Lowering risk intolerance to unlock private investments in renewable energy-based rural electrification

Abstract

As public resources are scarce, investments from the private sector are essential to scale up rural electrification and thus to achieve universal access to electricity by 2030. However, the lack of clear public policies, together with a high perceived risk, have been a deterrent to investors' participation in off-grid electrification projects. In this paper, we focus on identifying the main drivers of risk, namely the set of uncertainties and perceived risks that prevent private companies from investing in off-grid electrification projects. We use a stochastic discount cash flow technique — net present value (NPV) combined with Monte Carlo simulation — to incorporate these uncertainties and quantify the business and investment risks associated with an off-grid solar PV project. The technique is applied to the case of Colombia, wherein major contributors to risk are the variability in revenues and the annual revenue growth rate. For this case, we estimate the probability of project failure and investigate how private companies could mitigate risks by keeping operating costs to <50 % of revenues. In this regard, the role of the government proves to be essential in providing a better investment environment for private investors. We suggest that government interventions could take the form of financial de-risking instruments, including better-designed end-user subsidies and the implementation of concession agreements through long-term contracts. These results are of interest to private investors who need to account for risk analysis when deciding whether to invest or not in off-grid projects. Also, our findings guide policymakers seeking to understand the private sector perspective while designing efficient policy mechanisms to increase access to electricity in developing countries.