“Funding solar should be as easy as making yourself a coffee”,
In an interview published in La Tribune on September 6, Jean-Pascal Pham-Ba, Secretary General of the Terrawatt Initiative, spoke about the goals of the organization launched at last December’s COP21 climate summit. Achieving those goals is a considerable challenge, because it will involve enabling a mass rollout of solar power worldwide by reducing funding costs to the minimum possible level. We explain the issues involved…
The Dominique Pialot interview with Jean-Pascal Pham-Ba published in La Tribune on September 6, 2016
La Tribune - How did Terrawatt come about and what are its goals?
Jean-Pascal Pham-Ba. Answering that question requires us to cast our minds back to the preparations for last year's COP21 summit. One of the central debates focused on the resources needed to reduce the costs involved in generating solar power. Those costs contain two main components: the hardware cost and the funding cost. Industrial-scale production and high volumes have had a very positive effect on the first of those. The second has also trended favorably, thanks to low borrowing rates and an awareness in Western markets of the low risk involved in investing in solar assets.
Right from the beginning, Solairedirect had always highlighted this goal of reducing the costs involved in solar power as the key to international growth. And when ENGIE acquired Solairedirect, the quest for routes to clean energy generation at competitive prices was also a clear intention. So ENGIE CEO Isabelle Kocher decided to involve the full spectrum of expertise available within the Group to promote the development of competitive solar power worldwide through the Terrawatt Initiative, which she chairs.
The Terrawatt Initiative was launched to coincide with the opening of COP21 alongside the International Solar Alliance. How are the two linked?
The International Solar Alliance (ISA) was launched at COP21 under the aegis of the Indian Prime Minister and François Hollande with 50 other heads of state at a ceremony attended by Gérard Mestrallet - then the Chairman and CEO of ENGIE - to demonstrate private sector support for this political ambition. The aim of the ISA is to promote access to energy, and combat climate change through large-scale investment in solar power. India is alert to the potential role it could play amongst the countries of the South. In the same way as OPEC is a club of oil selling countries, the ISA wants to create a club of buying countries as part of an alliance to drive prices down. As a nuclear power with a presence in space and strong demographics, India is well placed to host an organization for international cooperation, such as the ISA. At the same time, since the levels of funding required necessarily require private sector involvement, the role of Terrawatt is, quite rightly, to assist governments in asking the right questions in order to put in place regulations that will attract private capital investment. This places us squarely at the heart of the central theme adopted by the G20 Climate Finance Day in May 2015: 'Shifting the Trillions' is all about how we switch the thousands of billions in investment capital available worldwide into the low carbon economy.
Solar power is now central to the strategic vision of ENGIE and its program of transformational change. So it's particularly telling that Isabelle Kocher, the CEO of ENGIE, has also agreed to chair the Terrawatt Initiative. In practical terms, the aim of Terrawatt is to advise governments, share information, coordinate efforts, provide training for all stakeholders, etc. We want everyone - including governments, financiers, energy companies, the general public and NGOs - to have the same level of information so that we can all work together to define the most effective market framework.
So what is your recipe for reducing the cost of funding?
It's all about analyzing and managing the limited risks involved in generating competitively priced solar power as effectively as possible, and structuring a series of international hedging mechanisms. This would allow us to achieve the investment-grade rating needed to access local capital markets (where these exist) and international capital markets at the best interest rates. Vast sources of finance looking for standardized products are confronted by an extremely diverse range of cash flows, funding processes, guarantees, legislation, etc. To resolve that situation, it is necessary to complete an entire sequential process of transformation which could be similar - to adopt a food industry analogy - to the transformation of a coffee bean (analogous to the revenue from any kind of solar power generating asset) into a Nespresso capsule (the standard financial product rated and listed in a major financial market as an asset class in its own right). The bottom line is that funding solar should be as easy as making yourself a coffee!
Our role is to coordinate the work done by all stakeholders to prepare and disseminate shared rules, market practices and contracts to create a harmonized and simple structure for generating solar power that everyone can produce at a cost of $30 per megawatt hour (the tariff recently proposed as part of bids in Dubai and Chile - ed.) or less. We have to make the shift from bespoke project funding to an industrial-scale market funding mindset. At this price, making the transition to low carbon power generation can happen very quickly. We're talking about nothing less than a revolution. (…)
Your aim is very ambitious... how do you hope to achieve it?
