August 20, 2012 — Development banks appear to be fuelling growth in wind energy across the world. Their role in assisting wind power projects over the recent years has been more pronounced than other forms of financing.
Since 2007, the development banks have made project finance contributions to renewable energy projects across the world.
Major beneficiaries from this increased lending by development banks are the mature clean energy technologies like wind, solar and biomass. In 2011, almost $75 billion were invested in wind projects from a total of $260 billion in clean energy projects. A portion of this investment will be from public sector institutions.
Wind has been the single largest beneficiary of these investments to date, receiving $7.2 billion in 2010 alone.
Amongst the newest entrants in this area are large pension funds. pensiondanmark, the fourth largest Danish pension company, has publicly declared its decision to provide asset financing for wind projects in Denmark will form about 10 percent of its investment portfolio by 2020.
The perceived high risk nature of clean energy investments, particularly in new markets, means that only a limited set of investors (i.e. those with a high risk appetite) would be willing to invest, thereby limiting the possibility of scaling up deployments.
In such an environment the role of public finance institutions in providing services such as loan guarantees, export credit support and risk insurance is critical as a bridging strategy in mature markets and vital for new and emerging markets. Overall, 2012 is very likely to see the trend of rising public sector finance strengthen.
An ongoing positive dialogue between project developers, WTG manufacturers, political and regulatory stakeholders and public funding institutions is the way forward to secure a more sustainable energy supply both from a financial and environmental point of view.
Global clean energy investment reached a new record of $260 billion in 2011. This characterizes a key milestone for a sector that enjoyed an average compound annual growth rate of 37 percent between 2004 and 2008, but then saw growth slowdown in the face of the widespread recession in 2009.
Last year the majority of investment was asset financing of utility- scale projects such as wind farms, solar projects and biofuel plants. The year 2011 also saw the trillionth dollar being invested in clean energy projects, which the global investment community considered a noteworthy milestone.
According to the IEA, $38 trillion of investment is required to meet projected energy demand through to 2035. Of this, the IEA projects that almost two-thirds of incremental energy demand in 2010-2035 will be met by natural gas and renewables.
The wind industry expects to install another 255 GW of wind between now and 2016. Meeting this growth target for the wind industry and the various national targets for renewables will depend upon the availability of rational and fair support mechanisms to be available in the interim. Further, the lack of a global price on carbon only thickens the plot for ensuring a viable return on investments for project developers.
However, while the value of direct payment mechanisms (such as tax credits, feed-in tariffs, capital subsidies) due to budgetary restrictions may be on the decline, the support from development banks is rising.
The lending portfolio of development banks (multilateral, regional and national) is increasingly reflecting larger support for clean energy projects. This support has largely come through greater involvement of these banks in club-deals and loan syndication activities undertaken for renewable energy projects in the post 2008 economy.