Managing Credit Risk and Improving Access to Finance in Green Energy Projects




Cost of !nance has a high impact on returns and viability of clean energy projects compared to fossil fuel-based energy projects because operating costs for renew- able energy projects are very low. Cost of !nance is signi!cantly in"uenced by credit risk assessment and ratings, which has usually been an inappropriate measure of credit risk for clean energy !nance. Factors like inadequate credit information, lack of historical data at the project level, and higher risk of technological obsolescence lead to a credit market failure in clean energy !nance, leading to mispricing of risk and poor capital allocation to clean energy infra- structure in the economy. Access to institutional !nance is more constrained in the distributed renewable energy sector because of high transaction costs, high or unknown consumer credit risk, and a variety of other challenges. It is important that these constraints be eased through appropriate policy and !nancing interven- tions to crowd-in domestic banks by improving the quality of credit informa- tion—technical and commercial—creating suitable !nancial intermediaries and providing risk mitigation solutions.