Neshwin Rodrigues and Duttatreya Das are energy analysts at Ember

High cost of capital is a major barrier to the rollout of renewable energy across the Global South. The Alliance of Small Island States has highlighted this repeatedly, and last year the International Energy Agency (IEA) concluded that across a range of developing and emerging economies, raising capital to build utility-scale solar projects costs twice as much as in the Global North.  

Capital costs more when investors perceive risks to be higher: the riskier the investment, the bigger return they demand. So the key to making renewable energy investment cheaper is to reduce the perceived risks.  

But to reduce them, we must first understand them. 

A league table for decision-makers 

At Ember, we have developed what we believe to be the first model-based approach that quantitatively assesses the importance of various factors affecting a solar energy project’s overall risk.  

As an example, in many countries the time it will take to get your solar farm connected to the grid is uncertain. This means missing out on revenue and presenting a clear risk to investors. We calculate the importance of this uncertainty relative to other risk factors. In this way we can build a ‘league table’ of factors that raise the cost of capital, giving policymakers the information they need to tackle the biggest first and bring costs down effectively.  

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We can also show investors where they are being too risk-averse for their own good, encouraging them to worry less and loosen the purse-strings a little. 

In the report that we publish today, we focus on India. But, in principle, our approach could be used in any country in the Global South where enough data is available to calibrate the model.

The Indian case is especially interesting at the moment because in 2023 the government introduced tenders for Firm and Dispatchable Renewable Energy (FDRE) generating capacity which require generators to supply electricity in non-solar hours. This can be approached by adding technologies like wind generation and battery storage.  

Range of uncertainties 

Among the risks that Indian utility-scale solar investments face, we show that the biggest is exposure to market price volatility for FDRE projects.

Electricity prices have become a lot more volatile since 2020, with events such as the Covid-19 pandemic contributing alongside more variable weather and changes to the electricity system and markets. This, we estimate, can reduce a facility’s overall revenue by 7-13%, sending a clear risk signal to investors. 

Second in our league table come the penalty payments that FDRE projects face if they fail to provide power when they are contracted to.

Next come delays in commissioning solar farms (due to issues such as grid connection queues), and then the perception that solar panels may perform less well than they’re claimed to. Uncertainties in the future cost of batteries, and the risk of other penalty payments, sit at the bottom end of the table. 

Cost escalation, delayed benefits 

In principle, we calculate that a solar farm in India would see investors needing up to a 4% higher return on investment to offset the risks associated with FDRE and project delays. 

Leaving these risks unaddressed would have major consequences. Renewables and batteries would be deployed more slowly, delaying the benefits of clean energy for citizens. It would keep energy bills higher than necessary, given that the cost of