How Results-Based Financing Can Help the Green Climate Fund Achieve its Objectives

How Results-Based Financing Can Help the Green Climate Fund Achieve its Objectives A Differ Report to The Norwegian Ministry of Climate and Environment April 2016 Contents Executive Summary ii Lists of Figures, Tables, Textboxes and Abbreviations iv Introduction 1 Results-Based Financing in the Context of the GCF 2 How RBF Can Help the GCF Achieve its Objectives 6 Operationalising RBF in the GCF 10 Recommendations and Way Forward 16 Appendix: Existing RBF programmes 18

Executive Summary The Context The main objective of the Green Climate Fund (GCF) is to promote the paradigm shift towards low-emission and climate resilient development pathways. Paragraph 3 of the Governing Instruments (GI) lists several guiding principles for achieving this objective: Catalyse public and private financing Pursue country-driven approaches Achieve scalability and flexibility Maximise the impact of its funding Enable processes for monitoring and evaluation Be transparent, accountable, efficient and effective The GCF finances projects and programmes through four key financing instruments: grants, concessional loans, guarantees and equity. Grants can be provided upfront, where payments are done prior to the activity and based on plans, budgets and expected results. Additionally, as a means to incentivize mitigation actions, paragraph 55 of the Governing Instrument states that the Fund may employ results-based financing approaches, where payment is made based on (independently) verified results. The GCF has already adopted a performance measurement framework for results-based REDD+ payments (B08/08). Results-based financing (RBF) has some attractive features which may make it a preferred form of intervention for the GCF; either alone or in combination with other financial instruments if a recipient country has limited access to up-front capital necessary to produce the results. This report discusses the RBF-potential in other sectors, in particular the energy sector. How RBF can help GCF achieve its objectives There are several reasons why RBF would be an attractive financing modality for GCF and its partner countries: 1. Triggering pipeline development. The submitted Intended Nationally Determined Contributions (INDC) indicate a large potential for energy-based RBF programmes under the GCF. Many countries have concrete plans to increase renewable energy generation capacity. It might be possible to build a strong GCF portfolio with leadership from partner countries where large GHG reduction volumes through scalability could quite rapidly be achieved. 2. Ensuring country ownership and fair allocation In an RBF programme any eligible party has the right to participate and get rewarded for the results achieved. Based on their own INDCs, developing countries can choose to focus on available RBF programmes, knowing that they are eligible to receive financial support from the GCF if they implement activities successfully. Hence, RBF ensures country driven interventions and could serve as one way of enhancing direct access. 3. Increasing access to donor funding. An effective GCF will give the donor countries greater confidence in the GCF and could potentially prefer to channel more funds through the GCF. RBF will increase the chance that grant money is used for intended purposes, and hence increase donor s confidence and support. Moreover, RBF has proven to be an effective financial instrument to mobilize commercial capital and private sector implementers. For recipient countries, this will mean more investments in total to the country than with a traditional grant allocation. 4. Maximising private sector engagement. International, global companies find attractive business opportunities in existing RBF programmes. Local businesses are developed accordingly. Moreover, in countries where access to private capital is insufficient, the GCF might combine RBF with the other financing instruments available (e.g. equity, concessional loans, guarantees) to finance some of the upfront costs, reducing the risk for private sector. 5. Operationalising Direct Access Modality and Private Sector Facility. The Direct Access modality is a way for receiving countries to get access to funds directly from the GCF to its national institutions without going through the International Accredited Entities. Programmatic RBF schemes on GCF-level can facilitate this financing path. Moreover, implementing RBF could be attractive to reach Private Sector Facility objectives. RBF is proven to be effective in catalysing private sector investments and suitable to stimulate development of commercial markets. In addition, it drives innovation and cost reductions as the players are free to choose themselves how to achieve the results. 6. Making it administratively easier for the Board/ Secretariat. It is often challenging to identify up-front which companies and projects will be successful. With an RBF approach, the need for resources to upfront project assessments ii EXECUTIVE SUMMARY

can be substantially reduced. Moreover, the due diligence can to a larger extent be done by commercial capital providers. This would allow the GCF to free up resources and capacities for use in other areas. Costs related to monitoring, reporting and verification (MRV) could be higher for RBF programmes than for other interventions. The additional MRV cost can however be limited through selection of appropriate result parameters. Moreover, RBF approaches fit well into the current frameworks and decisions at the GCF. The investment framework and the performance measurement framework are well suited for being applied on rights-based RBF projects and programmes. Hence, the Board can already now approve both project-based and programmatic RBF proposals from accredited entities. Operationalising RBF in the GCF There are several examples of successful RBF programmes within the energy sector. For instance, in the Republic of South Africa (RSA), using tenders and PPAs for providing more renewable energy to the grid is proven to be highly effective for catalysing private capital and efficient in terms of reducing costs. The programme has successfully combined the RBF with concessional loans and/or guarantees. The Infrastructure Development Company Limited (IDCOL) in Bangladesh is arguably the most successful RBF programme for rural electrification.the grant per unit has been reduced by about 80% since the program was initiated. The IDCOL program combines RBF with access to debt financing. Although RBF has proven very effective and efficient in energy projects, there are certain preconditions that must be in place for an RBF programme to be Textbox 1: Preconditions that must be in place for successful RBF implementation pre-agreed results must be measurable and verifiable at reasonable costs, defined without room for interpretation; pre-agreed results must be measurable within a reasonable time frame from the implementation of the project activity; the indicators measuring progress must be good proxies for the intended impacts and policy objectives; there must be access to up-front financing at a reasonable cost; the recipient must be able to assume risks and handle uncertainty on future performance and revenues; and the recipients must have reasonable control of the results. successful (see Textbox). An RBF approach in GCF should therefore first be used where the barriers are low and where RBF interventions already have proven to be successful. iii The GCF is in a unique position to combine various financial instruments into attractive financial packages for developing countries and private sector. It should therefore consider to develop comprehensive, programmatic, rights-based co-financing packages within the energy sectors that offer upfront grants for capacity building and readiness activities allocate grants through results-based payments offer concessional loans and guarantees to support project financing Two examples of potential rights-based RBF-programmes would be: 1. Supplying more renewable energy to the grid; Any country that fulfils certain eligibility criteria (defined in the design of the schemes) has the right to receive a pre-determined payment from the GCF, e.g. per delivered kwh. This programmatic approach could benefit from experiences from the existing programmes and be made available to a wide range of developing countries. This would be an example of mobilising funds at scale. For example, the GCF could search specifically for potential RBF schemes in the already launched Request for proposals (RFP 2016/PSF3) For the Design and Establishment of an RFP Programme for Mobilizing Funding at Scale 2. Achieving increased access to electricity; Companies have the right to receive a pre-determined payment from the GCF for each household provided with a renewable energy solution. This programmatic approach could benefit from the experiences from several successful rural electrification RBF interventions. Readiness grant support, concessional loans and guarantees could in addition be considered, where appropriate. The GCF could search specifically for potential RBF schemes in the already launched Request for proposals (RFP 2016/PSF2): For the Design and Establishment of an RFP Programme for Private Sector Funding of Micro, Small, and Medium Enterprise Activities. The Board may consider to launch two additional requests for proposals for operationalising the two rights-based RBF programmes suggested above. Hence, RBF can be initiated both top-down (initiative from Board/Secretariat), and bottom-up (applications from accredited entities/countries) as part of the Direct Access Modality and Private Sector Facility. EXECUTIVE SUMMARY

