Transformation Towards Renewable Energy Systems: Evaluating the Role of Development Financing Institutions

Abstract

Our paper seeks to evaluate the role of development financing institutions (DFIs) in fostering renewable energy transformations. Whereas the conventional approach to renewable energy finance emphasizes the bankability of individual projects, we advance an alternative approach for the role of DFIs in overcoming system-level constraints to enhance renewable energy transformations. We identify four constraints, namely, the incumbent entrenchment of fossil fuels, unmet energy demand of energy-intensive industries, weak production capacity of renewable energies, and lack of supporting infrastructure. We argue that DFIs can potentially address these constraints by setting a mission-driven vision, acting as honest brokers to overcome the incumbent entrenchment, scaling up renewable energy financing to make the cost of renewable energies more competitive, incubating nascent renewable energies, and financing supporting infrastructure. We then select representative DFIs to evaluate the role of DFIs in fostering renewable energy transformations. We find that most sampled DFIs have recently prioritized financing renewable energy, supported pilot projects to achieve demonstration effects, and made investments in complementary infrastructure. Yet few DFIs have achieved the economies of scale to bring down the renewable energy price or shape the policy environment in favor of renewable energy in a manner that can trigger significant transformational change.