Renewable energy policy has always been recognized as a major incentive to the growth of renewable energy and market. In particular, in the last decade, renewable energy sources are considerably increased due to the supportive renewable energy policy worldwide. Policymakers keep on updating and revising policies in response to market changes and advances in technologies. At the same time, policymakers have shifted their perspectives from cost and benefit to risk and return so as to align with investors’ perspectives. As a result, risk management has to be kept accordance with the changing policy of renewable energy. The dynamic process is important to make certain that major risks are not unattended and managed. The intent of the research is to provide stakeholders in renewable energy projects, including policymakers, financiers, developers and risk management instrument providers, a thorough review of risk management of renewable energy policy and to better define those risks so that they can be adequately mitigated to attract future investment. Five major risks which include market, credit, operational, liquidity and political risks associated with renewable energy developments and markets have been identified. Particularly, renewable energy policy risk is investigated and commonly used risk management tools are reviewed and proposed to address the associated risks and uncertainties faced by financers, developers and investors. It is also intended to setup a place for stakeholders to start, either when they want to replicate current, or are trying to develop new, workable risk management measures for renewable energy policy.
Lee Cheuk Wing,
Risk Management Methods Applied to Renewable and Sustainable Energy: A Review, Journal of Electrical and Electronic Engineering. Special Issue:Sustainable and Renewable Energies and Systems.
Vol. 3, No. 1-1,
2015, pp. 1-12.
A. McCrone, E. Usher, V. Sonntag-O’Brien, U. Moslener and C. Gruning, “Global Trends In Renewable Energy Investment 2013”, Frankfurt School-UNEP Centre, 2013. [Online]. Available: http://fs-unep-centre.org/publications
“Renewable energy coming of age”, The Journal of the International Energy Agency, 2012. [Online]. Available: http://www.iea.org
J. L. Sawin, “Renewables 2013: Global Status Report”, REN21, 2013. [Online]. Available: http://www.ren21.net/gsr
S. Carley, “State renewable energy electricity policies: An empirical evaluation of effectiveness”, Energy Policy, vol. 37, pp. 3071-3081, 2009.
R. C. Grace, D. A. Donovan and L. L. Melnick, “When Renewable Energy Policy Objectives Conflict: A Guide for Policymakers”, National Regulatory Research Institute, 2011.
G. Simpson and J. Clifton, “Picking winners and policy uncertainty: Stakeholder perceptions of Australia’s Renewable Energy Target”, Renewable Energy, vol. 57, pp.128-135, 2014.
C. W. Lee and J. Zhong, “Top down strategy for renewable energy investment: Conceptual framework and implementation”, Renewable Energy, vol. 68, pp.761-773, 2014
R. Wustenhagen and E. Menichetti, “Strategic choices for renewable energy investment: Conceptual framework and opportunities for further research”, Energy Policy, vol. 40, pp.1-10, 2012.
Y. Glemarec, W. Rickerson and O. Waissbein, “Transforming On-Grid Renewable Energy Markets, Transforming On-Grid Renewable Energy Markets”, 2011. [Online]. Available: http://www.undp.org/
S. Schuman and A. Lin, “China’s Renewable Energy Law and its impact on renewable power in China: Progress, challenges and recommendations for improving implementation”, Energy Policy, vol. 51, pp. 89-109, 2012.
A. G. Tveten, T. F. Bolkesjo, T. Martinsen and H. Hvarnes, “Solar feed-in tariffs and the merit order effect: A study of the German electricity market”, Energy Policy, vol. 61, pp.761-770, 2009.
T. Mezher, G. Dawelbait and Z. Abbas, “Renewable energy policy options for Abu Dhabi: Drivers and barriers”, Energy Policy, vol. 42, pp.315-328, 2012.
C. Klesssmann, C. Nabe and K. Burges, “Pros and cons of exposing renewables to electricity market risks – A comparison of the market integration approaches in Germany, Spain, and the UK”, Energy Policy, vol. 36, pp.3646-3661, 2008.