List of Figures Figure 1: Investment costs for new power generation capacities... 1 Figure 2: RBF in the standard result chain...2 Figure 3: RBF and GCF s financial instruments...3 Figure 4: Using the GCF toolbox to project finance.5 Figure 5: Country ownershop through rights-based RBF and direct access...7 Figure 6: RBF and direct access for a developing country...9 Figure 7: Comprehensive, programmatic, rightsbased co-financing RBF packages...11 Figure 8: Comprehensive financing packages for more renewables to the grid...13 Figure 9: Implementing RBF into the GCF - some options...16 List of Tables Table 1: Selected, existing RBF-programmes...2 Table 2: Risks and rewards of financial instruments 3 Table 3a: Advantages of RBF in a GCF context...4 Table 3b: Pre-conditions for successful implementation of RBF...4 Table 4: Financing instrument and the benefits to recipients...6 Table 5: Key characteristics of selected, existing RBF-programmes...10 Table 6: Examples of GCF financing packages for bringing more renewable to the grid...12 Table 7: The Global Tracking Framework and relative socioeconomic value...14 Table 8: Pros and cons of RBF for various actors...16 List of Textboxes iv Textbox 1: Terminology...1 List of Abbreviations AE = Accredited Entities BBF = Budget-based financing CDM = Clean Development Mechanism CER = Certified Emission Reduction ESMAP = Energy Sector Management Assistance Program FiT = Feed-in-Tariff GCF = Green Climate Fund GI = Governing Instrument GIZ = Deutsche Gesellschaft für Internationale Zusammenarbeit GTF = Global Tracking Framework IRENA = The International Renewable Energy Agency kwh = kilowatthour LDC = Least-Developed Country MRV = measuring, reporting and verifying NGO = Non-governmental organisation RBF = Results-based financing SDG = Sustainable Development Goal (UN) SE4All = Sustainable Energy for All LISTS OF FIGURES, TABLES, TEXTBOXES AND ABBREVIATIONS

1. Introduction The expected increase in global greenhouse gas emissions towards 2050 will largely come in developing countries. One of the main reasons is the increase in energy demand driven by economic development and population growth. Huge investments are required to ensure access to affordable, reliable, sustainable, and modern energy for all, as well as to develop energy infrastructure for economic growth and to improve the energy efficiency of industry and households. The Green Climate Fund (GCF; the Fund) has the potential to play a catalytic role by financing (part of) the incremental costs and reduce risks incurred by solutions that give lower emissions than the conventional baseline alternatives, see the schematic example in Figure 1. The Governing Instrument (GI) of the GCF states that it shall become the main global fund for climate change finance in channelling adequate financial resources to developing countries and catalysing climate finance, both public and private, and at the international and national levels. Moreover, the Fund will provide finance to developing countries to promote the paradigm shift towards low-emission and climate-resilient development pathways. Paragraph 3 of the GI lists several guiding principles for achieving a paradigm shift: Catalyse public and private financing Pursue country-driven approaches Textbox 1: Terminology Paragraph 55 in the Governing Instrument states that The Fund may employ results-based financing approaches, including, in particular for incentivizing mitigation actions, payment for verified results, where appropriate.. In GCF s fourth Board Meeting, Payment for performance was included as a modality for providing financing (Financial Instruments (GCF/B04/06), item 37-39). This report discusses the use of grants as Payment for performance. Recent literature tends to specify results-based financing approaches as either Results-Based Finance (for payments to private sector) or Results-Based Aid Figure 1: Investment costs for new power generation capacities $/kw To ensure economic development Incremental cost Fossil (coal) Renew ables (solar) To ensure green economic development Achieve scalability and flexibility Maximise the impact of its funding Enable processes for monitoring and evaluation Be transparent, accountable, efficient and effective The GI opens for results-based approaches (paragraph 55). Such approaches have already been discussed and approved in relation to REDD+ (Decisions B.07/04 and B.08/08). Results-Based Financing (RBF) is a results-based approach where grants are disbursed after an activity has taken place and where the grant amount is dependent on achieved, verified results (see Textbox 1 for terminology). RBF differs from conventional grants disbursed upfront which are based on budgets, plans and expected results. RBF has some features which may help the GCF achieve its objectives, and thereby make it an attractive form of intervention applied by the Fund; either alone or in combination with (for payments to Governments). However, for the purpose of this report, we assess at the general applicability of results-based grants within the energy sector and hence use RBF as the abbreviation for all such approaches - irrespectively of whether the recipient (or agent as frequently used in literature) is private, NGO, Government or others. In short, RBF is used as a general abbreviation for all results-based financing approaches, including Results-Based Financing, Results-Based Aid, Payment By Results, Results-Based Funding, Performance-Based Financing, Output-Based Aid, Performance-Based Contracting, cash on delivery, conditional cash transfers etc. 1 INTRODUCTION

2 other financial instruments (upfront grants, concessional loans, guarantees and equity). This report addresses the following questions: 1. How does RBF fit into the set of financial instruments that the GCF will utilize? 2. How can RBF help the GCF to achieve its objectives? 3. How can RBF be operationalised by the GCF? Even if the conclusions can be valid also for other sectors, this report focuses on the energy sector, and specifically on renewable energy generation, rural electrification and energy efficiency measures. 2. Results-Based Financing in the Context of the GCF 2.1 Key RBF characteristics Figure 2 illustrates key differences between RBF and conventional upfront grants (here called Budget-Based Financing, BBF). In a standard result chain the achieved results could be defined as output, outcome or impact. RBF implies a strong correlation between what you want to achieve (impact) and what you pay for (e.g. output). BBF has a weaker correlation between the objective (impact) and what you pay for (input), i.e. plans, budgets and expected impact. In an RBF scheme, what to and how to measure, verify and pay for the achieved results, must be clearly defined before launch to ensure predictability and unambiguity. The implementer will Table 1: Selected, existing RBF programmes Market segment RE grid power Grid extension Mini-grid Off-grid; SHS Cookstoves ENEF; Appliances RBF programmes (since) GET FiT (Uganda); REIPPPP (Rep.of South-Africa) ADB Nepal GIZ ProSolar (Kenya) IDCOL Bangladesh; SNV Lake Victoria (Tanzania) CSI (Indonesia); The Stove Auction (Mekong) Global Leap RBF (Bangladesh) therefore know during project planning, financing and implementation how much will be paid for the results. In this sense, RBF guarantees increased revenues in case of success. RBF programmes are already widely used in the energy sector, and Table 1 gives some examples of RBF programmes in developing countries (see chapter 4 and the Appendix for further details). All of these programmes could have been financed by the GCF -through grants, debt and guarantees. In addition, a large number of RBFprogrammes have also been implemented in the energy sector in developed countries. How does RBF, as an alternative modality to allocate grants, align with the other financial instruments that the GCF will be utilizing? Figure 3 illustrates the relation between the four financial instruments. Except from grants, all instruments imply that the financing provided is expected to be recuperated by the GCF. Hence, these instruments are closer to commercial financing and RESULTS-BASED FINANCING IN THE CONTEXT OF THE GCF Figure 2: RBF in the standard result chain BBF: Upfront payments based on Achieved results RBF: Payments based on achieved results Budgets, plans, expected results E.g. kwh or number of laws E.g. CO 2 e red. E.g. Mitigated climate change

