SEF Alliance: FAQs

Frequently Asked Questions

For other questions, please contact us.

What is public finance?

Public finance refers to the sources and uses of government spending. In the case of the SEF Alliance, we look at how governments provide financial support to sustainable energy projects and technologies and how they fund such support.

What is public finance for sustainable energy?

This refers to publicly backed interventions that help close financing gaps, leverage private investment, overcome market barriers, and accelerate market uptake of renewable energy and energy efficiency technologies and measures. These can range from grants for technology accelerators to interest rate subsidies for household purchases of sustainable energy equipment.

What mechanisms are used to make public sustainable energy investments?

Fund managers have a wide range of tools at their disposal to provide public support for sustainable energy. Selecting the appropriate mechanism will depend on several factors, including stage of technology development, investment size, risk profile and fund objectives.

In general, available funding mechanisms can be categorised as follows:

Technology Innovation

Conventional operating or capital grants
Technology incubators
Contingent grants
Soft and convertible loans
Public / private venture capital
Revenue support

Project Development

Equity co-investment
Mezzanine finance
Debt instruments
Risk management products (specialist insurance, derivatives)
Loan guarantees

Small and Medium-Sized Enterprises

Business development services
Networking activities
Direct finance mechanisms (grants, equity, commercial loans, subordinated debt)

End User Finance

Outsourced retailer financing and microfinance organizations
Interest rate subsidies
Collateral support and loan guarantees
Fee for service, leasing and third-party finance

Each of these approaches comes with its own set of considerations to review in light of the specific situation or objective. A comprehensive discussion can be found in the UNEP SEFI paper Public Finance Mechanisms to Catalyze Sustainable Energy Sector Growth.

Why should public finance be used to build sustainable energy markets?

In order to achieve global energy targets, a growing consensus indicates a strong need for targeted public financing of sustainable energy markets and technologies in addition to regulatory measures such as cap and trade. This is due to the fact that unique barriers complicate the market for sustainable energy even after appropriate regulation is in place, which the private sector is unable to overcome. Examples include structural market failures—such as the split incentives of building owners and renters systematically suppressing demand for energy efficiency products—and path dependant market failures— such as the difficulty of differentiating "green" electricity from conventionally-generated electricity.

It is especially important that the public sector help fill the critical gap in financing of early stage technology development and deployment, which is an area that the private sector is unable to finance to anywhere near the extent necessary for achieving market transformation at a meaningful pace. See, for example, the assessment by New Energy Finance in the SEF Alliance 2008 Venture Capital Study.

Where does public finance fit within broader climate change mitigation efforts?

Market-based regulatory instruments that put a price on carbon emissions, such as the cap-and-trade system of the Kyoto Protocol, today form the core of the global plan to mitigate climate change. These regulations, properly applied, can achieve significant emissions reductions in the most cost-efficient manner and are absolutely central to future climate policy. A consensus has emerged, however, that an effective climate change mitigation strategy additionally requires governments to apply public finance in select areas of sustainable energy and energy efficiency in order to achieve emissions reductions that are not attainable through market-based regulatory instruments alone.

Regulatory regimes like cap-and-trade seek to address the central and overarching market failure that inhibits the global transition to a low-carbon economy: the inability of the private sector to internalise social costs attached to greenhouse gas emissions. Government spending on low-carbon projects and technologies seeks to facilitate the same transition, but targets other, niche market barriers that remain even once regulation is in place. These market failures cannot be resolved by simply pricing carbon and must instead be addressed by more direct government involvement.

A detailed discussion of the role of public finance in international climate change mitigation efforts can be found in the article Beyond Cap and Trade: Public Finance in International Climate Change Policy.

How do governments capitalise public funds for sustainable energy?

Governments engaged in financing sustainable energy projects and technologies must provide adequate, predictable and sustainable financial resources to ensure maximum impact. An array of conventional and innovative mechanisms can supply these funds, each with unique attributes and considerations.