K. Sedghisigarchi, “Residential Solar Systems: Technology, Net-metering, and Financial payback”, IEEE Electrical Power & Energy Conference EPEC, pp.1-6, 2009.
A. J. Black, “Financial payback on California residential solar electric systems”, Solar Energy, vol. 4, pp.381-388, 2004.
S. Carley, “Distributed generation: an empirical analysis of primary motivators”, Energy Policy, vol. 37, pp.1648-1659, 2009.
Y. Yamamoto, “Pricing electricity from residential photovoltaic systems: A comparison of feed-in tariffs, net metering, and net purchase and sale”, Solar Energy, vol. 86, pp.2678-2685, 2012.
A. McCrone, E. Usher, V. Sonntag-O’Brien, U. Moslener, J. G. Andreas and C. Gruning, “Global Trends In Renewable Energy Investment 2011”, Frankfurt School-UNEP Centre, 2011. [Online]. Available: http://fs-unep-centre.org/publications
A. McCrone, E. Usher, V. Sonntag-O’Brien, U. Moslener and C. Gruning, “Global Trends In Renewable Energy Investment 2012”, Frankfurt School-UNEP Centre, 2012. [Online]. Available: http://fs-unep-centre.org/publications
A. Tang, N. Chiara and J. E. Taylor, “Financing renewable energy infrastructure: Formulation, pricing and impact of a carbon revenue bond”, Energy Policy, vol. 45, pp. 691-703, 2012.
G. Shrimali and S. Tirumalachetty, “Renewable energy certificate markets in India – A review”, Renewable and Sustainable Energy Reviews, vol. 26, pp.702-716, 2013.
V. Dinica and M. J. Arentsen, “Green certificate trading in the Netherlands in the prospect of the European electricity market”, Energy Policy, pp.609-620, 2003.
A. Ford, K. Vogstad and H. Flynn, “Simulating price patterns for tradable green certificates to promote electricity generation from wind”, Energy Policy, vol. 35, pp.91-111, 2007.
L. Nielsen and T. Jeppesen, “Tradable Green Certificates in selected European countries – overview and assessment”, Energy Policy, vol. 31, pp.3-14, 2003.
R. Wiser, S. Pickle and C. Goldman, “Renewable Energy and Restructuring: Policy Solutions for the Financing Dilemma”, The Electricity Journal, vol. 10, pp.65-75, 1997.
R. H. Wiser and S. J. Pickle, “Financing investments in renewable energy the impacts of policy design”, Renewable and Sustainable Energy Reviews, vol. 2, pp.361-386, 1999.
S. B. Darling, F. You, T. Veselka and A. Velosa, “Assumptions and the levelized cost of energy for photovoltaics”, Energy & Environmental Science, vol. 4, pp.3133-3139, 2011.
“Evaluating policies in support of the deployment of renewable power”, International Renewable Energy Agency (IRENA), 2012. [Online]. Available: http://www.irena.org
J. Badcock and M. Lenzen, “Subsidies for electricity-generating technologies: A review”, Energy Policy, vol. 38, pp.5038-5047, 2010.
O. Ghani, “Boosting Renewable Energy”, CFA Institute Magazine, vol. 24, pp.16-17, 2013.
B. G. Swezey, “The Impact of Competitive Bidding on the Market Prospects for Renewable Electric Technologies”, National Renewable Energy Laboratory (NREL), 1993. [Online]. Available: http://www.nrel.gov
“2013 Integrated Resource Planning Report”, Hawaiian Electric Company, chapter 18, 2013. [Online]. Available: http://www.heco.com
“Legal Frameworks for Renewable Energy”, Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ) GmbH, 2012. [Online]. Available: http://www.bmz.de
“Principles for the Management of Credit Risk - final document”, Bank for International Settlements, 2000. [Online]. Available: http://www.bis.org
“Financing Solar PV at Government Sites with PPAs and Public Debt”, National Renewable Energy Laboratory (NREL), 2011. [Online]. Available: http://www.nrel.gov
C. Weistroffer, “Credit default swaps: Heading towards a more stable system”, Deutsche Bank Research, 2010.
E. S. Silva and A. A. Pereira, “Credit Risk Measures – A Case of Renewable Energy Companies”, RECIPP, 2014. [Online]. Available: http://recipp.ipp.pt
L. Qi, “Research on Wind Power Systems”, Workshop on Power Electronics and Intelligent Transportation System, pp.408-410, 2008.
