Piloting and Scaling Up Clean Energy Transitions: The Role of Development Finance Institutions

In this paper, we examine the role of development finance institutions (DFIs) in piloting clean energy transitions by conducting in-depth case studies with representative multilateral development banks (MDBs) and national development banks. Our key findings include: (a) technical risk is the most compelling challenge for piloting new clean energies with huge uncertainties, and development-oriented DFIs endowed with industrial expertise can make forward looking pilot investments (sometimes throughout the supply chain) to demonstrate the viability of new technologies to attract private capital to follow suit; (b) policy and regulatory risks are a key hindrance in scaling up clean energies, and as public entities development banks have comparative advantages of coordinating and even shaping policy discussions with government agencies to mitigate such policy and regulatory risks; and (c) foreign exchange risk is an undeniable challenge for NDBs to attract foreign investment or for MDBs to invest renewable energy projects in developing countries especially given the fact that shadow financial markets make hedging costly, which encourages MDBs to explore local (green) bond issuances.