Funding methods include:

Existing revenues from taxes and debt issuance
Taxes and levies on carbon-creating activities (air travel, maritime fuel, electricity)
Carbon permit auction revenues

Compromises to make funding sources politically feasible, such as lowering other taxes, must be taken into account in any evaluation of options for capitalising a public fund.

What forms do public finance programmes take?

Publicly-backed finance programmes for sustainable energy come in many forms. Some of the most common are:

Independent public funds
State agencies (energy, technology, transportation, infrastructure, economic, etc.)
Non-for-profit organizations
Government-financed funds with third-party management
Supranational initiatives
Private companies with government shareholders
Independent funds with a portion of public financing
National and pan-national development banks and agencies
National membership associations of public entities
Environmental protection agencies with financing arms

Is public finance of sustainable energy redundant within the private sector?

Public finance programmes aim to play a role the private sector cannot play, and in fact encourage private sector investment that otherwise would not occur. Due to structural and path-dependent market failures in the sustainable energy sector, identifiable financing gaps have emerged where private sector involvement does not materialize. These are well-documented in sustainable energy finance literature. The most prominent gap is the "Valley of Death" (Murphy and Edwards, Bridging the Valley of Death, 2003) in which promising new energy technologies lose financing before entering the commercialization stage. Sustainable Development Technology Canada (SDTC), a government foundation that finances and supports the development and demonstration of clean technologies, attributes this "structural break in the innovation chain" to the lack of maturity of new technologies and risk-aversion in the private sector. Further financing gaps have been identified at the pre-exit stage and, in the case of project finance situations, in the inability to find asset-backed lending without excessively high equity capitalization ratios.

Efforts to quantify or substantiate financing gaps in the sustainable energy sector all confirm these phenomena and support the rationale for public finance in this area. UNEP/SEFI (Public Finance Mechanisms to Catalyze Sustainable Energy Sector Growth, 2004) writes that "studies show that although clean tech’s share of total venture capital continues to grow, clean energy technologies are lagging behind other clean technology sectors and the absolute amounts of investment are decreasing, which may increase the funding gap at the pre-commercialization stage." A University of St. Gallen study on sustainable energy venture capital found that investments in energy currently account for only 2% to 5% of all venture capital (Wüstenhagen and Teppo, IWÖ Discussion Paper No. 114, 2004). The energy sector as a whole appears to under invest in innovation, as shown in a paper by Margolis and Kamen (Energy Policy, 27, 1999), which makes this argument by comparing research and development intensity between U.S. energy companies and pharmaceutical companies. Pharmaceutical firms reinvested 10.0% of their turnover in research and development, while energy companies only 0.5%.

Consequently, public finance programmes have an opportunity to involve themselves in this market without fear of redundancy with the private sector.

Where does the funding go?

Grants, soft loans and patient venture capital are the most common methods of providing public financial support to sustainable energy projects and technologies. These funds are typically given directly to the responsible party at the project or company level, but the public financier may retain some oversight or control in the form of board representation, reporting requirements or structured performance targets upon which continued support is contingent.

How do public investors identify transaction opportunities?

Public funds most often invite relevant entities to submit business plans or proposals for consideration during regular annual review processes. Beyond this, transaction lead generation can occur in many ways, from forming industry contacts through related work to attending trade shows to identify opportunities or areas of interest. Public investors can act in partnership with private investors, and transactions could be identified by either party. Funds may also have dedicated teams responsible for business development, or may work with investment bankers. Additionally, collaboration with peer public funds can lead to identification of joint project opportunities that could benefit from multiple financing parties.

Furthermore, funds that invest across the entire project life cycle reap the benefit of organically generated deal flow. For instance, an organization that issues R&D grants thereby positions itself to take venture capital positions in the entities that show economic promise. A holistic approach to supporting concepts of different maturity will also create organizational efficiencies, as opportunity vetting and due diligence can be reduced or eliminated for proven projects.

How do public investors evaluate value for money in this area?

Sustainable energy public finance programs typically have formalized processes for assessing the value received for their investments. These impact assessments examine investments along a broad range of metrics.

