Interview

JETPs Need a Bottom-up Approach

Andrew Apampa, Data and Research Manager at Convergence, says more coordination and consultation is needed to increase the efficiency and effectiveness of Just Energy Transition Partnerships.

At COP28 in Dubai, there is growing anticipation in some quarters of an unexpected breakthrough that could commit governments to a phase-down in their use of fossil fuels. If the ongoing negotiations bear fruit, there could be a significant upsurge in demand for the financial support needed to effect transition to low-carbon energy systems, especially among developing nations.

Two years ago, at COP26 in Glasgow, there was a similar surprise, when parties signed up to a phase-down of coal for the first time, accompanied by the announcement of the first Just Energy Transition Partnership (JETP), designed to help South Africa to shift away from its heavy reliance on coal power.

In principle, the idea is that donor governments from developed countries put up concessionary finance to fund the most capital-intensive elements of the energy transition, such as decommissioning coal-fired power stations, which in turn attracts private capital to invest in related clean energy transition projects. This de-risking is considered vital to raise the necessary capital from multiple sources.

Since 2021, JETPs have been announced for Indonesia, Vietnam and Senegal. There could be more soon, especially if COP28 accelerates the move away unabated fossil fuels. But the difficulties experienced by existing JETPs have led some to ask whether they need a rethink at best, or a more fundamental review, to better support the global shift from fossil fuel usage.

According to Andrew Apampa, Data and Research Manager at Convergence, a specialist blended finance network, JETPs have been hampered to date by multiple factors, including their sheer complexity and the lack of ‘shovel-ready’ projects. Both these issues speak to the problem at the heart of JETPs: a yawning gap between the parties on the ground implementing the transition and those funding it.

“Lessons learned from countries like South Africa, Vietnam, Indonesia, and the forthcoming endeavors in Senegal, indicate the need for a more consultative and inclusive approach. The focus is shifting toward involving local stakeholders, governments, and the private sector in creating investment plans relevant to each country’s specific needs,” he says.

Blended finance goes “meta”

While JETPs do represent a form of blended finance, in that they attract private capital largely through the loss-absorbing powers of concessionary capital from the public and philanthropic sectors, Apampa notes they have distinct characteristics that give rise to particular challenges.

While traditional blended finance is project- and profit-based, JETPs are more programmatic and policy-led, which can lead to many layers of complexity. “You can think of JETPs as almost meta blended finance,” says Apampa.

At the project level, he explains, blended finance involves concessionary and private sector funding of one or more specific projects, for example, perhaps aligned with achieving one or more of the UN Sustainable Development Goals (SDGs) in an emerging markets location.

“At the programme level, it’s more about a structural approach,” he says. Here, concessional financing is deployed on a broader scale to align both public and private investors within a larger financing framework, such as a JETP, that funds individual projects.

“The idea is to allow the private sector to focus on commercially viable areas while directing concessional funds to sectors facing greater challenges in attracting private investment,” Apampa adds.

Earlier this month, the Glasgow Financial Alliance for Net Zero (GFANZ), which has pledged to at least match public sector financing commitments made through JETPs with Indonesia and Vietnam, published its 2023 Progress Report.

It notes that the GFANZ Secretariat and working group members have been focused on supporting government and public sector bodies in their efforts to mobilise increased levels of private capital, while also contributing to discussions around the development of each country’s investment policy plans.

GFANZ has also been supporting the early development of the Senegal JETP, which intends to mobilise €2.5 billion (US$2.7 billion) in new and additional financing over a three-to-five-year period starting in 2023.

The Indonesia and Vietnam JETPs depend on half the financing coming from GFANZ, but there is currently no clear or public plan for how this private finance will be delivered and on what terms.

Diverse agendas

While blended finance programmes are inevitably more complex than single projects, it’s the role of policy in JETPs that provides the real differences and challenges.

In traditional blended finance, transactions are primarily driven by fund managers which are individually accountable for returns and have track records that inspire confidence, says Apampa. In JETPs, the profit motive is balanced against policy goals, which themselves may not be fully articulated or shared by all the disparate parties involved.

“When multiple donors contribute within a single country’s JETP, the diverse agendas, approaches, and imposed conditions on financing have created complex requirements for the recipient country’s government. This complexity, in turn, hampers their ability to effectively engage the private sector for funding, he adds.

Convergence’s State of Blended Finance 2023 report included a section on JETPs for which the network interviewed a selection of stakeholders. “This recurring theme echoed among many we spoke to,” said Apampa.

Specifically, it appears that JETP donors have often found it hard to trace and allocate deployed funds, conflicting with their expectations for clear outcomes and transparency. These expectations can be further disrupted by the reliance of projects on the passing of regulatory reforms, which have sometimes heightened uncertainty and extended timeframes.

“The primary challenge repeatedly emphasised was the difficulty in aligning the various financing sources, agendas, and conditions set by different donors,” he said.

