Risks in Energy Access Projects

Overview

Mini-grids and stand-alone systems play an important role when facilitating energy access in developing countries with improved technology. However there are potential risks to be considered in spite of the financing scheme applied and the type of technology. Painuly (2001) in Hazelton et al. (2015) states that unawareness and misinterpretation of risks (and benefits) are a major barrier for technology adoption.

Project preparation and de-risking approach

Not well-prepared projects reduce their chances of receiving funding and miss important opportunities, additionally governments usually do not invest in project preparation except if there is a chance of attracting funding. Among the key factors challenging properproject preparation, identified in a report about scaling-up finance for sustainable energy investments of SE4All, point to: 

1. Lack of adequate project preparation funding for all phases of preparation.
2. Lack of government capacity to prepare good quality projects.
3. Absence of institutional vehicle for project preparation.

Project preparation also requires a sound project structure to reduce uncertainities and allocate risks and reduce uncertainty. In many instances during the preparation teh focus is on different phases of the project cycle, rathen than on all, especially in the earlier stages.

An appropriate project preparation should include a range of activities and outputs across the entire project cycle, an example of a governmental project preparation is presented in the report SE4All report:

Project cycle phases	Processes	Detailed activities	Examples of required outputs
Early stage Concept development	Project identification and concept development	Sector planning, project identification and screening	Sector policy papers Project concept notes Prefeasibility reports
	Establishing the enabling environment	Identifying legal/ regulatory/ institutional and other impediments and rectifying them	Laws Regulations Allocation of responsibilities
Mid to late stage Feasibility, structuring and transacting	Due diligence	Detailed financial, legal, engineering, environmental and social appraisals	Reports that validate and develop concept further
	Project structuring	Detailed financial and legal structuring	Financial models Legal documentation
	Marketing	Promotion of the project and assessment of private sector interest	Detailed project description/ information memorandum Road shows/ conferences
	Transacting	Procuring and negotiating project documentation	Bid documentation Signed, negotiated project documentation

Risks and possible approaches for mitigation/ control

The following table summarizes some of the risks identified based on existing projects and lessons learned from the literature review. Though this article is open for further contributions.

Some of the risks listed may be context specific, some are looked at from the ‘owner’ point of view, while others from the investor perspective. Moreover, the listed risks may correspond to more than one of the categories, though the information has been arranged this order within six categories to facilitate an overview.

 

