In an interview with Attali Associates, a strategic consulting firm founded by Jacques Attali, Annycent’s Managing Partner Cyrille Arnould spoke about how to promote investments in clean energies and build more appealing regulations to free local capital.
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Annycent’s Managing Partner Cyrille Arnould spoke with Attali Associates, a strategic consulting firm founded by Jacques Attali, about the double shift that is needed to catalyze private capital for renewable energy investments in the Global South. Advanced economies will have to promote investments in clean energies
in the Global South and EMDEs will have to build more appealing regulations in their home energy markets to free local capital. According to Cyrille Arnould, very specific directions must be followed:
EMDEs could extend the use of Power Price Agreements and other binding contracts. In this sense, the appearance of new “Take or pay” contracts – where a distributor guarantees the producer a pre-determined amount of revenue on the condition that the power producer makes the power available – underlines the willingness of the Global South to hedge risks in the electricity market to attract new investors.
Regarding clean energies, advanced economies could initiate a review of the Basel III agreements and the regulatory frameworks of pension funds and the insurance industry, that compel important capital reserves on investments. Given the particularity and newness of these most-needed infrastructure investments in the Global South, they could be treated separately from investment-grade operations. Currently, due to a lack of reference data, classical risk assessment methods in due diligence overestimate past failures in green infrastructure investments.
Risk-based capital requirement calculation is driven by statistical regression analysis which penalizes industry with shorter history (time series). In other words, investing in a fossil fuel asset in EMDEs will be deemed lower risk than in a renewable energy asset since the latter have at most 10 years of history. The current approach neither recognize that past performance is no indication of future ones, nor the stranded asset risk of coal and diesel plants.
Institutional investors and rating agencies must have a better understanding of infrastructure investments in the Global South. In advanced economies, most institutional investors remain little inclined to invest in funds operating in EMDEs because of a lack of understanding and rigid risk policies. Concerning rating agencies, their regular pessimistic risk assessments on EMDEs affect infrastructure investments that, in some cases, can be decorrelated from the bigger picture.
Institutional investors and rating agencies must gain a better understanding of infrastructure risk in the Global South and stop thinking about “EMDE’s risk”. EMDEs is a group including over 150s countries. As such, there is not one “EMDE risk” or its average is meaningless for country risk assessment for investment purpose.
Getting EMDEs right is not simply a question of fairness but more importantly a matter of fiduciary responsibility for institutions based in the “Global North” which need to capture the benefit of the growth of the Global South to balance negative demographic trends in OECD countries.