Revision as of 08:54, 16 August 2013

Risks and Barriers to Renewable Energy Financing

Overview

There are a number of key risks and barriers that can threaten investment in renewable energy (RE) projects and thus prevent the uptake of desirable technologies.

Lindlein & Mostert (2005) have suggested that it is appropriate to group these barriers by the market categories supply, demand and framework conditions. From this view the most pervasive barriers to financing renewable energy from demand to supply are categorised as:

Demand side barriers due to the characteristics of RE projects and internal problems of RE project sponsors.
On thesupply side of RE finance there are several shortcomings in the financial sector especially in developing countries where there might be no supply at all.
Framework conditions for projects within the energy sector can include substantial burden and barriers for RE finance (Lindlein & Mostert, 2005).

At a broad macro-economic level, barriers to RE investment can be categorised as follows (United Nations Environment Programme (UNEP), 2004):

Cognitive Barriers. Theses relate to the low level of awareness, understanding and attention afforded to RE financing and risk management instruments particularly in low income countries.
Political Barriers. These are associated with regulatory and policy issues and governmental leadership.
Analytical Barriers: these relate to the quality and availability of information necessary for prudent underwriting, developing quantitative analytical methodologies for risk management instruments and creating useful pricing models for environmental markets such as carbon emissions permits.
Market Barriers: these are associated with lack of financial, legal and institutional frameworks to support the uptake of RE projects in different jurisdictions.

Technology Aspects

Different RE technologies have different degrees of exposure to the various barriers and risks due to their specifics and maturity.

The table below highlights some of the key risk issues affecting different RE technologies. Technology and operational risks are the principal deterrents to attracting appropriate commercial insurance cover (United Nations Environment Programme (UNEP), 2004).

Key Risks & Barriers Associated with RE Projects

RET Type

Key Risk Issues

Risk Management Considerations

Geothermal

• Drilling expense and associated risk (e.g.

blow out).

• Exploration risk8 (e.g. unexpected

temperature and flow rate).

• Critical component failures such as pump

breakdowns.

• Long lead times (e.g. planning permission).

Limited experience of operators and certain aspects of

technology in different locations.

Limited resource measurement data.

Planning approvals can be difficult.

‘Stimulation technology’9 is still unproven but can reduce

exploration risk.

Large PV

• Component breakdowns (e.g. shortcircuits).

• Weather damage.

• Theft/vandalism.

Performance guarantee available (e.g. up to 25 years).

Standard components, with easy substitution.

Maintenance can be neglected (especially in developing

countries).

Solar thermal

• Prototypical/technology risks as project

size increases and combines with other

RETs e.g. solar towers.

Good operating history and loss record (since 1984).

Maintenance can be neglected (especially in developing

countries).

Small hydropower

• Flooding.

• Seasonal/annual resource variability.

• Prolonged breakdowns due to offsite

monitoring (long response time) and lack

of spare parts.

Long-term proven technology with low operational risks

and maintenance expenses.

Wind power

• Long lead times and up-front costs

(e.g. planning permission and

construction costs).

• Critical component failures (e.g. gear

train/ box, bearings, blades etc).

• Wind resource variability.

• Offshore cable laying.

Make and model of turbines.

Manufacturing warranties from component suppliers.

Good wind resource data.

Loss control e.g. fire fighting can be difficult offshore due

to height/location.

Development of best practice procedures.

Biomass power

• Fuel supply availability/variability.

• Resource price variability.

• Environmental liabilities associated with

fuel handling and storage.

Long-term contracts can solve the resource problems.

Fuel handling costs.

Emission controls.

Biogas power

• Resource risk (e.g. reduction of gas

quantity and quality due to changes in

organic feedstock).

• Planning opposition associated with odour

problems.

Strict safety procedures are needed as are loss controls

such as fire fighting equipment and services.

High rate of wear and tear.

Tidal/wave power

• Survivability in harsh marine environments

(mooring systems etc).

• Various designs and concepts but with no

clear winner at present.

• Prototypical/technology risks.

• Small scale and long lead times.

Mostly prototypical and technology demonstration

projects.

Good resource measurement data.

8 The probability of success in achieving (economically acceptable) minimum levels in thermal water production (minimum flow rates) and

reservoir temperatures.

