1. Financial Risk in Renewable Energy
Key risks faced by Developers &
Potential mitigation
Dr. Binny Prabhakar

2. Objective
 Financial Risk in RE - Evolving
 Project Development
 Energy Marketing – Carbon risks
 Asset Management
 Contextual Risks
 Mitigation of RE Risk
 Identify some financial risk management instruments and
approaches for RE
 Develop risk mitigation solutions that continue to exist without
or with limited public monitoring
 Stakeholder Management
‘Limitless RE sources do not translate into limitless profits’,
requires understanding the complexity & mitigating risks

3. RE Financial Risks: Influence
 Size of Project: Large vs. Small project
 RE Technology
 Stage: Lab vs. Pre-commercialized vs. Early Commercialized
vs. Market
 Location: Developed vs. Developing economies & regulations
 Competing Technologies – potential silver bullet
 Financial Mode: Project vs. Corporate vs Micro Financing
vs. Combination
 Complexity: Stakeholders, Technology, Regulatory,
Financials
 Grid: Grid vs. Non Grid connected projects
RE is characterised by higher uncertainty in ‘Downstream’
rather than ‘Upstream’, leading to higher transaction costs

4. RE Continuum (Large Project)
Financial Project Ops: Marketing & Risk
Structures Development Asset Management Management
• Project Finance • Feasibility
• Corporate Finance • Clearances
• Mezzanine • Financial closure
• Time overruns • Performance
• Cost Overruns • Fuel/Feedstock-SCS
• Tech specs failure • Credit
• Changes to Project • Technology
Counter Parties / Credit Non-Linear
Financial / Cashflows
Risk
Political
Regulations
Profile
Markets- Pricing /CER / VER
Technology
Force Majeure/ Weather / Resources
Contextual / ‘Bubble’ Competition
RE requires proactive and continuous Risk Management,
external scanning and cognizant of challenges

5. Financial Impact
Prior Current
Profit and Loss Statement Period
Budget
Period
Total Sales Revenue [J]
Total Cost of Sales [K]
Gross Profit [L=J-K]
Operating Expenses
Total Sales and Marketing Expenses [M]
Total Research and Development Expenses [N]
General and Adminstrative
Supplies
Depreciation
Insurance
Repairs and maintenance
Total General and Adminstrative Expenses [O]
Total Operating Expenses [P=M+N+O]
Income from Operations [Q=L-P]
Other Income [R]
Total Taxes [S]
Net Profit [T=Q+R-S]
RE, so far, has demonstrated that it in early days, it requires
an appetite for sustaining losses rather than profit

6. Challenges for the RE sector
 Free markets assumption (Vs. Vacillating Regulations)
 Demand  Supply; Supply  Markets; Markets  Price; Price 
Profits
 Completely developed value chain  Investors to Buyers
 Information availability: lack of technical and historical data
(technology performance and weather data)  inability to predict
prices, losses in economic and sustainable way or Diversify Portfolio
 Financial - Experience, Investments and Instruments
 Insurance/Banks: experience not as deep as other Sectors
 Insurance: International vs. domestic insurers
 Instruments innovation: Funding gaps b/w equity and debt
 Transactional costs: Higher compared to other projects
 Financial crisis  drying of €100 billion EU IF bond market
Uncertainty leading to real and perceived risks, impacting
Investor confidence  Impacts Cashflows, Financing

7. Challenges for the RE sector
 Technology per se
 Uncertainty/unproven & few precedents
 Lack of tech expertise to estimate risk exposure and assessment
 Economies of scale favoured, as most transaction costs are fixed
 Small projects donot offer adequate commercial margins
 Some proven technologies lack investors or insurance e.g. bioethanol
or bio-diesel
 Input & output prices poorly correlated –skew due to trade
arbitrage (difficult to hedge)
 Commodity Risk: Commodity markets exposure (well-developed
markets) adds considerable more variability and risk to cash flows
 Developers/ Farmers’ co-operatives have insufficient equity
Insurance companies are hesitant to take commodity risk or
market exposure risks

8. RE Risk Mitigation Options
 CanRisks be Mitigated?
 What instruments?
 Insurance
 Financial Instruments
 Export Credits
 ??
 Who can help diversify Risk?

9. RE Risk Mitigation Options
RE Project Risks Risk Mitigation Investors Actions/Attention
Project/Pre-construction
Get involved with developer early/ introduce partners Debt- equity
Pre-Project
as reqd. / structure, underwrite and syndicate/develop lending-
Conceptualization Contingent grants offtake Pjt community/ participate/understand other
Implementation transactions/value chains
Infrastructure Construction Risks
Construction Insurance - CAR/EAR Experienced contractors, EPC turnkey,
Holistic Management of Risk
Surety Bonds Indpdt. Tech Reviews, Completion guranatees
Counterparty Performance guarantees
Liquidation damages
Operational Risks
Performance Insurance Proven Tech, Operator incentives, Indpt Review
Surety Bonds
Counter Party Performance guarantees
Liquidation damages
Fuel/Feedstock Supply/Weather Weather Insurance/Derivatives/Hedges Fixed offtake n supply contracts, regulations
Credit Risk Guarantees
Credit derivatives/Swaps
Generic - All Phases
Policies, Subsidies, Funding, FITs etc Insurance/Hedges
Financial (Interest/Tax, etc) Derivative Products
Political Risk Guarantees
Political MFI Guarantees
Export Credit Guarantees
Insurance/Hedges
Force Majeure
CAT bonds
Market
Markets Derivatives/Hedges Fixed offtake n supply contracts, regulations
Financed
Carbon
Delivery
CER Proposal Insurance/Guarantees
Insurance/Carbon delivery & Permit
CER Delivery
delivery Guarantees

10. Risk Assessment: Improved Ratings
 Financial Risk Management (FRM) Instruments - such as standard
insurance, carbon credit delivery insurance, and weather derivatives
can make a project solvent and attractive to investors
 Impact of selected FRM were measured, separately & integrated
together and the results reflected through increases and decreases in
a project’s credit rating and internal rate of return (IRR)- at times
higher than country’s own credit rating!!
India (56,25 MW; 108 GWh/year; US$51.25M)
Source: UNEP Study

11. RE Outlook
 Continuous high interest in and demand for Entities/Incentives
renewable energy projects
 Renewable energy needs to become more  Developers /
competitive-delink from regulations Sponsors Equity
 Higher proportion of baseload power needs to  Corporate/Project
be achieved Financial Loans
 Industry consolidation in some areas expected  Banks
 Large transaction costs favor economies of  Insurance
scale  Grants/Tax incentives
 Short-to-midterm liquidity will be available  Mezzanine Finance
 Demand backlog in Eastern Europe  Export Credits
 Demand and potential in emerging markets
 BRICS

12. Thank You
Questions?

13. Financial risk instruments for RE projects