Barbara Buchner discusses Risk Gaps and renewable energy deployment

Risk Gaps

Risk — whether real or perceived — is the single most important factor preventing renewable energy projects from finding financial investors, or raising the returns that these investors demand. It is also one thing that policymakers can cause, control, alleviate, or help mitigate. In a series of three studies, titled Risk Gaps, CPI maps the availability of risk instruments against demand and analyzes several new, potential instruments designed to address the biggest gaps: first-loss protection instruments and policy risk insurance.

We find that there are gaps in risk coverage, particularly for policy risks and financing risks (and specifically, access to capital and investment liquidity risks). In both developed and developing countries demand for coverage for policy risk is not met adequately. On financing risks, both developed and developing countries have instruments that address access to capital risks for specific projects, but do not address liquidity risks, and thus do not encourage additional investment from the private sector. Finally, financing risks in developing markets are higher than in developed markets due to immature financial institutions and markets and not sufficiently covered by existing instruments.

Several new and proposed policy instruments designed to address these gaps are a step in the right direction. Still, the public sector and development financial institutions could do more.