3 Figure 3: RBF and GCF s financial instruments Pure Aid Grant financing (not to be paid back) BBF (upfront) RBF (on delivery) Concessional loan (upfront) further from the conventional aid paradigm than grants as they are more geared towards financial return and reinvestment. The RBF modality is a grant, but is closer to a commercial financing instrument than BBF as it is based on the fundamental commercial principle of paying for a service/ product if and only if it is delivered. As can be seen in Table 2, the GCF financial instruments have some key differences in terms of their attributes of risk and reward. All but up-front grants score HIGH on at least one of the dimensions. For loans, guarantees and equity, all, or more, of the financing provided is expected to be recuperated. The financing recuperated will then be available for reinvestment and, hence, increase the impact per dollar provided by the donors. RBF ensures high cost efficiency and high impact per dollar provided, although the funding disbursed is not to be paid back, as the measure is $/achieved result and not $/expected result. Up-front grants, Commercial financing (to be paid back) Guarantee (on non-delivery) Equity (upfront) Pure commerical however, may also have an impact, but that cannot be guaranteed as payments are done based on expected results only, not achieved results. Consequently, aspects in Table 2 and of the continuum in Figure 3 can obviously be debated, but they serve to stimulate thinking on the key differences between the instruments and their strategic fit with GCF s objectives and overall approach. 2.2 Advantages and preconditions of RBF Whereas Table 2 compares the financial instruments and RBF along selected parameters to characterise the differences between them, Table 3a lists some of the advantages that RBF in general entails, if implemented correctly. In short, it is cost-effective, stimulating commerical players and is administratively light for the GCF. At the same time, RBF may have some weaknesses and limitations as well, for instance that it requires RESULTS-BASED FINANCING IN THE CONTEXT OF THE GCF Table 2: Risks and rewards of financial instruments Up-front grant Results-based grant Concessional loan Guarantee Equity Repayment potential for the GCF NO No repayment NO No repayment HIGH Debt has priority HIGH Debt has priority MEDIUM Debt has priority Upside potential for the GCF NO No upside NO No upside LOW Only interests LOW Only risk premium HIGH Gets a share if successful Upside potential for the receiver NO for the majority, HIGH for those granted HIGH for everyone providing verified results Depends on conditions Depends on conditions Depends on conditions Certainty of cost effectiveness LOW Payment irrespective of impact HIGH Payment only for results MED Provided irrespective of impact MED Provided irrespective of impact MED Provided irrespective of impact

4 a higher level of upfront financing from other sources through debt and equity (see Figure 4) and that there should not be a too long time period from implementation of the project until results are achieved., and consequently verified and paid for. RBF should therefore, similar to any other financial instrument including upfront grants, only be used when the conditions are right. Table 3b illustrates some of the pre-conditions that must be in place for successfully implementing RBF. Ensuring fulfilment of the pre-conditions and avoiding the potential weaknesses are therefore in practise two sides of the same coin. For instance, ensuring RBF implementation where private capital and implementers are incentivized is the same as avoiding situations where RBF is less likely to be incentivizing private capital and implementers. Table 3a: Advantages of RBF in a GCF contect Advantages Requires country driven approaches, through accountability for results, but autonomy of how for the recipients Stimulating a market, not selected players (creates level playing field) High cost-effectiveness of available funds Ability to catalyse commercial capital Ability to transform a market segment Ability to replicate and scale successful activities Increased focus on results (output, outcome, impact) Administratively light for the GCF Reduces application process for recipients Predictable for market players Potential for improving the pipeline of the GCF Less prone to corruption Stimulates transparency Table 3b: Pre-conditions for successful implementation of RBF. Pre-conditions Pre-agreed results must be measurable, defined without room for interpretation and measurable within a reasonable time frame from the implementation of the project activity. The results to be measured must be closely linked to the desired impacts in order to stimulate the appropriate actions among implementers It must be possible to establish a clear baseline to measure results against All results should be subject to independent verification and a predictable system for measuring, reporting and verifying results must be in place up-front.. Sufficient financial resources to cover necessary investments for delivery of results must be available to implementers, given appropriate RBF amounts. There must be a high degree of confidence among implementing entities and commercial capital sources that the payment for results will come - timely - provided results are delivered. Finally, regarding the use of RBF in a GCF context, it is worth noting that on an aggregate level for all receiving countries seen together, implementing RBF does not automatically transfer risk from the GCF and its donors to the developing countries. Any funding contributed to the GCF is to be granted, lent to or invested in the eligible countries. This means that any amount to be disbursed as grants under the GCF will be granted, and that RBF just represents a different way of allocating funds between eligible actions. Having said that, individual countries may face a higher risk of not getting funds in the case of RBF compared to upfront grants. Still, the highest risk for not getting upfront grant is related to getting approved by the Board. The time-consuming application process does not automatically end successfully. RBF, on the other hand, guarantees payment if verified results are achieved, which actually may imply a lower risk for the implementing countries. As mentioned above, RBF requires a higher level of financing though debt and equity, compared to the situation where upfront grants are provided. However, the GCF is in a unique position to offer financial support to mitigate this increased challenge through comprehensive project financing packages. Hence, probably the best way of mitigating the potential weaknesses of RBF is to combine RBF with financial instruments that ensure (upfront) financing of good projects and programmes. RESULTS-BASED FINANCING IN THE CONTEXT OF THE GCF

