A product of Empowering Small Island Developing States: Scaling Up Renewable Energy for Resilient Economic Growth May 2024 This report was researched and prepared by the World Bank with the contributions of the Sustainable Renewables Risk Mitigation Initiative (SRMI) Partners, namely, the Asian Development Bank (ADB), Agence Française de Développement (AFD), African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) via GET.transform program, the International Renewable Energy Agency (IRENA), the International Solar Alliance (ISA), and Sustainable Energy for All (SEforAll). The work was funded by the Energy Sector Management Assistance Program (ESMAP), a multi-donor trust funded program administered by the World Bank. Authors: World Bank (Megan Meyer, Claire Nicolas, Rebeca Doctors, Pauline Ravillard, George Matthew), with the contributions from World Bank Group staff and consultants (Shamini Selvaratnam, Frederic Verdol, Chong Suk Song, Elin Hallgrimsdottir, Sabine Cornieti, Christophe de Gouvello and Zuzana Dobrotkova) and SRMI partners (Diala Hawila, IRENA, Bertrand Poche et Juliette Rose, AFD). Design: Justin Stayshyn Cover Image: Pacific Center for Renewable Energy and Energy Efficiency © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW | Washington DC 20433 202-473-1000 | www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Attribution Please cite the work as follows: “ESMAP, 2024, Empowering Small Island Developing States: Scaling Up Renewable Energy for Resilient Economic Growth” TABLE OF CONTENTS TABLE OF CONTENTS ABBREVIATIONS 4 04 RECOMMENDATIONS 18 EXECUTIVE SUMMARY 5 4.1 Solving the scale challenge 01 through innovative project and local financial intermediary empowerment 18 INTRODUCTION 8 4.2 Building Resilient Renewable Energy Futures: mainstreaming 02 SIDS: A HETEROGENEOUS resilience from the planning to the construction stage 19 GROUP OF COUNTRIES 9 4.3 Mitigating development risks in SIDS 20 03 4.4 Mitigating operational and financing risks in SIDS 23 CHALLENGES IN SIDS 12 3.1 The Scale Challenge 13 3.2 Climate Change Risks 14 3.3 Development Risks 14 3.4 Operational and Financing Risks 15 3 | Scaling Up Renewable Energy for Resilient Economic Growth ACRONYMS ABBREVIATIONS ADB: Asian Development Bank AFD: Agence Française de Développement AfDB: African Development Bank AOSIS: Alliance for Small Island States CARICOM: Caribbean Community DFI: Development Finance Institution DRE: Distributed Renewable Energy EBRD: European Bank for Reconstruction and Development EMDC: Emerging Markets and Developing Countries EPC: Engineering, Procurement and Construction FIT: Feed-in-Tariff FX: Foreign Exchange GHG: Greenhouse Gas GIZ: Deutsche Gesellschaft für Internationale Zusammenarbeit IEA: International Energy Agency IFI: International Financial Institution IOC: Indian Ocean Commission IPP: Independent Power Producers IRENA: International Renewable Energy Agency IRP: Integrated Resource Plan ISA: International Solar Alliance KfW: Kreditanstalt für Wiederaufbau MDB: Multilateral Development Bank OECD: Organisation for Economic Co-operation and Development OECS: Organisation of Eastern Caribbean States PPA: Power Purchase Agreement PV: Photovoltaic RE: Renewable Energy SIDS: Small Island Developing State SIDSDOCK: Small Island Developing States DOCK SE4All: Sustainable Energy for All SRMI: Sustainable Renewables Risk Mitigation Initiative UN: United Nations VRE: Variable Renewable Energy 4 | Scaling Up Renewable Energy for Resilient Economic Growth EXECUTIVE SUMMARY EXECUTIVE SUMMARY Small Island Developing States (SIDS) are costs, it also enhances energy security and a heterogeneous group of 39 countries resilience to climate change, while improving spread around the globe, yet they share the competitiveness of the tourism industry, common challenges in their power sectors. a critical sector for economic growth in These challenges often stem from their many SIDS. Given the fiscal limitations faced geographical limitations and remoteness, by many SIDS, mobilizing private sector limited natural resources, vulnerability to investment for the energy transition will be climate change impacts, small size of the critical. power system (around half of the SIDS have power systems smaller than 60MW) and Despite these opportunities and the the high cost of imported goods and fossil ambitious targets for renewable energy fuels. As a result, many SIDS face energy deployment set by most SIDS governments, insecurity and high electricity prices at renewable energy deployment has been an average of USD 31 c/kWh (compared to limited to date. On average, renewable an average USD 16 c/kWh in Sub-Saharan energy represents less than 20 percent of the African countries), which reduces economic generation while solar and wind represent competitiveness (e.g., on tourism) and less than 3 percent of the energy mix. Based hampers environmental resilience, on a market sounding with renewable energy two key factors of islands’ sustainable developers and financiers and an analysis of development. However, amidst these economic and energy sector data, this report challenges lie significant opportunities seeks to identify the reasons why renewable for transitioning to renewable energy (RE) energy scale-up in SIDS is lagging behind the sources and scaling up their deployment. rest of the world, and to identify strategies to mobilize private sector investment, despite SIDS dependence on fossil fuels for the inherent challenges involved. power generation was the norm for the development of these economies. The Cross-cutting challenges of scale and dramatic decrease of renewable energy climate vulnerability hinder the uptake technology costs and emergence of smartgrid of renewable energy energy in SIDS, solutions now present a compelling case despite their exceptional renewable for accelerating the SIDS transition to resources. A market sounding performed renewable energy. With abundant solar, for this report identified that the small scale wind, and – in some cases, biomass, hydro, of renewable energy projects in most SIDS geothermal, and marine – energy resources, creates significant barriers to scaling-up, SIDS possess an enormous untapped including reduced access to financing, higher potential for producing cleaner, cheaper, cost of capital, supply chain challenges, among more resilient electricity. In most SIDS, solar others. Climate risks need to be accounted power, even when coupled with storage, is for in the planning stages, yet assessment of nowadays the least cost option for power the costs and benefits of additional resilience generation expansion. Recent experience measures is complex in the context of high in several OECD islands shows that, with levels of uncertainty. In the operational phase, the adequate grid investments, high level of the risks of catastrophic damage to electricity variable renewable energy (VRE) penetration systems are higher in many SIDS given the in island power systems is achievable while exposure and lack of climate resilience of maintaining grid stability and reliability. most SIDS’ power systems, while mitigation Moreover, transitioning to renewables not measures can be expensive. only mitigates the environmental impact of fossil fuel use and lowers power generation 5 | Scaling Up Renewable Energy for Resilient Economic Growth Project development risks, with a development, including roads and ports, particular emphasis on procurement creating supply chain risks and increasing EXECUTIVE SUMMARY risks, stakeholder capacity, and grid risks costs of new renewable energy projects. are also perceived as high by developers. Many SIDS face a lack of local capacity for The solutions to overcome these procurement, which can lead to unsolicited challenges will have to be both financial proposals with high tariffs burdening the and technological, with a strong need sector for years. Lack of efficient management for more modern utilities, systems and and regulation of the electricity sector in many decision-making tools. Concessional finance SIDS often results in an inadequate framework and community engagement will also be key for Independent Power Producers (IPP) entry. to drive change and enable private sector VRE integration can pose a significant risk to investments. Innovation will be required both grid stability due to small grid sizes lacking in terms of technologies to allow for higher flexibility options, a lack of adequate power levels of VRE deployment and integration system planning, and insufficient forecasting in small island systems, as well as in the and dispatching tools and capabilities. structuring of risk mitigation instruments. The use of financial intermediaries can help reduce Project operational and financing risks transaction costs and the risks that larger are also prominent in SIDS, in particular financiers perceive with small-scale projects risks related to local financing, qualified in SIDS. Capacity building and technical workforce, and infrastructure. The assistance can support SIDS to increase local structural lack of financial and technical labor skills, improve power system planning, capacity of local banks impedes renewable including the incorporation of resilience energy projects in SIDS, as the transaction considerations, and to increase local capacity sizes typically fall well below the minimum for sector oversight and procurement. Climate ticket size for international investors. Off- and concessional financing, as well as grants, taker