Towards a green economy

4. Accelerate adoption by addressing market barriers

Measures to stimulate demand, e.g. building codes

Mature technology (hydro, geothermal)

1. Development and infrastructure planning

RD&D financing capital cost support for large-scale demonstration

Low cost gap

(onshore wind, biomass power in some markets)

High cost gap (solar CSP, solar PV)

Prototype and demo stage (e.g. fuel cells,

2nd generation biofuels, )

2. Stable, technology-specific incentives Feed-in tariffs, for credits, loan guarantees

3. Technology-neutral but declining support

Green certificates, GHG trading

1. Technology development and demonstration

2. Niche markets

3. Achieving competitiveness

4. Mass market Time

Note: The figure includes generalised technology classifications. In most cases, technology will fall in more than one category for any given time.

Figure 10: Policies for supporting renewable energy technologies Source: Adapted from IEA (2008e, 2010b)

and as competitiveness improves. Measures targeting consumption and demand may be more relevant at later stages of diffusion and market development.

5.3 Financing mechanisms

As mentioned in the previous section, public finance mechanisms are one group of public support measures that governments can use or promote in order to influence the specific risk/ return profile of renewable energy technologies. These Public Finance Mechanisms (PFM, see Figure 11), can be categorised by stage of economic development, by stage of technological development, by type of investors, by type of risk to private investors, or by addressing specific barriers or constraints (UNEP SEFI 2005; UNEP/ Vivid Economics 2009; UNEP SEFI, New Energy Finance and Chatham House 2009). Public Finance Mechanisms vary from simple grants to complex conditional funding structures. As a general rule, PFMs aim at complementing the private sector and not substituting for it as part of an integrated and coherent enabling environment alongside regulations, taxes and subsidies. In high- and middle-income countries, one of the key aims of PFMs is to mobilise (or leverage) as much private capital for investments as possible (UNEP SEFI 2008b). Exceptions may occur in developing country contexts, where there is

230

very limited private-sector involvement. Here, PFMs can be part of programmes to create and catalyse markets.

Even when risk-return ratios are favourable, one of the specific financing barriers that renewable energy projects may face can be due to high up-front capital costs or small project-size. Small-scale projects are at a disadvantage in attracting large mainstream investors such as pension funds. This can be a particularly relevant constraint in developing countries. Small project sizes also lead to planning and transaction costs that are high relative to the overall project cost.

Over the past decade, a variety of formal and informal financial institutions and financing arrangements have emerged that offer facilitate small-scale products for the energy-poor in rural areas. Figure 12 gives an overview of the various options available to the poor at different levels of poverty.42

The smallest projects are found in consumer-driven renewable energy solutions in developing countries, such as solar home systems. The high transaction costs involved call for innovative consumer finance

42. A broader discussion of the role of the financial services and investment sector in supporting the greening of the energy sector is included in the finance chapter of this report

Market deployment