Renewable Energy Finance: Catalysing A Sustainable Future for Island Communities

Access to affordable energy is one of the most pressing considerations faced by island communities, and it is a priority to actively promote and facilitate access to renewable energy, especially in the subregions of Small Island Developing States (SIDS).
Renewable Energy

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Introduction

Access to affordable energy is one of the most pressing considerations faced by island communities, and it is a priority to actively promote and facilitate access to renewable energy, especially in the subregions of Small Island Developing States (SIDS). In Fiji, there are efforts underway to reduce the consumption of expensive imported diesel and increase the availability of clean power, including three outer islands (Lakeba, Kadavu, and Rotuma). There is a similar reliance on diesel fuel on King Island, off the coast of Tasmania, where the focus has been on creating the world’s first hybrid system to achieve 100% renewable energy penetration at a megawatt-scale. Many of these sub-regions possess significant renewable energy potential including solar, wind and geothermal energy.

Furthermore, according to the International Renewable Energy Agency (IRENA), there has been an 85% increase globally in renewable energy power capacity over the past decade, and there has been a corresponding decline in the cost of renewable energy technologies by more than 70%. Despite this, there is still a high dependence on fossil imports to supply energy demand in many island territories, especially since the financing of renewable energy projects brings with it some specific challenges that need to be addressed.

Transitioning to Renewable Energy

Over the course of the past 30 years, a number of island communities have been striving to implement renewable energy initiatives and solutions. Examples of such efforts can be seen in Dominica and St. Lucia, where fossil fuels are imported primarily for electricity generation. Both territories are in the process of investigating the use of geothermal energy as a component of transitioning to renewable energy, and are bolstering this with the accompanying legislative developments to fully optimise renewable energy and energy efficiency.

The island of Ærø in Denmark, is on its way to a complete transition to Renewable Energy Sources, garnering it first place in the EU’s RESponsible Island competition rewarding holistic achievements in local renewable energy initiatives. West African Cape Verde has also started working towards 100%, and in the future, 300% renewables. Surplus energy remaining from meeting domestic needs could either be stored or exported. Cape Verde aims to become a renewables training hub for Africa. And in Samoa, a project is underway to build or rehabilitate the country’s hydropower infrastructure, which in 2012 was damaged by Cyclone Evan.

These islands have also illustrated a standard reality of many island communities: transitioning to renewable energy cannot be done without the necessary support and partnerships. These partners include entities such as the United Nations Industrial Development Organization (UNIDO), and The Global Sustainable Energy Islands Initiative Consortium (GSEII). Additionally, the respective governments have themselves invested millions of dollars in testing, research, and carrying out pilot studies, and this willingness is indicative of the undeniable potential of a way to effectively address the issue of energy. However, an unfortunate reality is that a barrier to effective transitioning and financing is that potential projects are often lacking clear objectives and implementation strategies. This will be further explored in the section “The Challenges of Financing Renewable Energy Projects.”

A joint project carried out by ECLAC and the German Development Agency GIZ, identified the following major fiscal considerations for islands transitioning to renewable energy sources:

  • Energy balance forecasting and goals financing
  • Interests of donors, funders and sponsors
  • Identification of intermediary entities
  • Identification of financing lines of entities that offer financing
  • Documentation and formalisation

Policy Considerations for Renewable Energy

Table I. Energy Challenges in the Caribbean.

Energy poverty is defines as a lack of access to modern energy services. These services are defines as household access to electricity and clean cooking facilities (IEA). The CARICOM Energy Policy was approved during the XLI Special Meeting of the Council for Trade and Economic Development on Energy held on 1 March 2013 in Trinidad and Tobado.
Source: Caricom 2013.

The table above illustrates some of the aspects that must be considered when putting effective policies in place, and therefore creating more financially viable renewable energy projects in the Caribbean, and, by extension, other island communities in the developing world.

It can be seen from the above table that policies that are conducive to securing renewable financing must be created on the basis of multi-stakeholder involvement. These cross-sectoral policies require important public-private sector collaboration, and seek to positively impact market failures such as non-competitive markets, and lack of consistent data. These issues affect nearly all energy consumption sectors, and The International Energy Agency (IEA) recommends the following actions:

  • Promote the collection of reliable, timely and detailed data on energy end uses and market technologies
  • Regularly update strategies and policies based on up-to-date evidence
  • Minimize market distortions caused by subsidies and other disincentives to energy efficiency and renewable energy
  • Facilitate private investments in energy efficiency

Additionally, during the regional conference “Energy Efficiency Policies for Latin America and the Caribbean” held in 2014 by IEA, in collaboration with ECLAC, other recommendations were made to create policies that would complement renewable energy financing, namely, strengthening local expertise and capacity, strengthening coordination and planning between Ministries, improving the quality and availability of data, and identifying the most suitable financing mechanisms for energy efficiency. These latter recommendations are indeed relevant to all island communities, irrespective of the region.

