Environmental Finance - Research Paper Example

Environmental finance [Insert Course and Unit Name] [Insert Institution] [Insert Date] Introduction Energy is an indispensable part of modern living, with entities going to great lengths to obtain energy. Electricity generation and use is a part of human lives and can be generated naturally for instance using solar or wind, hydro generation, nuclear or from fossil fuels. The method used to generate electricity depends on logistics and availability with each different method having its pros and cons. Flinders Island uses diesel generation, which is generally quite costly and causes emissions from the burning of fossil fuels. Its location on the Bass straits positions it on a fairly sufficient wind belt from which electricity can be generated using wind turbines. For a population of 800, they will need approximately 3 MW of energy from wind and such a project needs substantial capital financing to get of the ground. Various financing methods exist, from bank loans, joint ventures to public financing. This paper will review a suitable financing method for Flinders Island to establish a wind power project and any existing incentives from the Tasmanian federal government that the residents can take advantage. It will also evaluate other financing models that are innovative and make a conclusion afterwards. Literature review A great opportunity exists for the Flinders Island people to generate cheap and clean electricity from wind power, considering their location since fossil fuel generation has high fixed operating costs and renewable wind energy can help reduce these costs. In such a project, the Flinders Island people will benefit a great deal from reduced electricity costs while overall, the environment is kept clean with no emissions from burning fossil fuels. The project will also benefit the government by reducing subsidy expenditures for diesel electricity generation. However, investments in renewable energy systems have inherently high upfront costs in acquiring equipment and installations1. A funding method that takes into account the high initial costs and long term benefits to the community is therefore necessary to get the project up and running at an overall lower costs. Overall, lower costs imply low interest repayments and installments which is structured to facilitate the project to pay for itself. Taking advantage of available tax credits, incentives, or grants from the federal and local authorities will help fund and offset a substantial amount of the required initial investment. Since the government does not pay taxes, purchasing such equipment could cost them more, so a public private partnership becomes and ideal solution1. Public private partnerships apart from bringing social benefits like community development and income generation also ensure proper monitoring of the projects’ results and helps in capacity building2A public-private partnership means that the project is funded by the private entity but with incentives from the federal government used to reduce the overall cost. The two then sign an agreement where the private entity owns the equipment for a period say five years, so the private entity enjoys all the tax benefits while the people through the local government enjoy lower energy costs and everyone benefits from a cleaner environment. This system will allow the government of Tasmania to purchase electricity from the private partner at lower costs. The residents of Flinders Island then enjoy low energy costs, while not being engaged in capital sourcing and everyday management of the wind energy facility (the Federal government). Taking advantage of incentives like grants and tax cuts or breaks will also lower the total costs for the private partner. The private partner will also enjoy guaranteed market for its electricity by signing a power purchase agreement with the Tasmanian government and after the agreed period in which the private partner owns and maintains the equipment; ownership reverts to the government. By this time, it is envisaged that the private partner will have recovered their investment and made decent profits on its investment. The government also will be able to supply low cost clean electricity at very low initial investment and gain ownership of the project after a certain period, while being able to run the project from proceeds of selling low cost clean energy. In the end this model benefits all since the government spend s very little in terms of upfront costs, the private partner is assured of their returns, the people get cheaper electricity and the environment benefits a great deal. Private public partnerships have several advantages over traditional funding methods for public projects. They allow for quick, cost effective, and efficient undertaking and completion of projects since the private partner could be a firm with vast experience in such types of projects. Taking a green energy funding company as a private partner will bring the flavor of experience, technical knowhow and the bulk of the initial investment funds, as well as management for the first few years where they own the wind energy facility. Taxpayers get value for money since the risk of the investment is optimally transferred and professionally managed. Taxpayers money is used minimally to undertake the project, transferring the risk to the private partner thereby minimizing their risk. All projects have inherent risks and transferring risks is an optimal way to manage risks. Such partnerships bring benefit since synergy is created when public authorities collaborate with companies in the private sector especially with the cross transfer expertise, skill, and knowhow between the private and public sectors. Such a partnership removes constraints to capacity in the overall economy since higher labor and capital resource productivity is achieved in undertaking the project. The capital resources come mainly from the private sector and not from the public coffers. Private public partnerships enjoy better service delivery quality and accountability for the same since regulation s and performance regimes are driven by incentives. Partnering with a private company helps in creating greater diversity and innovation in public services provision while ensuring state assets are effectively utilized for the benefit of the wider community and public service users. Since a tender or offers of invitation are likely made by the state government, the ensuing completion and partnership applications by the private sector will ensure the best