Some considerations for an AMC in the climate context
Outline <ul><li>Advance Market Commitments and general pull-mechanisms (‘AMC+’) in climate finance. </li></ul><ul><li>Less...
AMC or ‘AMC+’...? <ul><li>Pull-mechanisms or ‘AMC+’ </li></ul><ul><li>A mechanism that provides a value enhancement to ove...
AMC+ climate applications must seek to leverage private funds. <ul><li>Current climate funding commitments: </li></ul><ul>...
How to learn from the vaccine AMC <ul><li>A key lesson of the vaccine AMC is that the specific product, market, industry, ...
The original vaccine AMC is complex… <ul><li>Supply commitments  sought for 200m doses annually for 10 years </li></ul><ul...
…  this was made necessary by diverse challenges in the market environment <ul><li>Problematic market features: </li></ul>...
Writing the AMC contract required a good sense of many parameters <ul><li>Overall  supply commitment size  (driven by need...
<ul><li>Both demand and cost curves were fairly well understood in the Pneumo AMC (demand more so). </li></ul><ul><li>Dema...
Social efficiency facilitated decision-making <ul><li>Uncertainty over cost estimates – could reduce it, but not eliminate...
Another lesson for climate AMCs: know the product’s social returns <ul><li>Because of asymmetric information, and/or becau...
Two possible analogies for an AMC in the climate context – and their limitations
Two possible analogies for an AMC in the climate context – and their limitations <ul><li>An analogy based on good social r...
An analogy based on good social returns: robust off-grid renewable energy <ul><li>High social returns; </li></ul><ul><li>C...
Limits of the analogy <ul><li>A very different market, with far less market power; </li></ul><ul><li>Social returns may be...
A different analogy, based on knowledge of the policy environment: support for uncertain government FiT <ul><li>Many devel...
Takeaway message
Some good questions to ask in approaching a climate AMC <ul><li>Basic conditions for an AMC: </li></ul><ul><li>Is there a ...
Takeaway points <ul><li>For pull-mechanisms (AMC+) in the climate area, leveraging private funds is key; </li></ul><ul><li...
 
Upcoming SlideShare
Loading in …5
×

Advance Market Commitments for Climate Change

1,134 views
1,077 views

Published on

Center for Global Development visiting senior associate Jan von der Goltz presents some considerations for advance market commitments in the climate change context.

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,134
On SlideShare
0
From Embeds
0
Number of Embeds
135
Actions
Shares
0
Downloads
20
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • I will spend most of my time talking about the original AMC concept, and what to learn from it for climate finance; But first, a word on broader pull-mechanisms – what one could call ‘AMC+’: Plenty of opportunities for good clean investments; Much under way.
  • Tie AMC subsidy to supply commitments Set a hard low tail price ceiling
  • Industry perceived considerable demand risk Donors have historically over-estimated demand GAVI’s long-term funding contingent upon periodic Board approval
  • AMC size should be driven by: Knowledge about potential market size (e.g. doses of vaccines, units of micro/pico-hydro); and Some knowledge of the cost curve: how much must be produced and sold to drive down unit cost to point of sustainability.
  • Not clear that we know the demand curves in clean tech – what if India puts in place solar mission? Perhaps we are doing better on cost curves? Not clear that we know the demand curves in clean tech – what if India puts in place solar mission? Perhaps we are doing better on cost curves? Would you be ready to draw a demand curve like this for your favorite project? Would you be confident in drawing projected MC as a function of units sold? IF TIME, ADD AC/MC GRAPH
  • Social returns are high; This has been frustrating to finance – especially at scale, and with local O/M Clearly defined need (similar to vaccines); Indivisibilities in research cost, if product is to fit the idea of robust, low-cost, locally maintained energy. (similar to adding relevant strains) At the same time, these are incremental improvements that it may be better to address with an AMC than with X-prizes; (because the demand element/market test ensures that innovations are practically useful) Specification could contain long-term delivery/maintenance requirement to force capacity dedicated to developing countries. AGAIN, MY PURPOSE HERE IS TO DEMONSTRATE THAT PARTICULAR CHARACTERISTICS MATTER, NOT TO CALL FOR THIS SPECIFIC INVESTMENT
  • (ask yourself when considering a particular technology: would you want to do this with SERIOUS funds?); Product characteristics are less naturally defined than for vaccines: Offer contract for a specific technology? Easier to define which technologies are eligible; Prevent diluting subsidy; Easier to know cost curve. Or request general “off-grid technology with certain generating capacity, at certain cost, and certifiably (by whom) suited for local O/M” Brings in consumer preference; Allows for technology evolution; Best solutions strongly depend on local factors (e.g., storage needs, insolation/wind/biomass availability, O/M capacity)
  • There may be an instructive analogy with the Pneumo AMC Donors had intimate knowledge of health system capacity and were confident in demand forecasts; Suppliers viewed demand as much more uncertain; This was driven by doubts about government capacity and donor willingness to pay.
  • Advance Market Commitments for Climate Change

