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Risk Mitigation
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 |  Risk mitigation is an integral element of financial structuring, particularly for non-recourse projects. The process entails using specific financial instruments to transfer specific risks away from the project sponsors and lenders to insurers and other parties better able to underwrite or manage the risk exposure.
Financial risk management is often one of the keys elements to enabling the deployment of renewable energy projects. Certain financial risk management instruments can help mitigate the perceived risks associated with renewable energy and improve the investment terms for such projects. |
| | Technology and operational risksTechnology and operational risks are the principal deterrents to attracting appropriate commercial insurance cover. Typical risk categories for small hydro and wind include: seasonal resource variability, potential for prolonged breakdowns due to offsite monitoring (long response time) and lack of spare parts, long lead times and up-front costs for planning, permitting and construction, etc. For biomass technologies, the risks also include biomass supply availability, biomass quality variability and price variability. The attached table highlights the key risk issues affecting different renewable energy technologies and the risk management instruments that can be used to respond to these risks. | |  | | Contractual risksContracts, especially a long-term power purchase agreement, are significant risk mitigation tools. They determine each project participant’s commitments and responsibilities. The more clearly these are defined and enforceable, the more comfort the lenders will have. In particular, lenders often look for deal balance, where the contracts allocate risks cost-effectively (to the parties best able to handle the risks) and provide adequate transparency as well as monetary safeguards. Where risks are insurable, commercially available insurance can play an essential part in ensuring that a successful project finance structure is achieved by transferring risks considered unacceptable away from the lenders and to the insurance markets. Generally, revenue exposure (as a result of project delays, damage/losses during fabrication, transport, installation, construction and operational stages) is of prime concern for lenders. They often require insurance due diligence to be undertaken to review the risks and the adequacy of the proposed insurance arrangements. These can be an integral part of developing contracts, clauses in credit and other agreements, and insurance-related conditions before reaching financial closure. | | | | WBG risk mitigation toolsWBG risk mitigation tools consist of a range of investment guarantees, hedging and political risk insurance products that are part of its efforts to boost direct foreign investment in developing countries. By covering risks the private market is unable to bear, the Bank's guarantees and risk management products open new investment opportunities for businesses in developing countries. IBRD and IDA Guarantees
The Bank's political risk mitigating products help encourage private capital flows to emerging market countries by providing a degree of protection against critical government-performance risks that private lenders are reluctant to assume. The Project Finance and Guarantees Department offers three types of guarantees to commercial lenders: - Partial Credit Guarantees cover a portion of scheduled repayments of private loans or bonds against all risks. These guarantees are usually provided for privately funded public projects.
- Partial Risk Guarantees cover debt services defaults on loans to private-sector projects caused by government failures to meet contractual obligations.
- Policy Based Guarantees cover portions of debt service on borrowing by eligible member countries from private foreign creditors in support of agreed structural, institutional and social policy reforms.
IBRD Hedging Products
These products provide borrowers with risk management capabilities for projects, lending programs or sovereign asset-liability management. International Bank for Reconstruction and Development hedging products include interest rate swaps, interest rate caps and collars, currency swaps and, on a case-by-case basis, commodity swaps. MIGA Investment Guarantee Services
Loan guarantees and insurance against non-commercial risks such as expropriation, breach of contract, or war are available to eligible investors for qualified investments in developing countries.
MIGA Mediation and Legal Services
MIGA, on a selective basis, encourages the settlement of investment disputes between member countries and investors who are not MIGA guarantee holders. This service fills a gap in international law remedies currently available to foreign investors in their disputes with host countries, where diplomatic solutions are not practical for some, and formal arbitration may be too costly for others. IFC Risk Management Products and Services
The International Finance Corporation offers a variety of risk management products for private-sector projects in developing countries, including currency and interest products, and risk management facilities. The IFC tailors its risk-management products to meet specific needs of its developing country clients. | | |
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