Helping the UN cut down on fossil fuels by de-risking energy service contracts

As previously noted, humanitarian agencies acknowledge the need to shift their dependence from fossil fuels and transition to more sustainable approaches to generating and consuming electricity, however, systemic barriers are preventing them from doing so, which results in the continued purchase of diesel generators as their primary source of power in locations suffering from energy poverty.

Recognizing this, a series of workshops were convened by the GPA Coordination Unit, GIZ and Shell during 2019 in order to identify practical ways to unlock the impasse and support the development of concrete solutions. The results from the workshops were then used to co-design concrete solutions that focused on replacing existing or planned, diesel generators with renewable or hybrid energy solutions supplied by the private sector through Power Purchase Agreements (PPAs) or Leasing Agreements.

Two priority activities were identified by the workshop participants in order to facilitate the large-scale uptake of these alternative delivery models, namely the development of: standard contractual terms for PPAs and Leasing Agreements (download the subsequent report from Energypedia); and a de-risking mechanism that protects the commercial entity’s capital investment from the UN’s standard contractual termination clause, which is a precondition of all long term agreements.

With technical and financial support from Shell, Energy MRC were contracted to develop a de-risking mechanism that could facilitate long term energy service contracts between humanitarian actors and third-party renewable energy providers. The subsequent report can be downloaded from Energypedia.  

The proposed derisking mechanism is based on a two-phased approach:

• Phase One: A short term liquidity facility would provide post-termination cashflow to the energy service company for up to 12 months, which would provide an opportunity to explore alternatives uses for, and/or off-takers to, the existing energy system to offset termination liabilities and act as a time buffer for the UN Agency to draw down on the guarantee mechanism.
• Phase Two: A guarantee mechanism would payout to the UN to cover its termination liabilities to the energy service company. 

The proposed approach mitigates contractual and financial risks associated with the UN’s Termination Clause, in doing so:

• It attracts energy service companies to the humanitarian sector;
• It limits the possibility of energy service companies charging a premium for electricity to cover its contractual and financial risks; and
• It permits the UN to outsource electricity supply and concentrate on its core activities.

In addition, high-level modeling of a sample portfolio of 70MW of solar projects (~700 facilities) with an assumed CAPEX of 65m USD could be underwritten by a guarantee fund of just 6m USD.

The next step is to develop and test the derisking mechanism in humanitarian settings, to support the decarbonization of UN energy infrastructure through energy service contracts.  

 

If you would like to know more about the above, please contact mark.gibson@unitar.org.

 

Further readings:

• Fossil Fuel Powered Generators in Humanitarian Operations Produce High CO2 Emissions
• How to insure long-term activities in short-term funding? A Guarantee Mechanism in Humanitarian Energy Contracts
• Helping the UN cut down on fossil fuels through standard energy service contract clauses
• Four ways to accelerate solar-powered electrification in humanitarian settings