liquidity and bankability risks are also will be required to help SIDS overcome the relevant for SIDS, particularly in the Asia and market failures and close the viability gap for Africa regions. SIDS also struggle with a lack renewable energy investments and should of qualified workforce, meaning that labor be prioritized by development banks and needs to be imported, which can be costly donor countries. Table 1 below presents a and even impractical, in some cases. Due to summary of recommended actions to scale-up limited fiscal space and lack of diversified renewable energy financing in SIDS. economies, many SIDS have poor associated infrastructure needed for renewable energy 6 | Scaling Up Renewable Energy for Resilient Economic Growth Table 1: Summary of recommended actions to scale-up renewable energy investment in SIDS EXECUTIVE SUMMARY CHALLENGE MITIGATION MEASURES SCALE OF X Development of hybrid projects to increase project CAPEX (e.g. solar+storage), attract more investors, and improve grid resilience. PROJECTS X Development and marketing of flagship projects can attract financiers and developers who otherwise may not be interested due to smaller scale. X Preparing financial intermediary operations (combined with capacity building) to channel higher volume of funding (e.g., from DFIs) to local lenders who can on-lend to smaller projects. X Preparation of standardized procurement and PPA transaction documents at a regional or sub-regional level to reduce transaction costs. CLIMATE X Adoption of a “least-regret” approach to power system planning to include climate resilience considerations. CHANGE X Resilience specifications included in all renewable energy procurement. X Climate finance should be made readily available to SIDS to cover the incremental costs of incorporating the resilience measures. X Explore potential to develop other resilient and flexible renewable energy technologies to complement VRE integration, when possible (e.g., hydro, geothermal or biomass). X Increase of local capacity expertise for renewable energy DEVELOPMENT deployment across the value chain from the development of RISKS entrepreneurship programs (e.g., rooftop solar PV installers) to procurement through advisory services combined with on-the-job training. X Improve grid through comprehensive sector planning and grid upgrade investment; active network management and weather forecasting tools; grid codes with dispatch priorities; provision of grid data to potential developers; selection of projects that improve grid stability (e.g., hybrids). X Mitigate land risks through locational studies when needed explore alternative/innovative renewable energy approaches (e.g. floating solar and agrivoltaics). OPERATIONAL X Engage stakeholders by identifying opportunities to maximize the socio-economic benefits of renewable energy projects and support AND FINANCING a just transition, including local job creation. RISKS X Reduce financing risk through financial intermediary operations to support on-lending by local or regional banks (plus capacity building); deploy concessional finance to cover due diligence costs, fund CAPEX buy-down mechanisms, and reduce Foreign Exchange (FX) risk, when necessary. X Improve offtaker bankability when needed through liquidity instruments. X Increase local workforce skills and support countries with market outreach to increase interest of EPCs. International support for SIDS should focus on leveraging clean energy investments that can drive green, resilient and inclusive development. This approach involves prioritizing renewable energy investments that not only contribute to climate adaptation and energy security but also enhance competitiveness, socio-economic development, including the growth of green jobs, and bolster power system resilience. Given the significant risks that climate change poses to the development of SIDS, developed countries and the international community should substantially increase the provision of resources to crowd-in private sector investment for a rapid scale-up of renewable energy in SIDS. This entails reducing perceived risks and covering the additional costs associated with implementing resilience measures required during the energy transition in SIDS. 7 | Scaling Up Renewable Energy for Resilient Economic Growth 1 INTRODUCTION Small Island Developing States (SIDS) are a distinct group of 39 UN Member States and 18 Non-UN Member States that can be found across the globe1. SIDS make up slightly less than 1 percent of the world’s population with an aggregate population of 65 million people. They face unique social, economic, and environmental challenges, and are typically geographically remote. SIDS economies tend to have a strong dependence on tourism with over 80 percent of SIDS having more than 40 percent of GDP directly linked to tourism. Most SIDS lack diversification in their economies which further exacerbates their exposure to economic shocks related to tourism. Their small population size and an isolation from international markets, implying high transportation costs, make them vulnerable to exogenous economic shocks while their fragile land and marine ecosystems make SIDS particularly vulnerable to the impacts of climate change. These challenges are compounded by limited institutional capacity and scarce public resources, which have become even scarcer in the aftermath of the COVID-19 pandemic. While SIDS contribution to the causes of This study delves into the distinctive climate change is insignificant, with less features of SIDS countries concerning than 1 percent of global greenhouse gas their transition to renewable energy with (GHG) emission contributions coming a focus on utility scale projects. Due to from SIDS, they disproportionately bear data constraints, the analysis in this report the impacts of climate change, with some centers on 20 out of the 38 SIDS spanning four countries facing an existential threat. regions: the Caribbean (Antigua and Barbuda, Despite their low emissions, SIDS can reap Barbados, Belize, Dominica, Grenada, Jamaica, many important benefits from transitioning St Lucia, St Vincent and the Grenadines), to clean energy, including increased socio- the Pacific (Papua New Guinea, Timor-Leste, economic development outcomes, energy Tonga, Tuvalu, Vanuatu), Africa (Cape Verde, security, reduced cost of electricity, and Comoros, Guinea-Bissau, Sao Tome and increased electricity system resiliency. Principe), and the Indian Ocean (Maldives, Mauritius, Seychelles). The objective of this paper is to characterize the unique circumstances that SIDS face, To inform this study, primary energy sector outline opportunities and challenges data was collected for the aforementioned stemming from these circumstances, and SIDS [further referred to as “the SIDS”] to propose tailored solutions to accelerate identify overarching patterns and notable the clean energy transition, thereby distinctions among the 20 SIDS across fostering economic growth and resilient diverse geographical regions. Additionally, a development. In particular, it aims to market sounding activity was conducted with understand how the World Bank’s Sustainable renewable energy developers already engaged Renewables Risk Mitigation Initiative (SRMI) in SIDS projects, along with other pertinent methodology could be adapted to the SIDS stakeholders, utilizing an online questionnaire. context2. Because of the heterogeneity among Subsequently, interviews were conducted with SIDS and the significant obstacles some face in a subset of renewable energy developers and attracting private sector finance, it is imperative Development Finance Institutions (DFIs) to to explore customized approaches that refine the understanding of key obstacles and leverage both public and private resources, to propose recommendations, as outlined in although in some cases leveraging private this report. sector finance may not be feasible. 1 as defined by the United Nations (UN): see here. 2 In “A Sure Path to Sustainable Solar, Wind and Geothermal,” SRMI outlines a step-by-step process for countries to undertake at the planning, strategy and implementation phases of developing a robust national renewable energy program that can attract private sector capital 8 | Scaling Up Renewable Energy for Resilient Economic Growth 2 SIDS: A HETEROGENEOUS GROUP OF COUNTRIES PRESENTING ABUNDANT OPPORTUNITIES NAME FOR RENEWABLE ENERGY SCALE-UP SIDS share many characteristics that are critical for renewable energy scale-up; however, important divergences exist and must be considered when developing solutions for this diverse group of island nations. SIDS POWER SECTOR Nearly half of the 20 SIDS studied have attracted utility-scale Independent Power Most SIDS have small and isolated grids, Producers (IPPs) for electricity generation. with limited land availability, although Private investment often occurs without there is a wide range. Among the SIDS, competitive processes, through bilateral the average grid capacity stands at 236 MW, agreements, which, in many cases, have not spanning from 3 to 1,200 MW. Notably, 45 resulted in tariff reductions. For example, percent of the SIDS possess power systems among the 20 SIDS analyzed, SIDS with private with capacities below 60MW3 (see Figure 1). investment have an average retail tariff of Of the SIDS, Belize and Guinea Bissau are USD 31c/kWh compared to those without at the only countries with interconnection for USD 29c/kWh. The SIDS having implemented electricity imports4. The median geographic competitive procurement of power generation size of the SIDS is 876 km2, around the same (3 of the SIDS), including VRE, have an average size as the City of Berlin, creating competition retail tariff of 27c/kWh. While the sample size for the use of scarce land resources. is small, this finding is aligned with the SRMI approach to developing renewables through Renewable evergy deployment in SIDS has competitive auctions to transparently drive been limited to date, with particularly low down costs. development of wind and solar. Average renewable energy penetration, including hydropower and geothermal power projects, is 20 percent across the SIDS, dominated by hydropower. Average VRE share is 3 percent across the SIDS, and more than half have zero utility scale VRE generation installed. Barbados is the SIDS that has the highest penetration of VRE, at 16 percent. 