Climate Change, Investing in reversing
Even as the COVID-19 pandemic concentrates the world’s attention, other global problems continue to threaten our planet. Such is the case of climate change, which demands collective action and innovative efforts to adapt to or combat its effects.
During 2020 IDB Invest championed the principle of investing in reversing, seeking to encourage its partners to pursue a more ambitious agenda to alter or undo policies and actions that worsen the impact of climate change in Latin America and the Caribbean.
One way to achieve that goal is by replacing the electricity generated by fossil fuel-burning power plants with renewable energy sources. While under the Paris Agreement countries across the world have committed to decarbonize their economies, under current timetables, the decommissioning of polluting plants will take several decades.
Chile, for instance, has committed to shut down by the year 2040 its 28 existing thermoelectric plants, which at present account for about 35% of its generation capacity. But a pioneering mechanism to monetize the cost of decarbonization (i.e., to compensate generators for the avoidance of greenhouse gas emissions) might help pave a quicker way to a cleaner future.
The mechanism is the key feature of a US$125 million financing package for the power utility ENGIE Energía Chile to build a 151-megawatt wind farm in the country’s northern desert. The financing consists of a US$74 million senior loan from IDB Invest, US$36 million from the China Fund for Co-financing in Latin America and the Caribbean, and US$15 million in blended financing from the Clean Technology Fund.
The novel mechanism – developed by IDB Invest, building on a study financed by grants from the Nordic Development Fund and the governments of Austria, The Netherlands and Sweden – will provide ENGIE a financial incentive to bring forward the closure of two coal-fired plants by several years, avoiding over 4,880 tons in greenhouse gas emissions over 2022-2041.
If Chile already possessed a functioning carbon market, those early offsets could be certified, priced and traded. In lieu, the deal’s mechanism sets a minimum price for ENGIE’s avoided emissions from not using those thermal plants as well as from generating electricity with wind turbines. Those offsets are then converted into a reduction in interest payments on the loan granted by the Clean Technology Fund.
“Our commitment to decarbonization predates our agreement with IDB Invest,” says ENGIE Energía Chile General Manager Axel Levêque. “But this mechanism acts as an accelerator for this kind of transformation.”
The utility, which specializes in supplying electricity to major industrial clients such as mining companies operating in northern Chile, has plans to develop solar and wind farms with a total generation capacity of about 1,000 megawatts in coming years.
For Hilen Meirovich, head of climate change at IDB Invest, the significance of the decarbonization monetizing mechanism goes far beyond this deal. Case in point: Chile is committed to decommissioning coal- and oil derivatives-burning plants with a capacity of more than 8,000 megawatts.
“This could become a template for the entire electricity generation industry, not just in Chile but for the rest of Latin America and the Caribbean,” says Meirovich. “One can even imagine it driving the decarbonization of public transportation, encouraging cities across the region to replace diesel buses with electric vehicles.”