Governance of risks in financing concentrated solar power projects in North Africa

Introduction

A low-carbon energy transition on the basis of renewable energies (RE) is of crucial importance in solving the interlinked global challenges of climate change and energy security. To transform the global energy system, substantial public and private investments will be needed. Yet, especially developing countries are struggling to foster private RE investments. The literature argues that the economic feasibility of an RE investment project hinges on the availability of affordable project financing, which itself depends on perceived risks by investors. As financing costs are found to be particularly high for capital-intensive RE projects and in developing countries, we investigate the economic impacts of a financial derisking approach for concentrated solar power (CSP) in four North African countries.

Methodology

First, we investigate the current risk environment and quantify the influence of each risk category as identified by [1] on the overall cost of capital by applying the financing cost waterfall approach [2]. Second, we analyze the direct impact of a derisking approach on the cost of electricity from CSP in a levelized cost of electricity (LCOE) model. Third, we derive macroeconomic effects of a derisking strategy by applying a computable general equilibrium (CGE) model. Fourth, through expert interviews, we identify public and private derisking measures from an investor’s point of view.

Results

i) A comprehensive derisking approach reducing the North African financing costs to European levels leads to a 32% reduction in the average North African LCOE from CSP; ii) The macroeconomic analysis of a 5% CSP target by 2020 in the four North African countries indicates that an ambitious derisking strategy has the potential to increase GDP on average by up to 0.15% or, in total for the four countries, by up to $US1.3 billion; iii) By conducting expert interviews with RE investors we learn that investors are aware of concrete investment risks, such as regulatory, political, revenue and market, and technical risks associated with RE projects in North Africa, and of private risk transfer measures to mitigate these risks.

Conclusions

Even though there is a long way to go to achieve a full financial derisking of RE investments in the North African region, we find a substantial feasible potential for financial derisking, eventually leading to overall economic benefits for the region. This is a reassuring conclusion, as without derisking RE investments, the stimulation of the required levels of private investment for a renewables-based energy transition to mitigate climate change, increase energy security, and foster economic and human development in developing countries will not be attainable.

Please note these Proceedings have received limited or no review from supervisors and IIASA program directors, and the views and results expressed therein do not necessarily represent IIASA, its National Member Organizations, or other organizations supporting the work.

Last edited: 30 September 2015