3 Note that this does not consider the impact of regional integration in the case of Guinea Bissau and Belize. 4 About 37% of Belize’s electricity comes from imported energy straight from Mexico, with which the country shares a common border (Martin Rivero et al., 2021). 9 | Scaling Up Renewable Energy for Resilient Economic Growth 2 4 A HETEROGENEOUS IN SIDS GROUP OF COUNTRIES OPPORTUNITIES SIDS: Figure 1 SIDS power system capacity, mix and land size (Source: authors) RE SCALE-UP TO IMPROVE security, renewable energy scale-up also presents an opportunity for public finances POWER AFFORDABILITY burdened by fossil fuel subsidies. Additionally, AND ENERGY SECURITY the substantial subsidies explicitly allocated to fossil fuels in 60 percent of the SIDS, averaging 0.6 percent of GDP and peaking at nearly 3 Investing in renewable energy presents percent for some SIDS like São Tomé and a promising avenue for reducing reliance Príncipe, further strain public finances. on fossil fuels in SIDS, thereby enhancing both power affordability and energy Furthermore, SIDS grapple with high security and unburdening public finances. electricity losses contributing to the Furthermore, scaling up renewable energy can high electricity tariffs, with T&D losses lead to tariff reduction which holds the key to around 18 percent5, higher than the global alleviating energy poverty, releasing vital fiscal average of 8 percent6. The reason for these resources, fostering economic growth, and high losses is mostly the centralization of enhancing the competitiveness of commercial power generation in a few power houses and industrial sectors. and the fact that the transmission sector is outdated. Renewable energy deployment The heavy reliance on fossil fuels for would necessitate an infrastructure upgrade power generation in SIDS, constituting and would enable the decentralization of approximately 84 percent of the power mix the generation. By addressing these issues on average, underscores the urgency of holistically and promoting the adoption of transitioning to renewable energy sources. renewable energy sources, SIDS can pave With 60 percent of selected SIDS importing the way for a more sustainable and resilient over 90 percent of their fossil fuel supply energy future. for electricity generation, the resultant high and volatile generation costs pose significant Renewable energy integration becomes challenges. In addition to improving energy more feasible in SIDS due to the prevailing 5 Notably, financially unsustainable utilities face even higher losses, averaging at 21 percent, in contrast to 11 percent for financial- ly viable counterparts. 6 World Bank Open Data, 2014. 7 https://fossilfuelsubsidytracker.org/ 10 | Scaling Up Renewable Energy for Resilient Economic Growth 2 high generation costs, leading to elevated sector investment. It also means that when electricity tariffs averaging 0.31 USD/kWh— utilities are not able to recover costs, public more than double the global average for ownership can further strain the country’s 2022 (0.14 USD/kWh7). These tariffs impede already limited fiscal capacity. economic competitiveness, exacerbate energy SIDS: A HETEROGENEOUS poverty, and hinder growth. However, they One third of the SIDS have cost also enhance the viability of renewable energy reflective tariffs, contributing to the GROUP OF COUNTRIES investments, offsetting development and creditworthiness of utilities and therefore financing challenges faced by many projects. reducing the off-taker risk. This can For instance, the Maldives successfully increase private sector willingness to invest implemented an 11 MW solar project in 2022, and/or reduce the need for risk mitigation supported by the World Bank ASPIRE project, mechanisms, which can drive up the project at a tariff of 9.8 USDc/kWh. Furthermore, cost. Moreover, creditworthy utilities are innovative solutions like hybrid projects better positioned to undertake essential (solar PV plus energy storage) and green infrastructure investments to facilitate VRE hydrogen, as seen in Barbados, hold promise integration, such as grid improvements that for economic and financial viability in SIDS, can reduce curtailment risks. potentially attracting concessional resources for piloting new technologies that would not Many SIDS have a strong tourism sector be economically attractive in other developing which can generate significant demand countries and contexts. for clean energy within the commercial sector. Evidence suggests that tourists are increasingly willing to pay a premium for SIDS ASSETS TO ATTRACT eco-friendly hotels8, incentivizing the hotel RENEWABLE ENERGY industry in SIDS countries to install their own DRE (Distributed Renewable Energy) DEVELOPERS system. When regulation is not yet adequate to scale-up DRE investments, governments Many SIDS have set out ambitious should prioritize improvement of regulations decarbonization targets, creating to allow for sustainable DRE integration. This momentum and a strong enabling could create, for example, an opportunity for environment for the energy transition. private investment in distributed solar through Over 90 percent of selected SIDS have local Renewable Energy Service Companies committed to 100 percent renewables (RESCOs) which can offer tailored solutions to between 2030 and 2050 as part of their hotels and resorts looking to transition to clean national energy plans as well as in their energy. By capitalizing on the demand for eco- pledges under the UNFCCC framework (NDCs, friendly tourism experiences, SIDS can not only Long-term Low Emissions Development enhance their sustainability credentials but also Strategies (LT-LEDS). The other 10 percent also stimulate economic growth and job creation in have lofty renewables goals no lower than the renewable energy sector. 50 percent by 2030. These ambitious targets not only demonstrate SIDS’ commitment SIDS have strong incentives to innovate to mitigating climate change but also signal and to be the first movers. Given their small their recognition of the economic and size and competing resources, innovative environmental benefits associated with solutions have been developed in SIDS, in renewable energy adoption. particular targeting the agriculture and energy nexus. These solutions can take the form of Given that most utilities are publicly owned agrivoltaics (a combination of solar plants (85 percent of the sample), governments with farming or fishing – see Box 4 in the last have significant leverage to steer the section) and the use of e.g. geothermal directly energy transition by implementing in the tourism industry (spas), food production coordinated adjustments to energy policy and preservation but also byproducts from and regulation, with a focus on promoting crops, such as sugar cane, for cogeneration. renewable energy development. This Other innovations, such as using colder deep includes initiatives such as establishing the waters or the sea as cooling solutions, are also necessary legal and regulatory framework being explored9. In addition, because of land for IPPs and providing government backed constraints in some SIDS exploring nearshore de-risking instruments to incentivize private and offshore technologies is a necessity. 