BEST PRACTICES IN FINANCING ENERGY EFFICIENCY AND RENEWABLE ENERGY PROJECTS
Fossil fuels have fueled our economy for two centuries. As a result, moving away from them entails fundamentally altering our production and consumption practices and more effectively utilizing available resources. It necessitates significant expenditures across all economic sectors and a new way of looking at the future.
The most challenging obstacle to leapfrogging on the green growth goal is persuading influential investors to divest from fossil-fuel-based assets. The decarbonization of financial flows is a vital component of this goal and is necessary for a sustainable transition away from fossil fuels.
Financing, which applies to renewable energy and energy efficiency, is one of the most significant hurdles to developing sustainable energy in Africa. Much work has commenced on financing methods for delivering energy services to rural communities in terms of renewable energy projects, particularly for rural electrification.
In Africa, a similar situation occurs for energy efficiency, where lack of access to funding impedes the adoption and development of more energy-efficient industrial production processes, despite the existence of projects that may save significant amounts of energy and money.
Over the next decade, Africa will require several billion euros in renewable energy investments and tens of billions in energy efficiency and transmission infrastructure. The energy markets in the region are underdeveloped and uncompetitive. Political concerns and regulatory inconsistency hamper private ownership and financing.
The experience needed to build bankable renewable energy and energy efficiency projects is lacking among regional banks, project investors, and local governments. Also, the absence of regional collaboration amongst stakeholders in the energy sector increases overall investment and funding requirements.
Many renewable energy projects are capital-intensive, thereby necessitating the provision of considerable sums of money long before the start of operations. Also, renewable energy and energy efficiency projects have a terrible reputation among financiers since they are still considered higher-risk investments, resulting in stricter restrictions for investors and developers.
Ways to Finance Renewable Energy Projects
Those looking to financing renewable energy projects can opt for any of the following:
1. Grants: Grants are not to be reimbursed; they are “gift” funds with particular usage conditions. Grants are available from the government and international organizations to promote environmental and development initiatives.
2. Leasing: Leasing is a popular method of overcoming the initial cost barrier. Leasing is a method of right acquisition to utilize a property (rather than possessing this asset). Finance leasing can be used for energy efficiency equipment in various markets, even if the equipment has no collateral value. Leasing businesses, which are frequently bank subsidiaries, are familiar with vendor finance programs and other types of equipment financing similar to energy efficiency.
3. Equity: Equity investors put money into a project in exchange for a piece of the company’s ownership. It entails high-risk financing with high rewards, which necessitates locating interested investors prepared to invest in the project and matching the investors to the project and its risks.
Professional venture capitalists can provide equity finance. Private equity includes investment in the expansion and growth of any company not listed on a public stock exchange. Venture capital (VC) is a sub-segment of private equity investment that entails investing in start-up companies with strong growth potential.
4. Debt: Debt financing is taking out a loan or issuing a bond to raise funds, with the borrower responsible for repaying both the principal and interest.
Ways to Attract Public Investment
1. Putting renewable energy policies in place
On the institutional level, renewable energy and energy efficiency policies and their implementation should be codified through government-approved laws or national programs.
2. Boosting investor optimism
Regardless of how promising the government’s support policies and regulations for renewable energy and energy efficiency are, the private sector’s participation will be greatly dependent on the government’s perceived stability and commitment in the medium and long run. As a result, the government should ideally enshrine long-term goals and incentives in a robust legislative framework, such as guaranteed market size and a guaranteed price on every quantity produced.
3. Raising public awareness
Information and capacity-building among key players, such as local bankers and fund managers, transmission and distribution system operators, development and electrification agencies, and industry representatives, should always be a part of the policy approach.
Financing as a global measure to combat climate change has become vital as renewable energy is a revolution and a necessity in developing countries.
Greater energy efficiency is critical for countries to transition to lower-carbon economic growth. And current and future cost reductions in renewable power generation technologies can help developing countries meet national and international energy and emissions policy goals and promote energy security, reliability, and affordability while promoting universal access to electricity at a lower cost than traditional sources.
Through better funding, many Global South countries can focus on developing renewable energy, which is environmentally friendly, to increase electricity access which will ultimately lead to economic growth. There’s a need to explore different avenues towards financing renewable energy projects.
Author: Adelowo Oguntola