My experience working on renewable energy issues in Latin America and the Caribbean since the mid-1990s has provided me a unique vantage point from which to review and comment on trends affecting the industry. In my career, I have gained insights from both the development and financing sides of projects, from the perspective of project owners as well as from the investor lending side. Drawing from these experiences, I would like to share a perspective that I feel is largely overlooked when discussing trends in project implementation.
Renewable energy has made tremendous inroads in recent years, including advances on the fronts of financing, technology and innovation, commercialization, and regulatory improvements. These are all areas that, historically, have slowed renewables deployment (see UNEP’s Global Trends in Renewable Energy Investment 2015 and REN21’s Renewables Global Status Report). But it is at the project level, in particular, that many potential obstacles remain.
The project level is where all of these trends and advances are meant to coalesce. In many places, greater recognition of the need for energy diversification—and greater acceptance of renewable energy solutions—is emerging. When a project fails to secure financing or is delayed in some way, this does not necessarily mean that the market, regulatory, and policy conditions that support renewable energy project deployment (i.e., the enabling environment) remain full of obstacles or are not yet supportive of these types of projects. Sometimes, the project simply is not ready or good enough for investors to feel that the risks associated with the loan or investment are or will be addressed.
This is not necessarily a bad thing, as the rigor, discipline, attention to detail, and focus that a business, credit, or investment review imposes raises questions, highlights gaps, and can result in a stronger project as it advances through the various steps required. This is a well-traveled, mainstream process that more-traditional energy projects know well, which may also result in stronger initiatives and business cases.
As renewable energy projects and technologies become more mainstream, the planning, development, implementation, and operation stages are a valuable part of project management. Ensuring that projects meet rigorous criteria and characteristics helps to strengthen projects overall and improves understanding of their long-term financial viability, leading to less-risky and more-collaborative approaches.
Future renewable energy projects will be better prepared to overcome past barriers if the various regulatory, financial, and technical layers intermingle and if the steps surrounding development, deployment, and operation are standardized, mainstreamed, and focused. Learning from previous successes, challenges, and experiences provides an opportunity to strengthen projects and initiatives. However, certain fundamental conditions at the project level also need to be strengthened, especially in developing countries where the energy transition is urgent due to rising energy insecurity. These conditions include the following:
The overall “story” of a project and its feasibility—commercial, technical, regulatory, financial, environmental, and community—cannot be overlooked. The failure to address the many aspects of feasibility before ground is broken is a common characteristic of projects that have trouble with financing.
It is important to have a clear, complete, and well-documented and evidenced business case prior to submitting a project proposal to a potential investor or financier. For many projects, the “case” that is presented is incomplete, resulting in gaps that delay the credit review process and stall implementation. As an example, the Green Climate Fund, a key entity under the financial mechanism for the United Nations Framework Convention on Climate Change, has indicated that it will not distribute funds to seven of the eight initial projects for which it has approved funding until the implementing entities complete additional preparatory measures to demonstrate readiness. The projects were approved, but only pending further review of needed feasibility studies.
To address this barrier, project developers need to be sure to put the project itself at the center of any initiative. Public policy, technological improvements, improved access to finance, and a strengthened legal framework are all key elements for ensuring that the environment is ready for the deployment of resilient, greenhouse gas mitigating infrastructure. But without a strong project, a connective story, a diversified background, public and private partnership, completeness, attention to detail, and a compelling case, the enabling environment has less impact.
Counterparty and Partner Fundamentals
Any type of transaction will require a close review of the various counterparties and other relevant actors involved. Whether they are proponents, owners, partners, technical specialists, consultants, or operators, the participating actors and the value that they bring to the project need to be clearly identified.
Investors typically review partner background information and records prior to any transaction as a means of evaluating credit risk. Owners and partners must present the required information transparently and expeditiously before a project can proceed. Clearly defining and communicating perceived risks helps ensure that there are no unintended delays and misunderstood evaluations. This is a critical part of a project’s background and story.
Project owners and developers should represent their ownership openly and honestly, and be mindful when seeking partners so that they know what to expect before projects get too far under way. After all, a long-term relationship does not end at financial closing—it only begins there.
A quality project, with quality promoters and key partners, requires a comprehensive evaluation process, which needs to be internalized and owned by all parties and driven by national priority.
Many projects experience difficulties at this stage of the process, due to preconceived bias. Some partners may expect that, due to the climate mitigation and/or adaptation benefits that their project promises to deliver, the rigor of scrutiny applied will be more accommodating and less restricting than projects that do not have social and ecological benefits. This is a false assumption, and, in most cases, the opposite is true: project approval may be trickier precisely because these types of projects tend to fall outside the comfort zone of the private financial sector. Although transformative environmental and social proposals may be increasingly valued and mainstreamed, project developers should not automatically relax rigor and due diligence during a credit evaluation.
The local context matters a great deal. A relevant actor in a project—whether an asset manager, a pension fund, or an international, multilateral, or bilateral funding partner—must have the ability to navigate, articulate, and implement within the localities of a given country or region. International resources, technology, and knowledge sharing can be a big asset to a project, as is the commitment and access that these international players bring to local policymakers. But the ability to successfully navigate and articulate locally, while remaining cognizant of the required context, conditions, and characteristics, is what strengthens conditions of success for a project. This goes a long way to securing project sustainability.
The reality is that a strong project, finance, technology, and development team is only as strong as the weakest link among the local participants that are party or stakeholders to a project.
Obstacles Are Inevitable But Increasingly Surmountable
It is important to understand that challenges are part and parcel of project development. Although there is a good likelihood that any given project will be managed well, be developed, and operate, opportunities for improper development also abound. Poor planning, poor communications, poor community engagement, and sloppy regulatory compliance can bring down even the most beneficial and strongest projects.
At the project level, problems, delays, and obstacles are normal, and developers should be prepared to manage them proactively and transparently. The only certain thing is that there will be plenty of elements in need of troubleshooting and refinement.
Given the improved enabling environment for access to renewable energy financing, a strong project should stand a better chance of being successfully financed today than was the case even two years ago. As the process moves ahead, developers should remember to always keep the project itself at the center of the initiative, and focus on moving the ball forward.
Jorge Barrigh is a Senior Fellow in Climate Finance and Energy at the Worldwatch Institute. He has 20 years of experience in renewable energy, finance, climate, and innovation/entrepreneurship in Latin America, the United States, and Canada. He has an MBA in Finance from Temple University, a BS in Economics from Messiah College, and an Advanced Innovation Management Certificate from the Haas School of Business at the University of California–Berkeley. Jorge recently was appointed to the Board of the Latin American and Caribbean Council on Renewable Energy (LAC-CORE) and lives in New Hope, Pennsylvania.