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than commercial projects, which can negate the benefit of lower capital costs. An additional complication is that small projects from private investors or communities may have trouble finding finance and if they do, generally pay higher fees than large established companies. Countries with lower perceived political and country risk, a proven track record and respected institutions benefit from more generous terms and are more likely to be able to attract private investors and arrange commercial loans. Efforts to minimise the sources of risk (Table 2.2), wherever possible, will help to reduce the cost of capital and improve the project economics. TABLE 2.2: ENERGY PROJECT RISK FACTORS The financial structure of renewable generation projects and the cost of capital varies widely by technology, country, project developer and region. As an example, in the United States between the fourth quarter of 2009 and the fourth quarter of 2010 the quarterly average required return on equity for wind projects ranged from a low of 8% to a high of 14.5%. While over the same period, the quarterly average cost of debt for wind projects ranged from a low of 4.9% to a high of 11%. Making the simple assumption that the debt‐to‐equity ratio is between 50% and 80% and that debt maturity matches project length results in project discount rates of between 5.5% and 12.6%. This has a dramatic impact on the LCOE of wind projects, as the LCOE of wind with a capital cost of 12.6% will be 45% higher than one with a cost of 5.5% assuming a 35% capacity factor and USD 0.01/kWh for O&M. The situation is very different in developing countries. It is often difficult for project developers to mobilise the funds necessary to bring a project to fruition. Multi‐lateral and bi‐lateral lending is often critical to unlocking commercial funding and terms that are not so onerous that they undermine the project economics. For instance, a reasonable weighted average cost of capital for African projects is 15‐20%, except where strong guarantees are in place. This is significantly higher than the average cost of capital for renewable energy projects in OECD countries which typically are between 6% and 12%. Public sector involvement (Government, multi‐lateral or bi‐lateral lenders) and guarantees can help to reduce risks that the developer has little control or no control over and encourage the private sector to invest based on the project’s technical and economic merits. As a result, interest in public‐private partnerships (PPPs) has been growing, with efforts to develop appropriate public policies and regulatory frameworks that will leverage multi‐lateral and bi‐lateral lending to increase private sector investments in renewables and climate finance in general.1 As commercial lenders gain experience in funding renewable energy projects in robust regulatory and economic frameworks, then access to finance and the terms offered should improve. 1 For a more detailed discussion of the challenges and opportunities of financing renewable projects in the context of “climate finance” see Limaye and Zhu, 2012. Phase Risks Pre-construction Technology risk Project design Debt and equity financing Construction Construction delays Cost overruns Environmental mitigation plans Social mitigation plans Operation Operation and maintenance costs Output quality/volume Resource fluctuations Electricity sales payments (PPA contracts, etc.) Country risk Currency devaluation Currency convertibility/transfer Political force majeure Environmental force majeure Regulatory risk SOURCE: BASED ON WORLD BANK, 2007. 20 Renewable Power Generation Costs in 2012: An OverviewPDF Image | International Renewable Energy Agency
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