Risk mitigation and transfer for renewable energy investments: a conceptual review

Abstract

The trillions of dollars needed to achieve global climate goals are more than an abstract number. They need to be channeled through viable projects that result in desirable outcomes, such as renewable energy infrastructure in developing countries. The complexity and barriers faced in the project development and finance process are often underestimated. The perception of risk is an important barrier to private investment in developing countries, hence one of the most relevant interventions is to reduce or transfer risk faced by investors. Renewable energy has benefited from this approach, yet its progress has been slow in some regions, such as Sub-Saharan Africa (SSA). In this paper, we look at risk-related interventions in renewable energy investments, particularly from the perspective of developers. To do that, we first review the literature and concepts related to the role of risk, the cost of capital, the project development process, and the investment selection process. The paper further explores the types and relevance of risks faced by renewable energy investors. Finally, the paper examines the use of risk mitigation and transfer (RMT) instruments in private utility-scale renewable energy investments and presents evidence of the effectiveness of RMT in practice.