Risk mitigation and transfer for renewable energy investments: a conceptual review

This conceptual review by the Stockholm Environment Institute examines the role of risk and the cost of capital in utility-scale renewable energy investments, with a specific focus on Sub-Saharan Africa. It analyzes how risk mitigation and transfer (RMT) instruments can be used to lower the Weighted Average Cost of Capital (WACC) and improve the Net Present Value (NPV) of projects to attract private investment in developing countries.

• The cost of capital is significantly higher in developing countries due to higher perceived systematic risks, including political instability, weak legal institutions, and unstable exchange rates.
• Renewable energy projects are particularly sensitive to the cost of capital because they are highly capital intensive with most costs occurring during the initial investment phase, meaning a higher WACC disproportionately increases the Levelized Cost of Electricity (LCOE).
• In Sub-Saharan Africa, renewable energy investment has been historically low, representing less than 1.5% of the global total between 2000 and 2020, despite the region accounting for nearly 15% of the global population.
• Investment selection for renewable energy developers relies on the Net Present Value (NPV) rule; higher perceived risks increase the discount rate (WACC), which can lower the NPV and make a project no longer appear value-creating.
• Risks for renewable energy in Sub-Saharan Africa are categorized into several types, including counterparty risk (poor financial health of utilities), grid and transmission risk, political risk, and currency/macroeconomic risk caused by mismatches between hard currency financing and local currency revenues.
• Risk Mitigation and Transfer (RMT) is divided into policy de-risking, which aims to reduce the probability of adverse events (e.g., utility reform), and financial de-risking, which transfers the consequences of adverse events to a third party, typically a Development Finance Institution (DFI).
• Various RMT instruments are used to make projects viable, including sovereign guarantees, Political Risk Insurance (PRI), and project-based guarantees like Partial Risk Guarantees (PRG) and Partial Credit Guarantees (PCG).
• Liquidity support instruments, such as the Regional Liquidity Support Facility (RLSF) provided by the Africa Trade Insurance Agency and KfW, help projects reach financial close by covering several months of Power Purchase Agreement (PPA) payments.
• Evidence from case studies indicates that combining de-risking instruments can significantly reduce the cost of electricity and the potential cost of negative scenarios; for example, in a Ugandan hydropower project, PRG and PRI reduced the potential cost of negative scenarios by 70%.

APA

Stockholm Environment Institute (n.d.). Risk mitigation and transfer for renewable energy investments: a conceptual review. https://www.sei.org/wp-content/uploads/2023/08/risk-mitigation-transfer-investments.pdf

Chicago

Stockholm Environment Institute. Risk mitigation and transfer for renewable energy investments: a conceptual review. n.d. https://www.sei.org/wp-content/uploads/2023/08/risk-mitigation-transfer-investments.pdf.

Wikipedia

{{cite report |author=Stockholm Environment Institute |title=Risk mitigation and transfer for renewable energy investments: a conceptual review |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{stockholmenvironmentinstitutendrisk, author = {{Stockholm Environment Institute}}, title = {{Risk mitigation and transfer for renewable energy investments: a conceptual review}}, institution = {Stockholm Environment Institute}, 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} }