- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
With the expansion of global renewable energy capacity to record levels in recent years, energy financing has also evolved at a rapid pace. The year 2015 set a milestone when renewable energy technology and investments surpassed those of non-renewables for the first time. Currently, renewables represent approximately 60 percent of all newly added capacity to power generation worldwide. Despite such high-level growth with unprecedented success in recent years, the question of how to finance renewable projects is still extremely pertinent for the leaders of the renewables sector.
Commercial banks and various financial institutions in addition to government subsidies and incentives provided by international organizations offer attractive financing options to boost the volume of renewables investments. Although traditionally commercial banks have been the most preferred option in funding renewable projects, other new alternative sources are also enticing interested investors.
Oil, gas and coal are fuels that still attract the most energy investments, and receive the largest percentage of financing around the world. However, these fossil fuels have been pushed off their perch in favor of renewables investments with global awareness generating reluctance to become too heavily dependent on hydrocarbons, with increasing energy security challenges, as well efforts to mitigate the mounting concerns over climate change.
Targets set in Kyoto, and in Paris in 2015 show that authorities are ready to support renewables like never before in recorded history. The European Union’s directives between 2001 and 2017 and schemes in 2007 that targeted a 20 percent reduction in carbon by 2020 have all contributed to the greater availability of alternative renewables financing. To boost renewable sources, many large projects in the EU, Turkey, Brazil, and in the U.S started to receive greater volumes of financing.
When comparing these investments in various parts of the world, the East Pacific region took the lead seeing rapid growth from $64 billion in 2013 up to $113 billion in 2014. China as the leader in investments was followed by India, Japan South Korea, which also have seen greater output from renewable plants.
Western Europe was the second largest region where renewable energy received the greatest volume of investments from $53 billion in 2015 to $73 billion in 2016.
Lastly, Canada and the U.S. were other dominant destinations that saw a peak in investments of US$52 billion. While solar and wind power were the leading sectors attracting investments, biomass, geothermal, biofuels and hydropower saw investments peak in recent years in these parts of the world.
The International Renewable Energy Agency’s (IRENA) annual statistics and publications reveal that private sources predominantly finance renewable energy projects around the world rather than through direct public investment. While public financing has played a significant role in enacting and increasing the share of renewable energy’s in the energy mix, private sector-based investments have taken the lead in renewables financing.
In 2016, private institutions backed more than 90 percent of renewable capacity, while public sources financed the remaining percentage. Publicly financed renewable projects, which only ranged between 12 to 16 percent from 2013 to 2015, echoes the potential that private institutions envisaged in renewables to maximize profits given that publicly financed renewable projects have been on a gradual decline in recent years.
According to a 2017 report of the global renewable energy policy multi-stakeholder network, REN 21, from 2013 to 2016 public institutions invested $40 billion annually in 147 countries compared to private investments over the same period of $270 billion.
In addition to fiscal subsidies, a large portion of public funds was spent on promoting renewables deployment and in implementing policies and regulatory instruments. Given that the number of countries in support of renewables increased from 28 to 147 from 2004 to 2016, it is indicative that interest in renewables skyrocketed throughout the world. Loans and grants to promote renewables backed by robust research and development (R&D) also reached a peak. Back in 2005, only 17 countries assigned funding for R&D whereas in 2016 this increased to approximately 100 countries, and in turn attracted more private investment to the sector.
Schemes for feed-in-tariffs and feed-in-premiums have also seen ever-greater numbers around the world.
The financial instruments used by private companies for project financing range from grants to concessional debts and equity to purely commercial debt. Grants and concessional finance have accounted for almost negligible shares in worldwide financing renewable projects at 0.5 and 4 percent, respectively, but concessional finance is used mainly in transmission and distribution operations. With utility-scale assets, such as costly solar and wind project, it has been the most widely used option. While this is still the case, lenders and renewables sponsors are still reluctant to fund big projects, because of unforeseen market risks, operational risks as well as raw material risks, which can be too costly given the long-term investment returns.
As financing options increase in renewable energy, the volume of renewable investments is poised to change dramatically due to the unprecedented mobilization around the world with major concerns over air quality and the subsequent pledges and agreement to curtail carbon emissions. While public investments will still be a catalyst in further encouraging renewable investments, the growing interest of private companies is set to continue in the years ahead. What happens next in the world of renewables is inextricably linked not only with the U.S., China India - the biggest energy consumers but also to other emerging economies that will define the share of renewables in the global energy mix.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.