The hype of Renewable Energy (RE) projects is always tremendous. In November 2010, when I attended the Singapore International Energy Week, the dissemination of hybrid wind-hydro power plant was noticed at the plenary session. Following this, a smart grid discourse encouraging a connection of RE power plant to the grid with the most effective and efficient way in conjunction with the electricity grid supply and demand management was warmly received, as such it is the time for RE, reigning over the dominance of conventional energy sources. No surprise, the next parallel sessions were heavily filled with renewable energy, or something in and between, discussions. Some of them even projected the route to renewable energy success stories that will be soon told by several Asian countries.
In reality, only few countries are able to capitalize this overvalued proposition. Most of them are advanced countries with either barely endowed or scarily threatened fossil fuel energy supplies. Such unfortunate condition had made these countries strengthened their RE policies, capitalized their existing technologies for RE developments and disclosed opportunities for financial institutions to engage in RE funding. As a result, not only these countries increase their energy mix share, but they also manage to market their R&D RE capacities outside. German, Denmark and Spain serve the examples.
But with respect to the other less advance hemisphere, the adoption of RE is in average a cry. Only a few countries manage to claim the success stories of RE developments. Some of the issues on the impediments of RE developments are outlined in the followings.
Small Power Purchase Agreement and Small Power Purchase Tariff
First of all, the need to have Small Power Purchase Agreement (SPPA) and Small Power Purchase Tariff (SPPT) must be followed with a consistent implementation supervised by an independent, yet has some authority, regulatory body. Strong SPPA and SPPT clauses and terms which give room for small IPPs to expand will create attractiveness for investors and project developers to explore RE opportunities in the country. In this context, it is the government task, through a regulatory body to ensure the same level of playing between electricity providers and buyers.
Take for an example the Energy Service Delivery (ESD) in Sri Lanka. Even with the SPPA and SPPT in hand, the implementation of the ESD was initially mediocre. The electricity of the country was served by the monopolistic state electric utility company. There was no regulatory body to supervise regulations related to tariff purchasing between electricity providers and buyers. Consequently, different perceptions on tariff computation methodologies as well as data input lost transparency occurred at a price which disadvantaged small IPPs. Only after the proposal to mediate the conflict through a neutral third party, did the problem resolve (Nagendran, 2001).
Financial Institution Equipped with RE Knowledge
It would be impossible to develop RE projects with liquid cash in hand. Project developers and owners try to lure investors to back up with financial support through loans. At the same time, investors need to understand the risk of the project in order to make a decision on projects to be invested in.
In the case of ESD, prior to the ESD programme one of the development banks participating in the ESD had previously provided equity and financing loan for a mini hydro project. The experience of the bank was shared to the others syndication, making it easier to disseminate information on the risk and return of RE investments. The communication on such financial issues was conducted among bankers, making it easier to comprehend RE issues rather than if these were disseminated by e.g. project developers.
Friday, July 8, 2011
Thursday, July 7, 2011
RE Bankable Project: A Reflection to fund RE
Who wants to back RE projects? What return can these 'backers' get?
Those questions are always thrown in the reciprocal posit whereby RE will never surpass conventional energy loans. In fact, real conditions on the ground suggest so. The price of RE is unattractive compared to any conventional energy. The networking effect attributed to the first mover advantage combined with the massive scale of exploration leads to the preoccupied perspective that conventional energy will prevail in the next decade or even more.
No doubt, RE is always viewed as the last resort for energy sources. The reason is its laggard inception and hesitation from the government. RE policies are put in the second league compared to fossil based energy policies. Consequently, the arrangement of a comprehensive policy that promotes and places RE in the same level of playing field is crippled. Even with the volatility of fossil fuel in the past few years, there have been tendencies to defend conventional energy distributions with fair price through the adoption of better and efficient technology.
The question left is the way to promote RE and get it recognized by funding institutions. The more it is acknowledged (by financiers), the more chance to get cash (for project developers) to fund RE projects. This can only be done with a strong warrant that RE projects will be in the same profitable confident level as conventional energy projects. In other words, strong RE policies must be installed in the first place. Secondly, strong willingness from the government to put RE in the larger portion of the energy mix must be followed by the provision of instruments and incentives which not only is attractive enough for the developers but also convinces financiers and venture capitalist to invest in RE.
But the concretization seems to be far from the expectation. In the United States, even with a strong support from the administration to pave the way of RE, conventional wisdoms of putting the money into the most demanding energy sources (a.k.a. oil and gas) preoccupy financiers' wisdom.
Only with recent developments that RE become bankable. This does not come easy. The financiers must be convinced with a set of complex PPAs in place as well as with one or two institutions willing to back up the project. In some cases, even the ownership of the project is backed by a fortune 100 company. This is the case of 845 MW Sheperd Flat wind farm in Oregon, where GE is part of the owner (Murray, 2010).
So, there will be a lot of home works to do before investing in RE.
References
Murray, T (2010) “The week in Green Energy: The Bankable Project”, [online], Available: http://www.greenenergyreporter.com/features/the-week-in-green-energy/week-green-energy-bankable-project/ [November 19, 2010]
Those questions are always thrown in the reciprocal posit whereby RE will never surpass conventional energy loans. In fact, real conditions on the ground suggest so. The price of RE is unattractive compared to any conventional energy. The networking effect attributed to the first mover advantage combined with the massive scale of exploration leads to the preoccupied perspective that conventional energy will prevail in the next decade or even more.
No doubt, RE is always viewed as the last resort for energy sources. The reason is its laggard inception and hesitation from the government. RE policies are put in the second league compared to fossil based energy policies. Consequently, the arrangement of a comprehensive policy that promotes and places RE in the same level of playing field is crippled. Even with the volatility of fossil fuel in the past few years, there have been tendencies to defend conventional energy distributions with fair price through the adoption of better and efficient technology.
The question left is the way to promote RE and get it recognized by funding institutions. The more it is acknowledged (by financiers), the more chance to get cash (for project developers) to fund RE projects. This can only be done with a strong warrant that RE projects will be in the same profitable confident level as conventional energy projects. In other words, strong RE policies must be installed in the first place. Secondly, strong willingness from the government to put RE in the larger portion of the energy mix must be followed by the provision of instruments and incentives which not only is attractive enough for the developers but also convinces financiers and venture capitalist to invest in RE.
But the concretization seems to be far from the expectation. In the United States, even with a strong support from the administration to pave the way of RE, conventional wisdoms of putting the money into the most demanding energy sources (a.k.a. oil and gas) preoccupy financiers' wisdom.
Only with recent developments that RE become bankable. This does not come easy. The financiers must be convinced with a set of complex PPAs in place as well as with one or two institutions willing to back up the project. In some cases, even the ownership of the project is backed by a fortune 100 company. This is the case of 845 MW Sheperd Flat wind farm in Oregon, where GE is part of the owner (Murray, 2010).
So, there will be a lot of home works to do before investing in RE.
References
Murray, T (2010) “The week in Green Energy: The Bankable Project”, [online], Available: http://www.greenenergyreporter.com/features/the-week-in-green-energy/week-green-energy-bankable-project/ [November 19, 2010]
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