2.3 RBF as part of a comprehensive project financing package All actions, projects and interventions, need access to financing up-front in order to be implemented. Most projects are financed with a majority of debt, combined with a share of equity/own contribution. However, in order to attract commercial capital (debt and equity) to provide financing for a project, the project needs to generate a reasonable return on both the debt and the equity. If future revenues from a project are either too low or too uncertain, concessional loans alone cannot ensure such reasonable return for commercial players. In order for the GCF to move a project from unattractive to attractive in those situations, the GCF needs to change the costs and/or the revenue outlook of the project. Up-front grants (e.g. as readiness support), concessional loans and equity from the GCF can contribute to up-front project financing, in case this is needed to release financing from private/commercial capital providers, see Figure 4. Such co-financing by the GCF would normally be designed so that the GCF covers the incremental costs to make projects commercially viable (ref Figure 1), and preferably a minor share of the total investment cost. RBF, on the other hand, impacts the revenue potential of a project. Co-financing through loans and equity from the GCF reduces the loan and equity required from commercial capital providers, and thereby reduces Figure 4: Using the GCF toolbox to project finance their share of the project risk. Concessional loans also reduce the cost of the financing for a project. This will make it easier for project implementers to attract commercial capital. Conventional, up-front grants and RBF address quite different parts of the project finance. Up-front grants reduce the share of the cost that the recipient needs to carry or finance from other capital sources (see Table 4). RBF, on the other hand, increases the potential rewards by increasing the revenue potential in the case of success. Consequently, RBF does not reduce the upfront financing needs, but it makes it easier to raise the up-front financing needed. Guarantees can be structured to reduce risks in different ways, e.g. guaranteeing a revenue stream to the project or repayment of debt to debt providers. Guarantees do not directly influence the costs or revenues of a project, but can make it easier to access financing. The GCF can support the receiving countries in several ways. Often, a combination of instruments is the most appropriate form of support, for instance through upfront readiness support grants (phased approach), as well as loans and guarantees, in combination with RBF. As illustrated in Figure 4, by combing the various instruments in its toolbox, the GCF is in a position to mitigate the main challenge facing implementers in an RBF scheme: access to upfront financing. Through such a combination of instruments it can give the same access to upfront financing as up- 5 RESULTS-BASED FINANCING IN THE CONTEXT OF THE GCF Project finance Upfront grant from GCF Con. loan from GCF Guarantee from GCF RBF from GCF Revenues Costs RBF BBF Guarantee from GCF Preferably, the GCF should have a minor share of the total project financing Future revenue from project Debt Equity/ own contrib. Receiving countries/ private sector Loans Equity from GCF Financing institutions Investors

6 Table 4: Financing instruments and the benefits of the recipients Main benefit of recipient Up-front grant Results-based grant Concessional loan Guarantee Equity Reduced costs Increased revenue potential front grants but increase the likelihood of achieving a high impact per donor dollar and increase the participation of commercial capital. 3. How RBF can help the GCF achieve its objectives In short, RBF can help meeting the GCF objectives by: 1. Triggering pipeline development 2. Ensuring country ownership and fair allocation 3. Increasing access to donor funding 4. Maximizing private sector engagement 5. Operationalizing Direct Access Modality and Private Sector Facility 6. Making it administratively easier for the Board/ Secretariat 3.1. Triggering pipeline development The GCF has ambitious goals to allocate funds during the initial resource mobilisation period (2015-2018), and the project pipeline has to reflect this ambition. By implementing RBF-programmes, for instance through the Direct Access Modality and/or the Private Sector Facility, the GCF can provide an opportunity for country governments, development institutions and private sector players to access financial support without being obliged to write time-consuming applications - with the risk of not getting approved. When designing and implementing RBF programmes, key issues such as indicators for results, how to measure these, how to verify, how much to pay for achieved results and baseline considerations must be dealt with. However, once this is done, fast-track actions from a wide range of implementers can be carried out simultaneously, without all of them first having to write project proposals and having them assessed by the GCF. This saves valuable time for both the GCF, the accredited entities and the potential recipients. Access to financing at low cost Access to financing at low cost Shared risk There is a potentially large demand for financial support which is not reflected in the current pipeline of applications received by the Fund. More specifically, RBF might be a relevant form of support for several national priorities and actions identified in the Intended Nationally Determined Contributions (INDCs). For example, renewable energy generation capacities is a key measure to mitigate GHG emissions in many of the INDCs, and at the same time ensure sustainable economic growth. Results-based financing through tenders and Power Purchase Agreements (PPAs) have proven to be an effective way of stimulating the private sector to develop grid-connected renewable energy plants. The potential for growing the GCF-pipeline through offering RBF support to renewable energy investments is substantial. For instance, Rwanda signals a clear ambition for a FiT policy, and has the GCF focal point and implementing agency in place. Similarly, Ghana has detailed description of implementation arrangements, funding needs and funding sources for renewable energy. In general, the Fund could contribute to scale existing initiatives and replicate existing programmes in new countries as a way to achieve results within a short time frame. A large share of the massive investments to be done in energy infrastructure, both on-grid and off-grid, can be effectively stimulated by support from the GCF through programmatic, rights-based RBF schemes. Programmatic approaches are in line with the Fund s strategy as these are scalable and replicable. 3.2 Ensuring country ownership and fair allocation One of the stated objectives of the GCF is to pursue country-driven approaches. A key feature of RBF is that it both makes the eligible recipients accountable for delivering results, and at the same time offers the recipients autonomy with regards to how the results are best achieved in the local context of the recipient. As such, RBF is a financing modal- HOW RBF CAN HELP THE GCF ACHIEVE ITS OBJECTIVES

ity which is well aligned with the GCF s objective of country-driven approaches. There are basically two ways of implementing an RBF-programme in a GCF context: 1. Rights-based RBF. Everyone qualified according to certain pre-defined eligibility criteria have a basic right to receive payment (RBF) if they can show verified results. Eligible implementers have the same incentives for results, and grants are often disbursed on a first-come/first serve basis. The principle of a reasonable and fair allocation across a broad range of countries can be managed in RBF programmes e.g. by determining/setting pre-determined envelopes for each country or groups of recipients. For instance, specific rights-based RBF-programmes with customised and attractive conditions can be developed and implemented for Small Island Developing States (SIDS) and Least Developed Countries (LDCs) to ensure access to funding for these and fair allocation across countries. 2. Tender-based RBF. In this case implementers compete for exclusive rights to receive payment for results. The winner(s) of the tender/ auction process are selected using predefined evaluation criteria and given exclusive rights to the RBF. This is common for larger infrastructure projects where project locations, dimensions and other characteristics are predetermined For example, the GCF may implement RBF under the Direct Access facility. Figure 5 assumes that this will normally be rights-based. However, the recipient government is free to choose whether a national RBF scheme will be right-based or tenderbased, or to generate results through different forms of policy interventions. RBF can therefore potentially help ensuring country ownership and autonomy. As seen from Figure 5, a rights-based RBF implemented by the GCF gives every eligible country the right to receive RBF if verified results (within the scope of the RBFprogramme) are achieved. It is up to the country how to implement this nationally, e.g. choice of technology and tender process. In this way, the GCF is responsive to developing countries needs and priorities, while at the same time ensure scale. The RBF-programmes could be combined with access to other GCF-funds as well, e.g. concessional loans, guarantees and upfront grants for readiness support. The countries can implement policies, knowing that if resuclts are achieved, they will be granted. 3.3 Increasing access to donor funding High effectiveness of the funds disbursed and high efficiency in the Secretariat and the Board is likely to attract additional donor funding to the GCF going forward. An RBF will increase the chance that money is allocated to contribute to intended results and impact. Moreover, RBF has proven to be an effective financial instrument to mobilize commercial capital under the right circumstances. Finally, a properly designed RBF programme can be managed effectively by the GCF. Hence, using RBF as one of the financing approaches under the 7 HOW RBF CAN HELP THE GCF ACHIEVE ITS OBJECTIVES Figure 5: Country ownership through rights-based RBF and direct access MRV Tender-winning company Results, e.g. kwh GCF Rightsbased RBF Receiving countries Project implementation Implementing companies Results, e.g. access MRV

