Managing foreign exchange risk in cross-border renewable energy projects: Investigating different exchange rate risk mitigation and allocation methodologies based on a utility scale solar PV project located in Ukraine

Abstract

The urgency of transitioning to renewable energy sources, to mitigate anthropogenic climate change, and to promote sustainable development, is universally acknowledged. Particularly developing countries face challenges in this transition.One of these challenges are underdeveloped capital markets to finance renewable energy at a necessary pace and scale. A critical barrier to international lending is the foreign exchange risk associated with long-lived projects such as renewable energy. Loans for renewable energy projects are often denominated in hard currencies (USD, Euro), while revenues are earned in local currencies.This currency discrepancy adds a further risk component to the transaction.When the local currency depreciates, the borrower may struggle to service its debt. Current strategies to mitigate this additional risk are plagued by limited effective nessor high costs, rendering many projects commercially unviable for international lenders. At the same time local financial institutions lack expertise or incentives to invest in renewable energy projects. This thesis seeks to provide a introduction to potential methodologies to mitigate and to allocate foreign exchangerisk, including local currency funding solutions. By providing this overview,the thesis aims to leave project developers and lenders with a better understanding of existing solutions to mitigate and allocate exchange rate risk, as well as mechanisms to enhance local currency funding. For readers from the institutional sector, especially Multilateral Development Finance Institutions this thesis will outline the limits of the current risk-mitigation strategies and highlight the need for far-reaching institutionalized approaches. While the thesis aims to contribute to addressing a global challenge, it will place particular focus on the reconstruction and further integration of Ukraine’s energy sector into that of the European Union. To this end, the concepts under investigation will be explored through an exemplary project setup located in Ukraine. The thesis will therefore be particularly relevant for the achievement of the United Nations Sustainable Development Goal 7 (Affordable and Clean Energy).