Energy Policy

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Tobias Schmidt, Energy Politics Group (www.epg.ethz.ch)
De-risking renewable energy investments in developing
countries
OIKOS Event St. Gallen, 27 Oct 2015

D GESS
EPG | Energy Politics Group | www.epg.ethz.ch
The lion’s share of global energy-infrastructure investments
will be invested in emerging economies
Þ Not only additional finance needed, but re-direction of existing and planned
capital flows from traditional high-carbon to low-emission, climate-resilient
investments
Þ Infrastructure investments in these countries are risky, resulting in high financing
cost
Þ Policy interventions in emerging economies often include activities by domestic or
international development banks to reduce financing costs and leverage private
capital
USD37tn by 2035 in
energy infrastructure
additional USD17tn to
reach 450ppm scenario
Source: IEA, World Energy Outlook 2012
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Do additional investments mean additional costs?
Source: IEA Energy Technology Perspectives, 2014
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So, if we can save money why don’t we do it?
Source: EPG (ETH Zurich)
§ High oil prices and no fossil fuel subsidies assumed
§ Low carbon technologies have a different cost structure
Þ More up-front finance needed (less cash-flow finance)
Þ Risks and the associated costs of finance matter much more for low-carbon technologies
Capital expenditures ($/MW)
Operating expenditures ($/MW)
High carbon
technology
(diesel)
Low carbon
technology
(Wind)
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Expectedfinancialreturn
Risk of investment
Attractive
Investment
Risk premium
Source: EPG/ETH Zurich, UNDP
Þ Investment Risk is an essential part of private sector’s investment
considerations
Þ Higher risks lead to higher cost of capital (i.e. financing cost)
Risk free rate
Unattractive
Investment
Private investors’ decisions are mainly guided by
the risk-return profile of an investment opportunity
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• More barriers increase the risks perceived by investors
• The financing costs increase with perceived risks
• A project feasible in one country might be infeasible in another due to higher
perceived risks
Source: Waissbein, O., Glemarec, Y., Bayraktar, H., & Schmidt, T. S. (2013). Derisking Renewable Energy Investment. United Nations
Development Programme (UNDP), New York, USA.
As investment risks in developing counties are typically
higher financing costs are increased
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Unlike fossil-fuel-based technologies, risk dramatically
increases the cost of renewables
Source: Waissbein, O., Glemarec, Y., Bayraktar, H., & Schmidt, T.S. (2013): "Derisking Renewable Energy Investment. A Framework to Support
Policymakers in Selecting Public Instruments to Promote Renewable Energy Investment in Developing Countries". New York, NY: United Nations
Development Programme www.undp.org/drei
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Financing costs much more relevant for renewable
than for fossil fuel-based technologies
Source: Schmidt T.S.: "Low-carbon investment risks and de-risking". Nature Climate Change 4 (2014), 237-239. doi: 10.1038/nclimate2112
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Source: EPG/ETH Zurich, UNDP
Expected financial
return
Risk of investment
Attractive
Investment
Risk
premium
Risk free
rate
Unattractive
Investment
Increase return
Reduce risk
Policy makers need to create a favorable investment
environment to attract investors
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§ Public funds are limited unless tax revenues are raised, which can
have detrimental effects on the economy
§ Most investments will have to come from the private sector
§ De-risking can leverage private finance and thereby strongly increase
the cost effectiveness of policies
Scarcity of funds and political options
Public funds Private funds
Source: EPG (ETH Zürich)
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Sources: EPG (ETH Zurich), Waissbein, O., Glemarec, Y., Bayraktar, H., & Schmidt, T.S. (2013): "Derisking Renewable Energy Investment. A
Framework to Support Policymakers in Selecting Public Instruments to Promote Renewable Energy Investment in Developing Countries". New York,
NY: United Nations Development Programme www.undp.org/drei
Risk compensation
(increased returns)
Risk mitigation
(policy derisking)
Risk transfer
(financial derisking)
Risk pooling
(portfolio derisking)
Approaches to address risks
Addressing risks can strongly reduce financing costs
1
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Generally, 2 different ways to address risk through public
sector instruments exist

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Public policy has a major impact on risks
and thereby on financing cost
Source: UNDP
Directly or indirectly affected by…
…energy sector regulation
….general
policy

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Public policy has a major impact on risks
and thereby on financing cost
Source: UNDP
Permits Risk:
• Obtaining Power Purchase
Agreement
• Obtaining operating permit
• Obatining construction permit
• …
Grid Integration Risk:
• Grid code for (intermittent)
renewable energy
• Connection rules
• …

D GESS
Risk Category Description
De-risking activities
Policy de-risking Financial de-risking
Power
Market Risk
Risk arising from limitations and
uncertainties in the energy
market, and/or suboptimal
regulations to address these
limitations and promote
renewable energy markets
Establish transparent, long-term national
wind energy strategy and targets
Establish a harmonized, well-regulated and
unbundled energy market, with cornerstone
instruments to address price and market-
access risk for wind energy projects
Reduce fuel subsidies and other distorting
regulation
Permits Risk
Risk arising from the public
sector’s inability to efficiently and
transparently administer wind
energy related regulations, for
example in licensing.
Establish streamlined licensing. Establish a
one-stop-shop wind energy licensing
institution
Contract enforcement and recourse
mechanisms
Social
Acceptance
Risk
Risks arising from lack of
awareness and resistence to
wind energy in communities and
end-users
Awareness raising campaigns targeting
communities and end-users
Pilot models for community involvement at
project sites
Political Risk
Risks arising form country-
specific governance and legal
issues
Provision of political risk insurance
covering expropriation, political
violence, currency restrictions
Exemplary risk categories in energy projects
Source: UNDP

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Combining policy instruments can reduce risks and thereby
increase the cost-effectiveness of policies

D GESS
In South Africa, derisking carries high potential to increase the
efficiency of their Wind support policy
Source: UNDP, Derisking Renewable Energy Investment (2013). Data obtained from interviews with wind investors and developers. See Annex A of the report for full assumptions.
The post-derisking cost of debt and equity show the average impacts over a 20 year modelling period, assuming linear timing effects.
4) Evaluation
stage

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The efficiency and effectiveness of renewable support policies
can be dramatically increased through derisking in all 4 countries
analyzed
4) Evaluation
stage

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Derisking can bring down the abatement costs substantially
4) Evaluation
stage

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Summarizing the 4 key messages
Upfront finance is essential to enable low-
emission development1
Important to use scarcer public funds in order
to leverage private funds2
For private investors, the risk-return profile of
an investment opportunity needs to be
attractive
3
Developing country (low-carbon) energy
policy should provide an instrument mix that
provides attractive returns and reduces risks
4
Source: UNDP
Cost
Time
Revenues
Private funds
LEDSFinance
Expectedfinancialreturn
Risk of investment
Attractive
Investment
Unattractive
Investment

D GESS
§ Addressing root causes of risks is a long-term process
§ Policy change needs to go beyond putting a price on carbon – hard to
sell
§ Political economy often stands against policy change
§ Trust builds up only slowly
§ Hard to measure/report/verify derisking effects
§ Lack of research! The boundaries of disciplines…
Is it all that easy?
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Thanks for your attention!
Source: EPG (ETH Zurich)
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A number of potential instruments for policy and
financial derisking exist
Source: UNDP
Public instrument table for renewable energy (Part 1)
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EPG | Energy Politics Group | www.epg.ethz.ch Source: UNDP
Public instrument table for renewable energy (Part 2)
A number of potential instruments for policy and
financial derisking exist
24

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