Chapter 6. Forecasts on RE Demand and Investment Costs
6.3 Financing
6.3.1 Domestic Financing Plan
6.3.1.1 Case Study on Korea
In
thisregard, the South Korea model can serve as reference. A basic method for self-financing
by a government is through tax reform. A portion of tax revenue can be allocated to a support
fund for RE through newly setting up a special account for RE. In South Korea, this is stipulated
in the Act on the Special Accounts for Energy and Resource-Related Projects.
[Figure 6-13] Case for financing in Korea
The special account legislation was enacted in 1994, defining the energy and resource-related sector as 1) development/production/transportation/stockpile/supply/quality management of energy and underground resources, 2) restructuring the projects of energy and underground resource related industry, 3) energy saving and RE businesses, and 4) safety management and distribution structure improvement business.
The special account consists of the investment account and the loan account and is operated and managed by the Minister of Trade, Industry, and Energy. The revenue of the investment account derives from import duties and sales levies on energy, such as oil and natural gas, and the expenditure is allocated to investment in, subsidy of, and contribution to the energy and resources business. The revenue of the loans account is from principal and interest of the loan, and it is expended for loans to the energy and resources business. To secure financial resources for expenditure, a transfer from general account can be done and, if the financial resource is insufficient, a long-term loan can be obtained to an amount approved by the National Assembly.
A part of transportation tax and energy tax is used to form revenue to support RE through the special account, and it is the foundation for implementing the supporting policies. A special account is one of the most basic and efficient ways of procuring funds from locally available sources.
6.3.1.2 Domestic Financing Plan
Like Korea, for Cameroon to mobilize financial resources, tax reform, budget integration, and adjustment between government departments are required. As in Korea, cooperation and mediation between government departments and agencies are essential because RE is related to various areas, such as energy, environment and technology. Therefore, some government budget items must be integrated, and
Source: KEEI
do so, the legal system may need to be reformed, such as the reform of the government organizations or financial resource utilization system, or enacting new laws.
In addition, by mobilizing government-funded RE funds, private investment can be promoted. This might appear an inappropriate plan for Cameroon, with a fledgling RE sector; however, it is desirable to consider private investment expansion from the outset to facilitate grow for this sector in the long term. Like the INDC scenario, encouraging the participation of private investors should be considered essential, as it is difficult to cover costs with only government funding in case proactive efforts need to be made to enable supply expansion.
Therefore, establishing a RE fund must be considered at the present stage as an effort to attract private investment, with the aim of converting the RE industrial development and supply sector, currently being led by the government, into a market-oriented sector. Investment in the form of funds poses more risks than one-sided subsidy support, but it is also more helpful in creating an institutional foundation for long-term market invigoration. Therefore, it is advisable to emphasize government tax reform at the early stage and to increase the focus on financing through funds gradually.
The PPP is a form of collaboration between government and private firms, which is established when constructing RE facilities. The government supports the stable promotion of the project by leading the project and addressing licensing issues, whereas detailed project content and capital and resource management/ administration are assigned to a private company. This method is used widely in various African countries, such as Algeria, Tunisia, and Morocco.
Another option is to utilize microfinance, which was originally a generic term for small loans to impoverished people. It affords the opportunity to pursue both poverty mitigation and business profit.
Financial support in the form of microfinance can be provided to projects related to the supply and spread of energy for underprivileged people. This concept can be adopted in RE projects as it effective for attaining energy independence in isolated regions. Such microfinance projects can be carried out in cooperation with international financing measures such as ODA and EDCF.
