Global experience in catalysing renewable energy finance and investment

Strengthening conditions to attract finance and investment in clean energy

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Centre on Green Finance and Investment

Global experience in catalysing renewable energy* finance and investment

This online compendium considers global experiences in the design and implementation of various financing mechanisms that have been used to encourage and catalyse renewable energy investment.

The compendium is by no means an exhaustive list of vehicles that can support the scale-up of finance for renewable energy projects.

It does, however, provide insights to five financial instruments that have been used to increase the flow of capital to renewable energy projects: from small-scale household solutions and early-market technologies to partnerships with financial institutions and issuance of asset-backed securities.

These examples could be applied in a similar manner – or differently, depending on the investment size, risk and anticipated investor profile – to increase the availability, affordability and attractiveness of clean energy finance in India.

In addition, a number of studies considering the tools and strategies to catalyse renewable energy finance are mentioned in the following examples. Links to these reports, along with additional complementary information, have been provided throughout.

*Note: renewable energy refers only to renewable power (electricity) throughout this study.

Renewable energy finance and investment in India

Catalysing renewable energy finance and investment

Global experience (e.g. in solar PV and on-shore wind) has shown that targeted public interventions can support increased flows of finance to renewable energy projects (Steffen, Egli & Schmidt, 2020).

For example, risk mitigation (e.g. the IREDA credit enhancement scheme) and financial tools such as the Ministry of Finance's Partial Credit Guarantee Scheme can help to enable flows of private capital to renewable energy projects.

A number of potential financing vehicles can build upon these initiatives, helping to catalyse the scale needed to finance India’s 2030 ambitions.

One such example is structured finance (e.g. via aggregation partnerships) to increase investment volumes and reduce due diligence costs, for instance for smaller-scale and distributed renewable energy projects.

Standardisation (e.g. of project documents) can also be used to prepare projects to be pooled as securitised assets for trading in capital markets (IRENA, 2016).

Other financial instruments such as green bond issuance, which has ramped up in India in recent years, can help scale up and recycle capital for renewable energy projects, particularly for more established, utility-scale renewable electricity developments. This could be done, for instance, through a limited-period, subsidised credit enhancement facility to support opening up India’s domestic bond market, which has seen very limited renewable energy bond issuances (CEEW, 2020).

These instruments can also expand the current investor base, for instance tapping into international institutional investors such as insurance and pension funds (CEEW-CBI, 2019).

Lessons from global experience

The following case studies pull from experiences in developing and applying financing vehicles that have been used to increase overall finance and investment in renewable energy development.

Common threads across these experiences include:

•Identifying the right instrument: each of the examples targeted a particular barrier (e.g. access to finance) or need (e.g. increased capital capacity) to design tailored solutions that addressed underlying risks and paved the way for increased flows of capital.

•Engaging the right partner(s): the interventions identified key partners (e.g. local financial institutions, credit specialists, business angels and industry experts) to help structure and prepare the financing mechanisms and ensure their effective application.

•Targeting potential investors: each case worked to address perceived risks and to demonstrate financial viability, helping to open the doors for potential investors, from venture capital and commercial banks to pension funds and company shareholders.

These shared considerations can be used to identify eventual opportunities and similar design elements that could be applied in the Indian context to increase finance and catalyse private investment in renewables.

Transaction enablers to empower renewable energy solutions

Targeted public support can improve access to finance, particularly for borrowers and technologies perceived as risky by private capital. Microfinance arrangements, for instance, can facilitate access to capital for households and small businesses looking to purchase renewable energy solutions.

De-risking tools (e.g. guarantees or using combinations of grants and equity) can similarly help prepare less-established renewable energy markets, emerging technologies and innovative businesses for private finance.

On-lending and co-lending structures can help local finance institutions to gain confidence in lending to renewable energy projects (IRENA, 2016). These partnerships also can be used for eventual aggregation and securitisation (e.g. for issuance of solar asset-backed securities).

These types of financial instruments can also help apply limited public funds strategically in a way that addresses market barriers while improving the overall “bankability” of renewable energy solutions.

Capital markets to catalyse renewable energy finance

As renewable energy markets mature, they generally need greater capital flows, including refinancing vehicles such as asset-backed securities that can recycle capital for new projects.

Debt capital market solutions for renewable energy projects have increased considerably in recent years and can help mobilise assets managed by institutional investors such as hedge fund and pension fund managers.

For example, IREDA Green Masala bonds and PFC off-shore bonds have helped tap into capital markets and accelerate flows of finance to renewable energy projects in India.

Institutional capital for renewable energy projects can be delivered using a number of investment vehicles, such as projects bonds, investment funds and even equity.

Broadly speaking, institutional investors have shown a preference for operating assets, avoiding risks in the design and development stages of projects.

Between 2009-19, over 75% of renewable energy deals involving institutional investors were in operating assets (IRENA, 2020).

The choice and design of the vehicle play a key role in the types of investors willing to provide capital, depending on the desired scale, simplicity, liquidity and risk.

For example, institutional investors such as pension funds and insurance companies typically require deals greater than USD 300 million (IRENA, 2016). Both domestic and international institutional investors also typically require ratings of AA and above, a threshold most renewable energy project loans are unable to achieve by themselves. Aggregating renewable energy assets can therefore help to achieve the right investment volume.

A limited-period, subsidised credit enhancement facility could also can help unlock bond market financing in India by helping generate an initial track record of issuances and providing risk-return guidance for future issuances (CEEW, 2020).

Download a PDF version of the case studies on Global experience in catalysing renewable energy finance and investment.