Although global investments in renewable energy plants are growing and indeed in 2010 exceeded investment in new fossil fuel fired plants for the first time, risk is also increasing, according to a new report, Managing the Risk in Renewable Energy, from the Economist Intelligence Unit (EIU). Sponsored by Swiss Re, the research highlights the need for the renewable energy sector to improve risk management and access alternative sources of capital as operational risks grow and governments cut sector funding on the back of an increasingly uncertain economic environment.
Based on a survey of 284 senior executives in the renewable energy industry in North America, Australia, Denmark, Spain, Italy, Germany and the UK, the report analyses the risks in financing, constructing and operating renewable energy projects, particularly large complex projects, and the parallel risk management challenges that the industry must confront.
Cuts in government expenditure for the renewables sector pose the possibility of a lack of future support from public finance for such developments, particularly in Europe. Currently, cuts for example, in solar feed-in tariffs range from 15% in Germany to 70% in the UK and there is the worry for investors that other governments will cut this support as part of their ongoing austerity measures, according to the EIU.
Early-stage costs are a major issue as projects are often capital intensive and highly leveraged, with up to 70-80% financed through debt. As companies seek to scale up investments overcoming financial risks is one of the key challenges, according to respondents. Other concerns for owners, operators and plant investors are political and regulatory risk and weather-related volume risk particularly for offshore wind farm producers. These risks moreover increase as projects grow in scale and complexity, but only half of respondents said they were successful in transferring the risks, many retained the risks related to renewable energy assets on their balances sheets. The availability of risk management resources, such as industry data, risk expertise and insurance remain limited in the sector, potentially restricting access to development capital.
However as the demand for solutions grows new products, particularly in insurance are starting to appear on the market such as alternative risk transfer solutions and weather-based financial derivatives, for example. Respondents considered however that they would transfer more risk if suitable products became more widely available especially if there were more standardised and cost-effective products.
For further information, visit EIU.