Difference between revisions of "Financial Instruments & Support for Renewable Energy"

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= Overview =
 
= Overview =
  
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There are various types of financing instruments that exist to support the scaling up of '''renewable energy technologies (<span data-scaytid="3" data-scayt_word="RETs">RETs</span>)'''. 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.<ref name="The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy">The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy</ref>
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'''Finance is essential for renewable energy technology (RET) projects in two ways<ref name="Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.">Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.</ref>:'''
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#Without funds projects would not materialize, and
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#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.
  
 
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Most '''renewable energy (RE)''' financing instruments fall under three main categories:<span style="line-height: 1.5em; font-size: 0.85em;"></span>
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= Financial Instruments =
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#'''Energy Market Instruments''' (Feed-in Tariffs, Premium, Renewable obligations, Tenders, Fiscal incentives);
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#'''Equity Finance Mechanisms''' (Venture Capital, Equity, R&D Grants, Capital/Project Grants, Contingent Grants);
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There are various types of financing instruments that exist to support the scaling up of '''renewable energy technologies (<span data-scayt_word="RETs" data-scaytid="3">RETs</span>)'''. 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.<ref name="The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy">The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy</ref>
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#'''Debt Finance Mechanisms''' (Mezzanine Debt, Senior Debt, Guarantees).<ref name="de Jager, D. et al., 2011. Financing Renewable Energy in the European Market, Brussels: ECOFYS.">de Jager, D. et al., 2011. Financing Renewable Energy in the European Market, Brussels: ECOFYS.</ref>
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These financial instruments can be distinguished by the level of risk assumed by the the entity funding the instrument concerned, and also by the level of leverage involved. The figure below illustrates this. The financial instruments in the figure are organised on the horizontal axis by their primary focus: whether to address underdeveloped financial markets, the risks and costs of RETs or both. The vertical axis organises the instruments by the level of risk and leverage associated with their use <ref name="The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy">The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy</ref>
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<div title="Page 21" class="page"><div class="layoutArea"><div class="column">
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[[File:RE Financial Instruments.PNG|thumb|center|650px|Source: The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. [Online] Available at: https://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/SREP_financing_instruments_sk_clean2_FINAL_FOR_PRINTING.pdf|alt=Source: The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. [Online] Available at: https://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/SREP_financing_instruments_sk_clean2_FINAL_FOR_PRINTING.pdf]]
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</div></div></div>
 
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== The Need for Renewable Energy Finance ==
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= On-Grid Renewable Energy Finance =
  
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'''Finance is essential for renewable energy technology (RET) projects in two ways<ref name="Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.">Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.</ref>:'''
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On-grid renewables projects face the key issue of how to create a price support mechanism that provides stability and predictability over the medium and long term. This can reduce the risk premium in the cost of capital, which in turn can increase the amount of investment in renewables and lower the price that consumers have to pay for RE. <span style="font-size: 0.85em">For on-grid projects the finance sequence is incomplete, and these gaps can often onl be filled with niche financial products. Some of theses products already exist, while some need to be created. The figure below shows which types of finance are often secured by on-grid projects, which types are occassionaly secured, and the current gaps and barriers in the finance sequence <ref name="Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.">Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.</ref>.</span>
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#Without funds projects would not materialize, and
 
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#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.
 
  
 
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== Demand Profile for Renewable Energy Financing ==
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Various forms of capital are involved in the financial sequence/'continuum' of grid-connected RETs as shown in the figure below. <u>The conventional power sector financial sequence includes these sources of capital:</u>
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*Equity Finance
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*Debt Finance
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*Corporate or Project Finance
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*Guarantees
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*Insurance<ref name="Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.">Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.</ref><span style="line-height: 1.5em;  font-size: 0.85em">.</span>
  
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'''The typical demand for RE financing has the following characteristics<ref name="Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.">Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.</ref>:'''
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*'''Client:''' Investors, entrepreneurs or households with limited experience and track-record
 
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*'''Type of Funds:''' “patient capital”, either credit or equity or equivalent
 
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*'''Amounts: '''Depending on project and RE type, from micro-finance till major project finance
 
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*'''External Financing Share:''' High, due to limited own capital
 
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*'''Maturity:''' Very Long term
 
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*'''Interest Rate:''' Lower Range of the market, due to limited return of investment.
 
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*'''Security and Collateral:''' Limited capacity for collateral, preferably on base of cash-flow<br/>
 
  
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<br/>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<ref name="Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.">Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.</ref>.
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[[File:On-Grid RE Financing.PNG|thumb|center|650px|Source: Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.]]
  
 
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= On-Grid Renewable Energy Finance =
 
  
 
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Generally, large and medium-scale renewable-energy projects need to operate within the same financing rules applied to conventional fossil-fueled energy projects. A key issue for financing on-grid renewables investments is how to create a '''price support mechanism '''that provides stability and predictability over the medium and long term. Achieving this will '''reduce the risk '''premium in the cost of capital, which '''will increase the amount of investment '''in renewables '''and lower the price '''that consumers have to pay for renewable energy. Policy interventions are taking a range of forms including '''market-based mechanisms '''such as carbon emissions trading and renewable obligation arrangements.
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== Equity Finance ==
  
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'''Fixed-price schemes '''such as the Feed-in Laws in Germany and Spain have demonstrated the impact a reliable regulatory environment can have on increasing the share of renewables.
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<span style="background-color: rgb(255, 255, 255)"></span>[[Equity Finance|► Read about Equity Finance here]]<br/>
  
