Fiscal and financial incentives
Financial and fiscal incentives are used to improve access to capital, lower financing costs, reduce the burden of high upfront investments or production costs of RE projects, and address misalignment of incentives associated with energy-efficient technologies. They can be introduced in a variety of forms, such as tax incentives, capital subsidies, grants, performance-based incentives, concessional loans, guarantees and risk mitigation measures.
Fiscal (tax) incentives are typically offered in the form of reductions in sales, energy, value-added or other taxes or in the form of investment tax credits, production tax credits or accelerated depreciation.
Reduction in taxes reduce the cost of RE systems for the installer/generator and increase their affordability and profitability. These are the most widespread policy instruments globally as they can be applied to projects and installations of all sizes, and in areas that are not connected to the grid.
Production and investment tax credits can support large-scale deployment, mainly in the form of production tax credits based on actual energy produced and investment tax credits that address high upfront investment of a project. Therefore, production tax credits can be more effective in incentivising the maximisation of energy production.
Accelerated depreciation is an incentive that allows the owner of new assets to reduce taxable income by claiming a much larger than usual depreciation allowance in the early years of the RE assets’ operation.
Performance-based incentives are provided based on actual performance of an installed technology (e.g. cents per kWh payment). They are often provided by utilities and funded through utility customer payments.
Capital subsidies can be used to help create a level playing field with conventional energy technologies and reduce initial capital costs. They can be used to target very specific RE technologies as well as particular user segments or geographies. Capital subsidies are typically used in markets in the very early stages of deployment, after which they tend to be replaced by performance-based subsidies.
Grants are normally provided by local governments, development finance institutions or non-profit organisations to fund feasibility studies; research and development; system demonstration, installation and operation; pilot projects and business development. Through hybrid approaches, grants may also be combined with concessional loans to support RE and energy efficiency deployment.
Concessional loans are provided on favourable terms (below market price) with lower interest rates, longer maturities and longer grace periods compared to standard commercial market loans. These loans help to overcome such barriers as limited access to or shortage of financing, high cost of capital, unproven technology or business model, low creditworthiness of the customers, lack of awareness and technical implementation skills.
Risk mitigation measures aim to improve risk-return characteristics of a RE investments. Such measures may include guarantees (covering political, technology, credit risks), loss-sharing arrangements, local currency lending and hedging instruments, bankable project development and technical assistance. These de-risking instruments enhance financial returns and help attract private sector investors into RE projects.
Globally, financial and tax incentives are being implemented in over 130 countries. They are often applied in parallel with other regulatory and pricing policies.
