The Likely Impact of Basel III on a Bank's Appetite for Renewable Energy Financing

Abstract

The new Basel III regulations are likely to make long-term financing more expensive, which will affect the financing of capital-intensive renewable energy technologies, because they typically rely on long-term financing. In addition, the capital and liquidity requirements of Basel III are likely to limit the amount of capital available for renewable energy financing from banks in the future. Together, these are threats to renewable energy deployment because limited financing may prevent the financing of some projects and because more expensive loans are likely to make a number of projects uninteresting financially. A potential solution is proposed here, which requires financing capital-intensive energy projects, pooling these investments into a portfolio and selling down the portfolio in tranches to various types of investors. The benefit of this solution for banks is that it will allow them to maintain the financing of capital intensive renewable energy projects, while complying more easily with Basel III.