As the global renewable energy boom picks up steam, innovative financing mechanisms are beginning to take shape in emerging economies whose access to capital is often limited by factors like currency risk, credit risk, local bank sector risk, inadequate pools of institutional investors, and limited technical expertise.
Global investors are typically drawn to developing countries by foreign direct investment or merger and acquisition opportunities, reports Tim Buckley, director of energy finance studies at the Institute for Energy Economics and Financial Analysis (IEEFA). He points to Italian utility ENEL SpA’s extensive investments in Latin America as an example of that traditional approach.
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But now, “new forms of partnerships are developing, too, to support local banks that lack the technical capacity or financial muscle to enter into and manage such projects,” Buckley writes. Multilateral development banks are also stepping up as catalysts, with the World Bank and KFW, Germany’s development bank, agreeing last year to invest in India’s ambitious solar initiative. And China recently began raising private capital for its renewable energy initiatives through green bonds.
Meanwhile, as renewable energy costs fall, “entire bond and equity markets are evolving as institutional investors, especially, see opportunity,” Buckley notes. “As these new channels of financing develop, country-by-country renewable energy sectors will create spillover advantages that build a broader path toward sustainable development.”
