Risk mitigation and transfer for renewable energy investments

The report examines how the perception of risk increases the cost of capital, thereby hindering renewable energy deployment in developing countries, particularly in Sub-Saharan Africa. It details the project development process from a developer's viewpoint, categorizes various investment risks, and analyzes RMT instruments—divided into policy and financial de-risking—designed to make projects financially viable by reducing the Weighted Average Cost of Capital (WACC) and increasing Net Present Value (NPV).

• The cost of capital is a primary barrier to renewable energy in developing countries because these projects are highly capital intensive, meaning the initial investment dominates lifetime costs. Consequently, a higher Weighted Average Cost of Capital (WACC) leads to a disproportionately higher Levelized Cost of Electricity (LCOE) compared to fuel-based technologies.
• Developing countries face higher costs of capital due to perceived systematic risks, including weaker legal institutions, unstable exchange rates, and less developed financial markets. This creates a 'climate investment trap' where high capital costs reduce investment, which in turn exacerbates climate problems and further increases the cost of capital.
• From a developer's perspective, investment selection relies on the Net Present Value (NPV) rule, where a project is only selected if NPV > 0. Because the discount rate (often the WACC) is a key variable in the NPV calculation, higher perceived risk directly lowers the NPV, potentially rendering a project non-viable.
• Renewable energy investments in Sub-Saharan Africa (SSA) are particularly constrained by the scarcity of trustworthy offtakers and interconnection issues. While the region has abundant resources, it received less than 1.5% of global renewable energy investments between 2000 and 2020.
• Investment risks for renewable energy are categorized into several types, with counterparty risk (failure of the offtaker to pay) and grid/transmission risk being especially salient in SSA due to the poor financial health of national utilities and limited grid capacity.
• Risk Mitigation and Transfer (RMT) is divided into policy de-risking and financial de-risking. Policy de-risking aims to reduce the probability of adverse events through reforms (e.g., utility reform, streamlined permitting), while financial de-risking transfers the consequences of adverse events to a third party, typically a Development Finance Institution (DFI).
• Various financial RMT instruments are used to attract investment: Sovereign guarantees provide government backing but are increasingly difficult to obtain due to high public debt; Political Risk Insurance (PRI) covers events like expropriation and breach of contract; and project-based guarantees (like PRG and PCG) from the World Bank Group provide payment cover and act as a deterrent against harmful government actions.
• Currency mismatch—where equipment and financing are in hard currency (HCY) but revenues are in local currency (LCY)—is a major risk in SSA. This is often mitigated by setting Power Purchase Agreement (PPA) terms in HCY but payable in LCY, effectively transferring the risk to the utility.
• Evidence from case studies indicates that RMT instruments can significantly lower electricity tariffs and enable large-scale investments. For example, in a Ugandan hydropower project, the use of PRG and PRI reduced the potential cost of negative scenarios by 70%.

APA

Duma, D., & Cabré, M. M. (2023). Risk mitigation and transfer for renewable energy investments. Stockholm Environment Institute. https://www.sei.org/wp-content/uploads/2023/08/risk-mitigation-transfer-investments.pdf

Chicago

Duma, Daniel, and Miquel Muñoz Cabré. Risk mitigation and transfer for renewable energy investments. Stockholm Environment Institute, 2023. https://www.sei.org/wp-content/uploads/2023/08/risk-mitigation-transfer-investments.pdf.

Wikipedia

{{cite report |last1=Duma |first1=Daniel |last2=Cabré |first2=Miquel Muñoz |title=Risk mitigation and transfer for renewable energy investments |publisher=Stockholm Environment Institute |date=September 2023 |url=https://www.sei.org/wp-content/uploads/2023/08/risk-mitigation-transfer-investments.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{duma2023risk, author = {Duma, Daniel and Cabré, Miquel Muñoz}, title = {{Risk mitigation and transfer for renewable energy investments}}, institution = {Stockholm Environment Institute}, year = {2023}, month = sep, url = {https://www.sei.org/wp-content/uploads/2023/08/risk-mitigation-transfer-investments.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }