Executives Identify the Greatest Risks of Investing in Renewable Energy

Despite global economic difficulties over the last few years, investment in renewable energy projects has increased and in 2010 actually surpassed investments in fossil fuel based power. A new report by the Economist Intelligence Unit (EIU) was written based upon a survey of 280 senior executives from the renewable energy industry, with the aim of studying the perceived risk involved in renewable projects.  The report shows how the executives are managing and reducing risk and the risk management challenges they must overcome.

To start the report identified the importance of renewable energy at the moment and how it is expected to change in the future. 33% of the executives said renewable energies are already a significant part of their business strategy, and 61% said that they expect this to be the case for their business within three years. Clearly indicating that renewable energies will grow to be an important sector for investors in the near future.

However as investment in renewable energies increases, so to do the risks involved. Risks may include: strategic risk; environmental risk; financial risk; market risk; operational risk; political/regulatory risk; and weather-related risk.

Of those surveyed, 76 percent identified financial risk as the most significant risk associated with renewable energy projects. 62 percent identified political and regulatory risk as fairly significant, and of those invested in the wind power sector, 66% listed weather related risk as important.

Generally the riskiest times to invest in a project are during the early stage of the lifecycle, such as during the financing stage.

Obstacles to risk management in the renewables industry include the restricted availability of data and the suitability of transfer mechanisms. 70% of the respondents said they are successful in identifying the risks, but less so at mitigating it or transferring it.

The single most effective method of reducing regulatory and weather related risk is by diversifying investments across different geographic and technological boundaries. Insurance policies are also popular with 60% using them in order to transfer the risk to third parties.

The report concludes that effective risk transfer products are limited and that the most effective way to reduce risk is to invest in joint ventures with dependable partners or by investing in the latter stages of developments that have already proven themselves to be safe and profitable.

By. James Burgess of Oilprice.com