S. Luthi and T. Prassler, “Analyzing policy support instruments and regulatory risk factors for wind energy deployment – a developers' perspective”, Energy Policy, vol. 39,pp. 4876–4892, 2011.
D. J. Swider, L. Beurskens, S. Davidson, J. Twidell, J. Pyrko, W. Pruggler, H. Auer, K. Vertin and R. Skema, “Conditions and costs for renewables electricity grid connection: Examples in Europe”, Renewable Energy, vol. 33, pp. 1832-1842, 2008.
M. Andor, K. Flinkerbusch, M. Janssen, B. Liebau and M. Wobben, “Rethinking Feed-in Tariffs and Priority Dispatch for Renewables”, Formaet, 2010. [Online]. Available: heep://www.hks.harvard.edu
“Managing the Risk in Renewable Energy”, Economist Intelligence Unit, The Economist, 2012. [Online]. Available: http://media.swissre.com.
L. Byrnes, C. Brown, J. Foster and L. D. Wagner, “Australian renewable energy policy: Barriers and challenges”, Renewable Energy, vol. 60, pp.711-721, 2013.
N. M. Bhandari, G. M. Burt, K. Dahal, S. J. Galloway and J. R. McDonald “Dispatch optimisation of renewable energy generation participating in a liberalised electricity market” International Journal of Emerging Electric Power Systems, vol. 3, pp.1-22, 2007.
C. Li, Y. Sun and X. Chen, “Analysis of the blackout in Europe on November 4, 2006”, Power Engineering Conference, IPEC, pp. 939-944, 2007.
G. I. Maldonado, “The performance of North American nuclear power plants during the electric power blackout of August 14, 2003”, Nuclear Science Symposium Conference Record, 2004 IEEE, vol. 7, pp.4603-4606, 2003.
P. P. Varaiya, F. F. Wu and J. W. Bialek, “Smart Operation of Smart Grid: Risk-Limiting Dispatch”, Proceedings of the IEEE, vol. 99, pp. 40-56, 2010.
“Smarter Energy: optimizing and integrating renewable energy resources”, IBM Sales and Distribution, Energy & Utilities, 2012. [Online]. Available: http://www-935.ibm.com
C. Isakson, “Operational Risk Management During Uncertainty”, Electric Light and Power (ELP), 2012. [Online]. Available: http://www.elp.com
“Catastrophe Bonds — The Birth of a New Asset Class”, GAM, 2012. [Online]. Available: http://www.britishchambershanghai.org
J. Wiedmeyer, “Catastrophe Bonds: An Innovative Renewable Energy Risk Management Tool?”, National Renewable Energy Laboratory (NREL), 2012. [Online]. Available: https://financere.nrel.gov
“Wind Turbines”, Local Government Association, 2012. [Online]. Available: htttp://www.local.gov.uk
M. Mendelsohn, “Tapping the Capital Markets: Are REITs Another Tool in Our Toolbox?”, Renewable Energy Project Finance, 2012. [Online]. Available: https://financere.nrel.gov
“Risk Analysis and Recommendations on EURELECTRIC’s Power Choices Study Chapter on Liquidity Risk – Definition of Liquidity Risk”, Eurelectric, 2013. [Online]. Available: http://www.eurelectric.org
V. Micale, G. Frisari, M. H. Mignucci and F. Mazza, “Risk Gaps: Policy Risk Instruments”, Climate Policy Initiative, 2013. [Online]. Available: http://climatepolicyinitiative.org
Varadarajan, U., D. Nelson, M. Hervé-Mignucci, and B. Pierpoint, “The Impacts of Policy on the Financing of Renewable Projects: A Case Study Analysis”, Climate Policy Initiative, 2011. [Online]. Available: http://climatepolicyinitiative.org/publication
E. Lantz, A. Warren, J.O. Roberts, and V. Gevorgian, “Wind Power Opportunities in St. Thomas, USVI: A Site-Specific Evaluation and Analysis”, National Renewable Energy Laboratory (NREL), 2012. [Online]. Available: http://www.nrel.gov
