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This report is the second in the financing mechanisms series of SEF Alliance studies, each of which looks in-depth at a specific type of public finance instrument used for building clean energy markets. This study examines the experience of public finance agencies and relevant lessons learned. The main intended audiences are programme designers and implementers, as well as programme strategists and policymakers.
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a SEF Alliance publication
SEF Alliance Publications
About this Report
Acknowledgements
Contents
List of Charts and Tables
Abbreviations and Acronyms
INTRODUCTION
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EXECUTIVE SUMMARY
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1 PBGs IN THE FINANCE CONTINUUM FOR RE & EE
1.1 Typology of ‘Transformational Technologies’
1.2 PBGs in the Finance Continuum for the Introduction of New
Technologies
1.2.1
1.2.2
1.2.3
1.2.4
1.3 Prevalence of PBG Use in EE & RE Support Programs
2 ECONOMIC RATIONALE FOR USE OF GUARANTEES
2.1 The Market for Commercial Risk Management Instruments
2.1.1
8 Source: Study by Kleimeier and Megginson quoted in Seidmann (2005).
2.1.2
9 As example to illustrate numeral orders of magnitude: For a 10-year loan and a given risk-free rate of interest,
the value of the guarantee is 3.7 percent of the value of the new investment when the standard deviation of asset
values is 0.15, rising to 35.4 percent when the standard deviation is 0.35. 10
Source: Seidman (2005). Bland and Yu estimated the cost of borrowing minus the guarantee fee for 445
insured and 694 uninsured bonds offered in 1985 and found the net gain to be positive and inversely related to
credit ratings. 11
Basel II qualifies most guarantee societies as guarantors if their guarantee product is in line with the regulatory
requirements.
2.2 Justification for Publicly Backed Guarantees
2.2.1
2.2.2
2.2.3
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2.2.4
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2.2.5
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2.3 PBGs for the Transformation of the Financial Sector
2.3.1
2.3.2
2.3.3
2.4 Institutional Economics: Information Function of PG Agencies
3 TYPOLOGY OF PUBLICLY BACKED GUARANTEES
3.1 Credit Guarantees
3.1.1
3.1.2
3.1.3
3.1.4
3.2 Formulas for Risk Sharing
3.2.1
3.2.2
3.2.3
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3.3 Counter Guarantees
3.4 Capital Market Guarantees
3.4.1
3.4.2
3.5 Risk Guarantees
3.6 Near-alternatives to Guarantees
3.6.1
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3.6.2
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3.7 Complementary Instruments to Guarantees
3.7.1
A
3.8.1
3.8.2
4 PBGs FOR BUSINESS FINANCE IN HIGH-TECH SMEs
4.1 PBGs for High-tech Entrepreneurial Start-ups
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4.2 PBGs for Risk Capital Investments in High-tech SMEs
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4.3 PBGs for Loans to High-tech Start-ups
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4.4 SME Performance Guarantees to Open Markets for SMEs
5 PBGs FOR PROJECT FINANCE
5.1 PBGs for Innovative Projects with Above-average Risks
5.1.1
5.1.2
5.1.3
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5.2 PBGs for RE-facilitating Infrastructure Investments
5.2.1
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5.2.2
5.2.3
5.2.4
5.2.5
5.3 PBGs for Investments in Small-scale Grid-connected RE
6 PBGs FOR INVESTMENTS IN END-USER RE & EE
6.1 Cost of Capital for End-user Investments in RE & EE
6.2 Market Aggregation and Loan Standardization Strategies
6.2.1
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6.2.2
6.2.3
6.3 PBGs for Individual Household Investments in EE and RE
6.3.1
6.3.2
6.3.3
6.4 Private Industry Investments in EE & RE
6.4.1
6.4.2
7 PBGs IN DEVELOPING COUNTRIES
7.1 Specific Challenges in Developing Countries
7.1.1
7.1.2
7.2 Guarantees to Promote Technology Transfer through DFI
7.2.1
7.2.2
7.2.3
7.2.4
7.3 PBGs for Business and Asset Finance in Developing and
Emerging Countries
7.3.1
7.3.2
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For more information, please see http://eandco.org/
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7.3.3
7.3.4
7.4 Matching Loan Tenor with RE & EE Revenues in Project
Finance
7.5 Are PBGs Successful in Changing Ingrained Lending
Practices?
8 STRUCTURING PBG PROGRAMS
8.1 Criteria and Success Indicators for Use of Guarantees
8.1.1
8.1.2
8.1.3
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8.2 Leveraging Ratios: Some Basic Issues
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8.3 Guarantee Pricing
8.3.1
8.3.2
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8.3.3
8.3.4
8.4 Funding and Public Budget Accounting of PBGs
8.4.1
8.4.2
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8.4.3
8.5 Developing EE/RE Finance Guarantee Programs: Topics and
Steps for SEF Alliance Members to Consider
8.5.1
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8.5.2
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8.5.3
8.5.4
8.5.5
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8.5.6
8.5.7
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8.5.8
8.5.9
ANNEXES
Annex I: References
Annex II: Typical Guarantee Structure & Terms
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Annex III: US DOE Loan Guarantee Program
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105
Commercial Technology means a technology in general use in the commercial marketplace in the United
States at the time the Term Sheet is issued by DOE. A technology is in general use if it has been installed in and
is being used in three or more commercial projects in the United States in the same general application as in the
proposed project, and has been in operation in each such commercial project for a period of at least five years.
The five year period shall be measured, for each project, starting on the in service date of the project or facility
employing that particular technology. For purposes of this section, commercial projects include projects that
have been the recipients of a loan guarantee from DOE under this part. 106
Definition of leading edge biofuels from new law Section 1705: “Leading edge biofuel projects that will use
technologies performing at the pilot or demonstration scale that the Secretary determines are likely to become
commercial technologies and will produce transportation fuels that substantially reduce life-cycle greenhouse gas
emissions compared to other transportation fuels.” Example potential project from current 1705 renewable
energy Solicitation: Commercialization of Advanced Design Bio-Refineries for Multi-Feedstock Processing into
Biofuels.
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This summary is based on discussion with Richard Corrigan, Senior Advisor to the US DOE, contact
information for whom is provided below. Any and all mistakes are the responsibility of the author. 108
Excerpted from the “Financing Alternative Energy: Development Finance Organizations (DFOs) as Deal
Origination & Risk-Sharing Partners in DOE’s Loan Guarantee Program – Section 1705 FIPP” power point
presented by Thomas H Cochran & Steven Klein, Advisors to US DOE, November 13, 2009. 109
Ibid.
110
All projects must undergo a National Environmental Policy Act (NEPA) review, a federal mandated review
that assesses environmental impacts of projects supported by federal funding. NEPA review is estimated to
extend the typical project development phase an additional year. This poses difficulties for the Section 1705
projects, funded by the Recovery Act, with construction start deadlines of September 30, 2011. 111
Excerpted from the “Financing Alternative Energy: Development Finance Organizations (DFOs) as Deal
Origination & Risk-Sharing Partners in DOE’s Loan Guarantee Program – Section 1705 FIPP” power point
presented by Thomas H Cochran & Steven Klein, Advisors to US DOE, November 13, 2009.
Annex IV: USDA Loan Guarantee Programs
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