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close this bookCase for Solar Energy Investments (World Bank, 1996)
close this folderA solar initiate
close this folderPreparation and finance of commercial and near-commercial applications
View the documentSources of finance
View the documentBuilding a project pipeline
View the documentPre-pipeline activities: education and training
View the documentPricing policies and openness to private investment
View the documentPitfalls in implementation

Sources of finance

An important step to commercialize solar energy use has already been taken, which was the decision (in March 1994) to establish the GEF on a permanent footing. The GEF has now moved from its pilot phase to an operational phase, is well placed to support an expanded program of near-commercial applications of tested technologies, and can attract significant amounts of finance from public and private resources. In its pilot phase, the GEF's leverage - the amount of conventional finance raised for each dollar of the GEF's own resources - for renewable energy projects was roughly 3:1; indeed, for applications that have good economic rates of return, excluding the premium (shadow price) placed on the reduction of carbon emissions, the GEF's role is mainly catalytic, such as to absorb transactions costs and reduce the risks of investments in essentially "pioneering" technologies, and in these cases the leverage can be much larger. Wind projects, for example, have now reached the point where the leverage can be as high as 10:1. In sum, the following sources of finance are available:

· The GEF, for such programs as photovoltaics for rural electrification and for solar-thermal, wind, and biomass-fired power projects using technologies already in use and under further development

· Conventional development finance from the Multilateral Development Banks (MDBs) and the International Development Association (IDA) where the projects are demonstrably economic

· Equity and loan finance from the International Finance Corporation (IFC), in conjunction with the GEF (see Box 2)

· Direct investment by the utilities

· Commercial finance (local and foreign)

· Private direct investment (local and foreign)

· Blends of the above.

Taking into account the resources arising from the replenishment of the GEF, it is possible in principle to finance, over a three-year period, an overall program of the following composition:

· 3 x 100 MW of solar-thermal plants (e.g., of the parabolic trough type)

· 20 to 50 MW of PVs for small-scale uses - rural electrification, water pumping, rural health clinics, street lighting, school buildings, etc.

Shift In Share of Primary Energy Demand Required to Stabilize CO2 Emissions, 1990-2050 (%)

· Several hundred MW of wind power projects

· One or two power generation schemes (~50 MOO), building on the experience gained with the Brazil project 9

· Several programs of small-scale investments (~50 MW equivalent; e.g., for rural electrification)

· Programs of special uses for agriculture and industry (e.g., solar crop dryers, industrial cooling and heating, waste treatment, and many other applications).

This list is not exhaustive and is not a proposal. It is intended only to indicate the emerging possibilities and to encourage various parties to search for investment opportunities. The types, scales, and quality of investments that are actually financed will likely be much different from this, and the overall level of investment could be much higher or much lower, depending on the work done in project identification and preparation over the next three years.

Such a program would only represent a starting point for international assistance for the development of solar energy, even allowing for programs already in place. Solar energy would not likely be fully commercial at the end of it, and a full program of commercialization will require a longer-term commitment from the development community (and various national energy programs) and a willingness to take risks; with the possible exception of wind turbines, this is true for all the key technologies used for electricity production - PVs, which aside from small-scale applications need a substantive 10-year program to move them into the cost ranges indicated, solar-thermal, and biomass for power production.

In addition, with research and development (discussed below), new approaches will be emerging that will also merit support as they move to the operational phase for example, central receiver solar-thermal systems, new PV concepts for grid-connected applications, and other approaches (including fuel cells) to introduce storage and make solar energy less intermittent and better suited for grid system dispatch. For these reasons, it has been suggested that the various agencies should outline and publish their long-term plans for solar development, outlining investment targets for the period, say, 19962000-2005. The aim would be to persuade investors that significant investment opportunities lie ahead; that development finance institutions are committed to seeing the technologies developed and used; and that these institutions are working on raising the financial resources required.

Box 2. The IFC and Renewable Energy

The International Finance Corporation (IFC) is the private sector arm of the World Bank Group and the largest multilateral source of equity and private sector investments in developing countries. It lends directly to private companies and makes equity investments in them, without guarantees from governments, and attracts other sources of funds for private-sector projects.

Since 1956, the IFC has provided more than $14 billion in financing for 1,290 companies in 109 developing countries. In July 1992, the IFC created its Infrastructure Department in response to the growing demand for its services in this area. The Power Division handles electric power generation projects, including projects using renewable energy resources such as hydro, geothermal, and biomass and new technologies such as wind energy, as well as conventional thermal generation projects and transmission and distribution projects, including national and international grids and metropolitan and local utilities.

The IFC has recently financed hydro projects in Belize (25 MOO), Chile (450 MW and 80 MOO), Costa Rica (11 MOO), and Guatemala (10 MOO), as well as a biomass cogeneration plant in Guatemala (70 MOO). Geothermal projects are under review in Guatemala, Indonesia, and Nicaragua. Wind power funding proposals have been received for projects in Argentina, Chile, China/Mongolia, Costa Rica, Egypt, Guatemala, Honduras, Mexico, Morocco, Ukraine, and Uruguay. Biomass or PV projects have been considered in Belize, Brazil, Colombia, Costa Rica, India, and Jamaica. The IFC has also invested in PV manufacturing in China.

The IFC has made the environment one of its most urgent priorities and is encouraging private sector involvement in the development of GEF assistance strategies for the private sector. As part of these efforts, as well as in relation to its power investments, the IFC is actively pursuing potential investments in renewable energy (biomass, wind, solar thermal, and PVs). The IFC can provide nonrecourse project finance services, namely:

· Debt/equity investments in commercial technologies in developing countries

· GEF grants or concessional financing to buy down capital cost differences for qualifying technologies alongside conventional IFC project financing.

The IFC can also provide services for manufacturing, investment, and corporate finance as follows:

Debt/equity investments in manufacture and assembly of commercial technologies in developing countries

· GEF grants supporting manufacture and assembly investments for precommercial technologies.

The IFC is also considering establishing a $100 to $200 million fund for renewable energy and energy efficiency that could provide equity (and possibly debt) financing for smaller on-grid renewable energy projects (5 to 20 MW) and for promising new off-grid applications using solar energy and other renewables and for energy efficiency projects. The GEF Council recently approved a $30 million cofinancing facility to supplement the Fund's resources to promote less mature commercial technologies and to reduce risks associated with these types of investments