UNDP Releases Framework on Derisking Renewable Energy Investment in Developing Countries

UNDP17 April 2013: The UN Development Programme (UNDP) has released a framework designed to help policy-makers select public instruments to promote investment in renewable energy in developing countries. The goal of the framework, presented in a report on “Derisking Renewable Energy Investment,” is to support transparent policy-making with quantitative comparisons of different public instruments and portfolios for derisking investments in renewable energy.

The framework consists of four stages. The first stage characterizes the risk environment, by identifying risks and investment barriers to renewable energy technology, and analyzing the effect of those risks on financing costs. The second stage investigates public derisking instruments, and quantifies related reductions in financing costs. The third determines the levelized cost of electricity (LCOE) by calculating the impact of reduced financing costs on life cycle cost and comparing it to current in-country baseline generation costs. The fourth and final stage evaluates the public derisking instrument mix through sensitivity analysis and a variety of performance metrics.

In addition to presenting the framework methodology, the report demonstrates how it can be used in practice, using an exercise based on the promotion of large-scale, onshore wind energy in Kenya, Mongolia, Panama, and South Africa. Drawing on a comparative analysis of the performance metrics of these four cases, it proceeds to offer practical findings on the effectiveness and efficiency of public finance, distributional impact of public interventions, and scaling-up of climate change mitigation outcomes.

In the conclusion, the report highlights the need for policy-makers to address risks to renewable energy investment in a systematic and integrated manner, in order to overcome barriers set up by monopolistic market structures and an historical focus on fossil fuels. It further concludes that financial derisking measures are likely to be cost-effective in comparison to direct payments of financial incentives to compensate investors for higher risk.

Alongside the report, UNDP has released a financial tool to calculate the impact of public instruments on the LCOE for a country's given baseline mix versus the LCOE of onshore wind energy. [UNDP Press Release] [Publication: Derisking Renewable Energy Investment] [Derisking Renewable Energy Investment Financial Tool]