Financial barriers, including lenders wary of what they believe are higher risks in the Caribbean, are hindering renewable energy deployment in the region.
That is the view of Susana Lopez, managing director of financial instruments at RELP, a philanthropy-backed non-profit organisation aimed at scaling up cheaper and faster renewable energy deployment in developing countries.
She thinks the answer to this challenge is using blended finance, which is public or philanthropic monies combined with private sector investment, and innovative derisking instruments to overcome this challenge.
Guarantees, including those provided by governments, was another option suggested.
Lopez was speaking last week during a joint CARICOM-RELP webinar on Innovative Financing And De-risking Mechanisms To Improve Renewable Energy Projects’ Bankability, where she examined the challenges impacting the affordability of funding to undertake renewable energy projects.
She said there are compelling reasons why the region should focus on renewable energy adoption, including the key challenges of high fuel import exposure, market fragmentation, and limited public funding.
However, one major hurdle she flagged was the high cost of funding. Lopez said this was more about perceived risks rather than technology.
Her recommendation was to use blended finance and innovative derisking instruments, for example a regional liquidity support guarantee, to make Caribbean markets less fragmented and attract private capital.
The ultimate aim would be reducing the electricity costs paid by consumers.
In outlining the cost of financing for renewable projects challenge, Lopez said: “You take an identical onshore wind project with the same turbines, the same construction costs, the same operating costs, and you build it in a developed market, and then you build the same project in a developing market.
“Well, according to UNDP, the financing cost in a developing market comes around 40 per cent higher than in a developed country. Why? Well, the reason is the cost of capital.
“Lenders . . . charge between five per cent [interest in developed economies], give or take, against ten per cent in developing economies. The hardware cost is the same. The only difference is the price of the risk, and because renewables are almost all up from capital, the cost of finance is the single biggest driver on the final tariff.”
She added: “So, if we want cheaper electricity for Caribbean households and businesses, the lever that we have to press is not the technology, it is removing, mitigating, or transferring that . . . perceived risk that is priced into the cost of capital.”
Lopez reiterated: “The Caribbean doesn’t have a technology problem or an economics project problem. It is a risk pricing problem, and that is a problem that we have to solve together. It’s more efficient to do it together than to do it separately.”
(SC)