about 950 million litres of advanced cellulosic biofuels by 2011 (as originally envisioned in the Energy Independence and Security Act of 2007) to about 25 million liters, due to difficulties in financing commercial production. The range of experience highlights the need to adjust targets according to evolving conditions. The achievement of targets requires a strategy of tailored policy measures, discussed in the further in the following sections.
5.2 Risks and returns
As is the case in other sectors, the nature of risks, relative to expected returns, influences the incentive to invest in renewable energy. If a project or company has an expected risk-adjusted rate of return on investment that is sufficiently high, it is considered an interesting opportunity for financing. Taking first the risks in renewable energy projects, these can be categorised as follows (UNEP SEFI, New Energy Finance and Chatham House 2009):
■ Technical and project-specific risks, including risks associated with lead times, construction costs, novelty of the technology, fuel and resources, and operations and management. Newer technologies have higher risks than traditional ones. As long as investors are unfamiliar with a technology and there is little in-country expertise, the perceived risk is high. Resource availability may also be an issue for specific technologies like geothermal where determination of good locations is costly and subject
41. This includes either anticipating or being able to adapt to unanticipated adverse effects from the deployment of a new renewable energy project. A prominent example is the production of biofuels, in which the EU and the US have adjusted their respective policy support
to uncertainty. Some resource dependency also occurs with hydro, wind, and biomass-based technologies. Risks will therefore differ at regional or national levels.
■ Country-specific institutional risks such as stability of the government,
reliability of the legal system,
transparency of business dealings, currency risks, and general instability due to wars, famine and strikes. For large-scale investments in a specific country, a long-term stable policy regime with a sound legal basis is needed;
■ Political risk and regulatory risks, such as unexpected changes in policy or uncertainty about the future direction of policy. Given the long pay-back periods, the contribution of policies to predictability, clarity and long-term stability in the investment climate, are viewed as critical in being able to stimulate more investments;41
and,
■ Business and market risks, including: 1) financial risks relating to the capital structure of the project such as high upfront capital intensity and the project’s ability to generate enough cash flow; 2) economic risks relating to interest rates, exchange rates, inflation, commodity prices, counterparty credit risk; and 3) market risks associated with, for example, future electricity and carbon prices (which may also be influenced by political and regulatory risks). Most renewable energy technologies are less vulnerable to the price and availability of fuel during the operation of a project. Those technologies that are dependent on biomass, however, do face potential market-price risks if the opportunity cost of biomass production is related to agricultural commodity prices and also because a reduction in fossil-fuel prices can make renewable energy less competitive in fuel and
Box 2: Tunisia’s Solar Energy Plan
In order to become less dependent on energy imports and the volatile prices of oil and gas, the Government of Tunisia decided to develop the country’s potential for renewable energy generation. A 2004 law on energy management provided a legal framework. In 2005, funding mechanisms such as the National Fund for Energy Management became available for deploying renewable energy technologies and increasing energy efficiency. Between 2005 and 2008, clean energy plans enabled the government to save nearly € 900 million in energy expenditures (equivalent to 10 per cent of primary energy consumption), with an initial investment in clean energy infrastructure of only € 260 million. The renewable energy supplies and energy efficiency measures are expected to have reduced total energy
consumption from conventional sources by about 20 per cent in 2011. In December 2009, the government presented the first national Solar Energy Plan and other complementary plans with the objective of increasing the share of renewable energy sources to 4.3 per cent of total energy generation in 2014, up from the current level of 0.8 per cent. The objective is to transform Tunisia into an international clean- energy hub. The Solar Energy Plan is based on three main technologies: solar PV, concentrating solar power and solar water heating systems, and comprises 40 renewable energy projects. The Plan’s budget through to 2016 is € 2 billion, while its savings on energy imports are expected to reach more than 20 per cent per year by the end of that year. Source: Agence Nationale pour la Maîtrise de l’Énergie (2009)