In this paper, the authors examine the role of development finance institutions (DFIs) in piloting clean energy transitions by conducting in-depth case studies with representative multilateral development banks (MDBs) and national development banks. Their key findings include:
- (a) technical risk is the most compelling challenge for piloting new clean energies with huge uncertainties, and development-oriented DFIs endowed with industrial expertise can make forwardlooking pilot investments (sometimes throughout the supply chain) to demonstrate the viability of new technologies to attract private capital to follow suit;
- (b) policy and regulatory risks are a key hindrance in scaling up clean energies, and as public entities development banks have comparative advantages of coordinating and even shaping policy discussions with government agencies to mitigate such policy and regulatory risks;
- and (c) foreign exchange risk is an undeniable challenge for NDBs to attract foreign investment or for MDBs to invest renewable energy projects in developing countries especially given the fact that shadow financial markets make hedging costly, which encourages MDBs to explore local (green) bond issuances.
This Research Paper is published in the framework of the International Research Initiative on Public Development Banks working groups and released for the occasion of the 14th AFD International Research Conference on Development.
It is part of the pilot research program “Realizing the Potential of Public Development Banks for Achieving Sustainable Development Goals”. This program was launched, along with the International Research Initiative on Public Development Banks (PDBs), by the Institute of New Structural Economics (INSE) at Peking University, and sponsored by the Agence française de développement (AFD), Ford Foundation and International Development Finance Club (IDFC).
Have a look on the key findings for a quick overview of the research results
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