Renewable energy needs a better financing model

A leading economist is warning that a better financing model is needed if the local renewable energy sector is to thrive.

However, addressing a risk management workshop on renewable energy, Dr Justin Robinson, dean of the Faculty of Social Sciences at the Cave Hill campus of the University of the West Indies, expressed concern that local commercial banks were still very risk averse when it came to lending for renewable energy projects.

He explained that many of the loans on offer were short-term loans with a seven-year maturity at seven per cent interest rate, which did not give investors an opportunity to recover their investments.

“So let’s say even though you may earn 20 per cent over the 20-year life of the equipment, for the first seven years your cash flow is negative. So that means that the only people who can really participate in that are people who have deep enough pockets that they can sustain themselves for the first seven years, which kind of rules out a lot of small investors,” he told the gathering at the Radisson Aquatica Resort on Tuesday.

The senior economics lecturer suggested that one of the ways in which financial institutions could better assist the industry would be to extend the loan period to 12 years at the same seven per cent interest rate.

This, he said, would allow investors “a positive cash flow from year one, which we think would make a big difference in terms of getting other people to invest”.

However, Robinson said in order to “get the bankers comfortable” with doing this, there would need to be “more certainty in the regulations”.

“So a fixed rate over the 20 years would also help the bankers get more comfortable with the risks [associated with the sector],” he said.

“I am also trying to advocate that maybe the credit unions could play a significant role there in facilitating this as an investment for a lot of small persons, because the structures we are proposing is for as little as $5,500, which gives you an income stream of about $7,500 a year over 20 years, which we see as a good, new investment for middle income and even low income persons to get into,” he added.

The economist said getting insurance for the sector was another “big issue” that needed to be “clarified”.

“If we are going to have a [solar] panel, what if a hurricane blows it down? So if a bank is going to lend, you need that [insurance] . . .  . So it is more about getting the nuts and bolts right,” he said, adding that last season’s devastating hurricanes were causing people to take “a better “ and “more positive look” at renewable energy systems.

Vice President of the Barbados Renewable Energy Association (BREA) Aidan Rogers said a proper risk assessment of the sector was necessary to give more certainty to financiers, investors and insurance providers.

“[Financiers] want to know that they can get back the money they loan to potential investors, and investors want to know that they can retain and achieve the returns that were calculated on their investment. A lot of this has to come with the strengthening of risk transfer modalities. This is where you see the necessary marriage between the insurance and financing industries,” he said, adding that the Fair Trading Commission (FTC) had a major role to play in this process.

“So the FTC in large measure would have to reflect on a lot of the specific market conditions here in terms of what are the likely costs of premiums for small scale, medium scale and large scale investments. Financiers would have to look to see that the FTC also provides tariffs that are competitive for them to get returns on the funds they loan to persons as well as investors to see that the returns are viable,” he explained.

Coming out of the workshop, which was organized by BREA, German development agency GIZ, and Munich Climate Insurance Initiative, stakeholders are hoping to develop a working model for financing and insurance of renewable energy systems, which they hope will help to attract more investment in the sector.


Credit: Marlon Madden, Barbados Today

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