We can't achieve it on our own, but we can achieve it by working with a large number of partners, such as IRENA (the International Renewable Energy Agency), the UNFCCC (United Nations Framework Convention on Climate Change), the teams of COP21 and - now - COP22, the ratings agencies, other NGOs and initiatives like the Climate Bond Initiative and the H20 minus CO2 Initiative for desalination. What matters most here is the quality of networking. Many bodies are now saying similar things, but each remains in its own silo. We want to bring everyone together around the same table to resolve any gaps in understanding and create the links needed. If we can't succeed in that, we will find ourselves face-to-face with serious climatic, not to say geopolitical, problems. (…)
What is the role played by development banks in this context?
They are extremely competent and make it possible to clear the ground. They do the initial task of simplifying matters in order to open up new opportunities in complex countries. But after that point, it's important that their remarkable experience lays the groundwork for market practices on which financial markets can build. What IFC (the World Bank Group institution dedicated to working with the private sector) is doing with Scaling Solar is precisely what it should be doing, and with remarkable results. We are now proposing to progress to open source in order to adapt it to a broader and more diverse environment so that everyone can use it free of charge.
Are there any other initiatives similar to Terrawatt?
A lot of people are interested in solar, naturally, but they tend to work in isolation on particular topics. As far as I am aware, ours is the only cross-disciplinary, open private initiative. We work through a series of multiple workshops on complex issues for which we form ad-hoc partnerships. In addition to ENGIE, which was behind the creation of Terrawatt, other energy industry stakeholders have also joined us, including the French companies Total and Schneider Electric, and the Spanish generator Iberdrola. We have relationships with European and North American funding bodies, European and Asian banks, market operators like Euronext, development banks, lawyers, consultants and auditors.
This awareness seems to be gaining traction, and renewables are already expanding at a sustained pace...
It's true that things are accelerating, and that fact is shaping mindsets generally. The fact that we can achieve tariffs as low as $30 per megawatt hour is countering the skepticism that once surrounded new energy sources. But as things stand, we have an annual market of around 50 GW and a stock of 230 GW, whereas if we're going to meet our climate targets, we need to achieve a stock of installed solar capacity of 2.5 TW between now and 2025. It's a target we share with Greenpeace, and it equates to the addition of 800 MW of installed capacity per day, funded by around $2,500 billion... which is about twice the market capitalization of the CAC40 index of France's leading companies! The industrial capacity is definitely doable, because the technology is relatively simple. The fact that industry stakeholders are not entering the market fully today is because they lack forward visibility. But if we can succeed in creating a market of the required size and making it solvent, they will take the plunge and create millions of jobs at the same time.
Your plans favor large-scale projects, but how can solar infrastructures be funded by individuals in developing countries?
In reality, there are two economic models here. Someone who buys his own solar panel, and someone who buys an installation in order to sell electricity, or buys into a mini-grid concession. In the latter case, the challenge is ensuring consistent cash flow over the long term on the basis of models currently under development. The aim here is to avoid limiting yourself to projects that simply complement existing infrastructures. In regions with mini-grids, there would no longer be any need for an electricity distribution network, but there would be a need for balance on a scale that is much smaller and much less costly.
And we can see that in Africa, communities with an electricity supply can expect their population to double within five years. This larger base makes it possible to improve demand-side solvency. Today, the cost of transmission is an obstacle, but this is another area in which Terrawatt must encourage the emergence of innovation.
You've just announced a partnership with MEDEF International; what does that actually consist of?
The partnership agreement signed by Isabelle Kocher and Frédéric Sanchez, the Chairman of MEDEF International, should enable French companies to benefit from the market that Terrawatt is helping to develop. MEDEF International can help us to involve national business leaders. If they can see the benefits for themselves of the simplification and harmonization solutions we are working on and which will bring them cheaper energy and new market opportunities, they will work alongside us to raise awareness at governmental level.
What are your plans as far as the general public are concerned?
Raising public awareness is actually one of our missions. It's very much a long-term project, but we want to begin by highlighting a few key points so that they become self-evident to the public at large, because most people have very little knowledge of these issues at the moment. More ambitious still, we want to create a new link between companies and citizens, so that the two will work together to invent the society that goes alongside this low carbon economy powered by renewables. A society in which a Sub-Saharan African country will have as much energy at its disposal as Saudi Arabia. It's a major turnaround, and a social project on the grand scale. To succeed, we must create forums for discussion and collaboration and the opportunities to use them.