Bridging the clean energy financing gap (Part 1)

Announcements from multilateral and regional lenders of approved financing for clean and renewable energy projects are a regular occurrence, not so for smaller projects that many times must rely on funds closer to home that are harder to secure.

BNamericas spoke to Fernando Alvarado, director of the Climate Technology Initiative (CTI)-Private Financing Advisory Network (PFAN) partnership's Central America and Caribbean program, to learn how this initiative looks to support such projects being developed by SMEs.

This is this first part of a two-part interview.

BNamericas: What hurdles were identified in Central America and the Caribbean?

Alvarado: First, there is a certain gap or disconnect between the community that develops clean energy projects and financing sources. This gap is much more evident when one goes to the SME sector.

Large projects normally already have very identified financing sources and in addition, because they are large, are very visible as they originate from some government tender or private concession, or because they have had to pass socialization and environmental compliance stages.

On the other hand, in the niche where PFAN operates, small and medium undertakings almost always are developed without necessarily having established relationships to procure financing.

And when these projects are a bit more mature they begin to try to identify financing sources and it's very common that these developers are not so sophisticated and do not necessarily have the information of all financing sources that exist, and therefore go to traditional sources that already are saturated.

BNamericas: What are some examples?

Alvarado: For example, they turn to a local bank and that bank already filled its quota of financing for a specific sector; it doesn't have unlimited availability. Businesspeople then have to try to identify alternative sources that take time.

The luckier ones are able to close financing after a year or so while others probably will desist because the process is slow, expensive and complicated.

BNamericas: Is this something seen across countries in the sub-regions?

Alvarado: I believe the situation is common to the entire region and this is what PFAN tries to attack: to serve as a bridge between these two groups and address the shortcomings very characteristic of projects this size in terms of bankability.

It's common to see that the technical aspects are the best addressed but that maybe they do not address the part of financial and legal structuring; maybe they didn't pay enough attention to the socialization and environmental compliance aspects. It costs projects to be bankable because many lack a very robust business plan.

The majority of projects one finds have had a technical feasibility study from where they begin to procure financing, but many times this is not enough for different financiers to decide if they provide support.

This is the other component of PFAN: work to support entrepreneurs in development of their business plans, covering the cost of mentors that accompany the businesspeople in development of their business plans to guarantee that when they are complete the project is bankable in the eyes of local or regional banks as well as equity investors.

BNamericas: Do you share the opinion then, for example, that the Dominican Republic's banking sector lacks the awareness and preparation to finance renewables, as highlighted by the study, "Roadmap to a Sustainable Energy System: Harnessing the Dominican Republic's Wind and Solar Resources," drafted by the Worldwatch Institute's Climate and Energy Program?

Alvarado: Yes and no. It must be analyzed a bit further with respect to technologies because in the case of hydroelectric I believe there already exists today enough experience in the banking sector to understand these projects.

Before, years ago, maybe banks didn't participate because they didn't understand the technologies or were not familiar with the financial analysis for this type of project. Today this is not an unknown.