives to make its investment profitable. The government needs the infusion of capital, and the innovation and cost-effectiveness that comes with it.
A symbiotic relationship
Climate-conscious PPPs make sense for several reasons. Primarily, PPPs are an excellent vehicle to promote cost-effective projects that spur innovation. PPPs can contractually set minimum performance standards that can result in lowering GHG emissions (for example, energy standards for building or minimum loss reduction targets for electricity distribution systems). A greater number of PPPs than before are developing conditions that can capture the private sector’s capacity to innovate, and benefit the planet in the process. This issue’s waste-to-energy success story shows how cost-efficiency and mitigation can coexist.
Other possibilities include solar or wind PPP building contractual incentives, like access to a Power Purchase Agreement or to concessional financing. This would encourage the construction of a pump-storage hydropower plant that could store water during off-peak demand periods (also described in this issue). Incentives are particularly important if we expect further technological innovation, as marginal cost-efficiency gains will translate to additional marginal returns for the project developer. The intrinsic competitive bidding feature of PPPs ensures that bidders will maximize project cost efficiency, which will be reflected in the least-cost bid to the government, and ultimately to consumers.
A closer look
PPPs are also important for climate initiatives because these partnerships can efficiently organize, under a single project umbrella, the numerous and complex arrangements that make a renewable energy (or any other climate-related) project work. A good example is the innovative area of Concentrated Solar Power (CSP) generation, an appealing new technology for countries with abundant sunshine and interest in reducing fossil fuel dependency.
A long-term, financially sustainable CSP project in the developing world will require a stable and adequate regulatory framework for renewable energy, conducive to long-term private investment. It will also require having a built-in power agreement with creditworthy off-takers, assurance of interconnection to a transmission line when the project is completed, and a functioning regulatory framework for power export. Availability of concessional financing and other types of multilateral support, like political risk guarantees, will most likely be necessary as well. The best way to handle all the pieces of this complex puzzle is through a PPP.
There is an additional value associated with climate-related PPPs: in countries with little experience in renewables, a PPP arrangement can become the “pilot” for future projects, and simultaneously contribute to the preparation of the applicable regulation, ensuring consistency between the legal framework and its actual implementation.
Lastly, it is critical to consider the role of PPPs in addressing adaptation to the effects of climate change. Adaptation initiatives, which would partially accept or avoid the climate risk, can be implemented by designing projects that look forward, examining the potential impacts of a changing climate in its infrastructure. Adaptation is gaining prominence as new funds are being negotiated to assist nations that need it most—especially developing countries, which see the impact of climate literally on the ground. Many of these governments feel that adaptation is in their immediate interest because results can help improve people’s lives right away. PPPs, with possible 25-year (or longer) concessions, have the advantage of providing a structure for addressing medium- and longer-term issues. One particularly relevant article in this issue describes how a port concessionaire in Cartagena, Colombia invested in adaptation measures following a climate impact risk analysis, and this assessment applies equally to PPPs.
Continued progress in the climate arena and the maturing of climate-related regulatory frameworks will eventually change the way PPPs are constructed. This happened in the telecom industry, when the private sector matured and broke away from its dependence on government. But in these early days, governments must collectively provide the support mechanisms through funding or regulatory incentives. Today we need a public sector that is engaged and can provide an enabling environment, funds that can catalyze progress, and a private sector committed to innovation and cost efficiency. Most important, the private sector must prioritize working with governments to continue building sustainable PPPs. From the symbolic embrace of government and the private sector, the future generation of climate-conscious business emerges.