Islamic finance and renewable energy: An innovative model for the sustainability of investments

Abstract

Due to the effects of the dramatic reduction of government incentives, investments in the field of PV electricity production decreased. It is necessary to rethink the funding techniques, extending the analysis also to the different cultural and financial models. In this paper, we will study the incentive-dependency of a ground-mounted PV system in order to reach the grid parity at the state-of-the-art of the Italian legislation, proposing an alternative financing tool available in Islamic Finance. We present the use of Sukuk, Islamic Finance instruments used for the realization of real assets in the Shari'ah-compliant Finance, that prohibits interest rates as in conventional financial markets. The cost of a PV power plant able to achieve grid parity was identified. Sukuk could limit the extent of leverage associated with financing. The minimum threshold of the fixed share that makes the investment profitable and bankable will be shown. Results evidenced the practical use of Shari'ah-compliant sukuk instruments to enhance processes of technological innovation in the energy production sector, and could provide the policy makers a quick glance about different financing instruments available for the renewables sector in the framework of the reduction of GHG emissions and the consequent negative effects of climate change.

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