    1. 1. Some considerations for an AMC in the climate context
    2. 2. Outline <ul><li>Advance Market Commitments and general pull-mechanisms (‘AMC+’) in climate finance. </li></ul><ul><li>Lessons from the vaccine AMC for the climate context. </li></ul><ul><li>An analogy, and its limitations. </li></ul>
    3. 3. AMC or ‘AMC+’...? <ul><li>Pull-mechanisms or ‘AMC+’ </li></ul><ul><li>A mechanism that provides a value enhancement to overcome uncertainty over whether investment costs can be recouped. </li></ul><ul><li>AMC </li></ul><ul><li>A pull mechanism that seeks to create a sustainable market by subsidizing demand in exchange for capacity creation. </li></ul>X-prize Renewable energy standard No demand subsidy Feed-in tariff Original AMC Demand subsidy No dedicated capacity Requires dedicated capacity
    4. 4. AMC+ climate applications must seek to leverage private funds. <ul><li>Current climate funding commitments: </li></ul><ul><li>Funds are scarce; </li></ul><ul><li>Many rival uses, from forests to adaptation; </li></ul><ul><li>Not clear how much funding is new; </li></ul><ul><li>Not clear how reliable. </li></ul><ul><li>Therefore: </li></ul><ul><li>Where possible, invest public funds to reach tipping point where markets become sustainable. </li></ul>Source: WDR 2010, Copenhagen Accord. Climate funding commitments vs. need estimates $63bn $300bn $100bn $10bn
    5. 5. How to learn from the vaccine AMC <ul><li>A key lesson of the vaccine AMC is that the specific product, market, industry, and policy context matter! </li></ul><ul><li>Do not try to just transplant the concept. </li></ul><ul><li>Rather, define the project, then tailor a financing instrument. </li></ul>
    6. 6. The original vaccine AMC is complex… <ul><li>Supply commitments sought for 200m doses annually for 10 years </li></ul><ul><ul><li>With tranching </li></ul></ul><ul><li>AMC subsidy entitlement (proportional to supply commitment) </li></ul><ul><ul><li>Rate of subsidy </li></ul></ul><ul><ul><li>Demand guarantee </li></ul></ul><ul><li>Tail price ceiling </li></ul>The principal goal: create a viable market that sustainably serves poor countries.
    7. 7. … this was made necessary by diverse challenges in the market environment <ul><li>Problematic market features: </li></ul><ul><li>Indivisibilities in capital investment </li></ul><ul><li>Demand risk and asymmetric information on demand </li></ul><ul><li>Asymmetric information on cost </li></ul><ul><li>Strong market power: </li></ul><ul><ul><li>Only two players in the short run, one assumed to have higher unit cost </li></ul></ul><ul><ul><li>Possibility of entry </li></ul></ul>In principle, addressing complex market failures is a strength of AMCs
    8. 8. Writing the AMC contract required a good sense of many parameters <ul><li>Overall supply commitment size (driven by need estimates) </li></ul><ul><ul><li>Tranche size (driven by timing of entry) </li></ul></ul><ul><li>AMC subsidy entitlement (driven by capital investment cost) </li></ul><ul><ul><li>Rate of subsidy (driven by signaling effect) </li></ul></ul><ul><ul><li>Demand guarantee (driven by industry risk perception) </li></ul></ul><ul><li>Tail price ceiling (driven by marginal cost) </li></ul>
    9. 9. <ul><li>Both demand and cost curves were fairly well understood in the Pneumo AMC (demand more so). </li></ul><ul><li>Demand projections were the result of close cooperation with developing-country counterparts, and intimate knowledge of the policy environment. </li></ul><ul><li>Yet, it still proved hard to get the parameters right. </li></ul><ul><li>There are risks in AMCs: </li></ul><ul><ul><li>Non-participation; </li></ul></ul><ul><ul><li>Windfall profits. </li></ul></ul><ul><li>Understanding demand and cost well is crucial in limiting risk. </li></ul>A lesson for climate AMCs: know the industry and the policy environment Source: GAVI Strategic Demand Forecast, 2009
    10. 10. Social efficiency facilitated decision-making <ul><li>Uncertainty over cost estimates – could reduce it, but not eliminate </li></ul><ul><li>Market power: needed to get several firms to bid </li></ul><ul><li>Very high and robust social value </li></ul><ul><li>Therefore: precaution called for maximizing the likelihood of success, rather than marginally reducing cost </li></ul>AMC subsidy per unit of capacity Tail price Social efficiency of AMC investment ($ per DALY) Robust efficiency Robust efficiency Source: adapted from World Bank, 2009 $4.00 $33 $3.50 $3.00 $2.50 $2.00 $10.00 $7.50 $6.00
