3. Finance and Risk
Clean power is cheap to build in most developing countries and expensive to finance, because investors price risks the project cannot control: a distribution company that may not pay, a plant that may not be finished, a currency that may fall and a state that may change the rules. Each risk has a different cheapest holder. This section of papers argues for removing payment risk at its source with a payment intermediary that guarantees the power contract rather than the debt, and then turning projects into a few standard securities: construction loans held by development banks, and pooled operating plants refinanced through first-loss equity and senior synthetic sovereign bonds. In stylized calibrations, the payment premium adds about 11 percent to a solar tariff, a contract guarantee removes it for about half its value in expected public cost, and refinancing the senior debt of pooled operating plants cuts the levelized cost of solar power by about a fifth (14–19 percent). The host state’s exposure becomes smaller, contingent and contracted, but it does not disappear, and the gain is real only where the structure improves collection or makes default rarer.
Section overview (pdf) → · Series slides (pdf) →
3.1 Guarantee the Contract, Not the Debt: A Payment Intermediary for Clean Power
Removing offtaker risk at source in developing-country power markets
Solar power is cheap to build in developing countries but dear to finance, because investors price the risk that a state-owned distribution company will pay late or not at all. A payment intermediary facility buys power under one standard contract, pays generators in full and on time, and collects arrears itself, behind a guarantee waterfall agreed in advance. Guaranteeing the contract removes the whole risk premium, about two dollars of saving per dollar of expected cost in a stylized case; guaranteeing project debt removes under a third of it. India’s Solar Energy Corporation shows the design works, and its buyers’ arrears show it needs utility reform.
Policy brief → · Working paper → · Slides (pdf) → · Policy brief (pdf) → · Working paper (pdf) →
3.2 From Projects to Asset Classes
Two-Stage Finance and Synthetic Sovereign Bonds for Clean Power
Clean power plants in developing countries are financed one at a time, on bespoke terms, so each lender prices construction, payment, currency and sovereign risk together for the life of the loan. This brief proposes turning them into a few standard securities. Banks finance construction against a contingent purchase contract; once plants operate, their debt is refinanced into pools that issue first-loss equity, a thin mezzanine and a senior synthetic sovereign bond. Pooling across countries under one contract keeps the cushion thin, and refinancing cuts the price of solar power by about a fifth. Standardization, not subsidy, lowers the price.
Policy brief → · Working paper → · Slides (pdf) → · Policy brief (pdf) → · Working paper (pdf) →
Time and Chance
Book · The Elements of Scale in the Green Transition
Why clean energy costs too much in the countries that need it most. The book works from the price of money through contracts and instruments to the institutions that would carry them.