Renewable energy finance: Sovereign guarantees



Less than two decades remain for countries around the world to make drastic cuts in
carbon-dioxide emissions. This is necessary to realise the goals of the Paris Agreement,
which calls for limiting the increase in average global temperature to well below 2 degrees
Celsius (°C) and ideally within 1.5 °C above preindustrial levels. The International Renewable
Energy Agency (IRENA) has estimated the total energy investments needed to fulfil the Paris
Agreement amount to USD 110 trillion by 2050, or USD 3.2 trillion per year.


As renewables have become a compelling investment proposition, global investments in
new renewable power have grown from less than USD 50 billion per year in 2004 to around
USD 300 billion per year in recent years (Frankfurt School-UNEP Centre/BNEF, 2019), exceeding
investments in new fossil fuel power by a factor of three in 2018.

Another defining trend of renewable energy investments has been a geographic shift towards
emerging and developing markets, which have been attracting most of the renewable investments each year since 2015, accounting for 63% of 2018 renewable power investments
(Figure 1). Besides China, which attracted 33% of total global renewable energy investments in 2018,other top emerging markets over the past decade include India, Brazil, Mexico, South Africa and Chile (Frankfurt School-UNEP Centre/BNEF, 2019).Nevertheless, many developing and emerging countries in Africa, the Middle East, South-East Asia and South-East Europe still have a largely untapped renewables investment potential.

Figure 1 Global renewable energy investment (excl. large hydropower), in USD billion, by region, 2004-2018

In addition to the growing technological and geographical diversity, the renewable energy
investment landscape is also witnessing a proliferation of new business models and investment vehicles, which can activate different investors and finance all stages of a renewable asset’s life. Examples include the rise of the green bond market, growing interest in corporate procurement of renewable power and new business models for small-scale renewables such
as the pay-as-you-go model.


Bringing a project to financial close requires all risks that the project bears to be allocated,
mitigated or transferred in a way that makes all stakeholders comfortable. This is no less true for renewable energy projects. Yet for projects in emerging countries, the main “residual” risks that few investors are able or willing to take are often related to the country itself. The buyer of the power may not be creditworthy, there is a risk that the legal and tax environment will change over time, or a new government may want to change the tariffs, among others. The “one size fits all” solution that most financial institutions asked for in the past to deal with country risks was a “sovereign guarantee”.


1.Guarantees are replaced by “letters of comfort” and “letters of support” The Ministry of Finance can still issue a document that does not have the same strength as a formal guarantee but that provides sufficient comfort to the stakeholders of the project. Some of these documents include strong commitments that can be legally enforced and are reviewed by the Attorney General, while others are more vague.

2. Use of the preferred creditor status of multilateral banks and insurers
Multilateral financial institutions that are majority owned by member countries and that have a
development role include multilateral banks (e.g., the World Bank, the Asian Development
Bank, the African Development Bank) and multilateral insurers (e.g., Multilateral Investment
Guarantee Agency (MIGA), Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), African Trade Insurance Agency (ATI)).

3. Put and call option agreement (PCOA)
Specifically, for PPAs, some countries have sought for a replacement of the traditional termination clauses that explicitly describe the responsibility of the government. Termination clauses come into effect if the IPP, the off-taker or the government fail to honour their obligations under the PPA. The party that is not responsible for the breach of contract can then terminate the contract and ask for compensation for the loss. In the case of a breach of contract by the off-taker, usually the national utility that is owned by the government,
then the government will have to pay the compensation. This is a contingent liability, and
potentially it accrues to the national debt.

4. Bilateral treaties
Bilateral treaties are agreements between two governments where the parties promise that
transactions made by a company from one country will not suffer from political risk events that are caused by the other government. Contrary to the system described under the PCS, the treaty covers all transactions and there is no notification to the government.

Figure 2 Structure of the ADB’s Pacific Renewable Energy Program


1. Initiatives to improve the creditworthiness of the off-taker
In some countries, the fundamental problem is that the off-taker does not have a strong balance sheet for structural reasons. The logical solution is to improve the creditworthiness of the utility by recapitalising it, improving its management and operations, and ensuring that its revenues match its expenses and enable it to make investments in its infrastructure. This requires significant resources and a full commitment from the government. Several initiatives to achieve this exist in Africa, spearheaded by the World Bank, the African Development Bank and the Millennium Challenge Corporation.

2. Renovar
In this initiative of the Argentinian government, the payment obligations for all renewable energy PPAs are taken over by Renovar, a government institution, taking thus the risk away from the national utility. The payment obligations of Renovar are in turn guaranteed by MIGA, a part of the World Bank Group with an AAA rating. By removing the payment risk this way:
• The government effectively removes the credit risk;
• Transaction costs are reduced as all the IPPs are covered under one single contract between MIGA and Renovar.
This has helped the government of Argentina negotiate low feed-in tariffs.

3. The Regional Liquidity Support Facility (RLSF)
One of the major challenges for an IPP is to guarantee to its lender that even if the off-taker
delays payment, the loan (principal plus interest) will still be repaid on time. The related risk is named “liquidity risk”.

4. The Transparency Tool
This tool was developed as part of the RLSF. All the IPPs of a given country are invited to inform their invoices and their payment records to a webbased platform. The consolidated information is shared with all participating IPPs and with the off-taker. The tool also produces trendlines and other reports that make it possible to assess the experience of an IPP in comparison with other IPPs. The information can be made public from time to time. The objective is to demonstrate that, over time, the off-taker is a reliable payer and thus
there is no need for a guarantee.

5. Partial Risk Guarantees (PRG)
PRGs are on-demand guarantees that are issued by investment-grade multilateral institutions such as the World Bank and the African Development Bank. They can be triggered in case an event that is described in the guarantee letter takes place. In most cases the institution that issues the guarantee requests a back-to-back guarantee from the government (Ministry of Finance).

6. Africa GreenCo
Africa GreenCo is a private initiative that develops an alternative to the off-taker risk in countries covered by the Southern African Power Pool (SAPP). Its objective is to become the official off-taker of renewable energy IPPs. As an official off-taker, it would have the right to sell the power to other participants in the SAPP if the national utility fails to pay. Its creditworthiness would be provided through a mix of strong capitalisation and guarantees issued by investment-grade institutions. In such case, the non-payment becomes a commercial rather than a political risk for the IPP.

7. Push for PPAs in local currency
In many developing countries, the IPPs want to be paid in hard currency (usually US dollars or
euro), since their source of funds and their capital expenditure (“CAPEX”) are usually denominated in these currencies. On the other hand, the off-takers generate their revenue in domestic currency. The depreciation of the domestic currency can thus create a major problem for the off-taker and affect its ability to pay for the power that it purchases. If the PPA is expressed in hard currency but the actual payment is made in domestic currency, but at an agreed exchange rate, the supplier has the risk that it will not be able to make the conversion
in the hard currency. The additional risk is that the IPP will not be able or allowed to transfer its hard currency to a bank account outside the country.

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