    11. 11. Another lesson for climate AMCs: know the product’s social returns <ul><li>Because of asymmetric information, and/or because technology is not yet there, uncertainty will remain despite due diligence </li></ul><ul><li>It will generally be hard to answer the question “what are the optimal parameters?” </li></ul><ul><li>IF social efficiency of the proposal is high and robust, it is enough to answer the question: </li></ul><ul><ul><li>“ Are the proposed parameters reasonably efficient and have a chance of leading to a successful AMC?” </li></ul></ul>
    12. 12. Two possible analogies for an AMC in the climate context – and their limitations
    13. 13. Two possible analogies for an AMC in the climate context – and their limitations <ul><li>An analogy based on good social returns: robust off-grid renewable energy. </li></ul><ul><li>A different analogy, based on knowledge of the policy environment: support for uncertain government FiT. </li></ul>
    14. 14. An analogy based on good social returns: robust off-grid renewable energy <ul><li>High social returns; </li></ul><ul><li>Clearly defined need; </li></ul><ul><li>Contract could require long-term delivery/maintenance to force capacity dedicated to developing countries. </li></ul><ul><li>Indivisibilities in research cost incurred to adapt product to low-cost, locally maintained deployment; </li></ul><ul><li>Market test inherent in AMC may be better suited than X-prize to ensure technology is robust. </li></ul>Thought experiment: is a traditional AMC suitable for financing off-grid renewable energy in developing countries that can be installed, operated and maintained with local capacities?
    15. 15. Limits of the analogy <ul><li>A very different market, with far less market power; </li></ul><ul><li>Social returns may be less clear in comparing clean tech v. traditional off-grid; </li></ul><ul><li>Hard to monitor performance; </li></ul><ul><li>Need may be less clear in long-term, as grids may expand. </li></ul><ul><li>Product characteristics are less naturally defined than for vaccines: </li></ul><ul><li>Offer contract for a specific technology? </li></ul><ul><li>Or request general “off/micro-grid technology with certain generating capacity, at certain cost and emissions level and certifiably (by whom?) suited for local O/M” </li></ul>
    16. 16. A different analogy, based on knowledge of the policy environment: support for uncertain government FiT <ul><li>Many developing countries are legislating market incentives for clean energy, such as FiT. </li></ul><ul><li>However, suppliers often perceive uncertainty over: </li></ul><ul><ul><li>Whether funds will be allocated to these subsidies; </li></ul></ul><ul><ul><li>Whether the physical and administrative infrastructure will be in place. </li></ul></ul><ul><li>Could think about leveraging strong existing engagement with power sector in developing country for an AMC or AMC+ support. </li></ul><ul><li>There is of course moral hazard (for the government) in this scheme. </li></ul><ul><ul><li>This is also the case with the vaccine AMC – governments must pay their part; </li></ul></ul><ul><ul><li>The scheme is only viable if donors have confidence in counterpart capacity and intentions; </li></ul></ul><ul><ul><li>It will be very much easier to consider if the social benefits are high and robust. </li></ul></ul>
    17. 17. Takeaway message
    18. 18. Some good questions to ask in approaching a climate AMC <ul><li>Basic conditions for an AMC: </li></ul><ul><li>Is there a market failure due to uncertainty over recouping investment? </li></ul><ul><li>Do we know the demand and cost curve for the product well enough to reasonably size the AMC? </li></ul><ul><li>Narrow down candidate AMCs: </li></ul><ul><li>Is the social return high and robust? </li></ul><ul><li>Do donors have a knowledge/trust advantage on government policies? </li></ul><ul><li>Make sure AMC has a comparative advantage: </li></ul><ul><li>Has the market failure frustrated other efforts to incentivize clean technology? </li></ul><ul><li>Is the investment eligible for funding under other financing mechanisms? </li></ul>
    19. 19. Takeaway points <ul><li>For pull-mechanisms (AMC+) in the climate area, leveraging private funds is key; </li></ul><ul><li>A full-fledged AMC like vaccine AMC is powerful, because it can address multiple market failures; </li></ul><ul><li>But the structure is complex; </li></ul><ul><li>And there is both political and non-performance risk in AMCs; </li></ul><ul><li>Getting it right requires a good knowledge of the details: </li></ul><ul><ul><li>Product; </li></ul></ul><ul><ul><li>Market; </li></ul></ul><ul><ul><li>Industry; </li></ul></ul><ul><ul><li>Policy environment. </li></ul></ul><ul><li>So, think carefully about whether to apply an AMC, and tailor it to the desired purpose. </li></ul>

    ×