Chapter 6. Forecasts on RE Demand and Investment Costs
6.3 Financing
6.3.2 Foreign Financing Plan
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.
are also making efforts in RE deployment to pursue economic development and GHG reduction at the same time.
However, as vast sums of money are required for RE endeavors, developing countries are in an awkward situation, unlike advanced countries with abundant financial resources. Therefore, it is necessary for them to find ways to acquire financial resources from the domestic market as well as foreign markets. The relevant study as Polycarp et al. (2013) reviewed various private and public cooperation funds and initiative plans that pursue the objectives of energy efficiency and climate change adaptation.
Developing countries can acquire financial resources abroad from the Official Development Assistance (ODA), Economic Development Cooperation Fund (EDFC), and Multi-lateral Development Banks (MDBs), or utilize international climate finance, such as Green Climate Fund (GCF), Clean Development Mechanism (CDM), and Seed Capital Assistance Facility (SCAF).
[Figure 6-16] Types of support for renewable energy business by stage
Source: KIEP (2015)
ODA refers to a donation or concessional loan provided to developing countries on the recipient country list of the Organization for Economic Cooperation and Development (OECD)’s Development Assistance Committee (DAC). In general, ODA is considered a grant, but the concept includes grants and loans, and because credit assistance is called EDCF, only grants can be perceived as ODA (KEA, 2016b).
EDCF refers to loans provided to the governments of developing countries for economic development, national welfare promotion, and to promote international cooperative relationship. EDCF is provided in
several forms, such as a development project loan, equipment loan, PPP loan, and program loan, and it includes debt guarantees for cooperative projects.
Debt guarantee for cooperative projects refers to the EDCF guaranteeing the debts of the government of a developing country that is having difficulties in mobilizing the financial resources necessary for a development project. This guarantee allows the government to acquire money from private or public financial institutions.
Another approach is to cooperate with an international agency from the initial stage of project development to utilize the funds for developing countries raised by international organizations. UNIDO (United Nations Industrial Development Organization) is the GEF (Global Environment Fund) agency and has established cooperative relationships with developing countries for RE project development and feasibility study (F/S), creating proposals and winning contracts for funding.
Developing counties can also utilize international climate finance, which refers to money for the support of climate change adaptation and GHG reduction in developing countries. There are several systems relevant to climate finance, such as International Emission Trading (IET), and Joint Implementation (JI).
CDM recognizes the emission reductions achieved by advanced countries that invest in projects and issues of developing countries as their reduction performance and the system is often used in relation with the emission trading scheme. Emission trading (ET) is a system used by advanced countries to meet emissions obligations through utilizing emission trading between countries that have accepted emission targets and are obliged to reduce emissions. JI is a system that recognizes a portion of emission reductions achieved by investment made between advanced counties. Among these, CDM is the only system in which developing countries can take part.
Public support for such RE projects pursued by developing countries is usually from the initial capital, which requires financing in their RE projects. This is used mostly to improve the economic feasibility of projects by reducing risks or increasing the rate of return for private investors (KIEP, 2015). Public support can contribute to improving the possibility of securing financing by reducing the risks through lowering the investment barriers.
In 2011, United Nations Environment Program (UNEP) conducted a close examination of low-carbon energy infrastructure in developing countries and analyzed the main characteristics and barriers. Based on the results, it implemented a Seed-Capital Assistance-Facility (hereafter SCAF) project that supports the development of RE initial projects. In addition, a representative renewable-energy international program, called a Scaling-Up Renewable Energy Program (hereafter SREP), is managed by the World Bank, with
SCAF is a measure to induce smoother participation of the private sector by supporting public funds at the initial development stage of RE projects. It was started with the financial resources of the Global Environment Facility (GEF) and UN foundation in 2012, with UNEP, ADB, and AfDB overseeing implementation.
The promotion procedure of SCAF to support the development of clean energy projects is as follows (KIEP, 2015). UNEP and joint implementation agencies find target funds or business candidates by schematizing renewable energy funds by regions and business status. Accordingly, once the business candidate submits a business proposal, the advisory committee, which is composed of the UNEP advisory council, donor agencies, and donor countries, reviews the business proposal and voices their opinions. Subsequently, candidates are selected through a due diligence process, reflecting the review of the advisory committee and the requirements, such as a safeguard, advisory committee approval.
Subsequently, the final beneficiary is determined.
Through such procedures of SCAF, the financial support was executed and given to eight funds in Asian and African regions in 2015. Especially, since the African regions do not have the basic infrastructure, UNEP and the implementing agencies in the first and second stages of the project provided financial and technical support for the recipient funds. UNEP and the implementing agencies were involved in equipment installation and operation stages.
SCAF does not allow more than one of the same type of technical support to a country, probably in an attempt to maintain the pilot nature of the program and to prevent unnecessary competition. SCAF provides support to bridge the insufficient competence of the developer and the low economic feasibility that act as risk factors in promoting RE projects. In addition, SCAF attempts to expand the development of RE by managing market failure factors, such as the insufficient expertise of the local project developer, insufficient number of fund managers in the early stage of the project, insufficient capital in the early stage of the project, and insufficient demand for investments in the poorest/low-income countries.
The Scaling-up Renewable Energy Program (SREP) implemented as part of the Clean Investment Fund promotes the low-carbon economic development of low-income countries. The goal is inducing private sector investment by determining economically feasible businesses. This is done by conducting pre- feasibility and feasibility studies in low-income countries that have RE potential and promising participation by the private sector, and by reducing the initial development cost. SREP materializes RE pilot projects by providing financial resources in the form of donations or concessional loans to low-income countries. In the process, it determines the initial entry barriers to participants in RE projects for reference in future activities.
As mentioned above, scope of business of SREP includes the pre-stage of RE projects, but most of its work relates to pre-feasibility and feasibility studies. Eleven countries, including South Korea, pledged a total of 796 million dollars (by December 31, 2014), and since this is mostly in the form of donations, it is appropriate for high-risk investment in low-income countries (KIEP, 2015). SREP is currently operating for