Investing in renewable energy can be a great way to reduce risk and meet decarbonization or sustainability objectives. However, it is important to understand the risks involved and take steps to minimize them. In this article, we will discuss six steps to reduce risks when investing in renewable energy. The first step is to understand the investment environment and the factors that will shape it over the next decade.
Technology is reducing the cost of renewable energy and increasing the proportion of variable renewable energy (wind and solar). Governments are adapting new forms of state support to maintain stable and attractive investment environments, while ensuring the long-term reliability of the energy system and its profitability. The second step is to understand the risk involved in an investment. Risk is the probability that the return on an investment will be different from that expected.
Investors often demand a risk premium, which reflects and takes into account the risk involved in an investment. The third step is to understand the history of governments in supporting and implementing subsidy policies, as well as the prospects for future policy changes in this area as a result of elections or changes in fiscal and environmental policies. The fourth step is to identify compatible projects, investors, funding sources, and instruments that can help projects reach full investment maturity. The International Renewable Energy Agency (IRENA) Sustainable Energy Market is a tool for doing this.
The fifth step is to take advantage of public capital in the form of domestic resources, donor contributions, and support from multilateral development banks in developing countries. The African Energy Guarantee Facility (AEGF) was created with contributions from various parts of the public and private sectors to secure and resecure sustainable energy projects. The sixth step is to make portfolios more sustainable by investing in renewable energy source (RES) projects. Estimates forecast more than $3.4 trillion in new investments in renewable energy over the next decade, including $2.72 trillion in wind and solar energy. By following these steps, investors can reduce their risk when investing in renewable energy and make their portfolios more sustainable.