This disconnect between the remote and the local was also reflected in the availability of projects within the stated goals and criteria of the JETPs. Convergence found that the narrowness of the project pipeline restricted the fulfillment of JETPs’ goals in several countries.

“This shortage emphasises the necessity for multilateral development banks (MDBs) and concessional financing to bolster the development of a more substantial project pipeline,” said Apampa,

There have been mounting calls for wider financial reform, in particular for MDBs to adapt their business models, skill sets, and approaches to risk in order to leverage the scale of private finance necessary to support a global climate transition.

Common ground

The differences between the existing JETPs can make it hard to identify common solutions. So different are the challenges they are seeking to overcome, and the environments in which they operate, that one might struggle to establish common ground beyond core objectives at all.

For example, whereas coal-fired plants in South Africa are already close to retirement, Indonesia’s fleet is relatively young. Additionally, Senegal’s government plans to expand the use of natural gas as a bridge between coal and clean energy.

As a still-new concept, there is no blueprint for JETP success, notes Apampa. “Essentially, it’s a learning process on the go, where individuals are navigating what works and what doesn’t.

“This aspect became evident in our interviews with practitioners, highlighting the absence of established best practices for this approach.”

With demand for transition finance only going in one direction, Convergence nevertheless made a couple of recommendations that could ensure JETPs not only support climate mitigation goals more effectively, but also channel blended finance to address adaptation funding challenges too.

As a JETP stakeholder noted, the financial commitments pledged are “not collective, fungible, or flexible pools of capital”. That leaves recipient governments with the complex task of working out what finance is being provided from what sources, and the terms and conditions of accessing it.

For this reason, Convergence recommended stripping out the complexity caused by multiple donors with multiple agendas and priorities. Ideally, they should speak to the recipient government with “a single voice”, committing also to “collective investment vehicles that can reflect and balance different donor priorities and commit financing coherently”.

As well as this increased coordination, Convergence also proposed more detailed consultation, at an earlier stage, between recipients and donors to identify which projects can be financed by the private sector alone, and developing the appropriate project pipelines, leaving concessional resources to be deployed where they are needed most.

“Donors and JETP countries should also consider developing energy transition investment plans outlining different funding options, funding needs, and reform proposals as a first step, which can then be marketed to potential financing partners,” the Convergence report adds.

Inverting the model

Apampa characterises the changes as effectively turning the JETP model on its head. To date, JETPs have been agreed in broad terms and announced at the political level, with the blanks filled in later, in terms of what to finance and how.

An inverted approach would instead build the investment plan from the ground up, designed explicitly to attract energy transition finance. Such plans, developed in tandem with various actors and integrating diverse energy systems, would focus on outlining emissions, pricing indicators, and technical assistance aspects.

“By better integrating these investment plans within a country’s energy mix, they become more marketable to potential financing partners. This innovative approach brings more direction, alignment, and coherence in the implementation phase,” says Apampa.

Potentially, this shift could reduce uncertainty for individual JETP governments, alleviating their concerns about disparate agendas, conditions, and strategies attached to different donor-funded projects.

“This shift ensures a more streamlined and coordinated implementation process,” he suggests.

This may well be needed if demand increases in the aftermath of COP28, and not purely to support clean energy transition.

While JETPs are focused on mitigating the risks of climate change, Apampa suggests that the shift in approach outlined above could, with the necessary due diligence, enable the model not only to scale but also to accommodate adaptation finance needs.

“Achieving scalability with JETPs will entail a gradual process of understanding what approaches suit diverse countries based on their energy profiles, specific needs, and the financial landscapes unique to each,” he says.

Adaptation and beyond

Further, Apampa suggests that conversations are already well advanced around the possibility of adaptation-based JETPs among mid-sized developing markets nations. But he does not underestimate the work involved.

“There’s an evident openness among stakeholders to explore how the JETP model could become more relevant and adaptable to diverse tiers of emerging markets,” Apampa says.

“When we look beyond the heavily interconnected tier of markets where traditional JETP models would make sense, it becomes apparent that the development and climate concerns in the subsequent group of countries could significantly differ.”

These countries might prioritise adaptation measures in their specific energy mixes, presenting a varied landscape. Hence, there is a growing need to envision how the JETP model could be tailored to suit these regions.

“Beyond merely transitioning from mitigation to adaptation, stakeholders are brainstorming various approaches to address fundamental issues such as the lack of coherence among different financing sources and the scarcity of a robust project pipeline,” he adds.

Apampa acknowledges that some JETP participants “currently exhibit limited enthusiasm” for future involvement, a reflection of the “considerable time and bandwidth” needed to understand the unique energy profiles, specific needs, and financial landscapes of recipient countries.

“Understanding the energy transition in these countries requires a tailored approach since just transitions differ based on regional contexts,” he observes.

However, Apampa stresses that an inversion of the existing approach has the potential to increase effectiveness, drawing in more private capital.

“This approach necessitates a bottom-up strategy, seeking where private sector involvement holds the most significance. There’s a growing acknowledgment that a top-down imposition of strategies won’t suffice,” he says.

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