If we’re going to accelerate the global clean energy transition, we need to get smarter about how we deploy scarce climate finance overseas. Nowhere is a smarter approach needed than in one of the last frontiers for coal expansion: Southeast Asia.

Public dollars, stranded assets

One key reason why many Southeast Asian countries are still considering new coal is that they are, in many cases, some of the last countries on earth where clean energy is not yet dirt-cheap. That is changing with notable success stories in places like Vietnam. But adverse public policy and a lack of investment have conspired to limit the march of cheap clean energy in most of the region. That creates a Catch-22: clean energy gets cheaper the more we build it, but if we don’t build new projects, those costs will not come down.

That dilemma is only exacerbated by international development investment policies. For years, the United States and many international donors have poured scarce resources into coal, oil and gas, seeding just enough doubt to delay clean energy development. Export credit agencies alone have been financing $31 billion in fossil fuels every year, with a significant amount of that supporting fossil fuels in Asia, according to Oil Change International. 

But things are changing. Leading public finance institutions in Europe have announced policies to end support for all fossil fuels. The U.K. government has pledged to stop financing overseas fossil fuels projects. And last month, John Kerry, President Joe Biden’s newly named presidential envoy for climate, announced plans to end public finance of “carbon-intensive” fossil fuel projects from entities like the U.S. Export-Import Bank and Development Finance Corporation, while ensuring that international finance institutions such as the Asian Development Bank, World Bank and the International Monetary Fund follow suit. 

These are important steps to avoid making the problem worse. But deciding to reorient this money away from fossil fuels is only half the battle. Redirecting it to jump-start clean energy in places like Southeast Asia is just as important if we’re going to get where we need to go. 

Public dollars, private leverage

One of the most important lessons we’ve learned over the past few years is that, in emerging markets, the increasing number of investors seeking clean energy deals isn’t matched with a healthy pipeline of projects to invest in. To solve that problem, we need to be investing scarce public dollars early in the project life cycle, where private capital is scarce, to de-risk new clean energy projects. The U.S. Agency for International Development and the U.K.-based Private Infrastructure Development Group estimate that every dollar in public money spent at this stage of the life cycle can leverage from 17 to 100 times that amount in private investment.

The problem is that existing multilateral public finance organizations rarely play that role. Instead, they tend to take a conservative approach, financing projects that are already bankable, and at times even crowding out private investment. In other words, rather than building the total pipeline of investable projects, they compete for them.

One solution is programs like the South East Asian Clean Energy Facility (Seacef), which was created specifically to solve the early-stage finance challenge. Seacef was seeded with over $10 million of philanthropic, impact and private-sector dollars and is raising more capital to continue deploying catalytic funding expected to leverage $2.5 billion in private finance. 

Since its launch six months ago, Seacef has funded three deals that represent more than 1 gigawatt of renewable energy capacity in promising clean-energy projects and businesses in Vietnam, Indonesia and the Philippines. Notably, it is designed to invest in these projects in a way that mirrors private markets, not as grants, cultivating the ecosystem of developers and asset investors to prepare the private markets to take on these development efforts over time. 

But while that’s an impressive use of scarce catalytic dollars, we need much, much more to get this job done. Mason Wallick, managing director of Clime Capital, which manages Seacef, cites a need for $500 billion of investment for the “VIP” countries — Vietnam, Indonesia, Philippines — to transition away from fossil fuels. “While the majority of this can come from the private sector, where there is a healthy appetite to fund de-risked projects, at least $14 billion of higher-risk early-stage capital is still required by 2030.” 

Seacef’s first investments aren’t close to this amount yet, which leaves us in our current predicament. “If we do not commit funding now to high-leverage, high-risk early stages of development, the billions available for construction will never be deployed,” said Gregor Patterson-Jones, Seacef investment committee chairman and climate finance expert. “We need to build the pipeline now to reap the climate rewards tomorrow.”

What needs to be done?

If we’re going to solve the early-stage finance problem and fill that $14 billion gap in Southeast Asia, we need governments and their public development finance institutions like the U.S. Development Finance Corporation and top European donors to step up. It’s worth noting that they have a history of supporting other programs like Seacef, such as the DFC’s ICEF and ACEF programs, which have successfully developed a pipeline of bankable projects in India and Africa. They’ve done that while ensuring the best use of public dollars thanks to experienced teams that do deep due diligence on individual deals and strong governance arrangements to ensure oversight of public dollars. But they are the exception, not the rule, in public finance.

Luckily, others aren’t waiting. Microsoft announced it is committing capital to Seacef, marking the vehicle’s first high-profile climate investor and sending a clear signal about the viability of the model. But we’re going to need more than Microsoft to get this market moving. We need other corporates and governments to follow Microsoft’s lead and fund innovative investment vehicles like Seacef, priming the pump for bankable clean energy projects that private investors are eager to invest in. 

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Justin Guay is director for global climate strategy at the Sunrise Project. Matthew Sebonia is founder and director of Global Climate Capital and strategic adviser to Seacef.