4.5 LEVERAGING INVESTMENT Finding 14. De-risking renewable energy investment. The DREI framework has provided UNDP with an analytical tool for demonstrating the financial benefits of renewable energy to government stakeholders and investors. It expanded the UNDP offer beyond its core policy and capacity-building work and has delivered to government partners an important tool to help achieve market readiness. UNDP developed the DREI methodology in response to the observation that in many developing countries, financing costs for renewable energy remain high even as hardware costs fall, because of the higher risks of investing in these contexts. Prior to DREI, UNDP worked primarily on policy de-risking, supporting Governments to adopt regulations that encourage financial investment. This remains the most common practice where UNDP seeks to encourage a market for renewable technology. As described in chapter 4.3, the reviewed projects set the right targets for their policy work and planned the right activities. However, in many cases the project duration is too short to develop a market for the technology. In some cases, these projects have already been the subject of initial discussions with potential financiers, which were broken off with the termination of the projects. Typically, the market will not yet be self-supporting or provide large-scale opportunities ready for investment. There is scope for the projects to accelerate their preparatory activities, but longer time frames are often required because policy approvals depend on political will, approval processes and pilot project development. The DREI framework provides clear financial analysis to supplement this process. Ideally, the analytical results show that the clean energy technology is financially competitive, thus reducing the economic uncertainties surrounding policy adoption and investment. Where the analysis shows that further subsidies are still necessary to achieve competitiveness, or to yield sufficient return for the investor, the subsidies may still be lower than those applied to non-renewables options. The analysis is particularly useful in situations where fundamental political persuasion for the creation of an enabling environment is still needed, i.e., where there is no market uptake yet and there is a lack of clarity regarding the financial options. However, even in contexts where initial steps have been taken to de-risk investments the tool can highlight further measures to reduce barriers and improve the regulatory environment.
FIGURE 15. Example of the visual outputs of the DREI analysis USD/kWh USD/kWh Financing Costs
Cost of Equity Cost of Debt Operational Costs Investment Costs/ Depreciation
Technology Costs
Renewable Energy Pre-Derisking Life-cycle
Renewable Energy Post-Derisking Life-cycle Costs
Note: LCOE= Levelized Cost of Electricity Source: Adapted from UNDP Bureau for Policy and Programme Support, 2021
Chapter 4. FINDINGS
47