Derisking renewable energy investments

A step-by-step guide to mitigating investment risks through effective policy and finance instruments

Increasing electricity generation using renewable energy technologies such as biomass, geothermal, hydropower, solar and wind will be essential to providing affordable, reliable, and sustainable energy access to all people worldwide and achieving the seventh of the United Nations Sustainable Development Goals (SDG 7). Scaling up renewables will also be critical for climate change mitigation and adaptation, to meet the goals of the Paris Agreement on climate change as well as the SDGs (in particular SDG 13). Many renewable energy technologies now represent cost-efficient alternatives to fossil fuels and nuclear energy and have seen record growth rates in recent years. Still, to further advance the energy transformation and achieve the goals of the Paris Agreement and the SDGs, public and private investment in the renewable energy sector will need to grow to at least double the current volume, from USD 310 billion to over USD 660 billion annually. However, too often, perceived or real risks delay or even prevent new investments in renewables at the required scale.

What is DREI?

Derisking Renewable Energy Investment (DREI) is an innovative framework developed by the United Nations Development Programme (UNDP) that aims to help governments scale up investment in renewable energy in their countries. It allows policymakers to identify barriers and risks hampering investment and to define effective policy and finance interventions to mitigate these, by either reducing, transferring, or compensating for risk. As of 2021, UNDP has published DREI toolkits for utility-scale renewable energy, interconnected rooftop PV, off-grid mini-grids and solar home systems. These toolkits also allow governments to calculate the levelized cost of electricity (LCOE) pre- and post-implementation of risk-mitigating instruments.

SD Strategies, a Berlin-based think tank and facilitator of the Energy Working Group of the LEDS Global Partnership, has pioneered the use of this ground-breaking instrument in Africa and Latin America, adapting the methodology for interconnected mini-grids in Nigeria and for biogas in Colombia. The resulting reports, Derisking Interconnected Solar Mini-Grid Investments in Nigeria and De la Práctica a la Política : Análisis de las Barreras a la Inversión en Biogás en Colombia (forthcoming here) provide concrete advice for shaping sound market frameworks and thus improving investment environments. The studies were authorized by the Energy Commission of the Government of Nigeria (ECN) and Colombia’s Low Carbon Strategy at the Ministry of Energy and Mining (Minenergia). They were supported by the Global Environment Facility (GEF) and UNDP, as well as LEDS GP and the LEDS LAC regional platform for Latin America and the Caribbean, respectively.

This Handbook presents a quick start guide to the DREI methodology as we have adapted it. The step-by-step guide below is based on UNDP’s original toolbox but limited to two key components that can deliver valuable and practical input for public decision making: the assessment of risks and barriers in a specific renewable technology market and the identification of policy and finance instruments that have the potential to mitigate these; as well as the design of a policy mix targeting the full range of the most severe critical and barriers and the most effective instruments. Accompanying modelling exercises such as LCOE analysis are not discussed here but can further improve market analysis as well as policy and finance reform.