[Figure 6-14] Structural diagram of microfinance for renewable energy
Source: IEA (2011)
However, PPP projects or those funded via microfinance are more dependent on foreign than domestic financing. This is because most private business operators of RE industry in developing countries are immature and, in many cases, large projects are conducted with the financial support and cooperation of advanced countries. These developed countries could be good participants in large projects, as they have good technical competence and abundant financial resources. There is also an option that encourages the participation of residents. In the case of Freiburg, Germany, such participation secured finances by residents acquiring the equity shares participation in the installation of solar PV generation facilities in houses and public playgrounds. This is an effective approach to opening projects to market forces, improving public awareness, securing funding with a minimum financial burden on the government, and promoting market development. However, this method is applicable only to advanced countries with advanced RE sectors and where the awareness of RE is high. Accordingly, it is not feasible in a developing country like Cameroon that is still in the early stages of maturity.
To efficiently manage public resources, the option of establishing and operating a RE financing corporation could be considered. This option can remove drawbacks which could include investment
utilization but the establishment of a separate specialized agency could be a viable alternative.
As an example, the government of Australia has established the Clean Energy Finance Corporation (CEFC) to help expand investment in its clean energy sector. The CEFC was established under the legal framework of the Clean Energy Finance Corporation Act 2012 (CEFC Act). The entity implements investments worth US$ 10 billion in accordance with its mandate.
[Figure 6-15] Utilization of domestic resource
Source: KEEI
The funds made by tax revenues would be utilized for direct cost subsidies, as well as for establishing and operating relevant organizations, and for projects directly offering subsidies. A portion of the funds would be mobilized for creating funds to induce private participation and would therefore serve as matching privately funded resources. In the earlier phases of diffusion, the focus will be on providing direct subsidies, which, however, is anticipated to gradually play a larger role in creating funds. Creation of funds is closely connected to PPP, which is related to international fund procurement and crucial factor from a mid- to long- term point of view.
Renewable energy corporations can be established through government-led investments in accordance with renewable energy corporation legislation. The size of the investment will obviously also be compliant with the same legislation. Once established, the corporation will run the projects independently. However, managing the revenues (saving loss carryover, depositing profit reserve, government subsidy payment, and the like), making up for deficits, and other related issues will be pursuant to the provisions specified by the legislation.
The Renewable Energy Agency, too, could be established through the investments made by and operated under the government or a non-government entity or entities in accordance with the related law(s).
When investing, the government must include the amount of investments in the budget for expenditures for each fiscal year to procure the funds that are required for operating the agency.
Supporting the RE programs of local governments would require utilizing the budgets of the governments to provide and operate new governments departments to oversee RE. The role of the central government would be to provide the local governing bodies with consultative and administrative support in order that the governing bodies could install their own departments dedicated to RE. On the other hand, personnel training/education programs would require direct annual funding by the central government, such as MINEE (or the Renewable Energy Agency), to secure separate budgets to implement the training/education. For the RE diffusion plans of local governments, an option could be considered wherein the central government would plan the related budgets and dispense the funds to the local governing bodies over the course of two years. The local governments would then establish diffusion plans based on expert consultations and research services by utilizing the central government dispensed budgets.
Budgets for low-interest rate loans would need to be allocated separately for the RE deployment projects and loans (subsidy) programs, such as RESCO, can be implemented. It would be an effective move for MINEE (or Renewable Energy Agency) to procure special funds to be used for subsidies and loan support programs, which would include the direct subsidies programs. Putting together and operating such special funds will be prescribed separately.
As regards FiT, the GET-FiT phase would involve entering into a GET-FiT Cameroon agreement with the GDB or Kreditanstaltfent Bank or vel (KfW) and the Deutsche Bank, securing public funds through the inputs of Germany, France, the UK, and the EU, and inducing private resources based on the public funds so secured. Once the Pre-FiT is about to be implemented, it would be effective to establish special funds to be used through PPA agreements. The purpose would be making up for losses incurred by the power transmitters and distributors who purchase RE (power) from RE power plants via PPA agreements. In the full-scale FiT implementation stages, special funds need to be established for FiT implementation, just as in the Pre-FiT phase. These special funds will derive from imposing certain rates of taxes on the power bills.
Utilizing such funds, RE power plants could be compensated for the difference between the contract and wholesale price of renewable power.