GCF can contribute positively to the outlook for attracting a larger share of the climate financing going forward. In this context it is also worth noting that RBF does not - on an aggregate level automatically transfer risk from the GCF to the receiving countries. Any RBF payment which is not done to unsuccessful interventions due to the lack of results, are consequently available for other interventions. If the use of RBF is likely to increase the future funding flowing to the GCF, one could argue that it is likely that the use of RBF will increase the total amount of grant funding allocated to the eligible countries, rather than reduce it. Moreover, the main risk of the individual countries and applicants is related to the funding proposal not being approved by the Board. 3.4 Maximising private sector engagement RBF is generally well suited to stimulate the development of markets that are close to commercial viability. Within the energy sector, there are vast market opportunities that are not exploited by the private sector due to insufficient commercial viability. How could RBF contribute to make these markets more attractive for the private sector? In general, it is necessary for the private sector both national and international implementers and financing institutions - to have predictable and fair operating conditions. Relative to providing up-front grants to selected implementers, an RBF approach will stimulate a wide range of implementers with the same available funding. As such, the implementers are sure to get financing from the RBF scheme if they deliver results quickly, and the GCF are sure to channel the majority of the financing to successful and scalable business models. Private capital finances both the successes and the failures, while the public funds are channelled to the successful cases. With the RBF representing a limited share of the total project cost, and only disbursed in case of success, the catalysing effect on the private sector is typically high for RBF schemes. RBF is proven to be effective in catalysing private sector investments and driving innovation, and is suitable to stimulate development of commercial markets, as long as the risk-reward profile is attractive. Sometimes, the required RBF is limited. For example, experiences from the Clean Development Mechanism (CDM) over the last 15 years show that it is possible to raise capital even without financing upfront from public sources. CDM is an RBF mechanism where payment for the carbon credits (e.g. Certified Emission Reductions (CERs)) usually have been done on delivery, and it has enabled thousands of implementers to raise capital upfront from financing institutions, because the capital providers have assessed the risk-reward-profile of the projects including the carbon revenue to be attractive. It is an interesting thought experiment to imagine how successful the CDM had been if the CDM Executive Board would have assessed all the proposed CDM projects with an aim of providing up-front grants to a limited selection of them. With the RBF-guarantee from the GCF that the project will get rewards for achieved results, the commercial capital providers (e.g. commercial banks), who are experts in assessing the risks of not getting their money back from borrowers, will be able to finance the projects that they find fundable within their risk profile. The banks rather than the GCF Board conduct the detailed project due diligence. Hence, by being co-investors/co-financers, the GCF can benefit from the competence of private players. If it is considered to be too risky to invest in for the private players, then they will not finance it and neither should probably not the GCF. Finding the right level of payment from the GCF to make it attractive for the private sector is therefore crucial. 3.5 Operationalising Direct Access Modality and the Private Sector Facility RBF programmes have the potential to operationalize the Direct Access Modality and the Private Sector Facility (PSF). The Direct Access Modality is a way for receiving countries to get access to funds directly from the GCF to its national institutions and implementing entities without going through the International Accredited Entities. Programmatic RBF schemes on GCF-level can facilitate this financing path. Figure 6 illustrates how this can be done. Through a regular funding proposal track, readiness support can be received to prepare Concept Notes and Funding Proposals, however, with the risk of not getting approved. On the other hand, following a rights-based RBF programme, direct access can 8 HOW RBF CAN HELP THE GCF ACHIEVE ITS OBJECTIVES

9 Figure 6: RBF and direct access for a developing country Readiness support application Regular RBF funding proposal track Direct access INDC Rights-based RBF programme (e.g. Through PSF) Direct (and rightsbased) access RBF Eligibiility Check to GCF If approved =) upfront grant to capacity building & preparations $ $ If approved by the GCF =) upfront grant to prepare implementation RBF Concept Note to GCF RBF Funding Proposal to GCF $ Preparing Implementation If not approved If approved by the GCF =) upfront grant to prepare Funding Proposal If not approved If approved by the GCF =) upfront grant to prepare implementation $ $ HOW RBF CAN HELP THE GCF ACHIEVE ITS OBJECTIVES Implementation 12 $ be achieved if certain pre-defined eligibility criteria are met. Then upfront grants automatically can be provided to prepare the implementation. Tha main share of the GCF s contribution will come after results have been achieved. Hence, direct access to readiness support should be encouraged. Since RBF could be combined with other financing instruments for project finance, it aligns well with the mandate of The Private Sector Facility (PSF). The PSF could deliver different types of mechanisms that incentivize action and innovation by private sector actors and buy down the incremental cost to improve the economics of specific activities (B4/07/p4). Implementing RBF could be attractive to reach these PSF objectives as RBF is proven to be effective in catalysing private sector investments and suitable to stimulate development of commercial markets. The Private Sector Facility which is established to enable the Fund to directly and indirectly finance private sector mitigation and adaptation activities look at tariff support and guarantees for small scale renewables. The PSF will promote the participation of private actors in developing countries, in particular local actors, including SMEs. The Small and Medium-sized Enterprise Pilot Programme is not yet established, but aims at using the Fund s concessional resources to improve SMEs access to finance. This fits very well with an RBF scheme, and RBF should be part of this. 3.6 Making it administratively easier for the Board/Secretariat Submissions to the GCF strategy process emphasise the need for the GCF to be an efficient and cost-effective fund. As the GCF could get an overwhelming amount of applications in the future, a programmatic RBF-approach could significantly reduce the workload and the implied resources and expertise needed to properly assess and compare them all. The risk of approving grant funding for unsuccessful projects or discarding funding for potentially successful projects based on unclear decision parameters, is significantly reduced through an RBF approach. Moreover, the GCF s investment framework used to assess project proposals is not well suited for prioritising between projects. It is rather a framework for assessing whether a project/entity is eligible to get funding or not. By employing RBF, this challenge is mitigated. However, a procedure for checking the eligibility of implementing entitieshas to be set up. Accredited Entities (AE) are crucial for bringing fundable projects to the Board. One concern among these is the time and resources spent to produce the documentation needed for the Board to assess the project proposals. If a rights- based RBF-programme is operational, the AEs will experience significantly reduced requirements for bringing eligible projects forward. Having said that, AEs