7 2022 data, www.electricrate.com 8 Sanghoon Kang, Sarah Nicholls. “Determinants of willingness to pay to stay at a green lodging facility” (2021). https://www. sciencedirect.com/science/article/abs/pii/S0278431920303868 9 For example, the Sea Water Air Conditioning project for an hospital in Tahiti (https://www.service-public.pf/sde/2022/07/27/swac/) 11 | Scaling Up Renewable Energy for Resilient Economic Growth 3 CHALLENGES IN SIDS NAME To better understand the key challenges to scaling up renewable energy in SIDS, a market sounding was conducted with key public and private sector stakeholders10. Participants were tasked with assessing the importance of different risks associated with renewable energy projects, including the two overarching categories, development and operational and financing risks: X Project development risks: risks encountered during the development phase, which occur prior to construction and operation, that encompass (i) grid risk, including connection risks; (ii) land risk, including ownership, availability, permitting, and environmental and social aspects; (iii) resource risk, for wind and geothermal in particular; (iv) legal risk, including the applicable regulatory, arbitration, and judicial frameworks; (v) procurement risk, including risk to have failed tenders, poor capacity of the offtaker and no generation plans where that given project would be stated; and (vi) integrity and corruption risk. X Project operational and financing risks: risks that surface once the project is operational and would impact the financing, that encompass (i) offtaker credit risk including the offtaker’s record of performance and timely payment, and risk of contract termination; (ii) the country’s power sector risk, including sector financial sustainability risk, reform risk, regulatory risk, and delay in the government’s construction work for grid reinforcements leading to curtailment risks; (iii) market risk, including currency risk and financing risk; (iv) country and macroeconomic risks; and (v) political risk, including breach of contract, expropriation, transfer restriction, currency inconvertibility, and war and civil disturbance. Additionally, respondents were also asked to identify the most effective mitigants for these risks. Two thematic challenges emerged from the analysis, transcending the various risk categories: scale and climate change vulnerability. By examining each of these risks and challenges, we aim to identify the critical barriers hindering the successful implementation and expansion of renewable energy projects in SIDS. Subsequently, the following section will provide targeted recommendations for effectively mitigating these risks to foster the advancement of renewable energy adoption within these regions. 10 There were 18 respondents in total (14 developers and 4 from public institutions, including government agencies and regula- tors). 60 percent of respondents answered for the Pacific and Indian Ocean regions, with 22 percent for Africa and 17 percent for the Caribbean. To confirm answers and explore further solutions to increase the share of renewable energy and VRE in SIDS, the team organized 7 follow-up interviews, both with developers and other DFIs. 12 | Scaling Up Renewable Energy for Resilient Economic Growth 3 3.1 THE SCALE CHALLENGE OPPORTUNITIES IN SIDS Scale is a cross-cutting theme that revenues, high cost of capital, insufficient underlies many of the challenges to supply chain readiness, lack of qualified EPCs developing renewable energy projects and lack of associated infrastructure (such as in SIDS. While some renewable energy ports and roads). These factors collectively developers express willingness to develop contribute to higher tariffs. Figure 2 below small renewable energy projects, most shows the negative trend between scale and view the small scale of projects to be a tariffs in the selected SIDS. The issue of scale deal-breaker. As described further below, impacts SIDS to different degrees, given the small scale of renewable energy projects in wide range in country size; smaller SIDS (e.g., SIDS has, among other things, the following Tuvalu, Tonga) are expected to face additional impacts: limited interest from investors and hurdles to attracting private sector capital lenders whose fixed costs for developing the compared to larger ones (such as Jamaica and project or processing the loans will be too Mauritius). high compared with the potential project 0 300 600 900 1200 60 Average retail electricity tariff (US$ cts/kWh) 45 30 15 0 MW installed Figure 2 Tariff as a function of selected SIDS’ national grid size (source: own analysis) Regional bundling11 is often considered hydrogen production (and/or export of its as a potentially promising approach. derivatives). Yet, electricity exports are not However, interdependencies amongst the likely to be viable in most contexts due to projects in various countries could increase the long distances between most islands complexity and therefore risks, making and the high seabed depths around many the approach unattractive. For example, of the volcanic islands. Even when this could delays or cancellation of one project could be viable, developers may be wary of taking jeopardize the entire portfolio. Another option on additional complexity, such as needing to considered was the interest in exploring consider the credit risk of additional off-takers. opportunities to develop larger projects on a single island by increasing the country’s grid expansion needs – for example, through plans to export electricity or through green 11 For example, small islands in a sub-region (i.e., the OECS in the Caribbean) could use a central agency (e.g., a regional associ- ation, regional development bank) to procure several smaller renewable energy projects, allowing the total to reach a scale that would attract more developers and reduce costs (transaction costs, financing costs, etc.) jointly competitively. 13 | Scaling Up Renewable Energy for Resilient Economic Growth 3 3.2 CLIMATE CHANGE RISKS OPPORTUNITIES IN SIDS SIDS are uniquely vulnerable to the as huge losses can occur for the country impacts of climate change, including and private sector if electricity systems rising sea levels, storm surge, flooding, (including specific renewable energy and high winds. SIDS such as Tuvalu, the projects) are compromised or otherwise Maldives, Solomon Islands and the Seychelles rendered non-operational due to a lack are among several SIDS facing an existential of proper functioning of the power threat due to sea level rise. SIDS also face a infrastructure. For example, Hurricane wide-range of exposure to natural disasters Maria in 2017, a category 5 storm that that are expected to increase in their intensity devastated the electricity sector in Dominica and frequency, including tropical cyclones (as well as Puerto Rico), caused a complete (e.g., Pacific and Caribbean islands) and system blackout which lasted for months for monsoons (Pacific and Indian Ocean islands). many communities. Developing a resilient Energy sector infrastructure is commonly infrastructure and a resilient grid is expensive vulnerable to these events, at times resulting particularly when it means retrofitting in major economic losses, in addition to existing assets. Resilience measures need possible loss of life if key government services to be accounted for in the planning stages, are unable to function. and assessment of the costs and benefits of additional resilience measures is challenging While climate risks occur at all stages in the context of high levels of uncertainty in of project development, they are most the estimation for future climate change. prominent during the operational phase, 3.3 DEVELOPMENT RISKS Project development risks emerged as the contribute to a prevalent reliance on most critical risks, with over 70 percent of unsolicited proposals, often resulting in respondents indicating it as a critical or high tariffs. Beyond procurement, given the highly critical risk12. Within this risk category, extensive public involvement in the energy lack of expertise in local counterparts, sector in most SIDS (policy, regulation, utility corruption and grid connection risks (including operation), government capacity constraints permitting and data availability) were most also lead to challenges in efficiently managing, frequently flagged as critical or highly critical. regulating and modernizing the electricity sector. This often results in inadequate legal Lack of local expertise in SIDS, in particular and regulatory framework to support IPP for procurement, is a key constraint to entry to the country, increasing project risk developing renewable energy projects. and decreasing private sector interest. Many SIDS, especially the smaller ones, encounter challenges related to the capacity Integration of variable renewable energy of their ministries and regulatory bodies, can pose a risk to grid stability if not well stemming from manpower and/or skill planned. For example, in most island systems, shortages. This is due to the fact that these weather conditions often affect the entire entities have very little staff that each have island at the same time, meaning changes to to manage a very diverse workload and to solar and wind availability will impact all the procure innovative technologies they are PV and wind farms at the same time which not necessarily familiar with. This limitation can have a serious impact on the electricity hampers their ability to effectively implement system. Without adequate storage, these government programs aimed at attracting issues can make SIDS power systems with IPPs. Insufficient skills for conducting high VRE vulnerable to instability or outages. successful procurement processes and However, in recent years, the world has seen negotiating with experienced developers island systems successfully operating at high 12 The respondent had to pick between : not critical, less critical, critical and very critical. 