Infrastructure

Sectoral policies to channel financing to key climate and clean development needs: Infrastructure

Department/ policymaker		101 ideas for a sustainable finance policy package
	Provide clarity on green	Tilt investment to green opportunities			Build green investment pipelines
		private finance	public finance	blended finance
Infrastructure			63. Embed resilience and mitigation in infrastructure plans  64. Integrate climate in national disaster plans and insurance 65. Prioritise strategic infrastructure	66. Green PPP framework  67. Hydrogen clusters

 

Approximately 70% of global GHG emissions are from infrastructure construction and operations. [i] Governments across the globe urgently need to build new or replace aging infrastructure. These investments offer an opportunity for deep decarbonisation and need to be innovative, low-carbon, energy-efficient, and resilient to the effects of climate change. Given the massive capital requirements this entails, private expertise and investment is essential. 

 

Embed climate resilience and mitigation in planning 

To ensure resilience to climate-related hazards, governments will need to address climate risk in infrastructure development and management, and in national disaster risk planning and insurance. For example, Indonesia has put in place a State Asset Insurance Policy program to insure public assets against climate and disaster risks as part of its National Disaster Risk Financing and Insurance strategy (DFRI). This will cover highly exposed buildings, bridges, transportation, and other government properties located in disaster-prone areas with a significant contribution to public services.[ii]

The ministry can also include climate risks and outcome in project appraisal and selection. By ensuring all infrastructure projects include climate risk, regardless of whether they are intended to be a green investment, will help better align public investment with climate goals and ensure climate resilience. The UK Department of Business, Energy and Industrial Strategy provides guidance on assessing energy use and GHG emissions of proposals, both with a direct impact on energy use and supply, and with an indirect impact through planning, land use change, construction or introduction of new products.[iii] Similarly, PPP evaluation should also include climate assessments. 

Ensuring infrastructure resilience and including mitigation strategies in planning is particularly crucial given the long lifetimes of public assets. This means governments likely have just one investment cycle to ensure resilience to future climate change or avoid carbon lock-in.

 

Strategic development of energy infrastructure  

A net zero energy system will have very different infrastructure needs to current systems. Variable renewable energy supply will increase energy storage requirements, while greater electrification will increase demands on the electricity grid. New patterns of energy imports will also emerge, dominated by cross-border electricity lines and hydrogen and synthetic fuel trade. In addition, energy infrastructure will need resilience, as increasing climate extremes increase likelihood of grid failures.

Grids and energy infrastructure are dominated by public investment and energy ministries will need to ensure strategic use of public funds to ensure distribution and storage does not present a barrier to RE development. 

The public sector can direct investment and prevent possible bottlenecks by prioritising certain infrastructure projects for investment. The EU’s Projects of Common Interest (PCIs) receive accelerated permitting and are also eligible for financial assistance under the Connecting Europe Facility budget for Energy (CEF-E). PCI allocation is prioritised by those projects that have the greatest net zero contribution.[iv] This is a particularly relevant example to countries with privatised energy infrastructure provision, allowing energy ministries to steer private investment to meet specific needs. 

A key infrastructure that may be on such priority lists is grid interconnectors and sectoral connectors. Ensuring grid interoperability is crucial to enabling increased RE penetration and helping guarantee investor returns as it allows the cross-border trade of energy. Power-to-X (PtX) technologies convert renewable electricity into synthetic fuels (green hydrogen, e-methanol, green ammonia). These can not only decarbonise energy intensive industries such as aviation and high-grade industrial heat, they could also enable grid balancing. Green hydrogen, stored in underground caverns or old gas fields (geological storage) could provide long-term grid balancing for VRE. Batteries may be more competitive for short-term balancing, however public support for both will not only scale nascent technologies, but also address investor concerns over variable renewable energy supply. 

To decarbonise energy uses which cannot be electrified, and to provide energy storage, net zero energy mixes will include hydrogen at a far greater magnitude than it is today. Total global hydrogen use is expected to grow 5-7 times, to account for 15-20% of energy demand and global hydrogen investment 2020-50 could total USD15tn.[v] To kickstart a hydrogen economy, governments can establish hydrogen clusters: areas where hydrogen production and consumption are developed together, ensuring demand and supply scale together.

Co-locating supply and demand overcomes the specific challenges of the hydrogen value chain. Simultaneous development of production, storage, transport and use can de-risk investment and drive self-reinforcing development. This demand certainty helps make the business case for investments in production. Clusters can also be established with simplified planning permissions, overcoming authorisation issues, and supported by subsidies such as on electricity tariffs. Other infrastructure clusters can also be established to enable development of other green technologies such as CCS and cement production. 

 

Establish a green PPP framework 

Governments can also establish a framework for public-private partnerships (PPPs) to leverage private finance for infrastructure projects. A PPP is a performance-based instrument, providing long-term value for money and continued quality service. Potential climate change impacts can be integrated in infrastructure project design and structure in a manner that enhances long-term affordability.[vi]PPPs are a valuable tool for developing sustainable and resilient critical transition infrastructure, providing financial value for the taxpayers and diversifying risk allocation. Involving the private sector can also allow knowledge sharing and increase transparency and accountability among stakeholders.[vii] A PPP legal framework is needed to establish good investment planning processes that prioritize projects based on development needs and contribution to the green transition. To ensure a successful PPP framework, a dedicated agency in the form of a PPP unit or secretariat needs to be established for an efficient roll-out of a PPP programme. 

PPPs can be used to build electricity infrastructure. These are typically independent power transmission models, covering individual electricity lines so as to better de-risk investment. Brazil, Peru and India have commissioned transmission lines in this way.[viii] PPAs can also be used for storage infrastructure. Israel added batteries to its PV auction scheme in 2020, attracting investors with clear regulations and significantly increasing its storage pipeline.[ix]

PPPs are often highly bespoke and slow to develop, focusing on single asset creation. Scaling green PPPs can create a pipeline of bankable infrastructure projects that can help deliver regional infrastructure needs. By developing a robust PPP model for a single deal and then replicating it, this approach spreads costs, enhances impact, and encourages programmatic, competitive tendering. This creates new markets and enables faster delivery and lower prices. For example, the IFC’s Nubian Suns project financed 13 solar PV projects in Egypt, assembling 18 developers and 11 FIs by taking a programmatic approach to financing. Multiple transactions were consolidated into a streamlined standardised process, resulting in significant cost efficiencies.[x] See Development Finance Institutionsfor more details on how DFIs can streamline blended finance offerings.