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Financial Institutions and Renewable Energies

By Federico Mazzella ,
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A new IDB publication analyzes how financial strategies can contribute to promoting clean energy.

Expansión de las energías renovables no convencionales en América Latina y el Caribe: el rol de las instituciones financieras de desarrollo [The expansion of nonconventional renewable energies in Latin America and the Caribbean: The role of financial development institutions]” (link in Spanish), published by the Inter-American Development Bank (IDB) in August 2016, analyzes the relationship between financing and sustainable energy.

There is a strong drive for the development of nonconventional renewable energy (NCRE) in Latin America and the Caribbean (LAC). However, NCRE still has a relatively small (aggregate) market share. Expanding this would entail overcoming numerous obstacles and risks, which explains the relatively slow pace at which these technologies are being adopted. The aim of this publication is to analyze the emerging experience of LAC in the design and implementation of financial instruments to promote private investment in the development of small- and medium-scale renewable energy. In particular, it seeks to examine the role that financial development institutions might play in driving this process, in the light of recent experiences.

The spread of innovative financial instruments would help to break down such obstacles. After reexamining certain preconceptions, specific needs could be identified that could help define a set of appropriate instruments for leveraging investments in NCRE at different scales.

To this end, the study argues for the need to i) combine programs for the diversification of financial instruments and funding lines in relation to terms and conditions that are appropriate for the investment cycle in NCRE through project financing (for which sources of patient capital with competitive long-term rates would need to be identified); ii) promoting the use of power purchase agreements (PPA); iii) deploying instruments for risk mitigation, including guarantees and insurance policies, and also involving institutional players, such as insurance companies or export credit agencies; iv) implementing independent third-party verification; and v) developing training and technical assistance programs to address information deficits and reduce transaction costs.

In this context, national development banks (NDBs) are in a unique position to stimulate and facilitate these investment flows and leverage the robust utilization of the region’s available renewable resources so as to contribute to its following a low-emissions development path.

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