Difference between revisions of "Barriers and Risks to Renewable Energy Financing"

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The table below highlights some of the key risk issues affecting different RE technologies. Technology and operational risks are the principal deterrents to attracting appropriate commercial insurance cover (United Nations Environment Programme (UNEP), 2004).
 
The table below highlights some of the key risk issues affecting different RE technologies. Technology and operational risks are the principal deterrents to attracting appropriate commercial insurance cover (United Nations Environment Programme (UNEP), 2004).
  
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Drilling expense and associated risk (e.g.
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*Drilling expense and associated risk (e.g.<span style="line-height: 1.5em;">blow out).</span>
 
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*Exploration risk8 (e.g. unexpected t<span style="line-height: 1.5em;">emperature and flow rate).</span>
blow out).
+
*Critical component failures such as pump <span style="line-height: 1.5em;">breakdowns.</span>
 
+
*Long lead times (e.g. planning permission).
Exploration risk8 (e.g. unexpected
 
 
 
temperature and flow rate).
 
 
 
Critical component failures such as pump
 
 
 
breakdowns.
 
 
 
Long lead times (e.g. planning permission).
 
  
 
| style="width:189px;" |  
 
| style="width:189px;" |  
Limited experience of operators and certain aspects of
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*Limited experience of operators and certain aspects of<span style="line-height: 1.5em;">technology in different locations.</span>
 
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*Limited resource measurement data.
technology in different locations.
+
*Planning approvals can be difficult.
 
+
*‘Stimulation technology’9 is still unproven but can reduce <span style="line-height: 1.5em;">exploration risk.</span>
Limited resource measurement data.
 
 
 
Planning approvals can be difficult.
 
 
 
‘Stimulation technology’9 is still unproven but can reduce
 
 
 
exploration risk.
 
  
 
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Component breakdowns (e.g. shortcircuits).
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*Component breakdowns (e.g. shortcircuits).
 
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*Weather damage.
Weather damage.
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*Theft/vandalism.
 
 
Theft/vandalism.
 
  
 
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Performance guarantee available (e.g. up to 25 years).
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*Performance guarantee available (e.g. up to 25 years).
 
+
*Standard components, with easy substitution.
Standard components, with easy substitution.
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*Maintenance can be neglected (especially in developing <span style="line-height: 1.5em;">countries).</span>
 
 
Maintenance can be neglected (especially in developing
 
 
 
countries).
 
  
 
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Prototypical/technology risks as project
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*Prototypical/technology risks as project <span style="line-height: 1.5em;">size increases and combines with other</span>
 
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*RETs e.g. solar towers.
size increases and combines with other
 
 
 
RETs e.g. solar towers.
 
  
 
| style="width:189px;" |  
 
| style="width:189px;" |  
Good operating history and loss record (since 1984).
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*Good operating history and loss record (since 1984).
 
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*Maintenance can be neglected (especially in developing <span style="line-height: 1.5em;">countries).</span>
Maintenance can be neglected (especially in developing
 
 
 
countries).
 
  
 
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Flooding.
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*Flooding.
 
+
*Seasonal/annual resource variability.
Seasonal/annual resource variability.
+
*Prolonged breakdowns due to offsite <span style="line-height: 1.5em;">monitoring (long response time) and lack </span><span style="line-height: 1.5em;">of spare parts.</span>
 
 
Prolonged breakdowns due to offsite
 
 
 
monitoring (long response time) and lack
 
 
 
of spare parts.
 
  
 
| style="width:189px;" |  
 
| style="width:189px;" |  
Long-term proven technology with low operational risks
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*Long-term proven technology with low operational risks <span style="line-height: 1.5em;">and maintenance expenses.</span>
 
 
and maintenance expenses.
 
  
 
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Long lead times and up-front costs
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*Long lead times and up-front costs <span style="line-height: 1.5em;">(e.g. planning permission and </span><span style="line-height: 1.5em;">construction costs).</span>
 
+
*Critical component failures (e.g. gear <span style="line-height: 1.5em;">train/ box, bearings, blades etc).</span>
(e.g. planning permission and
+
*Wind resource variability.
 
+
*Offshore cable laying.
construction costs).
 
 
 
Critical component failures (e.g. gear
 
 
 
train/ box, bearings, blades etc).
 
 
 
Wind resource variability.
 
 
 
Offshore cable laying.
 
  
 
| style="width:189px;" |  
 
| style="width:189px;" |  
Make and model of turbines.
+
*Make and model of turbines.
 
+
*Manufacturing warranties from component suppliers.
Manufacturing warranties from component suppliers.
+
*Good wind resource data.
 
+
*Loss control e.g. fire fighting can be difficult offshore due <span style="line-height: 1.5em;">to height/location.</span>
Good wind resource data.
+
*Development of best practice procedures.
 
 
Loss control e.g. fire fighting can be difficult offshore due
 
 
 
to height/location.
 
 
 
Development of best practice procedures.
 