A. Iimanen, “Understanding Expected Returns”, CFA Institute Conference Proceedings Quarterly, pp.55-63, 2013.
“International private equity and venture capital valuation guidelines”, Private Equity Valuation, 2010. [Online]. Available: http://wwwprivateequityvaluation.com
Z. Bodie, A. Kane and A. J. Marcus, “Investments”, McGraw-Hill, chapter 18, pp.562-605, 2008.
W. Pentland, “Germany’s Renewable Energy Subsidies Could Threaten Economic Growth”, Forbes, 2013. [Online]. Available: http://www.forbes.com
“Unlocking Shareholder Value: The Keys to Success”, Mergers & Acquisitions A Global Research Report, KPMG, 1999. [Online]. Available: http://www.kpmg.com
A. Ness, “An Overview of the Different Types of Mergers and Acquisitions”, Johnsons Corporate, 2014. [Online]. Available: http://www.johnsonscorporate.com.au
C. Mikael and K. Jani, "A Procedure for the Rapid Pre-acquisition Screening of Target Companies Using the Pay-off Method for Real Option Valuation", Journal of Real Options and Strategy 4 (1): pp.117–141, 2011.
S. Tongsopit and C. Greacen, “An assessment of Thailand’s feed-in tariff program”, Renewable Energy, vol. 60, pp.439-445, 2013.
D. Jacobs, N. Marzolf, J. R. Paredes, W. Rickerson, H. Flynn, C. B. Birck and M. S. Peralta, “Analysis of renewable energy incentives in the Latin America and Caribbean region: The feed-in tariff case”, Energy Policy, vol. 60, pp.601-610, 2013.
“California Feed-in Tariff Design and Policy Options”, KEMA, 2008. [Online]. Available: http://www.energy.ca.gov
“Exploring Feed-in Tariffs for California – Feed-in Tariff Design and Implementation Issues and Options”, KEMA, 2008. [Online]. Available: http://www.energy.ca.gov
B. Bakhtyar, K. Sopian, A. Zaharim, E. Salleh and C. H. Lim, “Potentials and challenges in implementing feed-in tariff policy in Indonesia and the Philippines”, Energy Policy, vol. 60, pp.418-423, 2013.
T. Couture and K. Cory, “State Clean Energy Policies Analysis (SCEPA) Project: An Analysis of Renewable Energy Feed-in Tariffs in the United States”, National Renewable Energy Laboratory (NREL), 2009. [Online]. Available: http://www.nrel.gov
P. E. Morthorst, “The development of a green certificate market”, Energy Policy, vol. 28, pp.1085-94, 2000.
J. P. Romankiewicz, “Contrary to common knowledge, U.S. produces 64% more wind energy than China”, 2012. [Online]. Available: http://sustainablejohn.com/?p=156
“Impact of Spain’s proposal to retroactively implement an “Industry Killing” 30% Solar Subsidy Cut on Existing Solar Plants.” Green World Investor, 2010. [Online]. Available: http://www.greenworldinvestor.com
F. M. Sukki, R. R. Iniguez, A. B. Munir, S. H. M. Yasin, S. H. A. Bakar, S. G. McMeekin and B. G. Steward, “Revised feed-in tariff for solar photovoltaic in the United Kingdom: A cloudy future ahead?”, Energy Policy, vol. 52, pp. 832-838, 2013.
S. Luthi and R. Wustenhagen, “The Price of Policy Risk – Empirical Study Looks at the Willingness of European Photovoltaic Project Developers to Invest”, SolarServer, 2009. [Online]. Available: http://www.soloarsever.com
C. W. Lee, S. K. K. Ng and J. Zhong, “Portfolio Optimization in Transmission Investment in Deregulated Market”, IEEE Power Engineering Society General Meeting, pp. 1-8, 2007.
