The cost of capital for renewable energy projects, essentially debt, is on average 7x higher for developing economies than developed economies. The actual spread varies widely, from 3% to 50%. This is despite the fact that the marginal cost of mitigation through renewable energy for one unit of carbon in developing economies is less than half of that in developed economies.
CPI published a discussion paper in June 2023, Cost of Capital for Renewable Energy Investments in Developing Economies, that outlines a market-readiness analysis of more than 40 International Solar Alliance (ISA) member countries with high solar output and significant associated investment potential. That discussion paper aimed to better understand the impact of investment risks specific to solar project development on the commercial viability of such projects, i.e., the risk premia on the delivered cost of capital for projects in these countries.
The primary purpose of this new discussion paper is to highlight the potential reduction in cost of capital as a result of risk mitigation through a well structured and sized credit guarantee facility. This paper outlines three different approaches by which a Global Credit Guarantee Fund (GCGF) could be sized via different proportions of funded capital and callable capital:
- Conservative: funded with USD 4.1 billion in capital which could result in a direct debt mobilization leverage of 28x.
- Moderate: funded with USD 1.2 billion in capital which could result in a direct debt mobilization leverage of 98x.
- Optimistic: funded with USD 660 million in capital which could result in a direct debt mobilization leverage of 250x.
For the sample set of 40 countries analyzed, GCGF could result in an average reduction in risk premia of 3%-6% and an average improvement in credit ratings of 2-6 notches.
This discussion paper goes into the details of each approach, potential structures for the fund, and recommendations on next steps to develop the GCGF concept.