  
 
|-
 
|-
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| style="width:189px;" |  
 
| style="width:189px;" |  
Fuel supply availability/variability.
+
*Fuel supply availability/variability.
 
+
*Resource price variability.
Resource price variability.
+
*Environmental liabilities associated with <span style="line-height: 1.5em;">fuel handling and storage.</span>
 
 
Environmental liabilities associated with
 
 
 
fuel handling and storage.
 
  
 
| style="width:189px;" |  
 
| style="width:189px;" |  
Long-term contracts can solve the resource problems.
+
*Long-term contracts can solve the resource problems.
 
+
*Fuel handling costs.
Fuel handling costs.
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*Emission controls.
 
 
Emission controls.
 
  
 
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| style="width:189px;" |  
 
| style="width:189px;" |  
Resource risk (e.g. reduction of gas
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*Resource risk (e.g. reduction of gas <span style="line-height: 1.5em;">quantity and quality due to changes in </span><span style="line-height: 1.5em;">organic feedstock).</span>
 
+
*Planning opposition associated with odour <span style="line-height: 1.5em;">problems.</span>
quantity and quality due to changes in
 
 
 
organic feedstock).
 
 
 
Planning opposition associated with odour
 
 
 
problems.
 
  
 
| style="width:189px;" |  
 
| style="width:189px;" |  
Strict safety procedures are needed as are loss controls
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*Strict safety procedures are needed as are loss controls <span style="line-height: 1.5em;">such as fire fighting equipment and services.</span>
 
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*High rate of wear and tear.
such as fire fighting equipment and services.
 
 
 
High rate of wear and tear.
 
  
 
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| style="width:189px;" |  
 
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Survivability in harsh marine environments
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*Survivability in harsh marine environments <span style="line-height: 1.5em;">(mooring systems etc).</span>
 
+
*Various designs and concepts but with no <span style="line-height: 1.5em;">clear winner at present.</span>
(mooring systems etc).
+
*Prototypical/technology risks.
 
+
*Small scale and long lead times.
Various designs and concepts but with no
 
 
 
clear winner at present.
 
 
 
Prototypical/technology risks.
 
 
 
Small scale and long lead times.
 
  
 
| style="width:189px;" |  
 
| style="width:189px;" |  
Mostly prototypical and technology demonstration
+
*Mostly prototypical and technology demonstration <span style="line-height: 1.5em;">projects.</span>
 
+
*Good resource measurement data.
projects.
 
 
 
Good resource measurement data.
 
  
 
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Revision as of 09:24, 16 August 2013

► Back to Financing & Funding Portal

Risks and Barriers to Renewable Energy Financing

Overview

There are a number of key risks and barriers that can threaten investment in renewable energy (RE) projects and thus prevent the uptake of desirable technologies.

Lindlein & Mostert (2005) have suggested that it is appropriate to group these barriers by the market categories supply, demand and framework conditions. From this view the most pervasive barriers to financing renewable energy from demand to supply are categorised as:

  • Demand side barriers due to the characteristics of RE projects and internal problems of RE project sponsors.
  • On thesupply side of RE finance there are several shortcomings in the financial sector especially in developing countries where there might be no supply at all.
  • Framework conditions for projects within the energy sector can include substantial burden and barriers for RE finance (Lindlein & Mostert, 2005).


At a broad macro-economic level, barriers to RE investment can be categorised as follows (United Nations Environment Programme (UNEP), 2004):

  • Cognitive Barriers. Theses relate to the low level of awareness, understanding and attention afforded to RE financing and risk management instruments particularly in low income countries.
  • Political Barriers. These are associated with regulatory and policy issues and governmental leadership.
  • Analytical Barriers: these relate to the quality and availability of information necessary for prudent underwriting, developing quantitative analytical methodologies for risk management instruments and creating useful pricing models for environmental markets such as carbon emissions permits.
  • Market Barriers: these are associated with lack of financial, legal and institutional frameworks to support the uptake of RE projects in different jurisdictions.


Technology Aspects

Different RE technologies have different degrees of exposure to the various barriers and risks due to their specifics and maturity.

The table below highlights some of the key risk issues affecting different RE technologies. Technology and operational risks are the principal deterrents to attracting appropriate commercial insurance cover (United Nations Environment Programme (UNEP), 2004).

Key Risks & Barriers Associated with RE Projects

RET Type

Key Risk Issues

Risk Management Considerations

Geothermal


  • Drilling expense and associated risk (e.g.blow out).
  • Exploration risk8 (e.g. unexpected temperature and flow rate).
  • Critical component failures such as pump breakdowns.
  • Long lead times (e.g. planning permission).
  • Limited experience of operators and certain aspects oftechnology in different locations.
  • Limited resource measurement data.
  • Planning approvals can be difficult.
  • ‘Stimulation technology’9 is still unproven but can reduce exploration risk.

Large PV


  • Component breakdowns (e.g. shortcircuits).
  • Weather damage.
  • Theft/vandalism.
  • Performance guarantee available (e.g. up to 25 years).
  • Standard components, with easy substitution.
  • Maintenance can be neglected (especially in developing countries).