might also propose RBF-programmes to the Board for approval, which then could be implemented with e.g. a regional scope including several countries, and with the AEs as the administrator of the programmes. Further, RBF is overall in line with the current GCF structure of decisions, frameworks and modalities. For instance, the mitigation and adaptation performance measurement frameworks (PMFs) adopted (Decision B.08/07) have been designed to measure the results from the Fund and, where appropriate, to serve as the basis for results-based payments, in accordance with any further guidance from the Board (Annex VIII, point 1). Some minor modifications to the Concept Note template and the Project Funding Application template are needed to align terminology and categories with an RBF-proposal. For instance, information on how to measure, verify and pay should be included as well as the eligibility criteria. Finally, the way the GCF is currently structured gives additional arguments to implement RBF as this will reduce or even eliminate (some of) the challenges that the GCF is facing. RBF is in line with the results management framework and the investment framework as both of these are providing indicators on output, outcome and impact and in RBF the indicator to measure and verify shall be as close as possible to these. 4. Operationalising RBF in the GCF 10 Like traditional upfront grant funding, RBF has characteristics that makes it important to be careful in the design of the schemes, for instance related to the higher need for upfront financing and to an unambiguous MRV-system. To ensure this, the GCF has much to gain from testing out RBF through pilot projects and programmes in areas where RBF demonstrably works well. This can be considered as the risk appetite that the GCF may have to show to distinguish itself from other climate funds, and to achieve paradigm shifts. This chapter provides some suggestions on how to operationalize RBF in the GCF. 4.1 Results-based financing in the energy sector RBF is already frequently used in energy sectors worldwide. For instance, results-based financing through tenders and Power Purchase Agreements have proven an effective way of stimulating the private sector to develop grid-connected renewable energy plants. By offering a price incentive for energy delivered to the grid (e.g. set through tenders/auctions), governments enable commercial players to get the risk/return required to implement renewable energy projects. The Republic of South Africa (RSA) is an example of an economyin-transition that recently has had great success in using these approaches. The authorities have entirely financed the tariffs themselves, while for OPERATIONALISING RBF IN THE GCF Table 5: Key characteristics of selected, existing RBF-programmes Programmes IDCOL (Bangladesh) Rural market development (Tanzania) GETFiT (Uganda) Market segment SHS SHS RE Grid power RBF Upfront financing MRV Fixed amount per unit verified as sold and installed Calculated for each system sold based on the number of lumen hours provided per solar day charge Premium per kwh fed to the grid (paid 50% at commercial operation; 50% per kwh first 5 years) Access to soft debt financing for POs Commercial equity and debt with optional capacity building support Commercial equity. Support offered to source mainstream debt financing products On-site verification by IDCOL 3rd party on-site verification of pico- PV suppliers, retailers and consumers 3rd party assessment of proposals; metered grid feed REIPPPP (Republic of South Africa) RE Grid power Tariff per kwh set through competitive, international tenders (reverse auctions) Commercial equity and debt Metered grid feed

instance the KfW-driven GET FiT programme in Uganda is partly financed by donors during the first 5 years before the government takes entirely over. Moreover, the Infrastructure Development Company Limited (IDCOL) in Bangladesh is arguably the most successful RBF programme for stand-alone Solar Home Systems (SHS) to bring people access to electricity services. IDCOL was established in 1997 by the Government of Bangladesh and operates as a non-bank financial institution. The IDCOL programme provides access to financing and result-based grants for verified installed SHSs. Table 5 gives some key information on selected, existing RBF programmes. 4.2 Options for RBF programmes under the GCF The GCF is in a unique position to combine various financial instruments into attractive financial packages for developing countries and private sector. It should therefore consider to develop comprehensive, programmatic, rights-based co-financing packages within the energy sectors that offer upfront grants for capacity building and readiness activities allocate grants through results-based payments offer concessional loans and guarantees to support project financing 11 Making it programmatic and rights-based means that if pre-defined criteria are met, funds are automatically made available across projects and geographies. Explicit and unambiguous eligibility critiera are therefore crucial, and should be part of the GCF s attention when developing RBF schemes. Making it programmatic and rights-based implies more predictability for the developing countries, it will simplify the application process significantly for the developing countries and the Secretariat, and it will ensure up-scaling and replication, potentially increasing the knowledge-sharing..figure 7 illustrates what such packages could look like. Two main options for operationalising RBF in the GCF are suggested in the following: 1. Programmatic, rights-based tariff support, inspired by GET FiT in Uganda and REIPPPP in RSA to provide renewable energy to the grid 2. Programmatic, rights-based RBF for providing access to electricity services to households (or others), inspired by IDCOL in Bangladesh and DFID s Rural Market Development in the Lake Victoria region in Tanzania In addition, we indicate some other RBF-alternatives that potentially also could be operationalized. OPERATIONALISING RBF IN THE GCF Figure 7: Comprehensive, programmatic, rights-based co-financing packages Private capital MRV Important to define in the design The eligibility criteria What to and how to MRV Payment level GCF Tender-winning company Results, e.g. kwh GCF Rightsbased RBF Receiving countries with plans to get more renewables to the grid Project implementation being attractive for market players Implementing companies Results, e.g. access GCF MRV

4.2.1 Programmatic, rights-based tariff support This RBF-option suggests that the GCF could partly finance national programmes for bringing clean energy to the grid. This could be organized as a multinational, programmatic GCF-initiative under the mitigation window, being in principle available to all developing countries. The countries choosing to implement such national programmes, e.g. by using tenders to attract national and international enterprises, will know that they have support from the GCF. Several parameters must be considered by the GCF when designing this RBF-option. The financing terms could in its simplest form be universal across all countries so that every country/implementer would get the same financial support from the GCF per kwh delivered to the grid (in c$/kwh). However, this would create undesired differences between countries and it might therefore rather be necessary to take into account for instance: technology (e.g. solar, wind, hydro, bio); the economic status of the countries (e.g. Least Developed Countries vs advanced developing countries); electricity price levels in the countries One possibility is therefore that the GCF programme pays a certain percentage of the total tariff that the winner of the tender is guaranteed as per the Power Purchase Agreement. The competition between the implementers in the tender defines a fair, market-based price, and the GCF will pay a share of this. 12 As indicated in Table 6, this percentage could be fixed for all countries (alternative 1) or it could take into account for instance the GDP level in the countries, e.g. by using the UN classifications of Least Developed Countries (LDCs) (alternative 2). The GCF could also consider to offer more comprehensive financing packages beyond the RBF itself. Table 6 shows for illustrative purposes some options that might be relevant to consider, in particular to distinguish between LDCs and other developing countries. In addition to these alternatives, upfront grants (fixed amount) for readiness support, preparing programmes and national tenders could be added. This is in line wth the current focus on readiness support within the GCF. Alternative 3 in Table 6 suggests that the GCF could provide concessional loans as well. The structure of this could be that project implementers secure the financing from other commercial sources first, knowing that if they succeed, concessional loan from the GCF will be made available. The private/ commercial capital providers are then doing the main due diligence and project risk assessment, ensuring a lower risk for GCF than if it goes alone. The GCF enters into the total financing package if and only if the project passes the commercial due diligence. At the same time, the risk for the commercial players are reduced when GCF is cofinancing the projects. OPERATIONALISING RBF IN THE GCF Table 6: Illustrative examples of GCF financing packages for bringing more renewable energy to the grid Alternative 4 indicates that the GCF could also provide a guarantee that the tariff will be paid to the market participants winning the tender. Nor- Alternative 1 2 3 4 Financing package Advanced/middle income countries LDCs Readiness support + RBF Readiness support + RBF Readiness support + RBF + concessional loan Readiness support + RBF + concessional loan + guarantee Fixed readiness support Minor share of FiT Fixed readiness support Minor share of FiT Fixed readiness support Minor share of FiT; Minor share of financing Fixed readiness support Minor share of FiT; Minor share of financing; Partial risk guarantees Fixed readiness support Minor share of FiT Higher share of readiness support and FiT than non-ldcs get Higher shares of readiness support, FiT and financing than LDCs get Higher shares of readiness support, FiT, financing and guarantees than non-ldcs get

