November 16, 2016
Countries with high solar power potential have backed a common risk mitigation mechanism that could unlock up to USD 15 billion of investments to add 20 gigawatts of photovoltaic capacity in more than 20 countries.
The proposed Common Risk Mitigation Mechanism (CRMM) is a multilateral market platform that has received initial support from countries including India, France, Australia, Mali, Namibia and Nigeria.
A CRMM feasibility study released at COP23 outlines the plan as a pilot phase with the eventual aim of leveraging billions of dollars of impact capital to catalyse USD 1 trillion of domestic and international private institutional capital. The CRMM could help build 1000 gigawatts (1 terawatt) of solar power generation capacity in low and middle-income countries by 2030, the study claimed.
The study was designed by a multi-stakeholder taskforce – comprised of the Council on Energy, Environment and Water, the Confederation of Indian Industry, the Currency Exchange Fund and the Terawatt Initiative – on the request of 17 signatory countries to the International Solar Alliance (ISA).
“As much as 75% of the cost of solar power is the cost of finance,” said Arunabha Ghosh, CEO of the Council on Energy, Environment and Water. “The pooling of risks would reduce double counting of risk variables, providing a single guarantee cover at prices lower than the additive price of existing insurance products.”
The study presents recommendations to governments of low- and middle-income countries to accelerate their solar energy generation capacity, at scale and in local currency. The idea is to develop a sustainable financial ecosystem, centred around an international guarantee mechanism, which could pool various types of risks and pool projects across many countries to lower the costs of hedging against those risks.
The financing of solar power generation assets in many developing countries suffers from a lack of risk mitigation tools, a high perception of risk among investors, high transaction costs, small project sizes, and lack of scale. Investors, developers and other stakeholders need transparency and clarity of process, which is often missing in some countries. The CRMM is designed to create a global solar market, boosting confidence among the international development community and private and public institutional financiers, to help meet international climate targets in countries with high solar potential.
The proposed mechanism is aligned with the aims of the ISA, jointly launched by India and France at the COP21 in Paris in 2015. It is set to become a treaty-based intergovernmental organisation on 6 December 2017, with Guinea becoming the 15th country to ratify the ISA Framework Agreement last week. The total number of ISA member countries has now increased to 44.
“There are 121 countries totally or partially within the tropics of Cancer and Capricorn, which are therefore eligible to be full members of ISA,” said Anand Kumar, secretary at India’s Ministry of New and Renewable Energy, in Bonn.
“The CRMM — the Paris Guarantee Fund — is a major step in the implementation of the Paris Declaration of the International Solar Alliance adopted on 30 November 2015 and of the ISA programme aimed at mobilising affordable finance at scale,” said Upendra Tripathy, interim director general of ISA. “This instrument will dramatically lower the cost of finance for renewable energy and the overall price of electricity.”
The CRMM’s pilot phase will be launched in 2018 with the aim to achieve a critical size and demonstrate its cost effectiveness in pooling and aggregating capital, and mitigating risks at an international level.
The Indian experience in developing large scale solar energy has shown that adequate distribution of risk is critical to project success. “The CRMM is a welcome announcement by the International Solar Alliance and can give India an opportunity to show other developing countries a path forward towards accelerated solar deployment,” said Bhaskar Deol, CEO of Mynergy, which provides financing solutions for distributed renewable energy projects in India. “Success for ISA member countries will depend on their ability to mobilise finance for small-scale, distributed solar projects, which suffer from risks such as off-taker risk, currency risk and policy uncertainty.”
Mudit Jain, senior manager at Bridge to India, a cleantech consultancy, said the biggest impediment for solar project development in low- to middle- income countries is the scarcity and high cost of capital. “If the CRMM mechanism can mitigate the political, off-taker and foreign exchange risks, it would definitely attract the low-cost capital, ultimately leading to large-scale solar deployment,” Jain told thethirdpole.net.
“However, USD 1 billion may not be sufficient to attract USD 15 billion capital in low-income countries where the risk is much higher and will require higher provisions for risk mitigation. I presume that the pilot phase would be targeted in the countries with already existing mechanisms to lower the aforementioned risks to a certain extent, including India.”
CRMM could have a positive impact because it will reduce the amount of effort that is required in raising funds, which is a major concern in India, according to Ritesh Pothan, an expert in the clean energy sector. “If it is able to reduce the interest rate and bring in a good rate, then there scope for storage and growth in the Indian market, not only from the solar perspective, but also from the ancillary to solar industry as well,” he said.
Many big companies in India are opting for onsite solar power projects, but most micro, small and medium enterprises and growing businesses find it difficult to bear the high initial cost of solar projects as availing finance is difficult. “Such an initiative will help the country in solar adoption,” Anshumaan Bhatnagar, director of Sunshot Technologies Pvt Ltd, told thethirdpole.net.
However, much initial work is needed to be done before starting any kind of mitigation process as part of this mechanism, said Ajith Gopi, head of the technical consultancy division and a programme officer at the Agency for Non-conventional Energy and Rural Technology.
“Most investments are coming in the solar off-grid sector, which is a major area for south-east Asian and sub-Saharan countries. You have to find a strategy by getting a clear picture of how we can implement this in mostly the off-grid sector, since a majority of the companies are involved in the grid-connected market,” said Gopi. “It will be difficult for private companies to travel to remote locations and provide off-grid solutions to societies.”
This, however, would not be a major impediment to the solar energy initiative of India and other member countries, Indian officials said. Although coal will continue to be used in the Indian energy sector, “we’re going ahead with our focus on renewable energy and will have 40% of our power from renewable energy by 2040″, said C.K Mishra, secretary at India’s ministry of environment, forests and climate change.
“We are targeting 1,000 gigawatts solar in all ISA countries by 2030 (in addition to what has already been installed),” said Anand Kumar, renewables secretary.
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