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Financial Instruments & Support for Renewable Energy
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Overview
Finance is essential for renewable energy technology (RET) projects in two ways[1]:
- 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.
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](/wiki/File:RE_Financial_Instruments.PNG)
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].
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
Results-Based Finance
► Read about Results-Based Finance here
Microfinance
► Read about Microfinance here
Carbon Finance
► Read about Carbon Finance here
Further Information
References
- ↑ Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, Frankfurt am Main: KfW.
- ↑ 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
- ↑ 3.0 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.
