Overcoming Barriers to Private Sector Investment in Clean Technology

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Smart renewable energy policy could be used to overcome barriers to private sector investment in clean energy in order to secure additional sources of financing.

This was suggested during the session on the Role of the Private Sector in promoting Green Technology at the sixth African Economic Conference in Addis Ababa.

Tom Nagle, from the Washington-based World Resources Centre, cited World Bank data indicating that an annual expenditure of US$41 billion was required to meet the surpassed demand and keep pace with economic growth through conventional grid-tied thermal generation and large scale hydropower, US$29 billion more than the amount currently spent through all avenues. According to the International Energy Agency, Africa would need an additional US$19 billion per year to achieve universal electrification through grid, mini-grid and off-grid technologies through 2030.

While private sector investment could be source of the additional financing, it faces a number of barriers, according to Nagle. The high cost of debt financing from investors requires returns commensurate with the perceived level of risk in developing renewable energy in developing countries. The perception of risk and the cost of finance for project developers, Nagle said, are high because of the inexperience with the technology as well as risks from foreign exchange and political concerns.

The availability of viable projects in the investment pipeline is also limited and, last of three barriers, is the regulatory uncertainty from policy changes that publicly provided incentives may dry up.

“Investors require transparency, longevity and certainty,” Nagle said. “Political risk of expropriation, nationalization or national default is the ultimate risk for capital intensive fixed investment.”

Nagle pointed out that among the things that could be done to encourage private sector investment are political commitment to meet clean energy targets, such as South Africa’s Integrated Resource Plan going up to 2030, independent and transparent regulation, and designing generation based incentives, such as Kenya’s, Tanzania’s and south Africa’s Feed-in Tariff programme.

“Africa can benefit from private sector involvement in closing its infrastructure investment gap,” Nagle said. He explained that providing incentives to investments in green technologies are most successful when they come with a complete package of enabling policy environments that are transparent and provide long-term certainty, economic incentives and preferential financing mechanisms.

The African Development Bank’s private sector wndow is leveraging Africa’s green growth in projects implementation with a USD 2.2 billion budget for its 2010-2012 funding of which 40% of the amount will finance renewable energy projects.