Investing in renewable energy is becoming increasingly popular as concerns about climate change lead to a shift towards more environmentally friendly options. However, there are a number of risks associated with investing in renewable energy that must be taken into account. Tariffs, opposition from the fossil fuel industry, and the vulnerability of supply chains for rare earth elements are all of concern to the renewable energy industry. Entirely new projects face challenges surrounding land acquisition and community relations, while existing projects may be subject to changes in the regulatory framework.
Investors must understand the dynamics of local power and start community participation from the beginning to avoid potential conflicts. Geothermal projects face a particular risk, since resource assessment involves drilling expensive exploratory test wells, which may not be able to find adequate resources. Policymakers will set thresholds for CO2 emissions by defining what constitutes “clean” (green) hydrogen in the EU taxonomy, which in turn will affect the renewable energy needed for its production. To mitigate regulatory risks, investors should perform policy-focused due diligence and plan country-specific scenarios in the early stages of the investment cycle.
Interest in investing in renewable energy and other sustainable sectors will only increase as concerns about climate change lead governments, companies and individuals to choose the most environmentally friendly option. Hydrogen is an example of how the risks and rewards of renewable energy are indirectly affected by regulations in a variety of other sectors. The rapid evolution of regulations and the politicization of wind and solar projects mean that the assessment of political risks is becoming an increasingly important step in the process of making investment decisions. Insurance is often a prerequisite for project financing, so there could be a growing need for insurance as the renewable energy industry continues to grow.
Investors must also consider local problems when developing their general market and ESG strategies for individual countries, and managing their governmental relations and providing them with resources. Overall, investing in renewable energy can be a rewarding experience if investors are aware of the risks associated with it. By understanding local power dynamics, performing policy-focused due diligence, and planning country-specific scenarios, investors can mitigate regulatory risks and make informed decisions about where to invest.
