NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, November 13, 2019

By KANIKA CHAWLA AND ARUNABHA GHOSH

An energy revolution is under way. Globally, renewables-based electricity capacity has seen more investments than fossil fuels in the past three years.

Yet, many remain wary of investing in renewable energy particularly in developing countries, which have large untapped potential for both solar and wind energy. These are generally perceived as challenging markets in which to operate, especially by risk-averse investors.

So, why do clean energy investments continue to be viewed as risky, despite evident trends pointing to the contrary? More importantly, what are these risks and just how real are they?

Renewable energy projects in emerging economies face several real risks. Some are unique to the sector itself, such as technology risk or integration of infirm power supply. Other risks are economy-wide, such as currency risk, counter-party risk, policy and political risk, etc.

However, there is a third risk category that is playing spoilsport for clean energy markets in emerging economies: the perception of risk. Specifically, in the case of renewables, there is often a delta, or variance, between perceived risk and actual recorded risk. This arises from lack of data on actual ground realities, which results in lack of coherence among various stakeholders in the clean energy industry. This deters investment.