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Political risk and valuation of renewable energy investments in developing countries

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  • Shimbar, Ali
  • Ebrahimi, Seyed Babak

Abstract

Irrefutably, energy transition has recently gathered momentum thanks to the Paris Agreement and renewable energy (RE) falling costs. However, unlocking the full socio-economic potential of energy transition requires encouraging Foreign Direct Investment (FDI) in developing countries where energy demand and the risk of stranded assets are growing. Encouraging FDI in developing countries necessitates addressing two highly controversial issues: measuring political risk and carrying out proper valuation of long-term RE investments. In this regard, current paper investigates the rationale behind classic risk-adjusted discount rate (RADR) approach. It finds that since RADR requires heuristics, it may lead to misrepresentation of real worth of RE projects in developing countries. Addressing this issue, the paper offers a hybrid method based on risk pricing which can incorporate political risk into valuation straightforwardly. The hybrid method is applied to a photovoltaic case in Iran. Surprisingly, while the analysis based on classic RADR approach indicates that the investment is not financially viable, the hybrid analysis demonstrates attractive return on the investment. This can contribute to unlocking a considerable annual amount of 270 TWh solar power in Iran. The empirical study also shows that the suitable rate to discount RE investments in Iran is 10.22%.

Suggested Citation

  • Shimbar, Ali & Ebrahimi, Seyed Babak, 2020. "Political risk and valuation of renewable energy investments in developing countries," Renewable Energy, Elsevier, vol. 145(C), pages 1325-1333.
    • Handle: RePEc:eee:renene:v:145:y:2020:i:c:p:1325-1333
    DOI: 10.1016/j.renene.2019.06.055
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    Cited by:

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    3. Haktanır, Elif & Kahraman, Cengiz, 2023. "Intuitionistic fuzzy risk adjusted discount rate and certainty equivalent methods for risky projects," International Journal of Production Economics, Elsevier, vol. 257(C).
    4. Ekaterina Azarova & Hannah Jun, 2021. "Investigating Determinants of International Clean Energy Investments in Emerging Markets," Sustainability, MDPI, vol. 13(21), pages 1-15, October.
    5. Meiramkul Saiymova & Marija Troyanskaya & Kulyash Shalgimbayeva & Zhanat Babazhanova & Roza Jumabekova, 2023. "The Vector Auto Regression Analysis of the Link between Renewable Energy Consumption and Economic Development for Turkey and Kazakhstan," International Journal of Energy Economics and Policy, Econjournals, vol. 13(2), pages 309-315, March.
    6. Gyanendra Singh Sisodia & Einas Awad & Heba Alkhoja & Bruno S. Sergi, 2020. "Strategic business risk evaluation for sustainable energy investment and stakeholder engagement: A proposal for energy policy development in the Middle East through Khalifa funding and land subsidies," Business Strategy and the Environment, Wiley Blackwell, vol. 29(6), pages 2789-2802, September.
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    8. Shahnazi, Rouhollah & Alimohammadlou, Moslem, 2022. "Investigating risks in renewable energy in oil-producing countries through multi-criteria decision-making methods based on interval type-2 fuzzy sets: A case study of Iran," Renewable Energy, Elsevier, vol. 191(C), pages 1009-1027.
    9. Shimbar, A., 2021. "Environment-related stranded assets: An agenda for research into value destruction within carbon-intensive sectors in response to environmental concerns," Renewable and Sustainable Energy Reviews, Elsevier, vol. 144(C).
    10. Chiu, Yi-Bin & Lee, Chien-Chiang, 2020. "Effects of financial development on energy consumption: The role of country risks," Energy Economics, Elsevier, vol. 90(C).
    11. Yang, Changhui & Jiang, Qi & Cui, Yangyu & He, Lijun, 2023. "Photovoltaic project investment based on the real options method: An analysis of the East China power grid region," Utilities Policy, Elsevier, vol. 80(C).
    12. Shahi Md. Tanvir Alam, 2022. "Renewable Energy (Solar and Wind) Generation and its Effect on some Variables for Selected EU Countries with Panel VAR Model," International Journal of Energy Economics and Policy, Econjournals, vol. 12(5), pages 303-310, September.
    13. Menyeh, Bridget Okyerebea, 2021. "Financing electricity access in Africa: A choice experiment study of household investor preferences for renewable energy investments in Ghana," Renewable and Sustainable Energy Reviews, Elsevier, vol. 146(C).
    14. Ayoub Zeraibi & Daniel Balsalobre-Lorente & Khurram Shehzad, 2020. "Examining the Asymmetric Nexus between Energy Consumption, Technological Innovation, and Economic Growth; Does Energy Consumption and Technology Boost Economic Development?," Sustainability, MDPI, vol. 12(21), pages 1-17, October.
    15. Shimbar, Ali, 2021. "Environment-related stranded assets: What does the market think about the impact of collective climate action on the value of fossil fuel stocks?," Energy Economics, Elsevier, vol. 103(C).
    16. Tsao, Yu-Chung & Thanh, Vo-Van, 2021. "Toward blockchain-based renewable energy microgrid design considering default risk and demand uncertainty," Renewable Energy, Elsevier, vol. 163(C), pages 870-881.
    17. Peng, Benhong & Zhao, Yinyin & Elahi, Ehsan & Wan, Anxia, 2022. "Pathway and key factor identification of third-party market cooperation of China's overseas energy investment projects," Technological Forecasting and Social Change, Elsevier, vol. 183(C).
    18. Qüinny Soares Rocha & Rafaele Almeida Munis & Richardson Barbosa Gomes da Silva & Elí Wilfredo Zavaleta Aguilar & Danilo Simões, 2023. "Photovoltaic Solar Energy in Forest Nurseries: A Strategic Decision Based on Real Options Analysis," Sustainability, MDPI, vol. 15(5), pages 1-11, February.
    19. Simpson, Nicholas Philip & Rabenold, Colton James & Sowman, Merle & Shearing, Clifford D., 2021. "Adoption rationales and effects of off-grid renewable energy access for African youth: A case study from Tanzania," Renewable and Sustainable Energy Reviews, Elsevier, vol. 141(C).
    20. Ilbahar, Esra & Kahraman, Cengiz & Cebi, Selcuk, 2022. "Risk assessment of renewable energy investments: A modified failure mode and effect analysis based on prospect theory and intuitionistic fuzzy AHP," Energy, Elsevier, vol. 239(PA).
    21. Hunjra, Ahmed Imran & Azam, Muhammad & Bruna, Maria Giuseppina & Verhoeven, Peter & Al-Faryan, Mamdouh Abdulaziz Saleh, 2022. "Sustainable development: The impact of political risk, macroeconomic policy uncertainty and ethnic conflict," International Review of Financial Analysis, Elsevier, vol. 84(C).
    22. Jabeen, Gul & Ahmad, Munir & Zhang, Qingyu, 2021. "Perceived critical factors affecting consumers’ intention to purchase renewable generation technologies: Rural-urban heterogeneity," Energy, Elsevier, vol. 218(C).
    23. Zhou, Pengfei & Luo, Jie & Cheng, Fei & Yüksel, Serhat & Dinçer, Hasan, 2021. "Analysis of risk priorities for renewable energy investment projects using a hybrid IT2 hesitant fuzzy decision-making approach with alpha cuts," Energy, Elsevier, vol. 224(C).
    24. Arango-Aramburo, S. & Ríos-Ocampo, J.P. & Larsen, E.R., 2020. "Examining the decreasing share of renewable energy amid growing thermal capacity: The case of South America," Renewable and Sustainable Energy Reviews, Elsevier, vol. 119(C).

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