13 Figure 8: Comprehensive financing package for more renewables to the grid GCF may guarantee for parts of the feed-in-tariff OPERATIONALISING RBF IN THE GCF GCF may co-finance part of the capital required upfront given that the capital market is already in and takes a major share GCF may finance a share of the tariff for, as a given percentage of the tender-decided price, for a given number of years 9 mally, it will be the national government that will be responsible to pay the tariff, but particularly in developing countries where the state finances are not robust, such a guarantee might be required by the commercial implementers to be interested in bidding in the tenders and thereby to realise the projects. Figure 8 illustrates how the GCF could support development of more renewable capacity on the grid through a combination of financial instruments. The GCF could co-finance a minor share of the upfront project costs (upfront grant readiness support and consessional loans), while the remaining could be financed by commercial capital. Moreover, the GCF could contribute with a minor share of the tariff to reduce the expenses for the state finances (RBF). Figure 8 indicates that this could be done over a 5-year period, similar to what is implemented in GET FiT in Uganda. Although such programmes are implemented several places already, the potential for providing renewable energy to the grid is nearly unlimited. This RBF-programme could therefore trigger the GCF s pipeline significantly. Several countries aim, according to their INDCs, at installing renewable capacities over the next years, and support from the GCF would contribute to a larger deployment of green energy than without the Fund participating. For illustrative purposes, if we assume that 50% of the annual commitments from developed coun tries go through the GCF (i.e. $50bn), that half of this goes to mitigation and half of this again goes to pro grammes and projects within the energy sector, around $12.5bn could be spent on this annually. As a perspective, India s ambitious solar power plan is to add 100 GW solar power capacity by 2022. If we assume 2,000 sun hours per year and that the GCF on average supports 1 c$/kwh (~20% of the tariff), the GCF could afford to provide tariff support for around six times the capacity of India s 100 GW solar program on an annual basis. The financial arrangements described above could be standardized for many if not all countries. If countries fulfil certain criteria, they are eligible to receive RBF-based funding from the GCF. This might administratively be easy for the GCF, it is scalable and replicable and it will secure country ownership. It will also ensure a strong pipeline for the Fund, and direct access for the receiving countries. Countries particularly LDCs and other countries with limited experience and capacity on such programmes could also get readiness support upfront to prepare for the underlying projects (and tenders) that the GCF will be supporting if implemented. This option could either be initiated by the GCF Secretariat as call for proposals on how to set up

such a programme, or it could be based on independent suggestions from accredited entities (AE) where these AEs have the administrative role of the programme. The key issue should be to set up a system that is transformative, attractive for private capital to enter into projects, easy to MRV and is administratively easy for the GCF. 4.2.2 RBF for access to electricity services While the first option focused on projects feeding clean energy into the grid, this option aims at stimulating projects and programmes providing access to clean electricity services to households with no or insufficient access today. This RBF programme could cover all forms of electricity access (from stand-alone solutions to grid access), be limited e.g. to off-grid solutions only or limited to 100% renewable energy connections only. The programme could also be designed to cover community services like health clinics and schools, or access for productive use. It could be organized as a multinational, programmatic initiative under the mitigation window, and the terms could be universal across all countries or differentiated between groups of countries, similar to the option described above. For households, the ESMAP and the SE4All have developed a Global Tracking Framework (GTF) for measuring and reporting progress towards the Sustainable Development Goal (SDG) 7.1 on universal access. The GTF defines five different electricity service levels, and is a natural framework to base this RBF programme on (see Table 7). Moreover, it might be relevant for the GCF to consider cooperation with organisations that are experienced in doing the MRV of such programmes, e.g. IRENA. Implemented through the Direct Access Facility, an RBF for access to electricity services would be a rights-based mechanism for all countries reporting towards the GTF, with relevant limitations. Progress could be reported on a national level relative to a 14 baseline situation, or simply in terms of a count of households having gained access to the respective service levels. The SE4All (possibly with help from other organisations like IRENA) could be responsible for coordinating the monitoring, reporting and verification (MRV) work, and the GCF could pay RBF amounts to the eligible countries based on verified units of progress (possibly in combination with concessional loans and guarantees). The GCF could also finance the MRV work of the SE4All as well as offer support to recipient countries for readiness activities relating to the MRV requirements. A third party (e.g. development bank (IAE) or national entities accredited through direct access) could manage financial flows. Recipient countries would have autonomy in terms of how results are achieved, but would be accountable for the delivery of results. Implemented through the Private Sector Facility, private sector players and other project implementers could report progress in terms of a count of households who have been provided with access to the different electricity service levels (similar to existing RBF programmes). All solutions must document that they meet the defined service level criteria and pass verification. The RBF amount to be paid for each household gaining access can be derived in different ways. IDCOL operates with a fixed, declining RBF amount per SHS. In Tanzania, the SNV-operated RBF calculated amounts specific to each type of system depending on the amount of lumen hours that the system can provide from one full charge. Alternatively, the payment amount can be set for each household corresponding to the estimated CO 2 e emission reduction impact and/or corresponding to the value in terms of the expected socioeconomic development impact of access to electricity. The CDM has a methodology for calculating the CO 2 e reductions per household gaining initial access to electricity, as well as a methodol- OPERATIONALISING RBF IN THE GCF Table 7: The Global Tracking Framework and relative socioeconomic value. The Emission reductions over 10 years assumes 100% renewable energy source Alternative GTF Tier 1 GTF Tier 2 GTF Tier 3 GTF Tier 4 GTF Tier 5 Global Tracking Framework Index value 1 2 3 4 5 Emission reductions over 10 years (tco2e) 0.3 2.4 5.6 12.0 21.0+

