Gaps & Barriers for Clean Energy Finance

Clean energy can play a vital role in the market transformation due to the cost savings and potential for new business models. However, even with the government initiatives, the large-scale adoption of clean energy projects and technologies has significantly remained untapped due to policy, institutional, projects and financial barriers. Among all these barriers, financial barriers are pivotal in hindering the proliferation of clean energy initiatives. In line with the context of this note, the broader financial barriers are explained below:

1. Small Project Size

    • Less size/value leads to high transaction costs for the lenders as well as to the end beneficiary.
    • Leads to project financing difficult without demand aggregation.

2. Poor Credit Worthiness of Borrower

    • Financial Institutions need precedents of a prospective borrower having received and successfully serviced loans, which is difficult for a non-creditworthy borrower.

3. Monitoring & Verification approach not standardized

    • For various technologies is not well defined, which makes securitization through future cash flow challenging.
    • Due to less clarity, enforcement of ESPC becomes difficult.

4. Banks not familiar with risk guarantee/sharing instruments

    • Despite various of risk sharing/risk guarantee instruments available globally, the banking sector is apprehensive towards energy efficiency lending.

5. High Collateral requirements of FIs adding to high cost of financing

    • Most of the full service ESCOs are small sized companies with weak balance sheet.
    • Stringent collateral requirements due to federal banks stipulation on asset-based funding.

6. Limited experience of Financial Institutions in appraisal and Financing projects

    • Due to low awareness, banks don’t have adequate level of confidence on the measurability and certainty of savings.
    • Limited risk assessment and appraisal experience of projects.

The rationale for the conspicuous push and shifts around the globe towards clean energy has been built over the preamble of less use of clean energy to engender the same level of output. Furthermore, due to reduced energy consumption, clean energy shall also eliminate greenhouse gas (GHG) emissions to achieve regulatory and government-led targets.

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