Report -3

Barriers to Commercializing Solar
Energy Technologies

There is no one basic project finance strategy for Solar energy projects. Solar energy projects vary considerably in scale, capacity, energy resource characteristics, sale of output, status of technology and a host of other factors. As a consequence, financial strategies require innovation and flexibility to overcome a range of barriers specific to solar energy projects. Some of the major financing barriers include:

High Capital to O&M Cost Ratio
Solar energy systems tend to have little or no fuel, operation and maintenance (O&M) costs but their initial unit capital costs tend to be much higher than fossil generation systems. The higher ratios of capital cost to O&M cost are significant because they indicate that renewable energy projects carry a disproportionately heavy initial burden that must be financed and amortized over the life of the project. Additionally, the initial high capital cost of renewable energy projects is a barrier to project financing.

High Project Development to Investment Cost Ratio
The ratio of project development costs to project investment is also higher for Solar energy projects. This is due to the nature of solar energy projects, which are often dispersed, small in scale and lack established infrastructure to assist in project development. Legal, regulatory and engineering transaction costs are also generally higher, more complex and do not benefit from the economies of scale common to large conventional projects.

Small Total Investment Requirements
Solar energy projects are generally smaller in scale and therefore require smaller total investments. As a consequence many commercial banks, utilities and established independent power producers (IPPs) are not interested in pursuing these smaller investments. The time and resources they must spend to undertake .due diligence. are high, as are the perceived risks.

Weak Basis for Non-Recourse Financing
Small, independent and newly established Solar energy project developers often lack the institutional track record and financial inputs necessary to secure non-recourse project financing.

Inaccurate Perception of Risk
Many Solar energy technologies are newly commercial and are, subsequently, not widely known among project financiers. Moreover, information about solar energy systems is not readily available and accessible to potential investors, although this is changing rapidly with greater Internet access. The reality is that many solar energy technologies are rapidly making commercial inroads in the marketplace.

Weak Project Developers
On a global scale, solar energy projects tend to be developed by smaller entities with weak financial positions. They are frequently unable to leverage the financial resources needed and as a result are unable to attract equity investors or secure debt financing.