Renewable energy projects are becoming “a significant source of the world’s power,” and Jeffrey Karp and Jim Wrathall of Sullivan & Worcester analyzed both the opportunities and risks involved for companies. Citing U.N. data, they say investment in renewables in developing countries was up 36 percent in 2014. But they note it’s imperative for developers to understand the risks of these projects for the environments they’re going into.
They identified several risk categories for renewable energy projects:
- Geopolitical Risk: Be mindful of politics, say the authors. Unstable governments can change laws—or even regimes—midway through a project. And though it may be possible to buy political risk insurance, it’s expensive and doesn’t always provide complete coverage.
- Legal Risk: “Developing countries may lack the general rule of law that provides for predictability and transparency of business transactions,” say Karp and Wrathall. Corruption, bribery and other threats are very real concerns, even including local counsel extorting foreign developers for more “legal fees.”
- Currency Risk: Developing countries’ local currencies can vary greatly, so take that into consideration when drafting contracts for an energy project. The authors note there are instruments to hedge the rates, but often currency swaps or other options can be costly and still will be unpredictable.
