Investors haven’t exactly jumped on the pacific islands because it has traditionally been difficult for them to assess the credit risks associated with the investments. But that could soon change.
The Islands Precarious Predicament:
The islands comprise of 15 per cent of the Earth’s surface. Given their precarious economies and limited resources, those living in the Pacific Islands look for ways to produce and distribute renewable energy that is economically feasible and environmentally friendly.
Many Pacific Island governments face limited public resources that are unable to finance the development of modern renewable facilities. When public financing is strained or lacking, the private sector will often step in and fill the gap, and this is being done in many countries around Asia. But the Pacific has substantial obstacles to adapting this approach and the need for Pacific Islands to receive funding is critical.
Government Owned Power Facilities:
In the Pacific, the government owns power utilities, so they rely on public financing. This means that there is a limited history of private sector borrowing, which makes it difficult for investors and their lenders to know their credit risk in these power investments.
Even though there are a few utilities that are in the process of being corporatized to encourage private sector financing, the process is limited at best.
Weaknesses in Purchase Agreements:
Power purchase agreements are used to define long-term agreements between sellers and buyers of an energy resource. In the Pacific islands, this relationship has often been inequitable because they do not share the same risk equity.
This means that the lenders are less inclined to provide long term financing for private sector power projects. Additionally, there are also uncertainties about the political risks and whether there will be foreign currency availability, particularly in the smaller nations.
Traditional solutions to these challenges have been to offer government guarantees to private investors so that there is less payment risk from utilities. This is helpful because it means that private companies can focus on the provisions related to the services and look into the efficiencies of operating the utility or plants. In the Pacific, however, many governments aren’t able to provide crucial guarantees to the investors.
In many cases, guarantees are regarded as obligations towards the country’s national debt. Mandated debt caps that do not allow them to take on additional obligations limit some countries. Other countries have small energy markets that prohibit the transaction costs for establishing a guarantee product. These nations are essentially being denied one of the most powerful tools for developing a healthy energy sector.
Asian Development Bank:
The Asian Development Bank is working on a new initiative called the Pacific Renewable Energy Program that will use grant funds from donors in order to attract private sector investors to fun projects in the Pacific.
Governments will not provide a guarantee, but instead, they will provide a letter of credit for up to two years to absorb liquidity risks and to improve credit risks of renewable power projects. This will ensure that there are no added nation debts.
The program has received support from donors that provide grants to Pacific nations, and could generate a myriad of positive developments – both short and long term.
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