181. Policy and regulatory risks derive from adverse and/or retroactive changes in legal and regulatory regimes affecting a project's financial viability. RE project development tends to be governed by specific policy regimes and economically-distorting support mechanisms that try to level the playing field with fossil fuels. Uncertainty about how policy decisions will affect RE projects and their cash flows therefore present a great challenge for developers seeking financing, and is a powerful deterrent to investors and lenders. This is particularly the case if a given support regime is essential to project viability. In Europe, for instance, subsidies to solar power projects account for up to 85% of initial revenue, meaning that a measure of regulatory risk hangs above most RE projects40.
182. Additional policy-related risks involved in the renewable energy sector are: lack of energy development strategies; tariff and non-tariff trade barriers to RE technologies; lack of political commitment and prevailing fossil fuel subsidies; legal and ownership rights; currency risk (OECD, 2014). High exposure to policy risk is made all the more acute by the lengthy investment horizon of RE infrastructure projects.
183. Paradoxically, a contributor to heightened political and regulatory risk is the dramatic fall in hardware costs - the cost of solar panels have fallen by 60% since 2008 as a consequence of strong competition and excess capacity among hardware manufacturers. This makes a given project cheaper, but has led to surging investments in RE solar projects overall, which in turn has over-burdened government RE support schemes (Bloomberg New Energy Finance, 2009).
184. Public budget constraints are also undermining the sustainability of financial support for RE investments, with reductions to RE subsidies changing the commercial equation for many projects. Spain, an early-mover in the field, introduced cuts to feed-in tariffs for existing solar projects of up to 45%, causing investment in RE projects to drop by more than one-half to USD 4.6 billion in 2010 (Bloomberg New Energy Finance, 2009).
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40. Standard & Poor's (July 2011), Why Regulatory Risk Hinders Renewable Energy Projects in Europe.