Financing the Alternative: Renewable Energy in Developing and Transition Countries

Abstract

This paper examines the determinants of credit allocation to renewable energy firms in developing and transition countries. Using a simple endogenous growth model, we show that the development of the renewable energy sector, i.e. the diversification of renewable energy resources used in primary energy production, depends on the quality of financial intermediation, debtor information costs to banks, and financing needs of renewable energy firms. Policies should aim at increasing financial sector performance through better institutional frameworks and improving financing conditions for new energy firms. The empirical analysis confirms the positive effect of financial intermediary development on the renewable energy sector.

Keywords: Financial intermediation, banks, renewable energy, economic growth

JEL Classification: Q42, G10, O41