Clearing barriers to project finance for renewable energy in developing countries: A Philippines case study

Abstract

Project finance (PF) is a powerful tool for mobilizing capital for renewable energy (RE) projects but faces challenges in developing countries. This paper examines factors driving the financing method choice between project finance (recourse exclusively to project assets) and corporate finance (recourse to parent company assets), including the feed-in tariff (FIT), using the Philippines as a case study for a developing country. After the RE Law was approved in 2008, RE capacity increased but RE share in energy mix decreased. FIT resulted in increased investments in RE, primarily in solar and wind. Results show that PF incidence is higher for baseload, high-capacity utilization, non-intermittent technologies; non-FIT projects with revenue contracts; and larger projects owned by public companies. Contrary to expectation, PF was less utilized for FIT-eligible RE, and projects owned by private or small investors. PF was utilized primarily by well-capitalized investors, and mostly by power and financial companies. The Philippine FIT's tight deadlines and low technology-specific capacity caps increased revenue uncertainty, resulting in high concentration of project ownership and potential erosion of public support. Given the intrinsic uncertainty of RE and developing countries, policymakers need to design policies to minimize revenue uncertainty, enable PF and broaden the investor base.