The Lima-Callao area has a population of 9 million andan economy worth US$66 billion in 2014. The preliminary results of our research indicate that the total energy bill for the city was US$4.7 billion and that the bill for waste and water was US$50 billion - meaning that 8% of everything earned in the local economy was spent on energy, water and waste.
The Guardian Online - article on CLCF's Financing Low Carbon Cities work
Rory Sullivan, Andy Gouldson and Philip Webber
Local authorities are increasingly interested in the potential for investments in energy efficiency and demand reduction to provide significant savings in energy costs, reductions in greenhouse gas emissions and wider economic and social benefits. A number have started to take action at scale on the low carbon agenda; examples include Birmingham City Council's intention to refurbish 200,000 properties by 2026 and Leeds City Region's commissioning of an assessment of the costs and benefits of taking action on climate change.
As yet, however, investments in low carbon cities fall short of their theoretical potential. A key reason for this is the scale of capital required. For example, for Leeds to finance all of its available investments in energy demand reduction, billions of pounds would be required - a level that dwarfs the amounts of investment being proposed by initiatives like the Green Deal.
At the same time, institutional investors (pension funds, investment managers, insurance companies) are increasingly interested in infrastructure investment opportunities and have identified energy efficiency and low-carbon infrastructure as potentially attractive areas.
Given the interest from local authorities in making these investments, and the interest from private sources of capital to provide the funds, what is needed to make this happen? Discussions with both sectors reveal a number of common themes:
Build portfolios that satisfy investor's demands on risks and returns
In terms of the financial characteristics of a project, institutional investors look for different rates of return depending on how risky they perceive a particular investment to be. Whether a project is deemed high risk requiring returns of 10-15%, or low-risk where the level of acceptable return will be significantly lower, it is possible to build portfolios of opportunities that will satisfy investor's demands on risks and returns.
Balancing reductions with investment returns
Although low carbon investment opportunities can offer high rates of return, by only focusing on the best options from a financial perspective, investor's choices can mean that projects that offer the most potential to increase energy efficiency or reduce greenhouse gas emissions become less investable. It is therefore important that attention is paid to the mix of investments contained within a portfolio to ensure that the level of savings or reductions achieved is maximised.
Develop a project pipeline
In terms of the availability of projects, investors expect a pipeline of opportunities. This is because they do not want to see their capital sitting idle when it could be invested elsewhere. Actions local authorities can take to address this problem include putting some of their own assets into the mix or mandating energy saving or low carbon technologies. Irrespective of the approach taken, the development of a large scale project pipeline needs to occur in parallel to the development of financing models and the raising of finance.
Pilot projects play a key role
In terms of how investor's perceive the financial characteristics of low carbon investments, pilot projects play a key role in providing evidence to address concerns, especially in relation to projects that are subject to significant technical and policy risks.
The central conclusion is that local authorities and the private sector need to understand the other's views on finance-related risk. Local authorities must engage with investors to understand what sort of investment vehicles they are interested in, the returns they would expect, the level of risk that is acceptable and the role local authorities can play in addressing their concerns. Investors need to engage with local authorities to understand the real risks associated with investments and the actions that can be taken to mitigate these risks.
Finally, there is a potentially interesting role for local authority pension funds, many of whom already have significant investments in infrastructure. While they are unlikely to invest in projects within their own region, they may, for example, be able to invest in a UK-wide low-carbon cities bond. These funds could be the catalyst to making low carbon cities a reality.
This article is based on a report Funding Low Carbon Cities: Mapping the Risks and Opportunities published by the Centre for Low Carbon Futures and the Centre for Climate Change Economics and Policy.
Dr Rory Sullivan is a senior research fellow at the University of Leeds and strategic adviser, Ethix SRI Advisers.
Andy Gouldson is director of the Centre for Climate Change Economics and Policy at the University of Leeds, and he sits on the Expert Advisory Panel for Social Sciences for DECC and DEFRA.
Philip Webber is a visiting professor at the University of Leeds and a non-executive Director of Yorkshire Energy Services CIC.
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The Centre for Low Carbon Futures (CLCF) is a collaborative research centre that focuses on the evidence base and demonstration of low carbon innovations, formed by the Universities of Birmingham, Hull, Leeds, Sheffield and York.