9 Stimulation technology attempts to improve natural productivity or to recover lost productivity from geothermal wells through various

techniques including chemical and explosive stimulation. (United Nations Environment Programme (UNEP), 2004)

Generally all large RET projects will require access to long term funding on a project finance basis, but their exposure to their barriers and risks will differ. Thus the need to obtain pre-investment financing and other project development processes will be more significant for hydro projects and less so for other technologies that do not have the same impacts on land use and on downstream communities (The World Bank, 2013).

Thus project sizes and transaction cost barriers are generally lower for wind and geothermal projects that can be developed on a greater scale than other technologies.

Geothermal and small hydro can be competitive with conventional technologies, and wind energy is also approaching competitiveness in some countries. However, solar technologies remain a long way from achieving cost competitiveness; therefore its affordability remains a key risk (The World Bank, 2013).

Resource uncertainties are also a problem for all technologies, though in differing ways:

Geothermal projects have the greatest risk at the time of resource appraisal, when the expensive drilling of exploratory wells is needed.
Biomass projects have a significant problem with the continuing availability of affordable and adequate resources.
Technologies dependent on carbon financing are likely to be more vulnerable to the resource uncertainty problem.

Off-Grid Projects

These projects face different problems from those on non-grid RET projects. Off-grid projects are generally reliant on sales of individual household or small scale systems to rural communities. Technical challenges may be limited but affordability and financeability are key.
The very small scale of such projects, down to the individual household level, means transaction costs can become an overwhelming barrier.
The lack of long term project financing is less of a barrier to such projects, due to their very small size, they typically rely on corporate finance or on customer purchases (The World Bank, 2013).

The figure below shows the significance of barriers and risks to different technologies, providing an indication of which barriers and risk are likely to pose the greatest challenges to developing RETs.

Technologies & Barriers and Risks

Financing Barriers

Project Risks

Lack of Long-term Financing

Lack of Project Financing

High & Uncertain Project Development Costs

Lack of Equity Finance

Small Scale of Projects

High Financial Cost

High Exposure to Regulatory Risk

Uncertainty Over Carbon Financing

High Costs of Resource Assessments

Uncertainty over Resource Adequacy

On-Grid

Wind

Hi

Med

Lo

Med

Lo

Med

Solar

Hi

Med

Lo

Med

Hi

Med

Lo

Med

Small Hydro

Hi

Med

Lo

Med

Lo

Med

Hi

Biomass

Hi

Med

Lo

Med

Lo

Hi

Geothermal

Med

Hi

Med

Lo

Med

Lo

Hi

Med

Off-Grid

Solar/Micro-hydro

Med

Lo

Med

Hi

Med

Lo

Med

Source: Adapted from The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds.

Note – Lo = Small/no impact (mitigation of risks is desirable.) Med = Moderate impact (mitigation of risks is less likely to be required.) Hi = Significant impact (mitigation of risks is generally necessary if the project is to proceed.

