The German Environment Ministry wants to encourage investments in clean energy in Africa through a new climate finance instrument. The ministry will provide 30 million euros from its International Climate Initiative as start-up financing for this project. The money will be used to hedge currency risks and thus mobilise much greater investments totalling up to 1.3 billion US dollars.
Currency fluctuations are one of the major investment risks in many African countries. This is particularly true for capital-intensive investments in renewable energies. Investors need to take out loans in dollars or euros, but they are shying away from the associated risk, as they themselves are paid in the local currency.
Hedging currency risks can help remedy this situation. Specifically, KfW Entwicklungsbank will work with the Amsterdam-based exchange rate hedging specialist TCX to offer risk hedging for investments in renewable energies and energy efficiency. The target group are investors in countries such as Rwanda, Uganda, Kenya, Tanzania, Zambia and Ghana. At a later stage the project will be extended to include other continents such as Asia.
The project will have a dual leverage effect. The Federal Environment Ministry provides 30 million euros to KfW. As a well-known and trustworthy investor KfW covers with this initial investment particularly high-risks, giving other financing partners an incentive to pay more into the TCX fund. All in all, a capital stock of up to 150 million euros is expected to be built. This sum could in turn be used, according to calculations by KfW, to hedge climate investments in developing countries up to an amount of 1.3 billion US dollars over the next ten years. It is estimated that this can help save up to 500,000 tonnes of CO2 per year.
Federal Environment Minister Barbara Hendricks stated: "This project demonstrates what climate finance is about. Our goal must be to steer global investment flows in the right direction. Smart leverage is needed here, for public funds alone are not sufficient to achieve this. Ultimately, we need a good climate finance mix, ranging from traditional aid to innovative financing instruments."