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Grants can be provided for demonstrations, pilot projects, to develop the market or to buy down the cost of the technology. Grants for finance have often been used to develop “revolving funds” for renewable energy finance.
Unfortunately their long term success rate has been low. Grants often originate from private foundations, but can also be provided by international development organizations like the World Bank (WB), the ADB, the GEF, U.N agencies, bilateral funding organizations and governments.
- The money received is not expected to be paid back.
- Experimental and unproven technologies can be used with lowered financial risk to implementers.
- Usually a complicated process must be followed to access grant funding that may take years to complete.
- There often is a loss of flexibility in purchasing, administration, project location and system designs since donor agencies place many requirements on the implementation process.
- A large administrative cost to meet donor requirements is common.
| Source:Wade, H. (2005). Financing Mechanisms for Renewable Energy Development in the Pacific Islands.|
Capital grants fund part of the investment costs of an renewable energy technology (RET) project, generally in an effort to reduce its ultimate financial cost in order to increase its competitiveness or, where off-takers are obliged to purchase its output, to reduce ultimate customer prices (the use of grants as part of a results-based financing mechanism is discussed separately) . Within the category of grants, we include capital contributions made in return for a shareholding in the project company (i.e., long-term equity investments).
A particular form of grant is the viability gap funding mechanism which is widely deployed in India, in particular. Under viability gap funding, the government can provide capital grants for a share of project costs, where the project would otherwise not be viable due to the constraints on user fees that can be charged. In India, the viability gap fund administered by central government will pay up to 20% of a project’s costs and sponsoring ministries and agencies can contribute a further 20%, requiring the developer to pay at least 60% of the costs.
Contingent Project Development Grants
Contingent project development grants - Public agencies can provide funding to help defray high development costs of renewable energy technologies providing funding as a loan, which then converts to a grant if the project is successfully implemented. This creates incentives for the developer to pursue rapid implementation of the project. However, there are obvious concerns as to how the developer would repay a loan if the project didn’t succeed as well as questions whether further incentives to reach implementation are required. An alternative mechanism is actually the reverse, a contingent grant that transforms to a loan if the project is successful.
Capital grants fund part of the investment costs of an RET project, generally in an effort to reduce its ultimate financial cost in order to increase its competitiveness or, where off-takers are obliged to purchase its output, to reduce ultimate customer prices (the use of grants as part of a results-based financing mechanism is discussed separately). Working capital grants fund pre-investment costs.
- ↑ 1.0 1.1 Wade, H. (2005). Financing Mechanisms for Renewable Energy Development in the Pacific Islands.
- ↑ 2.0 2.1 2.2 Renewable Energy Financial Instrument Tool (REFINe). Available at: http://www-esd.worldbank.org/refine/index.cfm