One of the biggest challenges for greater renewable energy deployment in the MENA region (Middle East and North Africa) is to overcome the hesitation of investors to put their money into solar energy generation and equipment manufacturing projects. This is mainly due to two key constraints of investing into renewable energy in the region, which consequently lead to limited access to funding: the frequent lack of profitability of RE projects and the associated high risks.
A significant lack of profitability of renewable energy projects is a problem encountered around the globe. In most cases globally energy production from RE sources is still more expensive in comparison to traditional means of production. Costs for non-renewable energy typically amount to 3-10 $US cents per kWh while energy produced from renewable sources is not only more costly in most cases but often also shows a far greater cost range. Admittedly, most renewable energy technologies “are still at the early commercial development stage” (OECD) which means that they will move down the cost curve over time. Additionally, a sharp price increase for fossil fuels is expected that will improve the renewable’s relative profitability. Still, for the moment this constitutes a complicated obstruction.
In the MENA region profitability problems are aggravated by exceptionally low prices for electricity. In many countries electricity prices “tend to be too low to enable the investor to recover the cost of generating electricity from renewable sources” (OECD) due to high fossil-fuel subsidies. This further worsens the prospects for profitability of most renewable energy technologies and points to a strong necessity for government support to broaden deployment of renewables.
Moreover, renewable energy projects are often characterised by a high level of risk involved. As renewable technologies tend to be capital-intensive and costly they imply lengthy payback periods, typically between 8 and 17 years. The typical structure of a renewable energy business plan is characterised by high up-front costs and small operating costs. Hence, investors depend on strong guarantees by the contracting entity to ensure a continuous flow of income from the project as well as on political and economic stability to secure a conducive environment for the project. The OECD classifies the risks involved as follows: (1) client risks, (2) political and regulatory risks, (3) market risks, (4) technology risks associated with the novelty of the technology.
The consequence is limited access to funding for many renewable energy projects. The above-mentioned lack of profitability as well as the high risks involved often results in reluctance on the side of commercial banks and other private financial actors to provide funding of renewable energy projects. Literature suggests that “the immaturity of the renewable energy sector increases the difficulties associated with accurately pricing relative risk of investments in clean energy, making it more difficult for these technologies to obtain financing at reasonable costs than for fossil fuel technologies” (Kalamova et al. 2011:8).
(This is an excerpt from a broader study entitled “Achieving inclusive competitiveness in the emerging solar energy sector in Morocco” that was conducted by a group of DIE/ German Development Institute researchers (including the blog author) in spring 2013. The final study is still to be published. If you are interested in receiving the final full product, please do not hesitate to contact me via my Twitter account (@mattcurious). Alternatively, just leave a reply below.)