Selecting effective financial instruments to support action on climate change
This low emission development strategies (LEDS) Finance Resource Guide presents a curated selection of resources on a range of topics around finance for LEDS and Nationally Determined Contributions (NDCs). It is designed to help LEDS practitioners find high-quality resources that meet their specific needs, avoiding time-consuming searches on the internet. It will be useful to individuals working on, or interested in, LEDS and NDC finance in both developed and developing countries.
- 1. Understanding the situation
- 1.1 Understanding current flows
- 1.2 Assessing financing needs
- 1.3 Assessing capacity
- 1.4 Identifying and overcoming barriers
- 2. Planning and coordinating
- 2.1 Institutions and governance
- 2.2 National finance strategies
- 2.3 Investment plans
- 2.4 National climate funds
- 2.5 Green investment banks
- 4. Using public finance
- 4.1 Managing national finance
- 4.2 International climate finance
- 4.3 Climate finance readiness
- 4.4 The Green Climate Fund
- 4.5 Direct access
- 5. Designing financial instruments
- 5.1 General resources
- 5.2 Sources of private finance
- 5.3 Risk mitigation
- 5.4 Guarantees
- 5.5 Feed-in tariffs and auctions
- 5.6 Taxes and tax incentives
- 5.7 Carbon pricing
5.3 Risk mitigation
Underlying market barriers and a perception of high risk constrain the development and financing of renewable energy and other mitigation projects. Although falling renewable energy technology costs have significantly lowered the capital needed to invest in new systems, financing renewable energy projects is still difficult in many parts of the world. This is due to the high cost of capital elevated by risks and to underlying market barriers. Identifying attractive projects and gaining access to capital often presents a key barrier to renewable energy investments. Project risk can take multiple forms. These include political and regulatory risk; counterparty, grid, and transmission link risk; currency, liquidity, and refinancing risk; as well as resource risk, which is particularly significant for geothermal energy. Policymakers, financial institutions, and investors can draw from a strong toolkit to help overcome these barriers, mitigate investment risk, and improve access to capital for their LEDS and NDCs. (Adapted from Unlocking renewable energy investment: The role of risk mitigation and structured finance, IRENA, 2016.)
This report identifies the main risks and barriers limiting investment, supplying a toolkit for policymakers, public and private investors, and public finance institutions to scale up their investments in renewable energy. The report is meant to serve as an all in one guide to the key financial market instruments for renewables, but many of the instruments are relevant for other low carbon markets. In particular, Chapter 3 (28 pp) introduces a range of instruments that can be used to address investment risks: guarantees and insurances, currency risk mitigation instruments, liquidity risk mitigation instruments, and specific geothermal resource risk mitigations. Chapter 5 presents three case studies (offshore wind, geothermal, solar), in each case looking at the project structure and success factors.
Derisking renewable energy investment: A framework to support policymakers in selecting public instruments to promote renewable energy investment in developing countries
The DREI framework systematically identifies the barriers and associated risks that can hold back private sector investment in renewable energy. Section 2.1 of this report covers the identification and classification of barriers to investment in renewable energy projects in developing countries. It helps identify barriers according to different stakeholder groups and provides a methodology for quantifying the impact of these barriers on financing costs of the project.
This paper addresses risk management fundamentals for energy efficiency projects in developing countries, in particular industrial energy efficiency projects. It explores the nature of the risks presented by projects, and discusses best practices for energy efficiency project risk management with illustrative case studies. It also describes behavioral and other obstacles to effective risk management, together with methods for overcoming these obstacles. The role of energy service companies is also considered in identifying and managing projects and reducing risks. The paper concludes with recommendations for companies and those promoting energy efficiency schemes in emerging economies.
This paper examines the potential for energy service companies to accelerate uptake of energy efficiency in developing countries, focusing on barriers to their growth and measures to eliminate those barriers. Using an energy service company can greatly reduce the risk of energy efficiency projects for clients. Section 1 discusses what energy service companies are and how they operate, and reviews the potential and current status of such companies in developing countries. Section 2 examines programs currently in place to foster the growth of energy service companies. In Section 3, barriers to energy service company development are considered in detail, and Section 4 highlights some of the measures that might be put in place to overcome these barriers.
Unlocking renewable energy investment: The role of risk mitigation and structured finance (in key resources, this subsection) presents three case studies (offshore wind, geothermal, solar).
Risk mitigation instruments for renewable energy in developing countries: A case study on hydropower in Africa
This case study examines the 250 megawatt Bujagali Hydropower Project in Uganda, which raised close to US$300 million in commercial loans and private equity, an unprecedented amount of private finance in a low income country. The study is explored from a project finance perspective. It is one of very few examples of large project finance structures simultaneously to use different risk mitigation instruments provided by the World Bank Group—a partial risk guarantee from the International Development Association; and the Multilateral Investment Guarantee Agency’s political risk insurance. It offers an opportunity to analyze how these particular instruments interact, and how effective they are in driving private investment and reducing the cost of renewable power in developing countries with high investment risks and very little private investment. The study also examines how these instruments might be applied to drive private investment in other renewable energy projects in developing countries.