14 | Scaling Up Renewable Energy for Resilient Economic Growth 3 levels of VRE without issue. The capacity can serve as a bottleneck for renewable mix of La Réunion island for example is 50 energy development in SIDS. Developers percent renewable, with half of the renewable flagged that most SIDS lack an up-to-date energy being variable (PV and wind). During long-term sector plan (e.g., Integrated weekends, VRE often represents between 50 Resource Plans, IRPs), thus failing to provide OPPORTUNITIES IN SIDS and 60 percent of the generation mix and the a clear vision on the expected pipeline for utility is now able to manage the grid without renewable energy projects. Preparing these starting dedicated flexible generators as the IRPs in SIDS can be a lengthy process, taking grid was modernized and forecasting tools years to publish, creating a risk of outdated upgraded in the recent years.To achieve data. Consequently, the information becomes this, SIDS will need to prioritize investment less valuable to private sector players on modern and automated grids, storage, interested in entering the market. This lack of and forecasting tools. Reinforcing grids clear, up-to-date planning and communication will become even more important as many undermines investor confidence and hinders SIDS aim for a rapid development of electric the timely implementation of renewable transportation which will have large impacts energy projects. on grids. Stakeholder risks can have delay or In most of the selected SIDS, land jeopardize the development of new availability is not perceived as a key renewable energy projects in SIDS. Local risk to develop renewable energy13. communities, the utility company, existing Nonetheless, it does pose an issue for 25 thermal power producers, government percent of the selected SIDS, particularly in entities, among others, can impede the some of the volcanic islands of the Caribbean energy transition if their concerns are not due to mountainous topography, as well as adequately heard and addressed. As in Tuvalu due to the small geographic size of other countries, this can run the gamut from the island14. In those islands, rooftop PV or communities that would be directly impacted floating PV are options to overcome the land by the construction process to NGOs to constraints. Overall, survey respondents entities with vested interests in the continued assessed risk of land ownership to be utilization of fossil fuels. However, given the relatively low. small and often close-knit populations in SIDS, disapproval of a relatively small group The absence of sufficient medium- can have an outsized impact on the ability of and long-term planning, coupled with projects to move ahead. inadequate communication of those plans, 3.4 OPERATIONAL AND FINANCING RISKS FINANCING RISKS face challenges with regards to their depth of liquidity, failing to have enough capital for Insufficient financial and technical capacity non-recourse lending. of local banks were flagged as the most critical financing risks for renewable Scale presents another significant energy projects in SIDS, followed by challenge in financing renewable energy constraints on accessing international projects in certain SIDS, as the financing sources of financing. As a result of these requirements may fall below the minimum financing constraints, renewable energy ticket size preferred by investors – projects in SIDS often encounter delays or particularly in the case of international proceed at significantly higher costs compared IPPs and financiers. For instance, in the to projects developed in many other markets. market sounding, one IPP indicated that its Many banks do not have the expertise needed minimum threshold for financing renewable to properly assess projects (i.e., do the energy projects is 50MW. Considering that required due diligence) or do project finance 45 percent of the selected SIDS have a total transactions. Many local banks may also installed capacity of less than 60 MW, this 13 For the purposes of this note, this is defined as having sites that would be suitable for solar or wind parks. 14 Battery Energy Storage System (BESS) Development in Pacific Island Countries (PICs) (worldbank.org);https://www.ifc.org/en/ insights-reports/2023/caribbean-regional-private-sector-diagnostic 15 | Scaling Up Renewable Energy for Resilient Economic Growth 3 poses a considerable obstacle to accessing OPERATIONAL/ financing for renewable energy projects in these jurisdictions. CONSTRUCTION RISKS Limited fiscal space of SIDS makes them Construction risks are one of the main OPPORTUNITIES IN SIDS particularly dependent on bilateral and challenges for developing renewable multilateral development banks to crowd energy projects in SIDS, primarily due to -in private sector investment. Many SIDS the shortage of qualified workforce and have constrained and fluctuating fiscal space, construction workers. The lack of local due to small and dispersed populations expertise but also often of construction leading to high costs of providing public workers exacerbates construction risks as services, combined with a larger share of projects often rely on locally sourced labor to revenues coming from sectors that are manage costs. For example, in some cases, more prone to variability such as tourism15. local universities do not offer sufficiently Moreover, SIDS fiscal balances can be robust STEM programs to train the necessary dramatically impacted by natural disasters. cohort for local skilled labor to support the With limited domestic fiscal space, SIDS face a construction of renewable energy projects. high reliance on external resources to finance Skilled workers are often lured to larger infrastructure investments, including for the labor markets abroad, attracted by greater clean energy transition. To attract private opportunities for career advancement and sector finance to scale-up these investments, upward mobility. Consequently, the local SIDS will need to mobilize concessional talent pool diminishes, leaving renewable resources and climate finance will be essential energy projects in SIDS vulnerable to delays to increase market confidence and reduce and increased costs (see Box 1) due to the the final cost of project development This has scarcity of qualified personnel but also of historically been the case in many SIDS. For semi-skilled and unskilled workers whose example, Caribbean OECS between 2012 and scarcity is due in some case to the small island 2019, over 70 percent of all financial flows population. came from bilateral and multilateral sources, with the World Bank providing the largest Lack of availability or interest of qualified share of the multilateral flows16. While there EPCs is linked with the issue of scale as has been an increase in new sources of public well as lack of local expertise. Indeed, funding available to SIDS – for example, via many SIDS are so small that they don’t the SIDS Lighthouse Initiative and the EU have local EPCs with strong capacity and/ Global Gateway – the energy transition in or presence of qualified international EPCs. SIDS is vulnerable to stalling if the volume of Thus, developers are left with sub-optimal international public support does not increase choices, which lead to higher transaction costs commensurate to the needs to de-risk private and implementation risks. In addition, these investment. smaller companies do not have the collateral or performance guarantees required by lenders, which can become a deal-breaker to OFF-TAKER AND POLITICAL financial close. Bringing an EPC from a larger, RISKS neighboring country, comes with a high cost premium, and – if local companies are sub- While Off-taker and Political risks are contracted – can still saddle the project with important in SIDS, they are perceived as substantial implementation risk. less critical than in the global market. For example, approximately half of market survey Inadequate infrastructure often increases respondents indicated that offtaker risk is a investment costs of RE. Given that many critical risk in the SIDS context, compared to SIDS have extremely small fiscal space, there more than three-quarters of respondents in is often a lack of funding for investments a global market sounding SRMI conducted in associated infrastructure needed for in 2019. Within this risk category, off-taker renewable energy projects, including roads liquidity and bankability were of the highest and port improvements (particularly relevant concern for survey respondents, especially for for wind, battery and geothermal projects). SIDS located in Asia and Africa. Delays in public sector implementation of these necessary infrastructure projects can become a major bottleneck to renewable energy projects moving forward efficiently. 15 OECD. Making Development Co-operation Work for Small Island Developing States. 2018. https://doi.org/10.1787/9789264287648-en 16 UNFCCC. Technical Assessment of Climate Finance in Eastern Caribbean States. 2022. https://unfccc.int/sites/default/files/ resource/UNFCCC_NBF_TA_OECS_final.pdf 16 | Scaling Up Renewable Energy for Resilient Economic Growth 3 1 BOX IMPACT OF HIGH CAPEX COSTS IN SIDS OPPORTUNITIES IN SIDS Due to the risks outlined above, CAPEX per MW for renewable energy projects in SIDS tends to be considerably higher compared to larger countries. A majority of respondents indicated a minimum CAPEX increase of 10-20 percent for renewable energy projects in SIDS, with 15 percent indicating a premium exceeding 50 percent, as depicted in Figure 4 below. While SIDS already face higher baseline generation costs, these high CAPEX premiums can further inflate PPA prices. This can deter decision-makers in SIDS who expect PPA prices to align with those in other regions. Moreover, in SIDS where utilities struggle to recover their costs (a situation observed in 65 percent of the selected SIDS), higher tariffs can exacerbate the cycle of increased generation costs, further hindering cost recovery, escalating off-taker risk, and diminishing private sector investment interest. What is the CAPEX premium to develop a renewable energy project in the selected SIDS? 4 Ground mounted utility-scale solar PV number of respondents 3 Rooftop solar PV Onshore wind 2 1 0 5-10% 10-20% 20-50% greater than 50% Figure 3 CAPEX premium in SDIS by technology Primary reason for the capex premium for PV, wind or geothermal in SIDS Supply chain/transport issues (i.e., remoteness, constraints at the port/to bring equipment to site) Market size leading to few EPC present in the country Additional technical Ground mounted requirements for utility-scale solar PV climate hazard risk Rooftop solar PV Local content regulations Onshore wind 0 2 4 6 8 10 12 14 16 Figure 4 Primary reasons identified by the market sounding respondents for renewable energy capex premium in SIDS 17 | Scaling Up Renewable Energy for Resilient Economic Growth 4 RECOMMENDATIONS Although there are numerous challenges to attracting private investment for renewable energy development in SIDS, the market sounding identified several solutions that can be deployed to overcome these barriers, including an important role for development banks, concessional climate funding, and grant-funded de-risking initiatives, such as SRMI. While some recommendations presented below apply at the country level, others apply at the regional level and regional associations17 could be leveraged to accelerate renewable energy scale-up (for example on capacity building, knowledge sharing, creation of STEM and Vocational Education and Training programs). 