Risk Gaps: Policy Risk Instruments

The document examines policy risk—defined as unexpected government regulatory changes—and its impact on renewable energy investments. It analyzes existing tools like MIGA and OPIC political risk insurance and World Bank partial risk guarantees, while detailing a new OPIC FiT insurance product. The report concludes with recommendations for improving these instruments through standardization, expanded geographic scope, and better integration with credit rating agency methodologies to enhance project bankability.

• Policy risk is categorized into two types: prospective risk, which involves general regulatory uncertainty and instability, and retroactive risk, which consists of changes that adversely affect the financial stability of existing projects.
• Retroactive changes to Feed-in-Tariff (FiT) regimes are a primary concern for investors as they directly impact expected revenues and can compromise a project's ability to service debt.
• Traditional political risk insurance from MIGA and OPIC can cover policy changes only if they qualify as an expropriatory breach of rights, which creates uncertainty regarding claim approval and reimbursement timing, with payments often taking one to five years.
• The World Bank's partial risk guarantees mitigate specific government obligations but have seen limited adoption (23 times since inception) due to their complexity, high transaction costs, and the requirement for an indemnity agreement from the host government.
• The OPIC FiT insurance is a specialized instrument for US investors in developing economies that covers both total expropriation (investment losses) and partial expropriation (business income losses for one to two years) resulting from retroactive FiT reductions.
• Effective policy risk insurance requires strong enforcement powers, which public providers like MIGA and OPIC possess through ties to the World Bank and US Government, thereby reducing moral hazard by host countries.
• High transaction costs and complex negotiating processes currently limit risk mitigation instruments to large projects; the report suggests that standardized Power Purchase Agreements (PPAs) could reduce these costs and uncertainty.
• To unlock institutional finance, policy risk insurance must improve project creditworthiness as viewed by rating agencies, who currently prefer a "pay first, investigate later" approach over the current insurance models.

APA

Micale, V., Frisari, G., Hervé-Mignucci, M., & Mazza, F. (2013). Risk Gaps: Policy Risk Instruments. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2013/01/Risk-Gaps-Policy-Risk-Instruments.pdf

Chicago

Micale, Valerio, Gianleo Frisari, Morgan Hervé-Mignucci, and Federico Mazza. Risk Gaps: Policy Risk Instruments. Climate Policy Initiative, 2013. https://www.climatepolicyinitiative.org/wp-content/uploads/2013/01/Risk-Gaps-Policy-Risk-Instruments.pdf.

Wikipedia

{{cite report |last1=Micale |first1=Valerio |last2=Frisari |first2=Gianleo |last3=Hervé-Mignucci |first3=Morgan |last4=Mazza |first4=Federico |title=Risk Gaps: Policy Risk Instruments |publisher=Climate Policy Initiative |date=January 2013 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2013/01/Risk-Gaps-Policy-Risk-Instruments.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{micale2013risk, author = {Micale, Valerio and Frisari, Gianleo and Hervé-Mignucci, Morgan and Mazza, Federico}, title = {{Risk Gaps: Policy Risk Instruments}}, institution = {Climate Policy Initiative}, year = {2013}, month = jan, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2013/01/Risk-Gaps-Policy-Risk-Instruments.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }