New climate finance instrument
The German Federal Environment Ministry is launching a new climate finance instrument to encourage billion-dollar investments in clean energy in Africa.
In many African countries, currency fluctuations are among the greatest investment risks. This applies particularly to capital-intensive investments in renewable energies and energy efficiency (4E). Investors have to borrow in dollars or euros but often shy away from the risk because they themselves are paid in local currency or pay a high price to compensate the currency fluctuations. The Federal Environment Ministry is now providing EUR 30 million in start-up finance from the International Climate Initiative (IKI) with the aim of mobilising significantly higher investments – up to 1.3 billion US dollars – through currency risk hedging.
The BMUB will provide EUR 30 million in catalytic financing to the TCX, which is located in Amsterdam. This additional capacity will be used to promote renewable energy and energy efficiency investments in Sub-Saharan Africa.
Specifically, KfW Development Bank plans to offer risk hedging for investments in renewable energies and energy efficiency through the well-established and innovative exchange rate hedging specialist Amsterdam-based currency exchange fund TCX. The target group is composed of investors, energy providers and smaller electricity suppliers in countries such as Rwanda, Uganda, Kenya, Tanzania, Zambia and Ghana. Thus, the Federal Environment Ministry through the IKI together with the African Union also supports the initiative of the G7 countries, installing about 10 gigawatts (GW) of renewable energy by 2020.
The initiative will create a double leverage effect. The Federal Environment Ministry will reduce the entire risk in the fund through KfW, a well-known and trustworthy investor, so that further financing partners have an incentive to invest additional funds in TCX. This arrangement is expected to generate a capital stock of up to EUR 150 million. According to KfW's calculations, this has the potential to hedge up to 1.3 billion US dollars in climate investments in developing countries over the next ten years. The achievable reductions in carbon emissions are estimated to exceed 500,000 tons annually. Additionally to the power supply of hundreds of thousands of local households, more stable electricity prices and more jobs are expected. Climate change and development can thus complement each other perfectly through the initial funding of IKI.
Barbara Hendricks, Federal Minister for the Environment said: 'This project illustrates another crucial aspect of climate finance. Our goal must be to direct global investment flows in the right direction. That requires smart leverage because we cannot do it with public funds alone. In climate finance we ultimately need a good mix ranging from traditional aid payments to innovative instruments.'
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Zukunft – Umwelt – Gesellschaft (ZUG) gGmbH