Financing Renewable Energy Projects
This is an excerpt from a report authored by Dr. V. Bakthavatsalam Managing Director Indian Renewable Energy Development Agency Ltd and published by United States Energy Organization.
The financing of Renewable Energy (RE) projects cannot be accomplished with one basic project financing strategy in the way that many large scale conventional energy projects are often financed. RE projects vary considerably in scale, capacity, energy source characteristics, points of sale for output, status of Technology and host of other factors.
Affordable financing is one of the critical factors inhibiting the usage of renewable energy. The financing can be augmented either by raising foreign currency loans or by raising local capital. Although the foreign term loans assistance are available are lower interest rates, however they are prone to high foreign exchange fluctuations, thereby making them expensive. Therefore raising local capital is more attractive for financing renewable energy projects.
Raising Local Capital
A number of innovative financing strategies have emerged to help overcome the primary financial barrier. These include:
Micro-lending / Micro-credit :
Here the scheme is targeted at local NGOs, which in turn establish small self help groups involving 20-25 members to whom financial assistance will be extended. The members regularly meet and deposit their regular savings for onward lending to the needy members for procuring Renewable energy systems like solar cooker or setting up a small Biogas plant.
Finance leasing programs
This approach allows the end-user to lease rather than purchase the Renewable Energy, whereby the end-users are relived of the burden of up-front purchasing of the renewable energy systems. In this way, financing can be aggregated to more central and larger components that are more easily appraised and managed.
Vendor Credits:
Renewable Energy vendors of both medium and large scale systems are now extending supplier credits to the consumers and projects to help close financing gaps and in the process secure their sales. In such situations, consumers and project financiers are more likely to reduce their perception of the technology risks if the equipment vendors are willing to financially back their products.
Targeted project credits:
Multilateral Development Banks (MDBs) can use the concept of approach of Targeted project credits to supply financing through National and Local Banks for Renewable energy projects.By targeting credits for such projects, the MDBs can encourage the National and local Banks to explore these new and emerging markets.
Equity Financing
Equity contribution apart from the promoter’s own sources can also be procured from the following :
a) Public Issues:
b) Equity shares : These do not carry any preferential right in respect of dividend and repayment of capital. These are usually of nominal value and tend to attract large number of investors belonging to all income groups.
c) Preference shares: These are shares having ownership rights like equity and also a fixed income like creditor capital. These may be also be convertible into equity.
d) Investment Institutions : Special Industrial Finance Institutions like State Financial Corporations, Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), Unit Trust of India, Life Insurance Corporation of India, Post Office Savings. These institution trade in stock and capital markets and issue primary securities to collect the savings from the public directly in the form of units or premiums, deposits or by issue of bonds/ debentures
e) Venture capital: This is a seed capital to start a new venture, basically, a “equity support to fund new concepts that involve a higher risk and at the same time, have high growth and profit potential.” The venture capitalist specialises in investing in new companies, These venture capitalists join the companies in the earlier and riskiest stage, they expect to earn unusually high returns.
f) Equity fund Investors: Equity funds investor provide investment capital in a project in return for a share of the equity of the project. In return for the higher expected yield, equity investors bear the greatest risk and have rights to distributions from the project only after all the other financial and tax obligations are met.
g) Involving Equipment suppliers : Reliable, experienced renewable energy equipment suppliers often not only construct, install and operate systems but also are willing to invest in projects on an equity basis in the hope of earning high returns on their investments.
h) Reinvestment of Earnings: This is a method of self financing wherein the companies reinvest a part of their profits in the business and only a part of the earnings are distributed in the form of dividends.
i) Tax Free Bonds: These bonds are 9 to 10% bonds with interest compounded half yearly and payable half yearly with facilities of buy –back upto certain limits.
j) Flexi Bonds : Bonds like Encash bond, Regular Income Bond, Money Multiplier Bond, Tax Saving Bond can be employed to raise funds from the Public by some of the investment Institutions.
Debt financing :
a) The main source of debt financing can be from National Commercial Banks, Multilateral Development Banks, Investment Institutions like GIC, LIC, Unit Trust of India, Mutual funds.
b) Financing Intermediaries involving Leasing transactions and Hire purchase transactions.
c) Subordinated debt : This is another form of financing that falls between the debt and equity. The subordinated debt is provided by a friendly investor or project –partner and is subordinated to other primary debt in case of project default.
d) Debentures: Just like the company’s owned capital is divided into number of shares, similarly, uniform parts of the borrowed capital is the debenture.
Grants / subsidies:
These are funds with no expected returns, Governmental, International and Bilateral organisations, foundations like USAID, Global Environment facility (GEF), UNDP, etc, offer grants to promote Renewable Energy and Developmental projects.
Apart from the above, there are various new instruments that can be employed for raising capital to fund renewable energy projects are:
1. According Priority sector Lending status for Renewables.
2. Consortium financing:
3. Creation of a Technology Development Fund from contributions from various FIs/ Banks, Govt. and various technology suppliers from which grants or soft term financial assistance to promoters of renewable energy projects may be provided.
4. Establishment of “Cess” on the users of conventional energy sources, which can be collected and used of the development of renewable energy projects.
5. Establishing of Rural Energy cooperatives / enterprises involving the retailers and manufacturers of renewable energy systems for micro –level lending operations.
6. Rural Cooperatives should be established with active participation of the village panchayats and extended with the help of Regional Rural Banks to take up the activities
linked to renewable energy.
7. Accepting Deposits from Public : The general public may be invited to deposit their savings with the company at a specified rate of interest for a specified period.
8. Corporate financing : Corporate finance can be raised using the following instruments:
a) Zero Interest Bonds: These are bonds sold at discount from their eventual maturity value and have zero interest rate. Further these have no immediate interest commitment. On maturity, the bonds can be converted into equity shares or non-convertible debentures depending on the requirement of the capital structure of the company. b) Equity warrant : This is a piece of paper attached to a non-convertible debentures, which gives the buyer or holder right to apply for and acquire an equity share at a future date.
c) Secured Premium Notes: This is a tradable instrument with detached warrant against which the holder gets one equity share after a fixed period of time.
d) Deep Discount Bond : The advantage of DDB is the elimination of investment risk. It allows the investor to lock in the yield to maturity or keep on withdrawing from the scheme periodically after five years.
e) Debt / assets securitisation: Securitisation is a way to create more credit by selling assets that have already been created and appear in the balance sheet. This raised credit could be used to create further assets and the cycle could be repeated.
f) Commercial Paper: These are short term unsecured promissory notes with fixed maturities, issued by well rated companies generally sold on discount basis.
8. Inter Corporate Lending/ Borrowings: Many Public Sector undertakings like Railways, food Corporation of India, Steel Authority of India, etc., issue bonds to the public for raising resources for their operations.
9. Issue of Government Bonds
10. Green banks: A number of Green banks or green funds area also emerging, which target the growth of renewable energy projects.
Related posts:
- Renewable Projects by NTPC
- Details of the renewable energy programmes/ schemes formulated by MNRE
- Private Sector Participation in Renewable Energy Sector
- Renewable Energy Projects in J & K
- Geo Thermal Energy Projects
- New Scheme for Energy Recovery Projects from Solid Wastes
- New Investment in Wind Energy
- Govt plans financial assistance for MSW projects.
