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Box 2.3Mitigating Political Risks in Renewables: A MIGA caseIn 2000, an energy company was awarded a build-own-operate contract for a geothermal power plant in Africa,with rights to develop additional geothermal fields and expand capacity. The company signed a 20-year powerpurchase agreement with the national power utility, a parastatal. The average base generation tariff was slightlyhigher than the average cost for domestically produced electricity but lower than the cost of imported hydropowerfrom neighboring countries. The country has long suffered from power shortages, and in 2000, only 10 percentof the population had access to electricity.Major risks for the investor included currency transfer restrictions, government breach of obligations underthe power purchase agreement, and civil disturbances. MIGA provided the company (a repeat client) coverageagainst currency transfer restrictions, war and civil disturbance, and expropriation. Expropriation coverage insuresbroadly not only against the risk of outright seizure but also against breach of contract and other forms of de factoexpropriation.Shortly after MIGA issued the guarantee for Phase 1 of the project, the government attempted to renegotiatethe tariffs because the off-taker’s power purchase price from the company, as agreed under the power purchaseagreement, was higher than the tariff it charged to end users. The government also refused to honor some of itscontractual obligations under the power purchase agreement. The dispute resulted in additional costs and delayedcompletion of the first phase of the project.MIGA worked with both parties over five years and played a crucial part in reaching a resolution. The World Bank’slong involvement in the sector—it had financed two adjacent geothermal plants—provided a foundation for thesediscussions. The disputes were resolved when the utility agreed to honor the existing power purchase agreementwithout price renegotiation. The investor considered MIGA’s guarantee as critical for the implementation of Phase1 of the project and, on resolving the dispute, obtained additional MIGA political risk insurance to cover expansionof the geothermal plant’s installed capacity.Source: IEG-MIGA.Over 2003–08, guarantees for grid-connected renewableenergy were $541 million, about 15 percent of WBGcommitments for grid-renewable energy. During this period,MIGA issued six guarantees for renewable energy projects.By far the largest guarantee was for the 1-GW Nam Thuen2 hydropower project in Lao PDR, which benefited from$91 million in MIGA political risk insurance and $50 millionin an IDA partial risk guarantee. These guarantees were essentialfor the participation of private lenders in the $1 billionloan consortium, which also included public agencies.Is there scope for greatly expanded use of the World Bank’spartial risk guarantees or MIGA’s political risk insurancein promoting renewable energy? IEG’s evaluation of WBGguarantees found that guarantees had been underutilizedand that high processing and transaction costs and—inMIGA’s case—eligibility restrictions on the type of risks thatcan be covered limited the WBG’s ability to expand guarantees.With a change in the MIGA Convention, MIGA’scoverage is now expanded, but its institutional constraintswould still need to be overcome.For the World Bank, supporting national guarantee facilitiesis one approach. 10 The World Bank could, for instance,help countries assess the fiscally prudent opportunities forfeed-in tariffs or renewable portfolio standards and supportguarantees for countries with sustainable plans.Guarantees have benefits, but add to the cost of finance.It may be possible to use carbon finance to offset someof this cost. As noted, at current carbon prices, annualrevenues from carbon credit sales provides little helpwith debt finance and little impetus for investment. Muchgreater leverage could be achieved, however, if carbonsales revenue were used to finance guarantee or insurancepayments, which in turn permitted lenders to offer longerloan durations.Promote renewable energy -friendly pricing regulationA renewable energy plant’s ROE is very sensitive to pricingof power. Appendix figure A.3 shows the ROE for three differentplants, evaluated at a range of different tariffs. As inthe case of carbon revenue, higher tariffs have a bigger effecton plants with higher capacity utilization, other thingsbeing equal. Under the assumptions shown, wind doesnot become commercially attractive until tariffs exceed10 cents/kWh.The returns to a renewable energy plant arevery sensitive to power tariffs.Countries have purely domestic rationales for paying a premiumfor renewable energy, including local pollution reduction,insurance against fuel price shocks (Hertzmark 2007),22 | Climate Change and the World Bank Group