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BRIEF September 9, 2019

Solar Risk Mitigation Initiative

Mobilizing US$ 500 million of concessional finance to unlock the potential of renewables in developing countries by 2025


Context

Solar technology is revolutionizing the power sector. It could become a game changer for many developing countries as solar is (i) wide-spread promoting energy security, (ii) among the cheaper source of electricity and cost-competitive with fossil fuel in many countries, (iii) supporting universal access to electricity, (iv) enabling a short construction timeline, and (v) when combined with battery storage, providing firm power. While the proportion of solar and wind generation is rising every year, it is still far from the scale needed to reach the sustainable development goals (SDGs) and to stay below the Climate Change Paris Agreement 2oC scenario.

According to the World Bank’s estimates, based on the International Energy Agency’s (IEA) Sustainable Development Scenario, 950 gigawatts (GW) of solar photovoltaic (PV) and 580 GW of wind need to be installed in developing countries by 2025.3 Those targets represent increases of 690 GW of solar PV and 330 GW of wind from today’s current installed capacity—to be built within six years and an investment of over US$500 billion in solar PV and US$400 billion in wind.

Challenge

To reach this objective, large amounts of private funding will have to be unlocked to complement the limited public financing available. Yet most developing countries still lack a pipeline of bankable solar projects for consideration by the private sector. Renewable energy deployment at the necessary scale is hindered by critical challenges such as grid integration technical constraints, off-taker risk, and weak procurement and planning capacity. These barriers prevent countries from attracting the private investments needed for accelerating its deployment. To develop one, countries must take a series of key steps to tackle critical risks perceived by the private sector while also minimizing risks for the public sector.

An Integrated Initiative

The World Bank– Energy Sector Management Assistance Program (WB-ESMAP), in partnership with, Agence Française de Développement (AFD), International Renewable Energy Agency (IRENA) and International Solar Alliance (ISA) developed the Solar Risk Mitigation Initiative (SRMI or “the Initiative”) to address these challenges. This unique approach offers development and climate financing for: (i) technical assistance to help countries develop evidence-based solar targets, implement a sustainable solar program, and maintain robust procurement processes with transaction advisors; (ii) critical public investments to enable integration of variable renewable energy (VRE), finance solar park infrastructure, and increase access to electricity ; and (iii) risk mitigation instruments to cover residu­al risks perceived by private investors.

Risk Mitigation Approach

SRMI aims to support countries in developing sustainable solar programs that will attract private investments and so reduce reliance on public finances. It has three components to mitigate the risk of solar deployment:

  • Sustainable Solar Targets: supporting the development of sustainable renewable roadmaps with medium-term targets based on sound planning and resource assessments, and providing concessional climate finance blended with development finance and technical support to ensure that countries have the right enabling environment to reduce country risk;
  • Transparent Procurement: supporting the selection of private sector developers and investors in a competitive and transparent manner to address country and project risk; and
  • Viable Risk Mitigation Coverage: developing viable risk mitigation coverage to cover residual project risks targeting solar (grid and off-grid) and storage deployment financed and operated by private investors.

Financing

Dedicated financing will be raised to support a technical assistance program as well as investment lending and risk mitigation coverage to implement the roadmaps. Concessional climate finance is expected to play a key role in new lending for grid infrastructure upgrades and development of solar parks as well as to support innovative risk mitigation coverage by leveraging the resources of development finance institutions.

Technical Assistance Program

Under SRMI, it is proposed to finance a technical assistance program through ESMAP to support countries develop an enabling environment, particularly (i) electricity least-cost planning, (ii) transparent selection of independent power producers including through the hiring of transaction advisors, and (iii) capacity building program.

SRMI’s first products are (i) the Sustainable Solar Guidelines: the report details each step to be taken to develop an effective program, highlighting links between each step and other critical matters that should be considered along the way to ensure an integrated approach with a diagnostic tool that countries can use to benchmark their progress in fulfilling the conditions for a sustainable solar program and (ii) a Global e-Tendering Platform that will enable countries to launch a competitive process to select independent power producers (IPPs) in a robust manner.

Expected Results

For illustration purposes, the combination of USD 250 million of concessional climate finance and USD 250 million from development partners focusing on countries with weaker grids[1] could directly leverage more than USD 3.3 billion from private investors which would represent (i) 1.8 GWp of PV with 2.4 GWh of storage and (ii) 900 MWp without storage representing around 8.3 million CO2 tons emissions avoided over the lifetime of the PV projects.

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[1] Under the assumption that the USD 500 million envelope would finance a public investment in storage, dispatch upgrades and solar park infrastructure. Noting that the investment on dispatch upgrade, utility-owned storage, and improvement of the enabling environment could enable much larger penetration in the grid of other commercially-financed VRE projects.