# **2. Barriers to Clean Energy Investments**

## _Generic Investment Barriers_

One overarching challenge to attracting private investment in clean technologies is a strong and believable government commitment to changing the trajectory of carbon emissions. Investors also look for political and macroeconomic stability, an educated workforce, adequate infrastructure (transportation, communications, energy), a functioning bureaucracy, rule of law, and a strong financial sector (Cosbey (2008)). Investors also need ready markets for their products and services. If a country restricts foreign investment in its power sector, this will likely affect investments in renewable power generation as well.

General economic and trade openness is also important to clean technology investors, who may depend, like investors in many other sectors, on supply chains for goods and services that are globally dispersed. Enabling power producers to access goods and services rapidly, at world market prices, will have an impact on the costs of investment and ultimately on energy costs. A World Bank study (World Bank, 2008) suggests that liberalizing trade can significantly increase the diffusion of clean technologies in developing countries.

While liberalization policies may help in gaining access to international technology, the success of technology diffusion in general depends on a range of other enabling factors, particularly the capacity to absorb and improve technologies in the host countries. Trade facilitation measures that help speed up the movement of goods at customs will also favorably impact the clean energy sectors. The presence of sound policies and institutions to promote competition and curb anti-competitive practices, while beneficial to private investment in general, particularly benefit renewable energy investors, as access to networks and the degree of buying power exercised by utilities are important for grid-connected power. Annex I presents some of the key technical and economic drivers of and constraints to private sector investment in the solar, wind, biomass, and small hydro sectors, based on worldwide experience.

## _Clean Energy-specific Investment Barriers_

There are also a number of barriers specific to clean energy investment. These may include market conditions such as prices for electricity and fossil fuels, or the presence of carbon and energy-related taxes. Market failure both in the innovation as well as diffusion sides to development, deployment and diffusion have been well-documented (See for instance Mallett, Sheridan and Sorrell,S.(2010), Barton (2007) and Kofoed-Wiuff, Sandholt and Marcus-Møller,C (2006)). Countries with binding GHG emissions targets and norms may provide a more favorable and predictable investment environment for RE and EE, as both will be required to meet emissions-related targets, particularly in rapidly growing economies.

However, a recent World Bank study (Avato and Coony, 2009) suggests renewed efforts in this area may face significant barriers that impact the ability to develop and deploy promising clean energy options such as (a) uncertain future value of CO2 emissions abatement; (b) provision of a public good being hampered by free-riding across space—countries that free-ride on the mitigation efforts of others; (c) the ―Valley of Death,‖ phenomenon which occurs when promising technologies languish between public and private sector research, development and demonstration (RD&D) efforts in innovation; (d) intellectual property 3