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A note on (climate) risk perception in renewable energy investment planning

Peter Schmidt, PIK


The energy sector is one of those sectors most directly affected by climate variability and change  (Ebinger and Vergara 2010, Moomaw et al. 2011). While in the past research focused mainly on the energy sector as a source for GhG emissions, more recent work examines its vulnerability and works towards the provision of sector-tailored climate services  to facilitate local adaptation strategies. For the Mediterranean Region, which is, on the one hand, regarded as a climate hot spot (i.e. a region particularly sensitive and vulnerable to global warming) and, on the other hand, as a potential supplier of low-carbon electricity (cf. Schellekens et al. 2010), such a user-oriented climate service is still absent. CLIM-RUN’s energy case study explores the renewable electricity (RES-E) and climate nexus in the Mediterranean Region by means of national case studies (Spain, Cyprus, Croatia and Morocco) and strives for providing user-oriented climate data to allow for optimal adaptation strategies. Hereafter, I will give a short overview about risk perceptions related to RES-E investment, possible explanations for the barriers to properly integrate climate risks into long-term investment planning and how CLIM-RUN aims at overcoming these difficulties.

Renewable energy investment concerns

Large parts of the electricity infrastructure in the Mediterranean Region are to be retrofitted and expanded over the coming decades and will then remain in place for at least 30-50 years (cf. Battaglini et al. 2009). Therefore, infrastructure planning needs to pay attention to climate impacts likely to occur over the next decades. A sophisticated climate service can assist energy stakeholders in taking optimal decisions concerning mid- to long-term energy infrastructure planning, i.e. reducing risks but also exploiting opportunities by anticipating significant climate trends (Ebinger and Vergara 2010). As for both retrofitting and construction of new energy infrastructure massive investment is needed (European Commission 2012), the role of energy financiers and their awareness of climate change is a crucial issue to consider in this regard.
Dealing with weather and climate related risks is nothing new for energy financiers. In the past, not exclusively, but foremost demand side weather related risks (e.g., a sudden increase in demand for gas and corresponding price spikes due to an unexpected cold winter period) were at the core of energy investor’s risk management strategies. With the growing share of intermittent RES-E technologies in the power system, additionally the renewables’ supply-side oriented weather related risks come to the fore (Moomaw et al. 2011). RES-E power plants, such as those focused upon in the CLIM-RUN energy case studies   solar photovoltaic (PV), concentrated solar power (CSP), wind mills and hydro power plants   are contingent on the long-term behavior of a wide range of climate parameters (e.g., wind speed, irradiation, precipitation) (Ebinger and Vergara 2010). One of the mayor concerns of renewable energy financiers is that the electricity output, for instance, of a PV or a wind power plants is highly volatile (The Economist 2011). This renders long-term RES-E investment planning more complex. For instance, a renewable energy investor must know the annual revenue flow to be expected from the intermittent power plant over its lifetime to make sure the investment pays off within a reasonable timeframe. As the revenue flow is directly linked to the amount of kilowatt hours (kWh) produced by the power plant, future climatic changes do not only impact on the productivity (e.g. the average load-factor) of a RES-E power station, but may also threaten the viability of the entire investment (cf. The Economist 2011).

RES-E investment risks on the rise

Today, a fairly stable revenue flow for RES-E production is guaranteed in many countries through feed-in tariffs, RES-E grid priority feed in, and other kinds of support mechanisms (REN21 2012). This keeps the incurred risk manageable and the project bankable. With the maturity of RES-E technologies, however, investors are exposed more directly to market conditions and also to the volatility of revenues resulting from alterations in weather and climate.
The Economist Intelligence Unit (The Economist 2011), on behalf of SwissRe, conducted a survey among 280 senior executives in the renewable energy sector and finds that their awareness of weather and climate related (volume) risks grows, especially among stakeholders in the wind sector. A report from the United Nations Environment Programme-Finance (UNEP-FI 2012) confirms these assertion by and large and stresses, among other, the need to improve access to historical climate data (e.g., solar irradiation, wind speeds, precipitation) as an important contribution to reduce investment risk in developing countries. Regardless of the overall increased awareness about weather/climate risks related to electricity production, both The Economist (2011) and the UNEP-FI (2012) study highlight that the perceived climate risk is dwarfed by political/regulatory, financial, and market risks.

