Derisking Renewable Energy Investments in Developing Countries – A Means to Attract Private Capital and Reduce Abatement Costs

June 25, 2013 - 12:00pm - 1:00pm
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Authors: O. Waissbein (UNDP), Y. Glemarec (UNDP), H. Bayraktar (UNDP, consultant), T.S. Schmidt (presenting, ETH Zurich)

Abstract: Around the world, developing countries are seeking to rapidly scale-up renewable energy investment. While renewable energy potentials are often favorable in developing countries, they remain mostly untapped. The reasons lay not just in higher technology cost of renewables, but in the challenges in securing long-term affordable finance. This is the case as - contrary to fossil fuel-based technologies - investment cost and their financing are the primary cost driver for electricity generated from renewable sources. Due to a number of perceived or actual behavioral, technical, regulatory, financial or administrative barriers and associated investment risks in developing countries, financing costs (e.g., the terms of debt) are significantly higher in developing countries. Reducing the financing costs and improving access to long-term affordable finance is therefore an important lever in leveraging investments in renewable energy technologies. In order to lower financing cost, the UNDP proposes to address the risks in the investment environment by means of public de-risking instruments.

Public derisking measures can broadly be divided into two groups: - Policy derisking instruments seek to remove the underlying barriers that are the root causes of risks. As the name implies, these instruments utilize policy and programmatic interventions to mitigate risk and include. - Financial derisking instruments do not seek to directly address the underlying barriers, but instead transfer the risks that investors face to public actors, such as development banks.

The objective of this report is to provide guidance for policymakers in selecting and quantifying the impact of public instruments in promoting investment in renewable energy. To this end, the UNDP team developed a framework to estimate the effects of risks and de-risking measures on the financing costs of renewable energies in a bottom-up techno-economic model and apply it to on-shore wind energy in four exemplary countries: Kenya, Mongolia, Panama, and South Africa. The modeling results show that the effects of public de-risking instruments by far outweigh their costs (especially in the case of policy derisking instruments). This indicates that de-risking can be a very effective and efficient lever to reduce the cost of renewable energy technologies and attract large scale private investment into these technologies in developing countries.

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