Reducing the Cost of Renewable Energy Investment in the Global South

The high cost of capital remains a significant obstacle to the expansion of renewable energy in the Global South. The Alliance of Small Island States has repeatedly highlighted this issue, and last year, the International Energy Agency (IEA) reported that developing and emerging economies face double the capital costs for utility-scale solar projects compared to the Global North.

Investors charge higher interest rates when they perceive greater risks. The riskier an investment appears, the greater the returns they demand. Therefore, reducing the perceived risks is key to making renewable energy investments more affordable. However, to mitigate these risks effectively, we must first understand them.

A Data-Driven Approach to Risk Assessment

At Ember, we have developed what we believe to be the first model-based approach that quantitatively evaluates the impact of different risk factors on solar energy projects.

For example, in many countries, the time required to connect a solar farm to the grid is uncertain, posing a financial risk to investors due to potential revenue loss. By assessing how this factor compares to other risks, we can create a ranking system to identify which risks increase capital costs the most. This helps policymakers prioritize the biggest challenges, enabling them to lower financing costs effectively.

Our model can also guide investors in reassessing their risk perceptions, helping them avoid excessive caution and unlock more funding for renewable energy projects.

Case Study: India’s Renewable Energy Market

In our latest report, we apply this approach to India, though it could be adapted for any country in the Global South where sufficient data is available.

India presents a particularly relevant case, as in 2023, the government introduced tenders for Firm and Dispatchable Renewable Energy (FDRE) capacity. These tenders require renewable energy producers to supply electricity during non-solar hours, which can be achieved by incorporating wind power and battery storage.

Key Risks Affecting India’s Solar Investments

Our analysis highlights several major risks for utility-scale solar investments in India, with market price volatility for FDRE projects being the most significant.

Since 2020, electricity prices have become increasingly unstable due to factors such as the Covid-19 pandemic, unpredictable weather patterns, and changes in the electricity market. This volatility can reduce a facility’s revenue by 7-13%, making it a major concern for investors.

The second-largest risk comes from penalty payments imposed on FDRE projects if they fail to deliver power as contracted.

Other risks include delays in commissioning solar farms, largely due to grid connection issues, as well as concerns that solar panels may underperform compared to initial estimates. Additionally, uncertainties regarding battery costs and other penalty payments rank lower in our risk assessment.

The Impact of Risk on Investment Returns

Our calculations suggest that a solar project in India may require up to a 4% higher return on investment to compensate for risks related to FDRE policies and project delays.

Failing to address these risks could have serious consequences. The deployment of renewables and battery storage would slow down, delaying the benefits of clean energy for citizens. Higher financing costs would also keep electricity prices elevated, given that capital costs account for about 50% of renewable energy prices in India and many other developing nations.

Moreover, the increased cost of capital could hinder India’s progress toward its 2030 renewable energy goal of 500 GW capacity, potentially resulting in a 100 GW shortfall—forcing greater reliance on coal and exacerbating climate change.

Solutions to Lower Risks and Costs

The good news is that understanding these risks makes it easier for policymakers to take action.

One solution is the use of Contracts for Difference (CfDs), which have been successfully implemented in other countries. These contracts provide long-term price guarantees for renewable energy, shielding investors from market price fluctuations and making financing more attractive.

To reduce commissioning delays, policymakers could increase the number of solar parks where grid connections are pre-installed, enabling solar developers to access a ready-to-use infrastructure.

Concerns over solar panel performance could be addressed by improving product testing standards and encouraging Indian manufacturers to adopt advanced designs.

Interestingly, our analysis found that investors overestimate some risks, particularly concerns that solar farms might underperform. In reality, 75% of solar projects produce more electricity than expected—a fact that should encourage investors to adopt a less cautious approach without requiring policy intervention.

Turning Concepts into Action

Our risk-based methodology has existed in theory for over a decade, but we have now translated these concepts into quantifiable cost estimates.

While our model does not address broader macroeconomic factors such as a country’s credit rating, it provides a valuable tool for reducing investment risks and making renewable energy development cheaper and faster.

Looking ahead, we hope to apply this approach in other Global South countries, helping them unlock the full potential of clean energy and accelerate their transition toward a sustainable future.