Mainstreaming environmental finance markets (I) – Small-scale energy efficiency and renewable energy finance

Abstract

Energy efficiency and small-scale renewable energy (EERE) projects have huge and essential contributions to make to create a sustainable, low-carbon economy and achieve the Millennium Development Goals. But there remains a large gap between the strong economic and environmental potential of EERE projects versus their limited commercial realization. A major cause of this gap is the lack of effective project delivery and financing mechanisms, adapted to national and local market conditions. The EERE market encompasses a diverse set of markets which fundamentally consist of large numbers of small, dispersed projects in a wide range of market segments. These markets are best approached programmatically, with market aggregation strategies. Successful programs combine a) access to finance with financial products structured and adapted to the target market, with b) marketing, project development and project delivery mechanisms that generate a steady flow of investment-ready projects, along with programs that build capacities of market participants to expand this business on a commercial basis. That is, they address both the supply side and the demand side of EERE financing. A substantial body of experience exists with commercial financing of EERE projects and with EERE finance programs. These are conducted by commercial financial institutions (CFIs) in partnership with development finance institutions (DFIs) that organize and systematically deliver EERE projects, services and financing for the implementation of multiple projects in target markets. Such programs a) engage and mobilize financing from local CFIs, and b) are frequently supported by credit lines, risk sharing facilities and/or other investment instruments and technical assistance programs provided by DFIs. Further, CFIs can partner with EERE businesses, energy utilities, associations of energy users and governments acting on behalf of energy users to market their financial products and generate substantial flows of well structured projects for financing. The public good features of clean energy produce a strong rationale for public investment to develop EERE finance markets. The urgency of scaling up EERE investments makes it imperative to assess experience and lessons of commercial EERE financing and EERE finance programs. It is important to share effective methods and define and implement scale-up strategies to capture the economic and environmental potential of EERE. After characterizing EERE markets, the challenges of EERE financing and the rationale for development finance initiatives in this field (Section 1), this chapter reports on a range of methods to structure and market commercial financing of EERE projects (Section 2); and successful EERE finance program models involving partnerships between CFIs and DFIs, including technical assistance programs (Section 3). The chapter contends that sufficient experience exists with successful EERE transaction structures and finance programs to justify roll out and scale-up, provided such programs are properly adapted to country and target market conditions. Initial ideas on scale-up strategies are provided in Section 4. This chapter is intended to inform commercial FIs of the possibilities for building profitable business lines in this field, to provide ideas and recommendations to DFIs for design of future EERE finance programs, and to be useful to other national and international development agencies concerned with promoting EERE finance market development.