4.1 SOLVING THE SCALE CHALLENGE THROUGH INNOVATIVE PROJECTS AND LOCAL FINANCIAL INTERMEDIARY EMPOWERMENT Solutions identified to overcome thresholds for projects that offer outsized lack of private sector in small-scale development benefits (e.g., demonstration renewable energy projects in SIDS include projects, or projects with high socio-economic development of hybrid projects. As benefits, including closing a gender gap). Such many SIDS face very high generation costs, projects can be beneficial for branding or hybridization of technologies may be part meeting commitments for socially responsible of a least-cost expansion plan in the context investing. When developing flagship projects of achieving high levels of renewable energy like these, SIDS should put extra efforts for integration. Hybrid projects, e.g. solar plus communication and marketing to showcase battery storage, solar powered desalination the expected impact of their planned plant and water pump or solar powered renewable energy projects. mobile phone towers, can help islands tender a relatively small renewable energy project Empowering local financial intermediaries with a more attractive ticket size, given that could lower transaction costs and facilitate battery storage is also CAPEX intensive. small projects. The interviewed international financiers feel that lending through a financial Flagship projects can also help attracting intermediary – either an experienced regional/ lenders and developers. While many DFIs national development bank or regional or have standard transaction size thresholds local commercial banks – could allow them that are typically well above the size of an to direct more financing to SIDS without the average renewable energy project in SIDS, transaction costs associated with project-by- some may be willing to lend below these project assessments. This should be combined 17 Regional associations play an important role in SIDS collaboration, including to support national and regional efforts for the energy transition. In the Caribbean, key regional organizations include CARICOM, OECS Commission and the Eastern Caribbe- an Central Bank. In the Pacific Islands, the Pacific Island Forum and the Pacific Power Association play a key role. IOC and UN Economic Commission for Africa are key organizations for SIDS in the Indian Ocean and Africa, respectively. Cross regional organizations such as the Small Island Developing States DOCK (SIDSDOCK), the Alliance for Small Island States (AOSIS) and the Commonwealth Secretariat exist as representatives for the climate and sustainable energy interest of SIDS. 18 | Scaling Up Renewable Energy for Resilient Economic Growth 4 with capacity building when needed, as regional to long-term decarbonization planning (e.g., or local banks may not have experience e-mobility and industrial decarbonization), as with financing utility-scale renewable energy this may create an opportunity to develop a projects18. Additionally, they see potential in larger pipeline of renewables. For example, lending to blended finance funds with a mandate in the Maldives, a recent World Bank study RECOMMENDATIONS to support smaller scale projects, thus requiring shows great potential for electric buses and a smaller ticket-size; this is discussed further in ferries, with a cumulative potential of rooftop the mitigation of financing risks section. PV generation at the charging operations of approximately 1.25 million kWh19. Green hydrogen could be a long-term solution and a good way to increase the Finally, new business models such as investment ticket size but, in the near- portfolio financing were explored, where term, the costs are likely to outweigh the a developer creates a portfolio of clean benefits for most islands. While domestic investments in one country to gain in use for energy storage may be viable as costs scale, e.g., working with the government to decline, alternatives storage technologies bundle together a utility scale renewable should be considered. Due to scale, it is energy plant, rooftop solar investments unlikely that SIDS can produce green hydrogen and energy efficiency solutions. This or its derivatives at a price that would be approach is unlikely to be attractive to competitive for international export; however, traditional renewable energy IPP developers. each case will need to be analyzed individually. However, it could be an opportunity for Green hydrogen for international export, if smaller IPPs to develop long-term plays in viable, would bring additional off-takers into niche markets. In the Maldives, the World the equation and add the uncertainties linked Bank financed projects where multiple to the nascent green hydrogen market. As the investments are bundled (e.g. rooftop and market for green hydrogen matures, this may floating PV, batteries, e-mobility chargers) and be a more viable option in some SIDS. the government is bringing private sector in to implement this. DFI support of these bundled On the medium term, the economy projects could give the private sector visibility decarbonization could create on the multiple smaller parts of the bundle opportunities. SIDS should ensure that happening and improve their confidence. future expectations for electrification of the economy are incorporated into their medium 4.2 BUILDING RESILIENT RENEWABLE ENERGY FUTURES: MAINSTREAMING RESILIENCE FROM THE PLANNING TO THE CONSTRUCTION STAGE Resilience is key for the power sector For example, it is estimated that investing durability and must be prominent in all in resilience in CARICOM could result in phases of the development of renewable net economic benefits worth 4.3 billion energy projects in SIDS. SIDS governments USD between 2020 and 204020. Around 15 should consider moving away from a percent of the selected SIDS have started traditional least-cost power system planning incorporating resilience measures in their approach to a least-regret approach. If the energy sector planning through Integrated focus in SIDS remains solely on the explicit and Resilient Resource Plans, and this should least-cost approach, then the resilience co- be incorporated as a standard practice across benefits of renewables’ deployment may be all SIDS. overlooked to the detriment of the country. 18 TIDES is an example of a blended finance fund that provides debt and equity solutions to pacific islands. 19 Potential for electric bus and ferries in Greater Male region. World Bank Group, December 2022. 20 Masson et al., 2020 19 | Scaling Up Renewable Energy for Resilient Economic Growth 4 In addition, renewable energy projects SIDS governments can complement VRE in SIDS should incorporate additional deployment with other more climate- technical specifications to withstand the resilient technologies, such as geothermal. impacts of climate change, to the extent For SIDS located on volcanic islands, possible. Governments, supported by exploration of geothermal energy potential qualified transaction advisors, need to ensure can be pursued. While there are high upfront RECOMMENDATIONS these standards are clearly communicated costs and relatively long timelines to develop in the procurement documentation. geothermal power, if found, it can serve Depending on the technology chosen to meet as a foundation to a decarbonized energy renewable energy targets and on the country’s system by providing reliable, resilient and vulnerability to climate change (and exposure clean baseload energy both for electricity to natural disaster and its type), certain as well as heat. Several SIDS are already resiliency measures will need to be accounted pursing geothermal energy, including for in the design of the relevant technology21. Dominica, Saint Lucia, Grenada, Saint Vincent During the construction and operation and the Grenadines. Dominica is leading phases, it’s key that all parties adhere to these the Caribbean, having signed a PPA for 10 standards. MW of geothermal energy, equivalent to two thirds of their peak demand. SIDS with Concessional financing solutions need biomass resources (e.g., bagasse from the to be offered to SIDS to help cover the sugar cane industry, agricultural waste) can additional upfront costs of incorporating explore the potential to develop biomass resilience measures, including dedicated, energy, including for electricity generation22. substantial grant funding complemented Mauritius is a leader amongst SIDS in the use by concessional loans. Additional high-level of biomass, with approximately 100MW of political attention to this issue is needed to installed capacity supplying 12 percent of total increase the volume of concessional funding electricity generation in 202123. flowing to SIDS. This is discussed further in the financing recommendations. 