Renewable energy plays a crucial role in achieving a low carbon economy and ensuring energy security. In recent years, renewable energy systems have experienced significant growth. Despite this growth, they are still not achieving their full potential, due in part to differing risk perceptions among investors, developers, and other stakeholders.
A gap has emerged between venture capital and project finance, arising from the different requirements and risk tolerances of both parties. Venture capital firms are increasingly hesitant to invest in early-stage renewable energy technologies due to their perceived high risks and long lead times. Furthermore, limited availability of capital has constrained growth and advancement of these technologies.
To address these challenges and bridge this gap, effective risk management in renewable energy projects is essential. Through effective risk management, the renewable energy sector can increase its appeal to investors, helping to secure the necessary financing for growth. In this context, it is essential that governments, financial institutions, and industry stakeholders collaborate to develop comprehensive risk management strategies to address challenges facing the renewable energy sector and further support further its growth.
Risk and renewable energy projects
Renewable energy projects are exposed to a variety of risks, ranging from political and economic, to technical and social:
Political risks: Renewable energy projects rely heavily on government support mechanisms, such as feed-in tariffs and renewable portfolio standards. These support mechanisms are subject to changes in policy, which can significantly impact a project’s economics and feasibility. To address political risks, country credit default swaps, risk-sharing schemes, and insurance are recommended. These measures provide a safety net against policy changes and other political uncertainties.
Economic risks: Common economic risks include market fluctuations and financing challenges. Renewable projects often require significant upfront investment with relatively low ongoing operational costs. Joint ventures and other collaborative arrangements can help manage these risks. Insurance, guarantees, and derivatives are also effective tools for mitigating financial uncertainties.
Technical risks: Many renewable technologies are still evolving and often involve small, modular technologies that require flexible and adaptive risk management strategies. Technical risks can be further mitigated through guarantees, warranties, insurance, and organisational arrangements between key parties. These measures help ensure the reliability and performance of renewable energy technologies.
Social risks: Addressing risks resulting from low public acceptance and perceived environmental impacts is critical for the success of renewable energy projects. Health, safety, social, and environmental impact assessments, along with stakeholder engagement plans, are essential for managing these risks and ensuring that potential impacts on communities and the environment are adequately addressed.
Risk strategies
To determine the most effective risk management strategies, stakeholders can draw insights from well-established industries, such as the conventional energy sector, which has already implemented strong risk management practices. These practices typically include comprehensive risk identification techniques, probabilistic modelling, and structured risk evaluation processes. By adopting these established methodologies, renewable energy projects can avoid common pitfalls and streamline their risk management processes.
While the core principles of risk management can be transferred from mature industries to the renewable energy sector, adjustments may be necessary to account for challenges unique to renewable energy projects. For example, the modularity and scalability of technologies like wind and solar power may require a more tailored risk assessment approach.
Broadly speaking, there are four key risk management strategies considered applicable to renewable energy projects:
Avoidance: Involves changing the project scope or plan to eliminate risks. While this strategy is often the most desirable, it may not always be feasible. Examples of avoidance strategies in renewable energy projects include using known materials instead of untested ones to avoid the associated technical risks. While this may be favoured to manage risk, it is likely to slow down innovation within the renewable energy sector. A balance between reliance on known materials and rigorous research and development to find better alternatives will be required.
Mitigation: This aims to reduce the probability and/or impact of a risk to an acceptable level. Early action to mitigate risks is generally more effective than dealing with consequences of inaction or delayed action. Mitigation strategies may include use of probabilistic modelling or Monte Carlo simulations to understand and quantify uncertainties, as well as to develop well-informed mitigation plans to address potential issues and ensure that resources are allocated efficiently.
Transfer/share: Involves shifting the burden of a threat to a third party through mechanisms like insurance, performance bonds, and warranties. Transference is effective if the third party is better equipped to manage the risk. Examples include purchasing insurance to cover specific risks, such as weather variability or construction delays.
Acceptance: Often adopted only when it is not possible to eliminate the risk, or the cost of mitigation is too high. In this case, contingency reserves, including time, money, or resources may be put in place to manage the potential impact of a risk occurring.
Stakeholder engagement
Stakeholder engagement is critical to risk management in renewable energy projects. Failing to manage stakeholder risk can lead to conflicts, project delays, and numerous other issues. Effective stakeholder engagement requires proactive communication, continuous feedback, and collaboration with stakeholders throughout the project. Involving stakeholders from the outset can help better anticipate potential risks on renewable energy projects and develop requisite strategies to overcome them. This inclusive approach ensures that stakeholders’ concerns and interests are addressed and ultimately enhances the feasibility, sustainability, and overall success of renewable energy projects.
Risk management in renewable energy projects
To advance the renewable energy sector, governments, financial institutions, and industry stakeholders must collaborate to develop comprehensive risk management strategies that address the barriers faced by renewable energy projects and facilitate investment.
At Farrelly Mitchell, our consultants are committed to the development of sustainable and renewable energy solutions throughout the food and agribusiness industry. We offer deep insights into the implementation and integration of clean energy solutions into existing business operations and can help to identify the financial feasibility of these technologies. In addition to this, we offer comprehensive risk management in renewable energy projects to identify and address inherent risks and commercial opportunities.
