Risks in Financing

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Financing EE project faces a wide range of risks, some are common, and some are specific either to the project or to a country. 'The level of risk associated with energy efficiency investments is different from other types of investments,'10 claims a report of Hagler Bailly Consulting. Typical common risks can be divided into (a) commercial and (b) policy.11

Commercial risks are connected with developing and constructing the project. To this category belong risks relating to interest rate changes, inflation, currency risk and international price movements of raw materials and energy inputs. The policy risks include changes in the regulatory framework, war, civil disturbance and strikes.

To mitigate the risks, the financial institutions should check the government's macroeconomic record as well as the technical and managerial competence of the sponsors. Equity investors, long-term lenders, contractors and suppliers each face different risks. The methods in preventing exchange rate risks include fixing forward rates; adjusting electricity prices in accordance with the exchange rate and guaranteeing currency availability. There are institutions that guarantee against political risks, such as the Multilateral Investment Guarantee Agency (MIGA). The existence of such guarantees enables businesses take advantage of new investment opportunities.12

8 UNECE 2006.

9 Schmidheiny and Zorraquin 1996, 41.

10 Hagler Bailly Consulting, Inc. 1996a.

11 IFC 2005.

12 World Bank 2005b, World Bank Group 2005.

In circumstances of high risks, investors require a high rate of return. Sources of risk in EE investments include: Guarantees at the state or regional level as sovereign state guarantees or regional administration guarantees (Figure. 9.2).13

Figure 9.2 Sources of Risk in Energy Efficiency Investments

Figure 9.2 Sources of Risk in Energy Efficiency Investments

Source: Authors.

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