H. Markowitz, “Portfolio selection,” Journal of Finance, vol. 7, pp. 77-91, 1952.
M. S. Nazir and F. Bouffard, “Risk-Sensitive Investment in Renewable Distributed Generation under Uncertainty Due to Post-Feed-In Tariff Policy”, Developments in Renewable Energy Technology (ICDRET), pp. 1-5, 2012.
L. Kitzing, “Risk implications of renewable support instruments: Comparative analysis of feed-in tariffs and premiums using a mean-variance approach”, Energy, vol. 54, pp.495-505, 2014.
X. G. Zhoa, T. T. Fend, L. Cui and X. Feng, “The barriers and institutional arrangements of the implementation of renewable portfolio standard: A perspective of China”, Renewable and Sustainable Energy Reviews, vol. 30, pp.371-380, 2014.
G. Wood and S. Dow, “What lessons have been learned in reforming the Renewables Obligation? An analysis of internal and external failures in UK renewable energy policy”, Energy Policy, vol. 39, pp.2228-2244, 2011.
R. Wiser, C. Namovicz, M. Gielecki and R. Smith, “The Experience with Renewable Portfolio Standards in the United States”, The Electricity Journal, vol. 20, pp.8-20, 2007.
P. Komor, “Renewable Energy Policy”, Diebold Institute for Public Policy Studies, New York, 2004.
J. Lipp, “Lessons for effective renewable electricity policy from Denmark, Germany and the United Kingdom”, Energy Policy, vol. 35, pp. 5481-5495, 2007.
A. S. Chuang, F. Wu, P. Varaiya, “A game-theoretic model for generation expansion planning: problem formulation and numerical comparisons”, IEEE Transactions on Power Systems, vol. 16, pp. 885-891, 2001.
J. H. Kim, J. B. Park, J. K. Park and S. K. Joo, “A market-based analysis on the generation expansion planning strategies”, Intelligent Systems Application to Power Systems, pp. 458- 463, 2005.
X. Zhang, X. Wang, X. Wang and H. Chen, “Energy uncertainty risk management of hydropower generators”, Transmission and distribution conference and exhibition: Asia and Pacific, 2005.
T. E. Hoff, R. Margolis and C. Herig, “A simple method for consumers to address uncertainty when purchasing photovoltaic”, Cleanpower research, 2003. [Online]. Available: http://www.cleanpower.com/research
K. Dykes and R. D. Neufville, “Real options for a wind farm in Wapakoneta, Ohio: incorporating uncertainty into economic feasibility studies for community wind”, World wind energy conference, 2008.
E. A. M. Cesena, J. Mutale and F. R. Davalos, “Real options theory applied to electricity generation projects: A review”, Renewable and Sustainable Energy Reviews, vol. 19, pp. 573-581, 2013.
K. T. Yeo and F. Qiu, “The value of management flexibility – a real option approach to investment evaluation”, International Journal of Project Management, vol. 21, pp. 243-250, 2003.
G. E. Frances, J. M. M. Quemada and E. S. M. Gonzalez, “RES and risk: Renewable energy’s contribution to energy security. A portfolio-based approach”, Renewable and Sustainable Energy Reviews, vol. 25, pp.549-559, 2013.
G. Hille and M. Francz, “Grid Connection of Solar PV – Technical and Economical Assessment of Net-metering in Kenya”, Federal Ministry of Economics and Technology, 2011. [Online]. Available: http://kerea.org
N. R. Darghouth, G. Barbose and R. Wiser, “The impact of rate design and net metering on the bill savings from distributed PV for residential customers in California”, Energy Policy, vol. 39, pp.5243-5253, 2011.
