As discussed in the post on National Clean Energy Fund, fund allocation will require a serious due-diligence of projects whereby a clear understanding and evaluation of risks will be crucial in project selection process. Projects such as setting up a solar or wind farm can potentially attract a lot of capital, however, if it will seriously damage the biodiversity of the region or if the region does not offer a promising market, then directing funds towards such a project may not be the best decision to take.
Besides identifying the key areas where NCEF would be put to use and viable financial instruments as medium of fund allocation, there still remains a very critical exercise to be carried out i.e. Risk Assessment. Risks associated with any project can be broadly categorized under four categories:
- Financial Risk: Financial risks mainly include uncertainties pertaining to access to investment and working capital, up‐front cost for investors, market size, high cost of power from renewable sources making it uncompetitive, rate of return, etc. The uncertainties in return associated with the barriers faced by implementing agencies accentuate the risks borne by the stakeholders.
- Technical Risk: Technical risks mainly include the risk and uncertainties regarding the performance of a particular technology, compliance to standards or certifications, system constraints etc.
- Implementation and Monitoring Risk: Even if a project is conceived in the area of clean technologies and renewable energies, there are immense implementation risks and monitoring risks associated with the projects. There are very may practical issues that emerge while it is put to execution. The monitoring difficulties may arise by virtue of the location of the project, oppositions from some indigenous groups and communities etc.
- Risk pertaining to Local Community Participation: A number of projects are pursued to generate off grid renewable energy so that the communities can benefit from them. Renewable energy pursuits for rural areas will be successful only when people would accept the new way of energy consumption and change their conventional methods. If they are inelastic towards it, then the project could be a total failure.
A necessary step towards risk assessment is the quantification of risk. This requires developing a ‘Risk Matrix’. The risk matrix includes all the parameters that indicate risks to be specified and weights or scores are assigned against each indicator. Once quantified, comparison between projects becomes more feasible and decision makers can prioritize the projects. Accordingly, portfolio of projects would be diversified as per degree of delivery risk.
The following is a simple illustration of ‘Risk Matrix’. First step is to define the parameters and then assign scores.
Scores in the red category indicate high degree of risk. In a similar manner, risk assessment matrix must be prepared for projects. Based on the outcome, appropriate action is take – rejection, selection with mitigation strategies or put in pipeline.
Further to the discussion on risk assessment, next up on ENVECOLOGIC will be a post on forms in which fund from NCEF should be allocated – grant, equity or debt capital.