Perceived climate risk in the CLIM-RUN energy case studies

The CLIM-RUN energy case studies’ empirical findings collated throughout a series of workshops (in Spain, Cyprus, Croatia, and Morocco), conference participations and routinely interacting with renewable energy financiers back the above mentioned observations. Although we found growing awareness of climate change among the stakeholders we spoke with, hardly anyone currently integrates climate data into mid- to long-term renewable energy investment planning. There are several reasons for this; among others, the limited usefulness of the available climate data, a lack of understanding, little trust in cutting-edge climate models and statistical forecasting techniques, and personal beliefs about climate change.

The CLIM-RUN experts are currently reviewing specific data requests from various stakeholders and aim at improving the quality and usability of climate data (see Goodess 2012 in the 2nd issue of this Newsletter). From the conversations and interviews with renewable energy financiers we also learnt that risks perceived to be more important (e.g. regulatory and market risk) are usually shorter-term and their impacts immediately tangible, which renders their inclusion into investment planning reasonable. An important lesson to be drawn from this is that the provision of climate data alone is not likely to encourage RES-E stakeholders to integrate climate change concerns in RES-E investment planning; research from the fields of social psychology, anthropology and communication shows that people are rather interested in the meaning of the information than in the data per se (cf. Ebinger and Vergara 2010, Geels 2010). This highlights the importance to study how the productivity of a real-life project (e.g., the currently constructed CSP power station in Quarzazate, Morocco) may be affected, if a potential climate risk was materializing. Additionally, empirical evidence stresses that there is a ‘cultural cognition of risk’: individuals perform risk perceptions congenial to their core beliefs, the values they hold and their personal experience (Kahan et al. 2011). For instance, conventional investment planning based on historical climate data and short-term weather forecasts worked fairly well up to now. Furthermore, even if climate models and statistical forecasting techniques are continuously improving, some stakeholders expressed doubts about the certainty of the modeled data. As long as individuals can solve problems through a so called first-order learning (i.e. accumulation of experiences within the existing cognitive frame) there is apparently no need to integrate more long-term oriented climate data into RES-E investment planning. However, through continuous interaction and steady communication between climate science communicators and energy stakeholders, second-order learning (i.e. an alteration of the current cognitive frame triggered by the provision of new information) can be accelerated (Geels 2010). Against this background, an important issue is to demonstrate how the climate data generated by climate models and statistical forecasting techniques deployed in CLIM-RUN can improve the investment planning compared to the traditional planning approach that merely relies on historical climate data. As for instance RES-E power plants that are built today will remain in place for at least 20-30 years, this kind of information, if significant in skill, can help to optimize the investment decision and create consciousness of likely impacts from climate forcing on, for instance, RES-E power stations.

Current and future action in CLIM-RUN’s energy case study

Providing context and meaning to climate data is an issue already addressed by the CLIM-RUN energy case study. In the 2nd issue of this newsletter (see Calmanti et al. 2012), preliminary forecasts on wind speed changes over the Mediterranean and likely implications for electricity production were given. Colleagues from Croatia demonstrated in a recently published paper how climate change impacts on energy generation from hydro power stations in Croatia (Pašičko et al. 2012). We will be further addressing this issue throughout the 2nd term of the CLIM-RUN project by disseminating information on climate change impacts on renewable energy generation via short reports, briefing notes and other web-based material.
Debates, controversies and disagreement with regard to, for instance, the usefulness of new climate modeling and forecasting techniques is nothing unusual at this early stage because the concept of climate services is a very new paradigm in the energy sector. Therefore, the CLIM-RUN energy case studies adopt a participatory approach (i.e. including renewable energy stakeholders from early-on) to allow for mutual learning, to stretch existing routines, to stimulate reflexivity and to further raise awareness for climate change impacts. To this end, we are looking forward to the 2nd round of stakeholder workshops to be held in 2013 in the case study regions.