PV, a dicey business

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When Activ Solar planned the hefty fleet of PV power plants it now has operating in Crimea, it cannot have foreseen the dramatic events of the past few weeks. As a company that prides itself on its in-house financial nous, no doubt the risk of doing business in a country such as Ukraine, with a recent history of political unrest, would have been built into its projects’ financial planning. But a snap annexation of the region by Russia probably wasn’t on the danger list.

As it is, as our recent reports on PV Tech have revealed, the Austria-based company is now playing a waiting game, with no detail yet forthcoming on what either the Ukrainian government or the Russian/Crimean government plans to do with the region’s power infrastructure.

The best hope for Activ Solar is that, as one observer we spoke to suggested, the Ukrainian government maintains its non-recognition of Crimea’s transition to Russian control and continues to pay out agreed feed-in tariffs for projects in the region. But as, if not more probable is the prospect of Ukraine casting these projects adrift and leaving them to the mercy of the region’s new political masters, who offer nothing like Ukraine’s generous feed-in tariff.

Although merely a side-story in Ukraine’s unfolding drama, the fate of Activ Solar’s Crimea PV plants is a vivid illustration of what many analysts have predicted will become an increasingly prominent aspect of solar business: managing political risk.

As solar widens its reach around the globe and moves into new markets, it will become increasingly exposed to the vagaries of policy and politics. Ukraine is a particularly extreme example of this – a country that has gone from looking extremely favourable to the brave or well-connected solar developer to the complete opposite almost overnight because of a sudden, unforeseen political crisis.

Given the surprise nature of events in Ukraine, Activ Solar’s unusual predicament is unlikely to be one shared by too many of its counterparts around the world to quite the same degree. But far more probable in the spectrum of risks likely to be faced by solar companies are the sorts of occurrences seen recently in countries such as Spain and the Czech Republic, where what looked like safe and lucrative solar investments backed by government subsidies have been turned on their heads due to changing political whims.

In this regard, solar has, ironically, not helped its own cause. The dramatic fall in PV costs in recent years has unsurprisingly resulted in a surge in investment. This has put strain on government support schemes and made the slashing of these same programmes an easy (if misleading) carrot for politicians to dangle in front of voters’ noses to head off any disquiet over rising energy bills.

This and the fact that energy projects in emerging markets can be highly politicised and even open to corruption mean that the level of political risk faced by the industry as it expands its global reach is likely to go up rather than down. This was borne out by a recent survey of renewable energy companies by the Economist Intelligence Unit and Swiss Re, in which 15% of those interviewed ranked political risk as a “high” risk for their business, while a further 46% rated is as a “medium” risk.

So what can developers do? Paradoxically one method for the industry to minimise the risk from political crises or about-turns is to adopt the mantra of not putting too many eggs in one basket. By building up a geographically diverse project portfolio, developers can minimise the worst of the effects of one market turning bad. As an aside to that, it will be interesting to see how Activ Solar fares should the worst happen to its plants in Crimea; although the company has recently announced plans to explore markets such as the USA and Saudi Arabia, it has yet to build any projects outside Ukraine.

Another approach is, of course, insurance. Traditionally offered by development banks in emerging-market projects they were backing, this is now finding its way into mainstream finance as solar becomes a better understood asset class.

Last week British firm insurance firm GCube announced a new insurance policy specifically geared towards covering projects against political risk. According to the company, the policy will offer projects across all the main renewable energy types insurance coverage of up to US$50 million against political incidents and regulatory u-turns. Its target markets are Latin America, Africa, Asia Pacific and Central Asia.

GCube would seem to be at the forefront of what looks set to become a rich new vein for the financial industry to tap. Last summer, Bloomberg New Energy Finance and Swiss Re published a report predicting the insurance market for wind and solar projects in just six countries – Australia, China, France, Germany, the UK and the US – would be worth anywhere between US$1.5 billion and US$2.8 billion by 2020. Extrapolated across the globe, that’s a big new source of revenue for insurance firms.

And having ‘off the peg’ insurance products such as this covering political risk will be a big step forward for the renewable energy industry too and a clear indication of the way in which it has matured. But as one of the authors of that same BNEF/Swiss Re report acknowledged, insurance is no “silver bullet” for the industry; not only will risk transfer products for solar be very expensive, they are also unlikely to cover against all eventualities.

Ultimately, there is as yet no sure-fire way for developers to protect themselves against all political risk. But given that one of the solar industry’s chief characteristics is its ability to open up new markets, it’s unlikely this fact will be enough to deter the pioneering firms from sniffing out new frontiers.

Solar investments can quickly become overrun by political events. Image: Alan Levine, Flickr.
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