2011 International Conference on Alternative Energy in Developing Countries and Emerging Economies
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percent corporate income tax deduction
for the next 5 years (after 8 year period)
[13]. From 2002 to 2008, 27 projects
were supported under BOI promotion,
resulting in energy savings of $35
million per year. The leverage energy
efficiency investment reached $120
million.
In the foreseeable future, government plans to
increase the incentives to a deduction of 200 percent
of energy efficiency investment cost and will apply
installed performance based incentives into the
taxation system.
Renewable energy finance provided by financial
institutions: Private finance mechanisms
Financial institutions mainly provide two types of
financing solutions; loan (debt) and investment
(equity). Each type of service has different processes
and ways of considerations by lenders or investors. In
lending and investing activities, financial institutions
incorporate risk and return profile into the feasibility
analysis. The higher the risk bears by a project, the
greater the return for lenders or investors. Debt
investors (lenders) usually accept lower risk appetite,
and thus lower return, compared to equity investors.
This is mainly due to the level of participation of
business operations. To elaborate, lenders will gain
fixed return based on agreed interest rate (can be
fluctuate along with market rate, in case of floating
interest rate). They also possess priority call as
senior claimants over all assets when borrowers go
bankrupted. On the other hand, equity investors will
gain return based on operating performance of
companies they are investing. The upside return of
the profit is unlimited for these investors. However,
the downside loss can be limited under a “limited
liability company” where investors are responsible
only up to the money they invest in the company.
They also have last priority call over insolvent asset.
Therefore, in comparison, equity investment is
riskier, but higher return potential, than debt
investment. For some cases, mezzanine finance
(quasi-equity debt) is used by investors to balance the
risk and return profile.
Financial service institutions are categorized by
types of services they provide to financial and capital
markets. In this paper, we are exploring the roles of
major types of financial institutions; commercial
bank, private equity and venture capital firms, and
funds, on the development of renewable energy
technologies. Private financing from financial
institutions is unarguably crucial for the development
of renewable energy technologies. In Fig. 3., it
shows that private financing involves in a project
since its inception – research and development stage.
Sophie Justice (2009), a seasoned corporate finance
expert at RBS, also explained the role of private
finance as the following:
VC funding and production subsidies required to
develop a new RE technology through to the
point it can begin to demonstrate a track record
and attract second stage funding. This might be
through an Initial Public Offering (IPO) on a
stock exchange to raise equity from external
investors, as well as project finance debt from
banks, to enable further project build out. The
term, the ‘valley of death’ is often used during
the phase illustrated above which describes the
difficulties of accessing commercial finance
between the initial VC investment and
demonstration; or from demonstration to
commercial roll-out with secondary VC
investment. The diagram shows where public
grants or specific subsidies can be essential.
In its final stages of development where a
technology steps into ‘Proven Technology’, it is
then assumed to be fully commercial and to
compete with other forms of RE, when standard
grants, support or incentive mechanisms or other
subsidies will become available. Investors such
as private equity firms are likely to be attracted at
this point, although there are overlaps between
stages and financial institutions [14].
Further, she elaborates on different types of
financial institutions, investment types, and expected
risk and return profile in Table IV.
TABLE VI
F
IS
’
INVESTMENTS AND THEIR EXPECTED RETURNS
(J
USTICE
, 2009)
Banks’ financial solutions for renewable energy
technologies
Corporate lending:
Banks provide loans to
companies to support operations, long-term
investments in assets and refinancing. To approve
loans, banks assess the company’s financial health
and stability, ability to service debt, and quality of
collateral. Financing cost, interest rate, will be
calculated based on the aforementioned assessment
accordingly. Usually, banks will define covenants –
usually focus on ability to pay off the debt - for the
company to comply throughout the loan tenure.
