The study updates an earlier 2014 analyses and was conducted in cooperation with ALCOR and UNDP.

Objective

Developing countries often suffer from a high cost of capital. Because utility-scale wind and solar photovoltaic power plants require high upfront capital investments, the corresponding levelized cost of electricity (LCOEs) are very sensible to the cost of capital. States can respond to a high a cost of capital by introducing public derisking measures, that can be understood as interventions by the government and its partners to address specific investment risks, in the form of policies, programmes or financial products.

This study analyses how a chosen set of public instruments, listed in Table 1, could alleviate the country specific investment risks. It quantifies the reduction of the cost of capital and the corresponding reduction of LCOEs and relates the overall economic savings to the cost for public instruments. The quantification of derisking measures’ effectiveness relies on data from structured interviews with private sector investors and developers.

Table 1: Public instruments taken into account for the modelling.

In view of rising power demand on the one hand and climate change on the other hand, Tunisia is aiming make use of its excellent renewable energy resources and to attract private investment into renewable energies. According to the Tunisian Solar Plan (TSP), 835 MW of solar PV and 940 MW of wind power shall be installed from the private sector by 2030, to reach a share of 30% of renewable energy generation in the power mix. Achievement of these targets would contribute to both Tunisia’s energy security and climate change mitigation commitment under the Paris Agreement.

Financing Costs and Risk Environment

The study contains a detailed analysis of the current risk environment. With a cost of equity (COE) of 17% and a cost of debt of 8%, the financing costs are significantly higher than for example in Germany, where these costs are 7% and 3%, respectively. In a modelling exercise, the individual contribution of different risk categories to the increased cost of capital is quantified as shown in Figure 1 for the case of COE. In particular, three risk categories are found to contribute strongly to higher financing costs: 1) “power market risk” , i.e. risks related to power market regulation, such as the need for well-functioning, transparent mechanisms for the sale of electricity; 2) “counterparty risk”; i.e. risk related to the reliability and credibility of the electricity buyer; and 3) “political risk”.

Figure 1: Impact of risk categories on the cost of equity for wind energy and solar PV investment in Tunisia, business-as-usual scenario.

Figure 2: Impact of derisking measures on the BAU cost of equity by risk category for wind energy and solar PV investment in Tunisia.

In a second stage, the modelling quantifies the effectiveness of derisking instruments and calculates a post derisking cost of capital as shown in Figure 2, for the case of cost of equity. The post dersiking cost of capital in turn yields post derisking LCOE’s. The overall economic savings obtained by public derisking measures are estimated by multiplying the pre and post derisking LCOEs with the TSP power generation targets from renewable energies and subtracting the one from the other. These savings are then compared to the costs of public instruments.

For wind energy, (2030 investment target: 940 MW) the modelling identifies a targeted package of public derisking measures with an estimated cost of EUR 104 million until 2030. These derisking measures result in the following potential benefits:

• Catalysing EUR 1.07 billion in private sector investment in wind energy.
• Lowering wind energy generation costs due to derisking from EUR 7.2 cents to EUR 5.8 cents per kWh.
• Creating economic savings related to derisking of wind energy of EUR 308 million over 20 years.
• Reducing carbon emissions by 21.6 million tonnes of CO2 over 20 years, relative to the baseline.

For solar PV, (2030 investment target: 835MW), the modelling identifies a targeted set of public derisking measures with an estimated cost of 54 million until 2030. When implemented, this results in the following benefits:

• Catalysing EUR 0.53 billion in private sector investment in solar PV.
• Lowering solar PV generation costs due to derisking from EUR 7.1 cents to EUR 5.6 cents per kWh.
• Creating economic savings related to derisking of solar PV of EUR 149 million over 20 years.
• Reducing carbon emissions by 10.6 million tonnes of CO2 over 20 years, relative to the baseline.

Conclusion

Today’s investment environment for renewable energy in Tunisia is characterised by a number of investment risks that result in high financing costs. Our study demonstrates how investment in public derisking instruments could reduce the overall cost for the generation of electricity from renewable sources. Economic savings related to lower costs of capital thereby outweigh the costs of derisking instruments. Accordingly, implementation of a derisking framework could indeed be cost-effective opportunity for policymakers in Tunisia to consider to facilitate the provision of reliable, affordable and clean power for Tunisian citizens. The results show which risks are most crucial to address and which derisking measures could have the greatest impact.