Sustainable Solutions for Green Financing and Investment in Renewable Energy Projects

Abstract

The lack of long-term financing, the low rate of return, the existence of various risks, and the lack of capacity of market players are major challenges for the development of green energy projects. This paper aimed to highlight the challenges of green financing and investment in renewable energy projects and to provide practical solutions for filling the green financing gap. Practical solutions include increasing the role of public financial institutions and non-banking financial institutions (pension funds and insurance companies) in long-term green investments, utilizing the spillover tax to increase the rate of return of green projects, developing green credit guarantee schemes to reduce the credit risk, establishing community-based trust funds, and addressing green investment risks via financial and policy de-risking. The paper also provides a practical example of the implementation of the proposed tools.Energies 2020, 13, 788 2 of 18 technological progress and cost reduction. Thanks to the technological progress, costs of renewable energy technologies reduced drastically. For example, solar PV module prices have reduced by around 80% since the end of 2009 and wind turbine prices have dropped by 30-40%. Although this is good news on one side, it prompts investors to pause to see how much the prices will drop on the other side.All in all, it is important to take the necessary steps for mitigating the risks of green financing to unlock the participation of financial institutions in these projects [4]. One solution is to incentivize non-banking financial institutions (NBFIs), such as pension funds or insurance companies, to engage in green energy projects. The advantages of pension funds and insurance companies over banks are that these institutions pursue asset-liability matching and their resources are long-term (10, 20, or 40 years). Insurance companies or pension funds can finance infrastructure projects, including large green energy projects such as large hydropower, as they are long-term projects (10-20 years). Therefore, it is very important to develop pension funds and insurance companies in developing countries to fill the financing gap of infrastructure projects, including energy and green energy projects [4].A good example of the role of non-banking financial institutions in unlocking green investment comes from Australia. The Powering Australian Renewables Fund (PARF) is a financing initiative that AGL Energy of Australia created and has $2-3 billion funds targeting to unlock the investments in large-scale renewable energy projects by diversifying the risks and reducing the financing costs. A partnership with the Queensland Investment Corporation (QIC) established the fund in 2016 on behalf of its clients, the Future Fund and those investing in the QIC Global Infrastructure Fund. The target is to accelerate Australia's transition to a low-carbon economy with the potential to meet 10% of the Federal Government's Renewable Energy Target (RET).One point that is important to consider is that public fina...

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