“Evaluation of Net Metering in Vermont Conducted Pursuant to Act 125 of 2012”, Public Service Department, 2013. [Online]. Available: http://publicservice .vermont.gov
“Freeing the Grid – Best and Worst Practices in State Net Metering Policies and Interconnection Standards”, Network for New Energy Choices, 2008. [Online]. Available: http://www.newenergychoices.org
E. Doris, S. Busche and S. Hockett, “Net metering policy development in Minnesota: Overview of trends in nationwide policy development and implications of increasing the eligible system size cap”, National Renewable Energy Laboratory (NREL), 2009. [Online]. Available: http://www.nrel.gov
I. Ansoff, “Strategies for Diversification”, Harvard Business Review, vol. 35, pp.113-124, 1957.
E. Holt, J. Sumner and L. Bird, “The role of renewable energy certificates in developing new renewable energy projects”, National Renewable Energy Laboratory (NREL), 2011. [Online]. Available: http://apps3.eere.energy.gov/greenpower
W. Johnston, “Australian renewable energy crisis as REC price dives”, Renewable Energy Focus, 2009. [Online]. Available: http://www.renewableenergyfocus.com
P. Menanteau, D. Fino and M. L. Lamy, “Prices versus quantities: choosing policies for promoting the development of renewable energy”, Energy Policy, vol. 31, pp.799-812, 2003.
P. Fristrup, “Forwards, Futures and Banks: Price Stability of Danish RES-E Certificates”, Risø National Laboratory, 2000.
E. Holt and L. Bird, “Emerging markets for renewable energy certificates: opportunities and challenges”, National Renewable Energy Laboratory (NREL), 2005. [Online]. Available: http://www.nrel.gov
K. Cory, J. Coughlin, T. Jenkin, J. Pater, and B. Swezey, “Innovations in Wind and Solar Financing”, National Renewable Energy Laboratory (NREL), 2008. [Online]. Available: http://www.nrel.gov
J. Weinstein, “Contracting for a unified RECs market”, Market View, 2006.
J. Cosman, “Renewable energy subsidies: lessons from Spain”, Global Policy, 2012. [Online]. Available: http://www.globalpolicyjournal.com
G. Black, D. Holley, D. Solan and M. Bergloff, “Fiscal and economic impacts of state incentives for wind energy development in the Western United States”, Renewable and Sustainable Energy Reviews, vol. 34, pp.136-144, 2014.
S. J. Deng and S. S. Oren, “Electricity derivatives and risk management”, Power Systems Engineering Research Center, 2005. [Online]. Available: http://www.pserc.wisc.edu
D. Skarr, “Understanding interest rate swap math and pricing”, California Debt and Investment Advisory Commission, 2007.
E. Kahn, “The production tax credit for wind turbine powerplants is an ineffective incentive”, Energy Policy, vol. 24, pp. 427-435, 1996.
M. Mendelsohn, C. Kreycik, L. Bird, P. Schwabe and K. Cory, “The impact of Financial Structure on the Cost of Solar Energy”, National Renewable Energy Laboratory (NREL), 2012. [Online]. Available: http://www.nrel.gov
M. J. Barradale, “Impact of public policy uncertainty on renewable energy investment: Wind power and the production tax credit”, Energy Policy, vol. 38, pp.7598-7709, 2010.
X. Lu, J. Tchou, M. B. McElroy and C. P. Nielsen, “The impact of Production Tax Credits on the profitable production of electricity from wind in the U. S.”, Energy Policy, vol. 39, pp. 4207-4214, 2011.
L. Zhang, “Optimal taxation with investment tax credit”, School of Economics, Renmin University of China (RUC), 2009.
C.B. Chapman, S.C. Ward and J.A. Bennell, “Incorporating uncertainty in competitive bidding”, International Journal of Project Management, vol.18, pp. 337-347, 2000.
M. King and A. Mercer, “The optimum markup when bidding with uncertain costs”, European Journal of Operational Research, vol. 47, pp. 348-368, 1990.
P. A. Naert and M. Weverbergh, “Cost Uncertainty in Competitive Bidding Models”, Journal of the Operational Research Society, vol. 29, pp. 361–372, 1978.
Y. Takano, N. Ishii and M. Muraki, “A sequential competitive bidding strategy considering inaccurate cost estimates”, Omega, vol. 42, pp. 132-140, 2014.
M. King and A. Mercer, “Problems in Determining Bidding Strategies”, The Journal of the Operational Research Society, vol. 36, pp. 915-923, 1985.