Derisking Renewables

Derisking Renewables

Countries are setting ambitious targets for clean energy. 

How can governments catalyse investment in cleaner transportation?

By Marcel Alers, United Nations Development Programme (UNDP)

Around the world, countries are setting ambitious targets for clean energy. Asian countries are at the very centre of these developments, taking the lead in sectors across the clean energy spectrum, from large-scale renewable energy deployment to cutting-edge solutions for sustainable urban transport. With the increasing level of urbanization, especially in Asia, the need for more sustainable transport options becomes more urgent. Inducing modal shifts, away from personal vehicle based transport to more use of public transit, improved urban planning and traffic demand management are emerging trends. Combined with increasing fuel efficiency standards for cars, reducing dependence on fossil fuels by increased use of hybrid technology and electric vehicles and greening the grid with an increasing share of electricity production coming from renewable sources, we can see the outline of a strategy towards a more sustainable future.

The financial sums involved in this shift to a clean energy future are enormous. According to the Global Energy Assessment, global investment needs in clean energy will increase to between USD 1.7–2.2 trillion per year over the coming decades, compared with current levels of about USD 1.3 trillion per year.

If this is to be achieved, it is clear that private sector investment must be at the forefront. In principle, the global capital markets, which McKinsey estimates amount to some USD 212 trillion in financial assets, have the size and depth to step up to the investment challenge.

Governments are actively putting in place a variety of public instruments to attract private sector investment in clean energy. However, these public instruments can come at a cost - to industry, to consumers or to the tax-payer. Policymakers face the challenge of designing public interventions which can most cost-effectively catalyse investment.

UNDP is supporting governments in many developing countries in this endeavour. A recent UNDP report, Derisking Renewable Energy Investment, makes the case that a key opportunity for policymakers acting today is to seek to reduce the high financing costs for renewable energy in many developing countries.

While technology costs for renewable energy have experienced remarkable decreases over the past decades, private sector investors in developing countries still often face high financing costs. These high financing costs reflect a range of investment risks that exist in early-stage renewable energy markets, encompassing technical, regulatory, financial and/or informational barriers to investment.

Given renewable energy’s high upfront investment costs, high financing costs can dramatically impact the competitiveness of renewable energy. UNDP’s report shows that upfront investment costs can amount to around 80% of the lifetime technology costs for wind power generation, but only around 15% in the case of gas power generation (where fuel and operational costs predominate). As project developers need to put in place financing to cover these high upfront investment costs, the end result is that high financing costs put renewable energy at a strong disadvantage to fossil-fuel based power generation. 

Policymakers can help by implementing public derisking measures, addressing the underlying investment risks that result in higher financing costs. An example is reducing the risks around permits by introducing a streamlined, one-stop-shop government agency. Another example is creating a loan-guarantee fund to address constraints within the local financial sector. With lower risk, financing costs come down, and renewably energy becomes more competitive.

An important finding of UNDP’s report is that investing in derisking measures appears to be cost-effective for governments when measured against paying direct financial incentives to compensate investors for higher risks. By reducing and managing investment risks - for example, those associated with renewable energy power markets, permits, and transmission – governments can change the fundamental risk reward trade-off that energy investors face in a given country.

There are many different ways to promote clean energy, and the path each country takes will depend on its specific national context, goals and resource endowments. Nonetheless, the opportunity to derisk investments holds particular promise to transform clean energy markets in developing countries. 

About the author:

Marcel Alers is the Global Head of the Energy, Infrastructure, Technology and Transport team at UNDP. Marcel manages UNDP’s portfolio of market transformation projects in clean energy funded by the Global Environment Facility (GEF). This portfolio currently totals over 150 active projects, representing over USD 500m in GEF funding and USD 4.2bn in related co-financing.

For more information on the Derisking Renewable Energy Investment report referred to in this article, please visit www.undp.org/DREI

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