Innovative Financing for Renewable Energy

Abstract

Renewable energy holds great promise for solving the world’s energy needs with minimal climate change and pollution consequences. While renewable energy is the fastest growing type of energy production, the prospects for it to displace fossil fuels are seriously inhibited by the high first/capital cost of renewable energy infrastructure. A characteristic of financing most renewable energy resources is that they have relatively high initial costs for capital equipment and training, followed by very low costs for the remainder of their lifetime as a result of their utilization of free basic resource inputs: sun, wind, flowing water, the heat of the earth, and the use of biofuels. An exception to high initial capital costs is the use of biogas from animal wastes, which has great potential particularly in poor rural areas.Unfortunately, the traditional financial system has not generally met the challenge of financing renewable energy upfront costs. This is due to several factors. First, unfamiliarity of these relatively new energy media has led lenders to avoid financing based on inaccurate perception of risks. Second, some renewable energy installations, particularly those proposed for isolated rural areas, are too small to be economic for traditional financing. Third, the risks of failure of projects due to inadequate provisions for training and maintenance may make bring into the question the long-term viability of some renewable energy projects. Fourth, landlord-tenant and transience of property owner disincentives discourage renewable energy investments. Finally, opposition from utilities and the fossil fuel industry to installations may affect the financing available to renewable energy in more affluent areas serviced by an electricity grid. There are also problems financing large centralized projects with transmission of electricity from remote desert areas for solar energy or mountain areas for wind farms to distant areas where the electricity is to be used.Despite these challenges, the global renewable energy market is rapidly growing. Advances in renewable energy technologies, novel financial instruments, and evolving mobile communication technologies, have spurred creative upfront financing for renewable energy infrastructure. There have been recent examples of creative upfront financing of renewable energy projects such as asset and on-bill financing, microfinance, leasing arrangements, and finance of up-front costs by local governments using property tax surcharges for repayment. For large projects in developed areas, various forms of bonding have been used.This presentation will describe these innovative financing programs and will provide examples of their successful utilization.