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Each market has a different ‘tipping point’ where smart money sitting on the fence can be induced to enter the sector. The most effective incentives are those that get markets past this tipping point. The US Production Tax Credit for wind, when in place, is a good example of a small incentive that has had a significant impact on wind investment. Unfortunately, its application has been inconsistent.
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== Debt Finance ==
  
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<span style="background-color: rgb(255, 255, 255)">[[Debt Finance|► Read about Debt Finance here]]</span>
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<div><div title="Page 36" class="page"><div class="layoutArea"></div></div></div>
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== <span style="font-size: 19.09090805053711px;  line-height: 23.636363983154297px">Project Finance</span> ==
  
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<span style="background-color: rgb(255, 255, 255)">[[Project Finance|► Read about Project Finance here]]</span>
  
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'''The On-Grid RE Finance Continuum (Sonntag-O’Brien, et al., 2004)'''
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Numerous forms of capital are involved in the finance continuum of a grid-connected RE plant, as is shown in Figure 2<sup>13</sup>. The conventional power-sector finance continuum includes the following sources of capital:
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== Guarantees ==
  
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• equity provided by the companies involved in the project, as well as in some cases by institutional and strategic investors;
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• corporate or project-financed loans provided by commercial banks or special purpose funds;
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• guarantees perhaps provided by an export credit agency (ECA) to cover specific cross-border risks;
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== Insurance ==
  
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• insurance provided by an insurer or insurance broker;
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• key parties to the transaction, such as fuel suppliers or power purchasers, who have entered into long-term contracts with the project.
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= Off-Grid Renewable Energy Finance =
  
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For RE on-grid projects the finance continuum is actually quite incomplete, and the gaps can often only be filled with niche financial products, some of which already exist and some of which need to be created. Figure 2 shows which types of finance are often secured by on-grid projects, which types are occasionally secured, and the current gaps and barriers in the continuum. Finally, the figure proposes some interventions that might be supported by public sources to close the gaps in the continuum.
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[[File:Off-grid RE Financing.PNG|thumb|center|650px|Source: Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.]]<br/>
  
 
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[[File:On-Grid RE Financing.PNG|frame|center|250px|Source: Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.]]<br/>
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= Results-Based Finance =
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[[Results-Based Financing|► Read about Results-Based Finance here]]<br/>
  
 
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= Microfinance =
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[[Microfinance|► Read about Microfinance here]]<br/>
  
 
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= Off-Grid Renewable Energy Finance =
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= Carbon Finance =
  
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[[File:Off-grid RE Financing.PNG|frame|center|250px|Source: Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.]]<br/>
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[[Carbon Finance|► Read about Carbon Finance here]]<br/>
  
 
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= Further Information =
 
= Further Information =
  
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*[https://energypedia.info/Revolving Funds Revolving Funds]
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*[[Revolving Funds|Revolving Funds]]
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= References =
 
= References =

Latest revision as of 16:02, 22 March 2017

► Back to Financing & Funding Portal

Overview

Finance is essential for renewable energy technology (RET) projects in two ways[1]:

  1. Without funds projects would not materialize, and
  2. 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.


Financial Instruments

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.[2]

These financial instruments can be distinguished by the level of risk assumed by the the entity funding the instrument concerned, and also by the level of leverage involved. The figure below illustrates this. The financial instruments in the figure are organised on the horizontal axis by their primary focus: whether to address underdeveloped financial markets, the risks and costs of RETs or both. The vertical axis organises the instruments by the level of risk and leverage associated with their use [2]


Source: The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. [Online] Available at: https://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/SREP_financing_instruments_sk_clean2_FINAL_FOR_PRINTING.pdf
Source: The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. [Online] Available at: https://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/SREP_financing_instruments_sk_clean2_FINAL_FOR_PRINTING.pdf


On-Grid Renewable Energy Finance

On-grid renewables projects face the key issue of how to create a price support mechanism that provides stability and predictability over the medium and long term. This can reduce the risk premium in the cost of capital, which in turn can increase the amount of investment in renewables and lower the price that consumers have to pay for RE. For on-grid projects the finance sequence is incomplete, and these gaps can often onl be filled with niche financial products. Some of theses products already exist, while some need to be created. The figure below shows which types of finance are often secured by on-grid projects, which types are occassionaly secured, and the current gaps and barriers in the finance sequence [3].


Various forms of capital are involved in the financial sequence/'continuum' of grid-connected RETs as shown in the figure below. The conventional power sector financial sequence includes these sources of capital:

  • Equity Finance
  • Debt Finance
  • Corporate or Project Finance
  • Guarantees
  • Insurance[3].


Source: Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.



Equity Finance

► Read about Equity Finance here


Debt Finance

► Read about Debt Finance here


Project Finance

► Read about Project Finance here


Guarantees



Insurance



Off-Grid Renewable Energy Finance


Source: Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.



Results-Based Finance

► Read about Results-Based Finance here


Microfinance

► Read about Microfinance here


Carbon Finance

► Read about Carbon Finance here



Further Information




References

  1. ↑ Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.
  2. ↑ 2.0 2.1 The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds. Available at: http://bit.ly/UFHIPy
  3. ↑ 3.0 3.1 Sonntag-O’Brien, V., Basel Agency for Sustainable Energy, Usher, E. & UN Environment Programme, 2004. Mobilising Finance for Renewable Energies - Thematic Background Paper, International Conference for Renewable Energies. Bonn, Renewables 2004.
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