Dimensions of renewable energy investment risk.
1. Steering innovations towards sustainable energy investments
“Sustainable energy investment” is a widely used phrase and concept in the fields of finance, engineering and economics. Typically, it focuses on evaluating renewable power development and includes assessments of political and regulatory risks, energy risk hedging and portfolio diversification. Often publications on this topic contribute to the climate change response agenda: promote investments in solar- or wind-powered technologies in order to realize a more equitable, sustainable and prosperous future; evaluate financial aspects of carbon budgeting and energy asset risk management; and respond to financial and climate risks associated with mitigation and adaptation policy interventions. Policymakers and energy regulators correctly perceive climate change to pose threats to energy assets, research and development (R&D), technological innovation to accelerate energy transitions and these impacts are projected to grow in the coming decades [1, 2, 3]. Concurrently, the energy sector is experiencing a myriad of challenges, from aging infrastructure, retiring workforces, years of stagnant investment to the need to attract new investment in smart grid resilience, business model innovation reforms, changing customer expectations, and more recently COVID-19 forced disruptions [4, 5]. To mitigate the worst possible impacts, attention is now shifting to strategies for de-risking energy investments—for example, long-term climate-risk hedging and adaption strategies in energy infrastructure development around financing, costs, and revenue—to foster local, national and supranational systems of resource autonomy and reduce the risks of climate change [6, 7, 8, 9].
Mainstreaming renewable-powered energy investment into business decision-making and risk pricing is an attractive climate-smart solution that societies and economies can adopt immediately to help overcome anachronistic electric power regimes and regional development dynamics. Globally, investments in distributed, renewable energy-powered futures keep accelerating with clear upward trends in worldwide power generation expansion and risk management at the forefront. Nevertheless, finding a low-carbon, risk pricing formula is not easy. Despite compelling arguments for investment in low-carbon technologies and applications, such as small-scale renewables and locally distributed green energy, digitalization, advanced batteries or carbon capture and storage (CCS), these interventions require a pragmatic assessment of their financeability, which in turn hinges on their technical and economic potential with respect to complex factors, including social equity, feasibility, socioeconomic impact, and climate impact. The scale of deploying these low-carbon technologies is also an important consideration to investors because project size is a critical determinant of the cost of unit returns. Some institutional investors consider small-scale investments less attractive due to their perceived low rate of returns. On the other hand, large-scale power systems, such as grid-scale battery storage and other scalable carbon-free power technologies require significant investment in risk hedging and portfolio diversification [8, 10]. The two principal risks that are often mentioned in this area involve (i) those arising from the physical effects of climate change on energy infrastructure, institutions, business operations, energy markets and assets, and (ii) risks resulting from investment in zero-carbon transition strategies due to changes in technology, policy, legal, and market factors. Table 1 summarizes various dimensions of these renewable energy investment risks.
|Technological risk||[2, 11, 12, 13]|
|Political risk||[9, 14, 15, 16, 17]|
|Economic foundation and market risk||[2, 14, 15, 16, 18]|
|Resource risk||[8, 11, 18, 19, 20]|
|Environmental / social risk||[3, 7, 15, 16, 18]|
Suitable climate-smart development—combining innovation mix in technology with those in policy development, new business models, systems operations and market design innovation—could do much to keep the global temperature within the 2°C carbon budget [3, 21]. Mature non-hydro power sources of renewable electricity, such as solar photovoltaics and onshore wind that can be deployed in a wide range of operating conditions, are generally considered low-risk. These technologies attract large-scale investments and deployment globally, but they are sometimes situated in challenging geographical locations and are vulnerable to weather conditions changes. For example, the risk of technical failure due to extreme weather conditions is always present. Risk averse institutional investors prefer investing in energy technologies with higher rate of return, improved reliability, and operational management [22, 23]. On the other hand, early-stage crucial technologies that have the potential to provide step-change reductions in both cost and energy requirements, and are not as vulnerable to weather and other external events. For example, CCS, and offshore wind are characterized by several technical and financial uncertainties, and are therefore considered high-risk investments by some investors. Typically, investment in such new technologies is often characterized by ‘wait and see’ approach, typically, to allow them undergo deployment cycles before they can attract long-term investment commitments.
2. Organization of the book
This book has twelve chapters.
Chapter 1 provides an introduction to the book and discusses the core dimensions of renewable energy-powered innovations and investment risk. It outlines the innovation landscape for a renewable energy-powered economy and the organization of the chapters. This book is a selective compilation of climate-sensitive working concepts, technological solutions and country-specific case studies positioned within the broader debate of innovations needed to accelerate investments in renewable energy deployment to meet demand and ensure that the energy transition is global, inclusive, socially equitable, and more sustainable. Chapter 2 examines the application of machine learning and artificial intelligence-supported technologies to tackle the risks of stranded electricity assets. This chapter discusses the asset stranding discourse, its implication to the energy sector and related infrastructure and recommends strategies for mitigating the risks of stranded assets in the energy sector. Chapter 3 explores the building energy efficiency market and how automated performance control could raise the energy savings performance guarantee and mitigate energy efficiency risks.
Chapter 4 explores the renewable energy loan guarantee market in the United States. It details Title XVII loan guarantee program, its operations and challenges. Chapter 5 provides an overview of the innovative circular business models in the Italian fashion industry in line with the Agenda 2030 and the Sustainable Development Goals (SDG) objectives. Chapter 6 reveals the direct impact of small country collaboration opportunities based on an analysis of investment flows in clean energy technologies. It examines how smaller countries, both in the developed and the developing world, can harness international cooperation to advance energy innovation and mitigate such impact. Chapter 7 offers a new paradigm for addressing energy poverty and malinvestment in the energy sector. This paradigm takes into consideration private property rights and the factors of production for modern forms of energy services like electricity.
Chapters 8 through 12 present case studies of energy innovation agendas regarding the state of energy investment in the developing world—Rwanda, Algeria, Egypt, Pakistan, and Mexico. The Rwandan case study discusses the off-grid appliance market using a multi-tier framework consisting of seven elements—capacity, duration, reliability, quality, affordability, legality, and health and safety of household electricity consumption. The Algerian case study discusses the link between growth in economic activity and energy consumption, underlining the current challenges. Meanwhile, the Egyptian case study uses Geographic Information Systems (GIS) and remote sensing techniques to show results and empirical evidence concerning the rate and risk of land degradation processes. Finally, the Pakistan and Mexican case studies assess the roles of biofuels and integrated hydroelectric-powered energy systems in hastening the transition to a low-carbon economy.