Financial Instruments & Support for Renewable Energy
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Overview
There are various types of financing instruments that exist to support the scaling up of renewable energy technologies (RETs). The choice and availability of instruments largely depends on if the project is being undertaken in a developed or developing country, and also on the stage of development of the technologies or projects in question. These can be broadly grouped into those that can be used in addressing financing barriers; those used to address the risks of RET investments; and those that address both simultaneously.[1]
Most renewable energy (RE) financing instruments fall under three main categories:
- Energy Market Instruments (Feed-in Tariffs, Premium, Renewable obligations, Tenders, Fiscal incentives);
- Equity Finance Mechanisms (Venture Capital, Equity, R&D Grants, Capital/Project Grants, Contingent Grants);
- Debt Finance Mechanisms (Mezzanine Debt, Senior Debt, Guarantees).[2]
The Need for Renewable Energy Finance
Finance is essential for renewable energy technology (RET) projects in two ways[3]:
- Without funds projects would not materialize, and
- With inadequate financing structure and conditions the disadvantage in competitiveness of RET would even increase, as the costs of electric power utilizing renewable energy technologies are highly sensitive to financing terms.
Demand Profile for Renewable Energy Financing
The typical demand for RE financing has the following characteristics[3]:
- Client: Investors, entrepreneurs or households with limited experience and track-record
- Type of Funds: “patient capital”, either credit or equity or equivalent
- Amounts: Depending on project and RE type, from micro-finance till major project finance
- External Financing Share: High, due to limited own capital
- Maturity: Very Long term
- Interest Rate: Lower Range of the market, due to limited return of investment.
- Security and Collateral: Limited capacity for collateral, preferably on base of cash-flow
This profile sets the benchmark for checking to which extent the local financial system with its funds and instruments can match the needs of RE financing[3].
Commercial Financial Instruments
The commercial private sector offers a wide variety of instruments for financing and risk coverage which potentially could be used for renewable energy technology (RET) finance. Many developing countries do not have a very developed local financial sector and thus currently lack many of the available instruments. However, in a process of globalization this does not mean, that such mechanisms and instruments and funds could not be made available for RE at all. Their contribution to overcome the hurdles of financing of RE projects depend on the willingness to deal with risk and invest funds as well as on the capability to use them for the realization of RE projects. If this would still mean overstrain for the actors in some countries, this may be an ideal case for external assistance to share this burden in order to promote RE[3].
Equity Finance and Risk Capital
Debt Financing
Mezzanine Finance and Subordinated Debt
Sales-Lease-Back Arrangements
Further Information
References
- ↑ The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy
- ↑ de Jager, D. et al., 2011. Financing Renewable Energy in the European Market, Brussels: ECOFYS.
- ↑ 3.0 3.1 3.2 3.3 Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.