Technical risks
Risk	Risk description	Risk mitigation/ control mechanism
Load uncertainty	Poor estimation of load size, growth and schedule, could derive in under- or oversized systems. This can lead to increased investment/running cost, lower efficiency, and unreliable supply. Overestimated efficiency	Recommended to perform in-field power ratings. Use of design tools to estimate load. Consider modular designs. If possible, the design should include future expansion. Limit the initial generation capacity and increase it gradually as demand grows. Manage consumption according to the available capacity: load control or daily energy allowance. Include energy efficiency measures.
Power quality	Integrating PV and batteries, in retrofits on existing systems, may affect the stability of the grid due to incompatibilities and an ineffective control system.	Appropriate control strategy. Appropriate design simulation prior implementation. Consider distributed generation as it is less variable than centralized systems.
Equipment failure/ Downtime	Premature failure of hardware can not only cause service interruption but damage the entire system. In addition, despite existing warranties, these can be hard to fulfil due to the remoteness where they system is located.	Appropriate routine maintenance. Equipment should meet quality standards and be appropriate for the environmental conditions.
Hardware compatibility issues	Proprietary protocols could provoke incompatibility between components.	Use open based protocols. Choose single provider.
Limitation for continuous supply/storage	Batteries have a limited life-span and are vulnerable to be misused, this impacts on the energy balance and supply affecting the operation of generators (specific for hybrid systems).	Proper training. Manage operators and user’s expectations. Consider product selection. Planning/budgeting for spare parts, replacement.
Familiarity with the technology	Difficulty to operate and maintain, complexity of maintenance, limited knowledge on maintenance issues.	Continuous capacity building on technical aspects starting before implementation. Trained technicians should receive payment for their job as incentive.
Future connectivity	Interim solutions, such as mini-grids, would ideally be connected to the main grid if it becomes available, otherwise it becomes obsolete.	Design should consider the same standard as the central network
Supply and installation issues	Incorrect installation and operation of hardware, combined with the remoteness where the technology is installed.	Incorporate capacity development in the plan: proper training for local installers and operators. Hire reliable contractors for installation and certain elements of the operation. Rely on construction consultants to oversee project implementation and ensure that contractors comply with the expectations of the developers.
Building and testing	Property damage or third-party liability arising from mishaps during building or testing.
Institutional/ Organizational risks
Risk	Risk description	Risk mitigation/ control mechanism
Stakeholder management	Multiple parties involved whose activities, incentives, will not align between parties, causing negative outcomes.	Parties need to aware of their obligations and maintain a collaborative approach. Agreements to protect every actor equally.
Operational	Administration errors or fraud.	Simple standardisation like appropriate accounting and regular auditing. Establishment of internal rules and the standardisation of processes. Regular training for contentious improvement, operational efficiency and service delivery.
Geographical isolation	Difficulties to acquire spare parts and/or repair due to long distances, transportation challenges and lack of skilled personnel in the area.	Ensure local capacity building. Routine and preventive maintenance should be properly scheduled. Timely identification of the closest spare parts provider/s.
Geo-political risks
Risk	Risk description	Risk mitigation/ control mechanism
Change in public policy	Increase in taxes levied on technology or import and export duties. Subsidies affecting operation and/or profitability.	Political risks with high probability of occurrence may be hard to mitigate.
Political instability	Unrest, social conflicts, war.
Delays in approvals	Arbitrary actions of public authorities can affect the development of any energy access project.	Continuous involvement and consultation of local authorities during the development and implementation.
Arrival of the national grid	Investment’s payback and further cash flows could be in danger or threatened.	Continuous involvement and consultation of local authorities during the development and implementation.
Financial and economic risks
Risk	Risk description	Risk mitigation/ control mechanism
Commitment, competence and credit worthiness of investors	Large level of investment/ long tenor of return, may require additional equity later after project has begun.	Credit assessment. Verify the competence and/or knowledge regarding energy projects.
Inadequate business models	Effective business models are key for deployment and may need to be continuously revised to scale up.	Information about similar experiences. Seek for support to ensure capacity building and/or access to finance. Chose models that are practical and appropriate for the local context.
Diesel and cost supply	Although the use is reduced (hybrid systems), prices and availability impact the operation of the system.	Maximise other sources of generation. Develop time-of-use-tariffs to discourage use when diesel would be required.
Exchange rates/ Inflation	Foreign exchange rate changes due to devaluation, convertibility or transfer restrictions.	Borrow in local currency. Cross-currency swaps (if possible). Use hedging instruments (though this may be complex and expensive). Involve local investors.
Credit	Risk of default of counterparties or default on specific payments.	Good credit risk management.
Liquidity and refinancing	Liquidity risks arising from revenue shortfalls or mismatches between the timing of cash receipts and payments. At the same time borrowers might be unable to refinance an outstanding loan due to inadequate loan terms or the maturity of the loan is mismatched with the lifetime of the project.	Internal liquidity facilities to advance or support payments to bridge short-term cash flow problems (i.e.: debt service reserve accounts, excess spread accounts, over-collateralisation, contingent equity). External liquidity facilities provide a short-term letter of credit or credit line without additional cash requirements (i.e. Regional Liquidity Support Facility (RLSF) established in partnership between KfW, Africa Trade INsurance Agency and IRENA in sub-Saharan Africa). Liquidity guarantee to lenghten loans. Put options to refinance ensuring long-term lending for borrowers.
Social risks
Risk	Risk description	Risk mitigation/ control mechanism
Public resistance	Resistance of interest groups because statics, water supply, smell (biogas), etc.	Include the whole community throughout the development and operation of the project. Partnerships with local organizations can help to facilitate the relationship between developers and customers. Implementation of capacity building measures and dedicated promotion of productive use of energy could support establishing local support. Project should be well embedded in the socio-cultural context where is going to be built/ installed. Ensure public opinion, transparency and involvement of local capacities
Community/social integration	Over-consumption from one or few users can cause a black-out. Theft or users connecting loads beyond their quota.	Community engagement from the outset and follow up. Avoid top-down approach. Respect local organisational structures. Manage and follow up user expectations: users should be aware of the potential limitations. Enforce load control measures. Tariff system to prevent overconsumption. Proper education to discourage illegal connections: educate about the consequences or impact on the operation and performance of the system.
Appropriate pricing and payments	Rural customers usually have low incomes which is challenging when setting a price that is both sufficiently high to give returns and low enough to make it affordable.	Tariffs should be flexible and revisable Educate about consequences of non-payment such as supply cut-off or penalties. Uncomplicated bill setting and non-bureaucratic procedures for connection and consumption payment. Smart metering systems equipped with tamper protection or in combination with incentives for electricity use. Take into account possible inability to pay: income fluctuations and payment culture. Verify the satisfaction of users (to avoid unwillingness to pay).
Operators and end users’ safety	Risks of harm due to higher voltages and extensive wiring.	Provide appropriate training to operators and users. Design and installation according to international standards.
Theft and vandalism	Components or other valuable materials for which there is a secondary market, are in danger of being stolen	Secure perimeter. Develop sense of ownership within the local community.
Environmental	Harm to the environment caused by operating the technology may affect planning & permitting.	Environmental Impact Assessment (EIA).
Weather-related /availability	Risk of fall in volume of electricity produced owing to lack of wind, sunshine, water flow/low rainfall, biomass availability.	If possible obtain long term data to select site. Establish close relationship to local biomass supply by creating dependency: supplying the supplier (fertilizer, bargain electricity price)
Force majeure	Environmental disaster like severe storms, typhoons, sandstorms, volcanic eruption, earth quakes, mud slides, etc.

Tools to identify (financial) risks

Best practices

Policy recommendations

References