2011 International Conference on Alternative Energy in Developing Countries and Emerging Economies
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development – a mechanism that directly connects
national energy policies to market place.
The importance of FIs in the development of
renewable energy industry
For the past two years, amid the most severe
financial crisis in the world history, leading
industrialized and emerging economies have spent
significant portions of their stimulus packages on
green investment, mainly involving renewable energy
industry. China has been the leader in clean stimulus
spending, pouring $221 billion for 2008-2009,
following by United States, South Korea, and the EU
amounting to $112 billion, $31 billion, and $23
billion, respectively [4]. Although these stimulus
packages aim to boost up economy through
developing, deploying, commercializing, and scaling
up renewable energy technologies, ultimate goals are
to secure energy resources, create new business
cluster, reduce energy importation, and mitigate
GHG emissions. In a global perspective, these public
finance schemes prove to be a good start for global
investment in fighting climate change.
With regards to the climate change issue, $45
trillion of investment is required by 2050, $12 trillion
by 2020, to reduce CO
2
Given the substantial role in solving global- and
national-level energy issues, we can further elaborate
the benefits of FIs’s private financing as the
following:
emissions by 50 percent
from 2005 levels (IEA, 2008). Clearly, given the
massive investment requirement, public finance
mechanisms alone could not help countries attain
their goals. Therefore, assuming a majority of
nations foresee the threats of climate change impacts,
private financing through FIs is crucial for IEA’s
investment requirement. After all, public finance
only helps to stimulate and mobilize private finance
in the development of renewable energy industry.
Enhance greater access to finance.
Core business
activities of FIs are to pool, mobilize and manage
capital for investors. Institutional (e.g. pension fund,
endowment fund, and insurance companies) and
individual investors who seek returns from their
excess capital have invested mainly through FIs. FIs,
experts in investment world, will act as agents to
maximize returns for their investors by choosing
investments with acceptable and desirable risk and
return profiles. Therefore, FIs are in an advantageous
position to access to a large pool of financial
resource. This pool of capital will be distributed to
potential deals where FIs see commercial
possibilities. With the demand of green investments
to solve energy and climate change issues globally,
FIs have allocated a significant portion of their
capital under management to the renewable energy
industry. Although FIs have faced reduced liquidity
and higher credit risk during this current economic
recession, new investments by the financial sector in
all renewable technologies reached $119 billion in
2008, 7 percent increase from 2007, probably one of
a few growth industries for the past two years.
Financial investment in sustainable energy in the
developing countries possessed strong growth by 27
percent on 2007, reaching $36.6 billion in 2008 [5].
Standardized deal approval process.
Approval
process is implemented to ensure that a deal has
commercial and scalable viabilities in the long-run. It
is important that high potential technologies are
financially supported by FIs from the beginning -
research and development stage. On the other hand,
if a technology is not feasible, this approval process
should be done early enough to prevent entrepreneurs
and investors from unprofitable investments. The
process includes initial review of risk and return,
industry analysis, project specific analysis, detailed
financial modeling and stress testing, initial approval
by team leader, and final review and approval by
investment or credit committees.
Experienced professional with commercial and
technical expertise.
Financial professionals gain
experience from reviewing and approving new
business ventures in other industries. With their
expertise in investment in new business development,
they could help investors who lack direct experience
and practical knowledge in renewable energy to
invest in their desired green technologies, stocks, and
companies. Considering technological aspect,
although technologies are varied from one industry to
another, crucial aspects of technology investment
(e.g. technology lifespan, scalability and capital
expenditure requirement) can be taken into account
when reviewing a new proposal. To a significant
degree, financial experts have capability to foresee
the potential of an investment proposal. For
renewable energy investment, it’s crucial that the
technologies are proven, and at the same time
commercially viable. Financial professionals’
expertise is therefore beneficial to entrepreneurs and
investors.
Risk mitigation expertise:
Based on their
experience, financial professionals learn how to
identify, mitigate and monitor risks inherited in new
investments. Typical risks for investment in
renewable energy include country risk, policy and
regulatory risk, financial risk (e.g. currency and
interest rate), technical and project specific risk
(construction, technological, environmental, and
operation and management risks), and market risks.
For example, in a hyperinflation economy,
experienced financial professionals could suggest
foreign investors to enter into a forward currency