4.3 MITIGATING DEVELOPMENT RISKS IN SIDS This Section proposes some possible trusted transaction advisor can ensure that mitigants to the key development risks any procurement process (unsolicited, feed- for renewable energy projects in SIDS as in-tariffs, auctions) include the necessary discussed in Section 3.3 above. technical standards based on robust energy sector planning. To ensure local capacity is maintained beyond transaction advisory MITIGATING LOCAL support, these services should mandatorily CAPACITY, GRID, LAND AND include capacity building of relevant government staff via on-the-job training in the STAKEHOLDER RISKS preparation of tender documents. As the most critical development risk in the selected SIDS, To mitigate lack of local expertise for SRMI has prioritized opportunities to secure procurement and transaction negotiations, grant funding to support these efforts in SIDS SIDS can seek technical assistance from and beyond. the World Bank/SRMI other MDBs/DFIs and institutions like IRENA to acquire The preferred mechanism to reduce grid transaction advisory services. Having a risks is a take-or-pay clause in the PPA. 21 Generic measures include: 1) dikes, 2) stronger transmission towers, 3) replace transmission towers in poor condition, 4) protect substations from flooding, 5) fiberglass poles for primary distribution feeders, 6) replace weak poles, 7) increase guying for secondary distribution feeders, 8) underground distribution lines (if flooding not a risk). Source: resiliency studies carried out by the World Bank and the consulting firm Hatch in both Antigua and Barbuda, and Saint Vincent and the Grenadines, in August and July 2022, respectively. 22 The carbon footprint of biomass energy must be evaluated on a case-by-case basis. For example, biomass generated on newly deforested land would not be considered carbon neutral. 23 IEA. https://www.iea.org/countries/mauritius/electricity 20 | Scaling Up Renewable Energy for Resilient Economic Growth 4 However, off-takers may not be willing some developers indicated that they will be to include this clause, thus additional more willing to engage in small renewable mitigants may also be considered. Such energy projects in SIDS if they can see a clear a mitigant can be a clear, and regularly pipeline of future projects in the coming updated, sector plan including a VRE years. Where there is not sufficient flexibility integration analysis from the relevant in the grid, tenders of variable renewable RECOMMENDATIONS authority (government, utility, TSO, etc.) to energy with battery storage can also mitigate ensure that the capacity of VRE planned will grid risk by allowing storage during periods be able to be absorbed by the system and of excess generation and by improving the that the necessary grid upgrades have been system flexibility and ability to cope with VRE identified. The subsequent implementation variability. of the grid upgrades is the next necessary step to enable VRE integration. This planning For SIDS with land constraints, governments must be complemented with more active can undertake studies to assess the network management tools. Finally, grid data space available for utility scale plants and availability, and grid codes that include priority distributed renewable resources and deploy of dispatch are also key. innovative solutions. When land availability is uncertain, the first step is to carry out a Integrated Resource Plans or other sector locational study to identify how much land is planning documents should be prepared available. For example, locational studies have expediently; of particular importance been carried out in Dominica, Cape Verde, in SIDS is that the IRPs preparation be Guinea-Bissau and Sao Tome and Principe. In coupled with a strong public awareness Dominica, specific geographical clusters for and a sound communication strategy, so solar and wind projects were identified. Figure that developers become aware of updated 4 below presents these in detail. In addition information in a timely fashion. In addition, to assessment of sites for wind or solar parks, it is worth highlighting that this can also help it is recommended that these studies also small islands overcome the issue of scale, as include an assessment of rooftop solar PV Figure 5 Locational study in Dominica (top) and Rooftop PV potential assessment in Grenada (bottom) 21 | Scaling Up Renewable Energy for Resilient Economic Growth potential. In Antigua and Barbuda, Grenada, yields and increased resilience to the impacts of 4 Papua New Guinea, Vanuatu, Guinea-Bissau climate change (See Box 4). and the Maldives, rooftop solar potential assessments were carried out. In Grenada, To mitigate stakeholder risks, SIDS for a defined area of interest of 205 km2, the governments can engage affected estimated installed capacity of rooftop solar communities early in the development RECOMMENDATIONS PV was found to be 619 MW, compared to a process to allow for a greater opportunity current grid size of 54MW24. Figure 4 shows a to shape decision-making. In many SIDS, the brief illustration of the distribution of the yearly skills required to undertake the renewable potential generation of rooftop solar PV for energy transition are very limited. The SRMI a selected zone. Of course, not all buildings methodology points to the importance of have sufficient structural integrity to support local development projects in vicinity of solar PV, particularly when considering climate renewable energy installations26, which vulnerability. Existing satellite mapping tools can decrease stakeholder risk and increase allow to assess the quality of the roof, yet the socio-economic benefits of a project to building audits are required to confirm their support a just transition. Building on the suitability. recommendations to mitigate the risk of local expertise, building local business capacity can When resources are available, geothermal support the energy transition and raise the and biomass should be explored but where acceptability and local investment capital and those resources are unavailable or limited provide long-term economic benefits with and where land is scarce for VRE parks and/or ongoing provision of goods and services by rooftop potential is limited, SIDS can consider the SIDS local businesses and companies. For innovative approaches and alternative example, Barbados has a requirement for at technologies. For example, offshore wind and least 30% of locals involved in the execution floating solar can be explored e.g. the Maldives of projects to ensuring local capacity and have a very high floating PV potential at 730 buy-in. If there are skills gaps in the local labor MW25. Countries can also explore innovative market, such an approach should be coupled solutions, including agrivoltaics, which can bring with measure to building local capacity, as multiple benefits including improved agricultural described further below. BOX 2: AGRIVOLTAICS TO OPTIMIZE THE USE OF LAND, PROMOTE ADAPTATION AND IMPROVE LIVELIHOODS Onshore solar is typically the most cost-effective renewable energy option. However, it requires large areas for building solar PV farms: a 10 MW utility-scale solar PV farm requires around 12 ha of land, generating constraints and opportunity costs in SIDS due to the competition of land for housing, commerce, and agriculture. Agrivoltaics is the use of land for both agriculture and solar PV energy generation (sometimes referred to as agrisolar, dual use solar, low impact solar). In addition to conserving land through the dual-purpose use of space, adding solar modules on top of agriculture activities can help manage the solar radiation, especially if semi-transparent and orientable, thereby reducing evapotranspiration and soil temperature. This approach can also facilitate water collection management and irrigation, in addition to creating an additional source of revenue for farmers from electricity sales, which can also increase their resilience to variations in crop yields and provide shade for herds27. In some cases, floating PV can be combined with fish farming. Agrivoltaics can thus help address land availability for PV as well as respond to climate change impact, especially during hot and dry periods, and contribute to rural economic development. However, agricultural yields and water management benefits can be impacted either positively or negatively by a variety of non-energy factors, including the type of crop, soil, and climate, etc. Thus, the use of agrivoltaics must be considered as a multi-sectoral approach rather than an energy-only centered solution. 24 These results come from an assessment of technical rooftop solar energy potential which can be found at https://rooftopsolar.energydata.info/. 25 Least Cost Generation Capacity Expansion in Maldives Scenarios and inputs for PLEXOS Simulation. World Bank, 2022. 