Solar thermal


  • Prototypical/technology risks as project size increases and combines with other
  • RETs e.g. solar towers.
  • Good operating history and loss record (since 1984).
  • Maintenance can be neglected (especially in developing countries).

Small hydropower


  • Flooding.
  • Seasonal/annual resource variability.
  • Prolonged breakdowns due to offsite monitoring (long response time) and lack of spare parts.
  • Long-term proven technology with low operational risks and maintenance expenses.

Wind power


  • Long lead times and up-front costs (e.g. planning permission and construction costs).
  • Critical component failures (e.g. gear train/ box, bearings, blades etc).
  • Wind resource variability.
  • Offshore cable laying.
  • Make and model of turbines.
  • Manufacturing warranties from component suppliers.
  • Good wind resource data.
  • Loss control e.g. fire fighting can be difficult offshore due to height/location.
  • Development of best practice procedures.

Biomass power


  • Fuel supply availability/variability.
  • Resource price variability.
  • Environmental liabilities associated with fuel handling and storage.
  • Long-term contracts can solve the resource problems.
  • Fuel handling costs.
  • Emission controls.

Biogas power


  • Resource risk (e.g. reduction of gas quantity and quality due to changes in organic feedstock).
  • Planning opposition associated with odour problems.
  • Strict safety procedures are needed as are loss controls such as fire fighting equipment and services.
  • High rate of wear and tear.

Tidal/wave power

  • Survivability in harsh marine environments (mooring systems etc).
  • Various designs and concepts but with no clear winner at present.
  • Prototypical/technology risks.
  • Small scale and long lead times.
  • Mostly prototypical and technology demonstration projects.
  • Good resource measurement data.

8 The probability of success in achieving (economically acceptable) minimum levels in thermal water production (minimum flow rates) and

reservoir temperatures.

9 Stimulation technology attempts to improve natural productivity or to recover lost productivity from geothermal wells through various

techniques including chemical and explosive stimulation. (United Nations Environment Programme (UNEP), 2004)


Generally all large RET projects will require access to long term funding on a project finance basis, but their exposure to their barriers and risks will differ. Thus the need to obtain pre-investment financing and other project development processes will be more significant for hydro projects and less so for other technologies that do not have the same impacts on land use and on downstream communities (The World Bank, 2013).

Thus project sizes and transaction cost barriers are generally lower for wind and geothermal projects that can be developed on a greater scale than other technologies.

Geothermal and small hydro can be competitive with conventional technologies, and wind energy is also approaching competitiveness in some countries. However, solar technologies remain a long way from achieving cost competitiveness; therefore its affordability remains a key risk (The World Bank, 2013).


Resource uncertainties are also a problem for all technologies, though in differing ways:

  • Geothermal projects have the greatest risk at the time of resource appraisal, when the expensive drilling of exploratory wells is needed.
  • Biomass projects have a significant problem with the continuing availability of affordable and adequate resources.
  • Technologies dependent on carbon financing are likely to be more vulnerable to the resource uncertainty problem.


Off-Grid Projects

  • These projects face different problems from those on non-grid RET projects. Off-grid projects are generally reliant on sales of individual household or small scale systems to rural communities. Technical challenges may be limited but affordability and financeability are key.
  • The very small scale of such projects, down to the individual household level, means transaction costs can become an overwhelming barrier.
  • The lack of long term project financing is less of a barrier to such projects, due to their very small size, they typically rely on corporate finance or on customer purchases (The World Bank, 2013).


The figure below shows the significance of barriers and risks to different technologies, providing an indication of which barriers and risk are likely to pose the greatest challenges to developing RETs.


Technologies & Barriers and Risks


Financing Barriers

Project Risks


Lack of Long-term Financing

Lack of Project Financing

High & Uncertain Project Development Costs

Lack of Equity Finance

Small Scale of Projects

High Financial Cost

High Exposure to Regulatory Risk

Uncertainty Over Carbon Financing

High Costs of Resource Assessments

Uncertainty over Resource Adequacy

On-Grid


Wind

Hi

Med

Lo

Lo

Lo

Med

Med

Med

Lo

Med

Solar

Hi

Med

Lo

Med

Med

Hi

Med

Med

Lo

Med

Small Hydro

Hi

Med

Med

Med

Lo

Lo

Med

Lo

Med

Hi

Biomass

Hi

Med

Lo

Lo

Med

Med

Med

Med

Lo

Hi

Geothermal

Med

Med

Hi

Med

Lo

Lo

Med

Lo

Hi

Med

Off-grid


Solar/Micro-hydro

Med

Lo

Med

Hi

Hi

Med

Lo

Lo

Lo

Med

Source: Adapted from The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds.

Note – Lo = Small/no impact (mitigation of risks is desirable.) Med = Moderate impact (mitigation of risks is less likely to be required.) Hi = Significant impact (mitigation of risks is generally necessary if the project is to proceed.


Financing Barriers


Risks of Renewable Energy Projects


Further Information


References