The Asian Development Bank has published the second volume of Financing Clean Energy in Developing Asia where my chapter titled CLEAN ENERGY FINANCING: SOURCES, INSTRUMENTS, RISKS, AND MITIGATION OPTIONS has appeared.
As the international community prepares for urgent and unprecedented interventions to shift the global economy towards lower carbon emissions, clean energy projects are taking center stage. Investment in clean energy and energy efficiency has grown in recent years to reach $289 billion in 2019, but funding required to follow a 1.5 degrees Celsius pathway is significantly higher. Mobilising this additional finance is a major challenge, particularly for Asian developing countries, many of which rely heavily on carbon-intensive energy.
This chapter presents a review of public, private, and alternative sources of clean energy finance. While public and private investment sources play an important role in clean energy financing, other innovative approaches and alternative sources are needed. International finance flows have supported projects via grants and concessional finance, and though domestic resources are playing a bigger role now, the economic impact of the coronavirus disease (COVID-19) pandemic has strained public finances, creating new uncertainties. Accordingly, innovative ways of attracting domestic finance, particularly through green bonds, have received more attention.
Similarly, utility-scale clean energy projects have relied on two main financing approaches: balance sheet and project finance. Balance sheet finance remains the preferred approach due to ease of execution, non-familiarity with project finance—particularly in new and emerging markets—and a poor understanding of risk in clean energy projects. A combination of debt and equity is used in varying proportion in utility-scale projects and commercial rate debt finance is widely used due to the dominant role of private finance in the sector.
The chapter also presents a review of barriers to clean energy finance. The pandemic has slowed clean energy investment. The economic crisis has affected the bankability of projects, made investors more risk averse, and altered expectations of returns. Clean energy projects also face inherent barriers due to the viability gap and political, regulatory, exchange rate, and liquidity risks, among others. Weak capital markets, particularly in terms of poorly developed bond markets and immature capital markets, also act as barriers. Remedies could include implementing clean energy-driven post-COVID recovery plans, creating portfolios of risk mitigation instruments, and developing pipelines of bankable projects.
Five case studies from Asia and the Pacific illustrate how clean energy financing has been approached by different countries.
The book can be downloaded from here: https://www.adb.org/publications/financing-clean-energy-developing-asia-volume-2
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