Development of markets for, and large-scale use of, renewable energy products and technologies have been hindered by their high up-front capital costs; the renewable energy industry's inadequate access to credit; subsidies for fossil fuels; and low purchasing capacity among potential consumers. While conventional funding and financial instruments such as capital subsidies, donor grants, and tax rebates and similar fiscal incentives have been able to achieve a certain level of penetration, the large-scale use and commercialization of renewable energy products and technologies requires innovative approaches to the selection and delivery of financial instruments and mechanisms. This research note explores four instruments that are likely to be primary sources of finance for the development and commercialization of renewable energy technologies and products in the mid to long term: government finance; international funding (including the Clean Development Mechanism); private-sector finance (including financing through energy service companies); and micro-credit and community-based finance. The challenge of financing is addressed under a life-cycle approach, which looks at financing mechanisms for the phases of: (1) research and development; (2) demonstration; (3) early commercialization; and (4) demand-driven commercialization on two renewable energy sectors that are particularly relevant for developing countries: solar and wind power. Case studies from India are examined in each of the four categories of financing. Findings to date indicate that these four categories all play different roles at different stages of the life-cycle, not only individually, but also in combination. The research so far also shows that the roles of these four financing mechanisms are technology-specific.
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