Financing Renewable Energy Projects in Island Economies

The Global Environment Facility (GEF) provides insights into relevant aspects of funding small-scale renewable projects, and is in fact one of the largest providers of such funding. Some of the insights that are particularly relevant to island communities include:Facilitating Small Businesses – In rural and island communities there needs to be a particular emphasis on effective business planning, consistent project management and access to finance and consumer credit. The GEF designed a financing mechanism called the Photovoltaic Market Transformation Initiative (PVMTI), to support selected photovoltaic business models and provide them with a combination of technical assistance and loan financing, as well as providing guarantees and equity.

Contingent Loans and Grants – One of the major issues to bear in mind regarding the financing of renewable energy projects is the financial risk involved. The private sector is unwilling to invest because of this, however, if the public sector shares the risk, there is a greater degree of willingness. Contingent loans can be created to lessen the risk of the investment as well as offset the costs of project development. A contingent loan has a similar interest rate and payment schedule for a traditional loan, but the crucial difference is that the loan would be forgiven if certain conditions are met.

Supporting Project Development Costs – Financial mechanisms can help to provide the necessary capital to support up-front costs for renewable energy project development, and therefore mitigate the financial risks associated with early stage development activities. These loans are contingently reimbursable, and the repayment is linked to financial closure.

Helping Banks Understand Renewables – Projects can be put in place to work with commercial banks to structure financial mechanisms, and provide information in relation to the advantages of renewable energy investments. This helps to increase the ability of banks to comprehensively assess the risks of energy projects. This improved risk assessment capability facilitates the willingness of the financial sector to lend in the field of renewable energy.

The Challenges of Financing Renewable Energy Projects

The major challenges of renewable energy financing include issues with regulatory frameworks and policies, the presence of informal institutions, costs associated with financing, and small market size.

Regulatory frameworks can be problematic because many electrical utilities, especially in the Caribbean region, are monopolies in electricity generation, transmission and distribution. Furthermore, they have not implemented net-metering or feed-in-tariffs, which would encourage independent power producers (IPP). Additionally, there can be application processes that lack transparency. The accompanying lack of expertise is a significant obstacle, as this leads to unclear implementation activities, as well as unsound monitoring and reporting. These deficiencies in project development make it difficult to obtain consistent funding, and leads to gaps in data. Linked to these gaps are the price distortions arising from fossil fuel subsidies, which decreases the incentives to switch to cleaner energy sources.

Informal institutions present a challenge because of the deep traditional ties to conventional energy sources. This is seen in Trinidad and Tobago, where a significant level of export revenue is generated from exporting fossil fuels.

The high initial cost of financing is a barrier that exists both at the utility and at the private sector levels, and is most challenging where conventional energy systems are already in place. Unfortunately, many financial institutions in island communities do not provide the region adequate financial products for investments in renewable energy, and this results in excessive reliance on financing vehicles from international developmental agencies. In order to mitigate this, some island territories have organised loans, tax exemptions and other measures to incentivize widespread use of residential renewable energy technologies.

Finally, an important barrier is the small market size and low energy demand of some island territories, particularly SIDS. More information about financing renewable energy projects is available here.

Success Stories: Case Studies of Santo Antão and Madagascar

A renewable energy project in Monte Trigo, Santo Antão, has changed the lives of its 270 residents. Previously, in this fishing village, there was limited access to electricity from a diesel generator, which was very difficult to maintain. This created a stark sense of vulnerability, exacerbated by isolation, lack of reliable transportation infrastructure and the high poverty rate. A micro solar photovoltaic power plant was constructed with co-financing between the 75% European Union (Energy Facility) and the municipality of Porto Novo, and it currently supplies 39,3 kWp for 24 hours a day to 75 houses and institutions. The level of sustainability is seen by the fact that the excess energy produced in the photovoltaic power plant is used by fishermen for refrigeration purposes. Monte Trigo is the only 100% green village in Cabo Verde, and there has been a significant boost to the quality of life.

In 2011, the electrification rate in rural Madagascar was just 5%. Traditional sources of energy were costly, as well as being harmful to the environment. A pilot project was carried out, and funded by the collaboration between the European Commission, the French Ministry of Ecology, Sustainable Development and Energy, Madagascar’s Ministry of Energy, and the private entity Electricité de France. This project facilitated the construction of two wind turbines connected to a local grid distribution, and a total of 78 individual solar photovoltaic systems, and, as a result, 5,000 inhabitants of this island community now benefit from the improved quality of social and economic services, and approximately 20 micro-businesses now have access to electricity.

These case studies illustrate that renewable energy financing is indeed a worthwhile endeavour that serves to facilitate the implementation of SDG #7, affordable and clean energy. The collaborative funding power of public-private sector partnerships is deeply beneficial, and will create a more sustainable future.

Call to Action

Register for the 2022 Island Innovation Island Finance Forum to explore exciting and insightful solutions to the challenges mentioned above. The Island Finance Forum brings together senior financiers, development partners and regulators to share and exchange expertise on sustainable and inclusive financial structures in island communities. The Forum aims to highlight the unique financial challenges faced by global island communities and the solutions for sustainable economic recovery and inclusive growth in a post-pandemic world.

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