Financing Barriers

Risks of Renewable Energy Projects

Further Information

References

@@ Line 15: / Line 15: @@
 *'''Framework conditions''' for projects within the energy sector can include substantial burden and barriers for RE finance (Lindlein & Mostert, 2005).<span style="line-height: 1.5em; font-size: 0.85em;"></span>
+<br/>
 At a broad macro-economic level, barriers to RE investment can be categorised as follows (United Nations Environment Programme (UNEP), 2004):
@@ Line 29: / Line 29: @@
 Different RE technologies have different degrees of exposure to the various barriers and risks due to their specifics and maturity.<span style="line-height: 1.5em; font-size: 0.85em;"></span>
 The table below highlights some of the key risk issues affecting different RE technologies. Technology and operational risks are the principal deterrents to attracting appropriate commercial insurance cover (United Nations Environment Programme (UNEP), 2004).
 <br/>
@@ Line 52: / Line 52: @@
 Geothermal
+<br/>
 | style="width:189px;" |
@@ Line 86: / Line 86: @@
 Large PV
+<br/>
 | style="width:189px;" |
@@ Line 108: / Line 108: @@
 Solar thermal
+<br/>
 | style="width:189px;" |
@@ Line 128: / Line 128: @@
 Small hydropower
+<br/>
 | style="width:189px;" |
@@ Line 150: / Line 150: @@
 Wind power
+<br/>
 | style="width:189px;" |
@@ Line 184: / Line 184: @@
 Biomass power
+<br/>
 | style="width:189px;" |
@@ Line 206: / Line 206: @@
 Biogas power
+<br/>
 | style="width:189px;" |
@@ Line 260: / Line 260: @@
 techniques including chemical and explosive stimulation. (United Nations Environment Programme (UNEP), 2004)
+<br/>
 Generally all large RET projects will require access to long term funding on a project finance basis, but their exposure to their barriers and risks will differ. Thus the need to obtain pre-investment financing and other project development processes will be more significant for hydro projects and less so for other technologies that do not have the same impacts on land use and on downstream communities (The World Bank, 2013).<span style="line-height: 1.5em; font-size: 0.85em;"></span>
@@ Line 275: / Line 275: @@
 *Technologies dependent on carbon financing are likely to be more vulnerable to the resource uncertainty problem.
+<br/>
 <u>'''Off-Grid Projects'''</u>
@@ Line 282: / Line 282: @@
 *The lack of long term project financing is less of a barrier to such projects, due to their very small size, they typically rely on corporate finance or on customer purchases (The World Bank, 2013).
+<br/>
 The figure below shows the significance of barriers and risks to different technologies, providing an indication of which barriers and risk are likely to pose the greatest challenges to developing RETs.
@@ Line 288: / Line 288: @@
 <br/>
-{| border="0" cellspacing="0" cellpadding="0" width="100%" style="width: 100%;"
+{| border="0" cellspacing="0" cellpadding="0" style="width: 100%;"
 |-
 | colspan="2" style="width:13.22%;height:23px;" |
+<br/>
+| colspan="10" style="width: 86%; height: 23px; background-color: rgb(79, 129, 189);" | <p style="text-align: center;">'''Technologies & Barriers and Risks'''</p>
-| colspan="10" style="width:86.78%;height:23px;" |
-'''Technologies & Barriers and Risks'''
 |-
 | style="width:12.82%;height:19px;" |
+<br/>
+| colspan="6" style="width: 41%; height: 19px; background-color: rgb(141, 179, 226);" |
-| colspan="6" style="width:41.24%;height:19px;" |
 '''Financing Barriers'''
-| colspan="5" style="width:45.94%;height:19px;" |
+| colspan="6" style="width: 41%; height: 19px; background-color: rgb(141, 179, 226);" |
 '''Project Risks'''
 |-
 | style="width:12.82%;" |
+<br/>
+| colspan="2" style="width: 8%; background-color: rgb(219, 229, 241);" |
-| colspan="2" style="width:8.12%;" |
 '''Lack of Long-term Financing'''
-| style="width:8.16%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''Lack of Project Financing'''
-| style="width:10.6%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''High & Uncertain Project Development Costs'''
-| style="width:7.08%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''Lack of Equity Finance'''
-| style="width:7.3%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''Small Scale of Projects'''
-| style="width:7.74%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''High Financial Cost'''
-| style="width:9.0%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''High Exposure to Regulatory Risk'''
-| style="width:9.54%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''Uncertainty Over Carbon Financing'''
-| style="width:10.14%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''High Costs of Resource Assessments'''
-| style="width:9.52%;" |
+| style="width: 8%; background-color: rgb(219, 229, 241);" colspan="2" |
 '''Uncertainty over Resource Adequacy'''
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(141, 179, 226);" |
-'''On-Grid
+'''On-Grid'''
 | colspan="11" style="width:87.18%;" |
+<br/>
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(79, 129, 189);" |
 '''Wind'''
@@ Line 382: / Line 380: @@
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(79, 129, 189);" |
 '''Solar'''
@@ Line 416: / Line 414: @@
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(79, 129, 189);" |
 '''Small Hydro'''
@@ Line 450: / Line 448: @@
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(79, 129, 189);" |
 '''Biomass'''
@@ Line 484: / Line 482: @@
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(79, 129, 189);" |
 '''Geothermal'''
@@ Line 518: / Line 516: @@
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(141, 179, 226);" |
 '''Off-Grid'''
 | colspan="11" style="width:87.18%;" |
+<br/>
 |-
-| style="width:12.82%;" |
+| style="width: 12%; background-color: rgb(79, 129, 189);" |
 '''Solar/Micro-hydro'''

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Barriers and Risks to Renewable Energy Financing

Revision as of 08:54, 16 August 2013

Contents

Risks and Barriers to Renewable Energy Financing

Overview

Technology Aspects

Financing Barriers

Risks of Renewable Energy Projects

Further Information

References

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Barriers and Risks to Renewable Energy Financing

Revision as of 08:54, 16 August 2013

Contents

Risks and Barriers to Renewable Energy Financing

Overview

Technology Aspects

Financing Barriers

Risks of Renewable Energy Projects

Further Information

References