Financial metrics used include:

Programme funds expended
Leveraging of third party financing
Cost effectiveness of programme
Internal rate of return
Return on investment

Energy metrics used include:

Immediate energy savings achieved
Long-term energy savings identified or forecast
Renewable energy delivered
Renewable energy installed

Environmental metrics used include:

Immediate GHG reductions and savings achieved
Long-term GHG reductions identified or forecast
Environmental co-benefits

Every organisation will approach the question of impact assessment differently, with specific processes and metrics determined by institutional structure, stakeholder interests and long-term objectives.

What is the SEF Alliance?

The SEFI Public Finance Alliance – more commonly referred to as the “SEF Alliance” – is a coalition of public and publicly-backed sustainable energy financing organisations in various countries. The aim is to improve the effectiveness of member organisations to finance and transform clean energy markets within their own countries, and to assist other governments in establishing similar programmes. Member organisations govern the platform directly. It began operating in 2008 with five founding member funds: the U.K. Carbon Trust, the California Energy Commission, Sustainable Energy Ireland, Sustainable Development Technology Canada, and Sitra, the Finnish Innovation Fund. Each member finances the development of sustainable energy markets in its respective region and fund managers use this platform to exchange best practices, pool resources, and launch joint projects.

What is the value of SEF Alliance membership?

The SEF Alliance was founded in the belief that there is a critical role for governments to play in taking a targeted financing approach that emphasises technology innovation and deployment, but the way forward in the design and implementation of these programmes is not always clear. As public fund managers experiment with new approaches, arguably the most important support they can receive is from sharing knowledge with their fellow public finance pioneers, the organisations in other countries that are tackling the same challenges. The Alliance therefore focuses on building the collective knowledge of this group by facilitating regular exchange of best practices and lessons learned among members. This knowledge management function benefits not just the members in learning from each other, but also policymakers, who will need to draw on that knowledge in coming years and can now benefit from its collection in a single organisation.

The SEF Alliance is active and dynamic, driven by its members. It allows members to take advantage of the many untapped opportunities to improve cost effectiveness by pooling resources to launch international joint projects where appropriate. Currently, the group is conducting a series of studies that look in-depth at the different sustainable energy financing options available to governments, as well a separate study to understand the ways that each member assesses the impact of its financing programs. The members have also initiated a further investigation into opportunities for joint financing of research and development for specific technologies. The SEF Alliance is being consulted by the OECD and the UNFCCC for help with their scoping efforts to understand the current and potential role of international public financing programmes within the broader effort to combat climate change.

What does membership in the SEF Alliance cost?

Member assessments for each year are set by the Steering Committee at the annual meeting of the preceding year. This is done as follows: first, members agree on a target budget and work plan for the upcoming year; second, each organisation is asked to contribute an agreed baseline amount; finally, the remainder of the target budget is divided among the OECD member funds and weighted according to the size of their annual budgets for sustainable energy programmes.

To give an example, the resulting assessment structure for 2008 was as follows:

(2008 scale)

OECD with annual funds over €40 million € 35,000

OECD with annual funds between €20 and €40 million € 22,500

OECD with annual funds less than €20 million € 15,000

Non-OECD € 10,000

Certain developing country funds may be exempt from membership assessments altogether. For more information please Contact Us.

I have a new mandate to invest in sustainable energy. What can the SEF Alliance do for me?

SEF Alliance members are some of the largest, most-experienced investors in sustainable energy, public or private. As a new fund and member, your organisation would have direct access to the deep pool of knowledge held at these institutions. The SEF Alliance is the central repository for all best practices and hard-earned experiences of its member funds. Alliance staff and member professionals would be available to guide your new fund through the process of organisation structuring, internal controls establishment, operational initiation, investment evaluation, portfolio management and stakeholder reporting. Furthermore, the SEF Alliance would serve as a brokerage for opportunities to work on joint projects with other member funds. The cost savings and sound strategic direction provided by membership should easily offset the expense of membership, and should do so within a very short time frame.

Other questions? Please contact us.