Barriers and Risks to Renewable Energy Financing

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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.

Barriers for RE in the Steps Towards Financial Closure. Source: Lindlein, P. & Mostert, W., 2005. Financing Renewable Energies - Instruments, Strategies, Practice Approaches, KfW.

At a broad macro-economic level, barriers to RE investment can be categorised as follows:

• 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.

Technological Differences

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.

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 risk* (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’** 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.
Notes: * The probability of success in achieving (economically acceptable) minimum levels in thermal water production (minimum flow rates) and reservoir temperatures. **Stimulation technology attempts to improve natural productivity or to recover lost productivity from geothermal wells through various techniques including chemical and explosive stimulation.

Source:

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.

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.

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 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.

Further Information

• Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds