Managing Credit Risk and Improving Access to Finance in Green Energy Projects

Abstract

Cost of finance has a high impact on returns and viability of clean energy projects compared to fossil fuel-based energy projects because operating costs for renewable energy projects are very low. Cost of finance is significantly influenced by credit risk assessment and ratings, which has usually been an inappropriate measure of credit risk for clean energy finance. Factors like inadequate credit information, lack of historical data at the project level, and higher risk of technological obsolescence lead to a credit market failure in clean energy finance, leading to mispricing of risk and poor capital allocation to clean energy infrastructure in the economy. Access to institutional finance is more constrained in the distributed renewable energy sector because of high transaction costs, high or unknown consumer credit risk, and a variety of other challenges. It is important that these constraints be eased through appropriate policy and financing interventions to crowd-in domestic banks by improving the quality of credit information—technical and commercial—creating suitable financial intermediaries and providing risk mitigation solutions.