ogy for calculating the emission related to a new grid connection. The GTF values going into the Index of Access for each service level could possibly be a proxy for the relative value in terms of socioeconomic development; with unlimited and reliable access implicitly having five times the impact of the most basic access. Table 7 illustrates the two dimensions. A quick way to derive the payment amounts would be to first establish the incremental cost for a low service level (i.e. the one to aim for as a minimum under the universal access objective), and use this amount to deduct support levels for the higher service levels based on relative emission reduction impact and/or socioeconomic development impact. This would result in payment amounts linked to the expected impact of each unit of progress, and not the cost. And the value of initial access to electricity for one household can be assumed to be universal. In general, value-based RBF programs are more universal in nature than cost-based RBF programs. The market for off-grid electrification is particularly compatible with an RBF programme. When a standard, well-defined service is to be delivered by a range of players, in remote areas, applying a variety of technical solutions, then it is better to reward and scale the business models that prove successful in different circumstances instead of allocating funds to a pre-selected few. Certainty of the quality of the stand-alone projects provided could be ensured by e.g. allowing only products approved by Lighting Global. Experience from e.g. Bangladesh, Tanzania and Kenya demonstrates the ability of an RBF to catalyse private sector involvement, ability to help the best business models achieve scale and the potential for creating a market which is sustainable without the subsidy in a matter of a few years. It is likely that we will see the same development in all developing countries over the next decade. The GCF can provide the stimulus to get the process started in a range of markets with an RBF programme. And, with the Pay-As-You-Go solutions likely to dominate the market going forward, verifiable data will be easily accessible and up-front project financing will be sourced in international capital markets. For both local and international private players, a rights-based RBF mechanism is desirable as it can provide predictability and a level playing field. For 15 developing country governments, a programmatic, rights-based RBF could serve as an effective way of accessing financing for the continuation or scaling of ongoing efforts to increase electrification rates. For the GCF, it reduces the risk of not picking the right projects upfront. 4.2.3 Other RBF options Improving the energy efficiency in buildings, industry and transportation is recognized to have a huge potential for reducing GHG emissions. As for buildings, implementation of new technology that provides energy-efficient cooling and energy efficient appliances, e.g. lights, TV, fans and refrigerators, are all relevant options for RBF programmes. In general, the following features indicate a potential for the use of RBF: a range of implementers are expected to deliver results simultaneously there are easily measurable and verifiable results that are closely linked to the desirable impacts where the end objective is a sustainable market without subsidies replication of proven technologies and business models in new geographical areas. Below some other RBF-options are very briefly presented RBF on distributed electricity solutions. For distributed solutions, for instance roof-top solar, the feed-in tariff is rights-based so that everyone eligible installing solar solutions on their roofs has the right to receive financial support. This distributed RBF option with rights-based feed-in tariffs is particularly relevant in areas with unstable grid and frequent load shedding. Through smart meter technology measuring, reporting and verifying (MRV) of the production and consumption profile of a building with roof-top solar is relatively easy. An RBF programme targeting this segment can also easily be replicated and has therefore a significant potential. RBF on cooling of buildings. Electricity consumption related to cooling of buildings in developing countries constitutes a significant share of the total energy use in a country, due to the cooling requirements and old and inefficient cooling equipment. Introducing energyefficient cooling technology could reduce the OPERATIONALISING RBF IN THE GCF

electricity consumption of up to 50%. An RBF on this could be rights-based as long as the technology installed is pre-qualified, and payment would be when the new technology is in operation (easy to verify). As the investment cost is high, the RBF could be supported by concessional loans and/or guarantees so that the implementer get financing in place. Such an RBF-programme could be multinational. This RBF would be easily scalable and replicable. RBF on energy-efficient appliances. The objective of an RBF on energy-efficient appliances is to provide increased access to electricity for households by saving electricity through efficient appliances. Through stimulating availability and adoption of outstanding appliances, households should be able to reach a higher degree of access, preferably without increasing their budget. RBF on cookstoves. RBF programmes on cookstoves could be operationalised in several ways. As presented in the RBF for SHSs, there could be a fixed, pre-defined price derived from using the GTF and CDM methodology. Another option is instead of using a fixed subsidy per stove the subsidy level could be set by an innovative approach where the stoves are auctioned to the stove distributors. Frequent auctions ensure that the subsidy is set at a level that will give distribution without creating windfall profit for the distributors. This is now being implemented by SNV in the Mekong region (www.thestoveauction.org) Table 8: Pros and cons of RBF for various actors 5. Recommendations and way forward 16 RBF has characteristics that can help GCF in reaching its objectives, while at the same time reducing the financial risk and administrative burden for GCF. Hence RBF should be considered an integral part of the GCF s strategy moving forward. The GCF is in a unique position to combine various financial instruments into attractive financial packages for developing countries and private sector. It should therefore consider to develop comprehensive, programmatic, rights-based co-financing packages within the energy sectors that offer upfront grants for capacity building and readiness activities allocate grants through results-based payments offer concessional loans and guarantees to support project financing There is a large number of RBF-programmes and mechanisms which can provide templates for best practices. These existing RBF-mechanisms take many shapes and forms, but some of the most prominent ones are tender-based (e.g for more renewables to the grid) and project-based financing mechanisms (e.g. CDM). Some of these mechanisms have been very effective in generating scale and mobilise private capital. OPERATIONALISING RBF IN THE GCF Actors Pros/advantage Cons/preconditions & mitigation Donors Receivers GCF Lower risk as payments are for results only Cost-effective Avoid the beauty contest during application and the risk of rejection Country ownership and direct access More private capital stimulated Commercial markets are to a larger extent developed Predictable and fair Administratively light(er) Improved pipeline Good fit with other financial instruments Operationalising the Direct Access Modality and the Private Sector Facility No guarantee that results will be achieved, however that is similar to upfront grant financing Potentially more challenging to get upfront financing for implementers that previously have received conventional grants The GCF should combine RBF with other financial instruments MRV and payment must be unambiguously determined in advance The design of the programme should mitigate potential weaknesses of RBF Limited experiences with implementation

Table 8 gives a short summary of the pros and cons for different players of making RBF part of GCF s instruments and modalities for providing financial support to developing countries. Importantly, successful implementation of RBF programmes requires that the right pre-conditions are in place and that the design of the programmes are done so that the potential weaknesss of RBF are mitigated. By experience, most of - if not all - of the potential barriers can be removed or reduced through proper design. Having said that, RBF programmes should first be implemented in segments where results-based payment has proven to be successful. The energy sector, e.g. for providing more renewable energy to the grid and for providing access to energy services, is a promising place to start. One first step for GCF to getting involved in RBFmechanisms might be to establish pilot programmes. Considering that most experience with climate-focused RBF have taken place in forestry (REDD+) and in the energy sector, the pilot programmes might focus on this sector. Two avenues that can be explored by the GCF using RBF, which have been highlighted in this report, are: 1. Adding grid connect renewable energy; and 2. Increase the number of people that have access to sustainable electricity services. 17 If the subsidy-level of an RBF-mechanism is sufficiently high, implementers will be able to raise upfront financing from private capital providers. However, GCF is in the unique situation that it can simultaneously use several instruments (grants, loans, guarantees and equity). Cleverly combining such instruments might reduce the total financing required. Hence, combinations of instruments should be explored, bearing in mind that operating several instruments at the same time will increase complexity. RBF pilot programs should be developed and implemented, based on separate calls for proposals defined by the GCF Secretariat. However, RBF aspects could be taken into consideration in the ongoing Request for Proposals For the Design and Establishment of an RFP Programme for Private Sector Funding of Micro, Small, and Medium Enterprise Activities (RFP2016/PSF2) and For the Design and Establishment of an RFP Programme for Mobilizing Funding at Scale, both run by the Private Sector Facility. Another way to gain experience would be to encourage the accredited entities and the developing countries(through direct access, see Figure 9) to submit RBF proposals to the GCF Secretariat. The current Concept Note and Funding Proposal Templates must however be slightly modified to enable this. RECOMMENDATIONS AND THE WAY FORWARD Figure 9: Implementing RBF into the GCF - some options RBF into GCF 1 2 3 A GCF Board/Sec Strategy process Action points Concept Note and Funding Proposal template modifications RBF Framework Pilot RBF RfP Developing countries Submit RBF Concept Notes and Funding Proposals Accredited entities Submit RBF Concept Notes and Funding Proposals B PSF Include RBF in RfPs Set aside for RBF? C Direct Access Modality Pilot RBF