qualified firms become partners, passing on the quality to the undertaking of a project intended to benefit the public3. The Tasmanian federal government has incentives for environmental projects relating to clean energy production, in particular for areas in the Bass straits. These incentives are directed reducing the use of diesel power in electric generation; lower the emission of green house gases in the Bass straits Islands. The projects are also aimed at lowering energy costs for the area residents and businesses as well as lower costs borne by Tasmanian taxpayers; and to encourage the adoption and undertaking of small to medium scale renewable energy projects for a wider application. For firms to qualify for grants from the Tasmanian state government, they must fulfill certain requirements. The grant is administered and run by the Energy Conservation and Planning office (OEPC) that falls within DIER (Department of infrastructure, energy, and resources) of Tasmania. The Tasmania federal government offers various incentives to encourage power generation projects within the Bass straits. The Tasmania federal government is running a project; Renewable Energy Fund- King and Flinders Islands in which grants are available to interested and qualifying entities. The program is aimed at reducing costs of generating energy within Bass Straits Islands, lower carbon emissions and lower costs of the State’s power bill subsidies. This is to be achieved through starting renewable energy projects and reducing energy wastage and currently run a $ 100 000 grant for qualifying firms in the first round of grants. It has also set aside $ 30 million loan scheme for renewable energy projects aimed at businesses so they can better use renewable energy sources. The scheme will offer viable renewable energy projects low interest loans of up to 70 % of the renewable energy generation project and grants covering up to 10 percent of the projects’ total value, with a ceiling of $ 100 000 per project. The entities applying for these loans are required to fulfill terms as the federal government set out and provide at least 20 percent of the projects’ required funding4. Other incentives target small-scale power producers including domestic entities, which are meant to encourage energy efficiency and small-scale power generation. Under this scheme, the Tasmanian federal government provides rebates to homes that achieve energy efficiency under the Efficient Homes initiative. The federal government also encourages households to use renewable energy systems like using solar for water heating in a bid to conserve energy. Towards this end, the government has set aside a $ 350 000 to the local councils of Flinders and King Islands in the Bass Straits, to improve energy efficiency and reduce their costs of energy. This will be achieved by ensuring the Islands residents make use of all government programs for renewable energy production for instance the Green Start and Green loans programs. The government is also encouraging use of solar for water heating and feed-in programs where excess generated power in fed into the national grid and rebates provided5. The Bass Straits renewable energy project is run by Hydro Tasmania, a company that has entered into a contract with the Tasmanian federal government to provide customers residing on the Bass Straits with concessional electricity provision. The federal Tasmanian government supports this concessionary electricity supply agreement with a boost of $ 7 million yearly as funding support6. This initiative included the other aforementioned ones can be improved through incorporating multinationals under a private public partnership in which the government provides tax concessions, waivers, and other incentives like tax holidays for the interested company. The private company then sources for funding for the project, runs the project for an agreed period during which it will act as the owner of the renewable power generation infrastructure. After this period when the private partner has achieved its financial targets, the government takes over ownership of the facility. The facility should run itself with low power tariffs to consumers. The government can provide a further incentive by underwriting any loans the private partner may take for the projects’ purpose. Conclusion Renewable energy is a suitable solution to diesel electricity generation on the Bass Straits Island, as it will provide cheaper and clean energy, help in environmental conservation, reduce taxpayer money expenditure through state government subsidies, and improve the local economy. Such projects need a huge initial capital outlay and the best way to go about is through private public partnerships (PPP) where the government invites interested parties to develop the power generation facility; the private partner funds the project and runs it for a given time period say ten years as its owner. After this period when it is assumed the private partner has achieved its financial goals for the project, ownership reverts to the government, which now runs the facility. The Tasmanian government provides grants to interested qualified renewable power producers, rebates to energy efficient homes and funds the Bass Straits Islands concessionary electricity supply to residents to the tune of $ 7 million yearly. Reference List Department of infrastructure, energy, and resources, Energy Conservation and Planning office (2009). Energy policy statement Retrieved from Department of infrastructure, energy, and resources website: http://www.dier.tas.gov.au/__data/assets/pdf_file/0005/47246/Energy_Policy_Statement.pdf Energy Matters Pty Ltd. “Renewable Energy News” (2011, April 30). Tasmania's new solar incentive for business Retrieved from http://www.energymatters.com.au/index.php? main_ page=news_article&article_id=1468 (Accessed April 14 2012). Hydro-Electric Corporation. Powering the bass strait islands. (2012). Retrieved from http://www.hydro.com.au/energy/bass-strait-islands (accessed 15 April 2012). OECD, Environmental finance intergovernmental transfers for environmental infrastructure, Paris, France: OECD, 2006 P. 61-72 Peterson, L, "Public-Private Partnerships Can Help Finance Renewable Energy Projects." October 18 2010, http://www.renewableenergyworld.com/rea/news/article/2010/10/public-private-partnerships-can-help-finance-renewable-energy-projects (Accessed April 14 2012). United nations, An integrated approach to rural development: dialogues at the economic and social council, New York: United nations, 2005 p.103 Read More