Financing and
Investment in Cities

Global investment in new renewable energy capacity, including power and fuels (but not including hydropower projects larger than 50 MW) totalled USD 282.2 billion in 2019, up 1% over 2018.1In the first half of 2020, global investment in new renewable energy capacity rose 5% relative to the first half of 2019, suggesting sustained growth despite the COVID-19 pandemic.2 Some of this investment occurred in city-related projects – by municipal governments as well as other residential, commercial and industrial actors within cities – but the exact amount is unknown. Although data are becoming more available, no comprehensive dataset on renewable energy investment in cities by sector exists.

This chapter explores financing and investment in cities, including the provision of funding for renewable energy projects and the process of investing in projects to turn a profit. The discussion examines common financing mechanisms applied by cities worldwide and how these mechanisms are being used to support renewables across the world’s regions. The chapter concludes with an overview of the challenges that cities face in investment and finance of renewable energy projects.

Each city operates within a distinctive framework that affects the amount and type of renewable energy financing and investment available. Variables include the policies and regulations that govern city actions, the nature of relationships with higher levels of governments, partnerships with the private sector, ownership rights of the electric grid, etc.

Municipal governments are responsible for only a small share of the total financing that occurs within a city; in contrast, private individuals and companies account for far more of the investment in city-related projects – whether in the energy, buildings, commercial or industrial sectors – and have their own priorities, planning horizons and funding constraints. The total finance package allocated to renewables therefore results from many different players, regulations, institutions and financing mechanisms and is specific to every city.

Financing for renewables also must be tailored to meet the unique characteristics of each end-use sector: power, heating and cooling, and transport. In the power sector, municipal governments and other urban actors generally target renewable energy projects in two main categories: small-scale, on-site generating capacity (for example, rooftop solar PV on single buildings or on somewhat larger areas such as parking or waste sites), and larger-scale projects (for example, solar PV or wind farms) that often are located outside of geographical city limits.

In the heating and cooling sector, cities often target district heating networks. Different ownership models for these networks affect the allocation of financing and include, for example, municipal ownership, long-term concession agreements with private operators and “unbundled” networks with private ownership. The networks can be fed by large-scale heat pumpsi, municipal waste incineration, biomass boilers, industrial waste recovery, solar thermal and geothermal energy, although the share of renewables across these options can vary.3

In the transport sector, cities working towards climate mitigation goals typically target projects related to mass public transit and zero-emission vehicles (including electric vehicles), which enables renewable electricity to replace fossil fuels in some transport applications (particularly through smart chargingii).4

BOX 1. Global and Urban Climate Finance Flows

BOX 1. Global and Urban Climate Finance Flows

Global climate finance flows reached an estimated USD 608-622 billion in 2019, up 6-8% from the 2017/18 averages of USD 574 billion annually. Climate flows, which crossed the USD half-trillion mark for the first time in 2017, were highly concentrated on mitigation efforts (representing 93% of total flows in 2019). By sector, renewable energy generation accounted for the largest share of the flows tracked, largely due to more investments originating in China (particularly solar, wind and hydropower investments) and the United States (with an increased volume of investments in solar PV and onshore wind). The second largest investment during 2017/2018 was in sustainable transport (around USD 140 billion annually, making it the fastest-growing sector for climate finance), followed by investment in energy efficiency (around USD 33 billion annually).

Cities face major capacity constraints in financing climate change mitigation and adaptation projects. First, the public sector, notably city governments, often has budget capacity limitations and low rates of creditworthiness, which hinders private investment or any major borrowing scheme. Also, many long-term climate-smart infrastructure investments need highly technical capacity to pull together investor-ready bankable projects with sufficient size and quality to increase climate finance flows. Many countries forbid their local governments from issuing any kind of debt, including municipal bonds. Also, many private investors lack experience working with sustainable urban infrastructure, which often impedes investments.

Because cities are key players in achieving the Paris Agreement, investments must be scaled to promote the shift to the low-carbon, climate-resilient infrastructure that is needed to face the climate emergency. However, while there is a clear picture of global climate finance flows, information on urban climate financei flows is lacking. By producing clear data, measuring progress, and understanding gaps and opportunities, city governments can have a better picture of the sources of finance, the financial instruments employed, and the policies that can more effectively drive investment, leading to improved policy planning in cities.

Source: See endnote 5 for this chapter.

iFor further information on financing of city-level climate action, see the Cities Climate Finance Leadership Alliance, www.citiesclimatefinance.org, and its forthcoming report, State of Cities Climate Finance 2021.i