Gaps in risk coverage can discourage investment in renewable energy projects, finds a new analysis released by the Climate Policy Initiative (CPI). New and existing risk-mitigation instruments could help make these investments more viable but are not fully adequate for the task, the firm says.
"Our analysis shows that rapid and unexpected policy changes around the world, the immaturity of financial markets in emerging countries and the relative newness of clean technologies are not sufficiently covered by risk instruments and can discourage investors," explains Barbara Buchner, director of CPI Europe. "Development financial institutions and the public sector have the opportunity to fill these gaps in risk coverage."
In a series of three studies, CPI mapped the availability of risk instruments against demand, and analyzes several potential instruments designed to address the biggest gaps: first-loss protection instruments and policy risk insurance.
According to CPI, the European Commission - European Investment Bank Project Bond Initiative, in pilot phase, and a proposed institution that would provide first-loss protection, called the Sustainable Development Bond Assurance Corp., would attempt to shield investors from a pre-defined amount of financial loss, thus enhancing the credit worthiness and improving the financial profile of an investment.
Although these new first-loss protection instruments are a step in the right direction, CPI says, it will be challenging to offer these products at a price that project investors can afford while simultaneously meeting emissions-reduction goals.
Similarly, new and existing instruments that address policy risk have room for improvement. Specifically, expropriation coverage instruments offered by the Multilateral Investment Guarantee and Overseas Private Investment Corp. (OPIC) only provide partial coverage. Significant uncertainties limit how much they have been used, and have made credit rating agencies reluctant to fully acknowledge their effectiveness in enhancing projects' credit ratings.
A new instrument offered by OPIC, a feed-in-tariff insurance product, fills in some of these gaps by providing direct policy risk coverage in developing countries, CPI says.