Driven by rapid expansion in developing countries, renewables are
becoming a significant source of the world’s power. According to the
United Nations Environmental Programme’s (UNEP) 9th “Global Trends in Renewable Energy Investment 2015,” investment in developing countries was up 36 percent in 2014, totaling $131.3 billion.
China ($83.3 billion), Brazil ($7.6 billion), India ($7.4 billion)
and South Africa ($5.5 billion) were all in the top 10 of investing
countries while more than $1 billion was invested in Indonesia, Chile,
Mexico, Kenya and Turkey. As renewables continue to expand into
developing nations, it is incumbent upon developers to understand the
risk features of some of these environments.
Best Practices for Renewable Development in Developing Countries
Geo-Political Risk
Renewable developers need to be mindful of the politics when they
locate their projects. Unstable governments may expropriate projects,
change laws, or even change regimes due to war or internal uprisings
during the life of a long-term Power Purchase Agreement (PPA).
Political risk insurance may be available, but coverage plans may be
costly or incomplete. Partnering with an international organization
like the World Bank or International Finance Corporation (IFC) may ease
some of these worries since even unstable regimes look to these
international organizations for financial stability and support in the
global markets in the event of government default.
Legal Risk
Developing countries may lack the general rule of law that provides
for predictability and transparency of business transactions. In some
countries, bribing government officials to obtain required permits may
be the norm. Additionally, local courts may not offer developers relief
for their claims as judicial officers may also request bribes or be
closely aligned with the government decision-makers. U.S. companies
need to be mindful to steer clear of engaging with such officials to
avoid allegations of violating the Foreign Corrupt Practices Act
(FCPA). Corruption risk may extend beyond just bribery; there are
reported instances of local counsel threatening projects and extorting
foreign developers to pay increased legal fees.
Currency Risk
A developing country’s local currency may fluctuate greatly, and if
their currency inflates the project’s revenue stream loses its value in
international markets. To protect against currency risk, developers
should either negotiate their PPAs to receive payment in a predictable
currency or hedge this risk.
Although, financial institutions offer exchange rate hedging
instruments, such as currency swaps or currency futures options, the
upkeep on these agreements may be expensive if the developer negotiates a
good position on a volatile currency.
Physical Risk
In negotiating the terms of PPAs and debt financing agreements,
project sponsors should consider the potential impact on their projects
of adverse weather/climate conditions or other natural disasters. Thus,
developers should be mindful that, if for example completion or ongoing
operation of their projects could be delayed or interrupted by flooding
or other impacts from a major storm, they may need to invoke a force
majeure clause due to an unavoidable event or occurrence.
Counterparty Risk
The offtaker in many of these countries may be the
government-sponsored utility. If the utility refuses to accept the
project’s renewable power or fails to make payments, developers could
find themselves seeking relief in a government-sponsored court.
Developers should ensure that their PPA agreements provide for
arbitration in a neutral venue to help alleviate this concern.
Additionally, involvement by the World Bank or IFC could help developers
navigate such situations. If you have any questions regarding assessing risk or developing risk
management strategies for renewable energy projects in developing
countries, please contact our Energy Finance practice.
This article was originally published The Energy Finance Report and was republished with permission.
http://www.renewableenergyworld.com/articles/2015/05/managing-the-risks-of-renewable-energy-projects-in-developing-countries.html