The renewable energy sector is rapidly growing with several innovations and opportunities geared at developing and implementing energy-efficient solutions. Present challenges around energy security, energy prices and sustainable living in the face of the climate crisis remind us of the need for energy-efficient projects. However, many innovations and strategies are waived due to differing market barriers. The lack of commercial finance for developing these projects is an example of such barriers. For this challenge to be mitigated, several funding schemes have been developed. One of such is the credit line facility.
A credit line is a resilient loan option financial institutions offer to individuals and corporate entities. It enables individuals to borrow money in increments, repay and borrow again on a revolving basis.
How Does Credit Line Work?
A credit line is a common financing model employed by international financial institutions (IFI) and governments to provide funds for local banks that provide debt financing for small investments. Usually, a donor (IFI or government) provides a low-interest or long-term loan to one or more financial institutions for a specified purpose (in this case – an energy efficiency project) or a target market (e.g. SMEs). The receiving financial institution then loans the funds to lenders that implement eligible investments at the market rate.
According to the World Bank, one significance of credit lines is that they provide a dedicated financing window for targeted investments, particularly in underdeveloped markets. While sub-borrowers (lenders) are often commercial enterprises, credit lines dedicated to energy efficiency have been used to support residential building projects (e.g., in apartment buildings). It could be lent through other intermediaries (e.g., ESCOs, equipment suppliers, leasing firms, and other banks) for eligible investments.
What organisations are presently employing this solution?
The World Bank is an excellent example of a donor organisation that has championed energy-efficient projects through credit line financing. To date, the bank has sponsored over twelve (12) projects through financing institutions, including the International Bank for Reconstruction and Development (IBRD) and Clean Technology Funds (CTF).
Locally, some credit line facilities are providing loans to meet the needs of renewable energy and energy-efficient project developers. An example is the Sustainable Use of Natural Resources and Energy Finance (SUNREF) Nigeria project. The project provides a credit line of USD 70 million for developing green energy projects. This facility recently announced a deal with the Lagos State Business School. In this deal, the school will receive the loan through Access Bank with a 9 per cent interest and an 8-year repayment period. The Lagos state business school plans to deploy a 350kW solar project.
Conclusively, credit line facilities are viable ways to ensure the development of projects while ensuring the elimination of financial risks. Furthermore, these facilities pave the way for easy and immediate access to finance in the short term while creating a revolving window for commercial financing in the medium to long term.