26 The SRMI Guidelines on “Maximizing Socioeconomic Benefits Triggered by Renewables” published by the World Bank in Octo- ber 2022 provide advice on how to promote local development along the renewable energy project value chain. Accessible from: https://www.esmap.org/Maximizing_Socioeconomic_Benefits_Triggered_by_Renewables. 27 An agrivoltaics project example in La Reunion island: https://www.afd.fr/fr/carte-des-projets/des-serres-photovoltaiques 22 | Scaling Up Renewable Energy for Resilient Economic Growth 4 4.4 MITIGATING OPERATIONAL AND FINANCING RISKS IN SIDS RECOMMENDATIONS MITIGATING FINANCING and Seychelles) and US$ 48.5 million from the Clean Technology Fund (to Dominica, RISKS Maldives and St. Lucia). However, the current concessional finance available for SIDS is far Use of financial intermediaries and from reaching the level needed and is often concessional funding can mitigate supply driven and not coordinated with SIDS financing risks by increasing the agendas. A regional approach, or even one availability of local financing, building at the UN-SIDS levels, should be advanced to local capacity, and improving project scale-up and coordinate the funding sources. bankability. International financiers, including DFIs, can lend to regional, local Deploying grant-funded CAPEX buy- banks (development and/or commercial) or down mechanisms can be key when the blended finance funds, which then on-lend offtaker cannot afford a high tariff and the to smaller projects. This can be coupled with renewable energy project could have large capacity building to support local financial development impact. This is particularly institutions knowledge of financing utility- relevant in SIDS, which have a high percentage scale renewable energy projects. In addition of utilities that are not recovering costs (70 to project-financing for IPPs, this could percent of the selected SIDS), and that also also be done through a growing market for face higher CAPEX due to the need to build renewable energy from the Commercial and in additional resilience measures given their Industrial sector, including hotels for islands high vulnerability to climate change. SRMI with a large tourism industry. The wholesaling has successfully piloted this mechanism in approach will facilitate flows of funds from Maldives and is currently designing a similar larger financiers to smaller projects in SIDS instrument with Sao Tome and Principe, which by reducing transaction costs. The local would allow for an overall cost reduction of lending institutions are often more willing to the generation cost of 8 percent and a 20 lend to smaller projects, and they also better percent reduction in the country’s fuel bill. understand local risks. Finally, the allocation of SRMI is now looking to scale-up these tools FX risk must still be addressed; in some cases, through a new Financial Innovation Window innovative risk mechanisms for FX can be (see position paper for more details). considered, as described in the SRMI position paper “How to Unlock a Pipeline of Bankable Reducing upfront costs and transaction Renewable Energy Projects in Emerging costs for developing renewable energy Markets and Developing Countries?”28. projects in SIDS can increase financing flows. One solution can be the provision Significant concessional funding is critical of grant funding by DFIs and/or donors to to reduce the impact of high CAPEX and support due diligence costs for renewable risk premiums in many SIDS projects, energy projects in SIDS, to increase the including the additional costs associated willingness of developers to explore entry with building in resilience to climate into these markets. To complement this, change. Blending concessional finance SIDS governments could publish clear criteria with DFIs or commercial lenders can reduce that will be used to qualify bidders and DFIs financing risk by providing a new source could publish their list of criteria to finance of capital that offers benefits to co-lenders projects, thereby helping developers focus (reducing their exposure, reducing repayment their due diligence and project preparation risk), developers (improved returns) and efforts on what matters most. In addition, project beneficiaries (lower tariffs). Provision standardization was identified as an important of concessional climate lending can also strategy, which could include templates for create a crowding-in effect, as these funds project preparation documents (e.g., E&S can increase the visibility of projects and assessments) and financing documents increase interest of co-lenders. In the recent (PPAs, government support agreements, etc.). years, SRMI has successfully leveraged climate To increase efficiency and impact, regional funds for SIDS, including US$ 25 million from organizations could play an important role in the Green Climate Fund (to Guinea Bissau working with countries to adapt international 28 http://documents.worldbank.org/curated/en/099120623171525006/P1742020cf52b60e6096b80854984124388 23 | Scaling Up Renewable Energy for Resilient Economic Growth 4 templates of such documents to fit the context MITIGATING CONSTRUCTION/ of SIDS in their region or sub-region. These templates would not need to come with OPERATING RISKS “stapled financing,” thus allowing room for adjustments to fit the requirements of each Market sounding results indicated that sovereign state and the project; nonetheless, construction and operational risks are RECOMMENDATIONS they would still offer the potential to reduce more challenging than other risks to transaction costs by creating a common mitigate in SIDS. Survey results suggested starting point for governments, developers that incorporation of climate resilience and financiers to negotiate projects. through clear technical standards is an important mitigant, as well as using a CAPEX Alternative procurement options can help buy-down mechanism to reduce the burden to secure financing. As described above, of resilience costs on the project’s viability. experience around the world and in the Follow up discussions with developers and selected SIDS countries has demonstrated financiers highlighted two other important the benefits of competitive procurement of mitigants for the SIDS context: increasing the renewable energy using auctions. However, skills of the local workforce for construction in cases where market sounding reveals that and operation of renewable energy projects, an auction is unlikely to be successful due to a as well as support to overcome lack of lack of market interest, countries can consider availability or interest of EPCs. publicly funded renewable energy projects. This is particularly true for countries where The lack of workforce for construction fuel costs are burdening the utility and/or the works can be mitigated through efforts government finance and where renewable to increase the prevalence of Technical energy deployment would significantly and Vocational Education and training improve generation costs. programs in schools, technical colleges, communities and universities. Outreach at the junior high-school level through job fairs MITIGATING OFFTAKER and internships can increase interest in these RISKS areas, while outreach at the community level can attract people looking for a new career. Sovereign guarantees are preferred by Promoting regional exchanges could also IPPs to mitigate offtaker risks, but this support the creation of a pool of qualified instrument is rarely available. Based on workers to supply the region. Special efforts the market sounding, the most effective should be made to close the gender gap in mitigant is – unsurprisingly – the provision these jobs in the energy sector, through e.g. of sovereign guarantees. However, many dedicated scholarships and outreach efforts. governments are moving away from this approach, so alternatives need to be Development banks could play a role to considered. The next most effective mitigant is help overcome the risks associated with liquidity instruments (cash collateral, escrow, lack of qualified EPCs operating in SIDS. letter of credit) established by the offtaker. For example, development banks could offer Partial Risk Guarantees issued by DFIs were support to local EPCs to avoid the higher also listed as effective, although discussions costs associated with bringing in international with developers and financiers indicated EPCs. If local EPCs don’t exist, public support a reluctance due to the transaction costs can be offered to establish companies that involved in processing these instruments, can play this role by managing several small particularly in the context of SIDS, where companies that, bundled together, provide the transaction costs could represent a high services of a traditional EPC. In addition, share of the financing. To overcome this development banks could offer grant-funded challenge, SRMI is seeking to develop grant- EPC guarantees in cases where local EPCs funded liquidity guarantees to support small (including sub-contractors) are not able to transactions, including in SIDS, as part of a provide the guarantees required by financiers new Financial Innovation Window. (e.g., balance sheets are too small). To mitigate supply chain risk, SIDS can invest in road and port improvements; given fiscal constraints, concessional and/or grant funding may be required. If this is not feasible, in some cases, these costs can be covered by IPPs, although this will result in higher electricity tariffs with potential negative distributional impacts. 24 | Scaling Up Renewable Energy for Resilient Economic Growth