Development Finance Institutions (DFIs) play a crucial role in balancing risk and reward in financing energy storage projects by employing several key strategies:
Balancing Risk and Reward
- Sharing Risks with Private Investors:
- DFIs partner with private investors by sharing risks, which helps mitigate challenges associated with energy storage projects in emerging markets, particularly in developing economies.
- This approach enhances project viability through mechanisms like concessional loans and guarantees, making the projects more attractive to private investors.
- Enhancing Project Viability:
- DFIs use technical assistance and co-investment opportunities to improve the feasibility of energy storage projects.
- By providing sector-specific policy support, DFIs lay the groundwork for long-term transformative changes in these markets.
- Financial Instruments:
- DFIs predominantly use debt instruments, which account for over 90% of their financing. This approach helps manage risk and ensures financial sustainability for the projects they support.
- Grants and equity are also used, though to a lesser extent, mainly for projects that require specific development impacts.
- Mobilizing Private Capital:
- DFIs aim to mobilize private capital by demonstrating the viability of energy storage projects.
- However, currently, for every dollar disbursed by DFIs, only about 33 cents are mobilized from the private sector, highlighting the need to increase private sector participation.
- Sector Support:
- DFIs support the development of sector-level strategies, helping set ambitious targets and signal market commitment to the energy transition.
- They facilitate programs like competitive bidding for renewable energy projects, which are vital for attracting and securing investment.
Case Study: Climate Investment Funds
The Global Energy Storage Program (GESP), part of the Climate Investment Funds (CIF), is an example of how DFIs are supporting renewable energy storage in developing countries. GESP provides low-cost funding for breakthrough storage solutions, helping bring clean electricity to millions.
Challenges in Financing Energy Storage
Despite these efforts, several challenges persist, including financial risks due to novel technologies and the absence of secured financial models. Large-scale adoption of battery energy storage systems (BESS) requires low-risk/low-cost capital providers and established financial sector players. DFIs can help mitigate these risks by providing guarantees and improving project creditworthiness, facilitating broader private sector engagement.
In summary, DFIs balance risk and reward in financing energy storage projects by sharing risks with private investors, improving project viability, using tailored financial instruments, mobilizing private capital, and providing sector-level support.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-dfis-balance-risk-and-reward-in-financing-energy-storage-projects/
