Introduction > Develop Project Plan > Assess Feasibility > Identify and Select Finance Source/Instrument > Mitigate Risks > Secure Permits and Approvals > Seek Project Funding/Finance > Structure and Close Financing > Case Studies > Acknowledgements

Step 4: Mitigate Risks

All investments carry some degree of risk, including the possibility that finance providers or funding organizations lose part or all of their investment. Successfully sourcing financing involves aligning investors’ risk tolerance and return expectations with the project’s risk level. To secure funding, it is crucial to recognize the potential risks and have strategies in place to mitigate them.

A project may face various risks, including political, policy, regulatory, technical, and financial risks. Project developers should identify these risks during the technical, regulatory, and financial feasibility studies (Step 2) and, if applicable, as part of a pilot project. The next step is to draft measures to mitigate these identified risks and, if possible, implement these measures and deploy any necessary risk mitigation instruments. Risk mitigation instruments can reduce a project’s exposure to risk, the severity of potential losses, and uncertainty throughout the project. Reductions of these risks are essential to developing a bankable project that is attractive to potential investors (Step 6). The Risk Analysis Checklist for Biogas Projects, discussed below in the Key Resources section, includes more information about assessing and mitigating technical, operational, and financial risks.

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Best Practice Activities for this Step

Mitigate political, policy, and regulatory risks
Political, policy, and regulatory risks are potential complications that the project developer may face from political decisions, events, policies, or conditions and that can significantly affect the operability and bankability of the project. A project developer’s influence on types of risks might be limited. However, developers, who share similar objectives, can collaborate with national or local governments to recommend measures for creating an enabling policy framework for organic waste management projects, such as:

• Enforcement of laws and regulations to ensure that permitting and approval processes proceed without complications.
• Development and implementation of government policies, which include landfill diversion targets and disposal bans, standards for production and marketing of compost or biogas, source separation programs, and higher tipping fees for landfilling.
• Creation of tax incentives, such as reduced tax rates or tax rebates, which can free cash flow, support creditworthiness, and enhance returns to equity holders. Investment tax credits (i.e., dollar-for-dollar credit for expenses invested) could incentivize the development of organic waste treatment or biogas facilities and procurement of equipment.

Mitigate operational and technical risks
Operational and technical risks are the uncertainties and hazards a project may face during its development and are related to the main technical components of the project (listed in Step 2). These risks may include shortages of qualified staff, facility and equipment failures, unplanned operational challenges or closures, or unreliable feedstock supply. Below are potential risk mitigants:

• Feedstock guarantees, such as contracts with city parks and public works, large food waste generators (e.g., hospitals, schools, farmer’s markets, resorts), farmers, and waste haulers can mitigate the risk of limited feedstock availability.
• Market guarantees, such as memoranda of understanding or contracts with the recoverable products’ offtakers, such as city parks, farmers, and public works, can ensure there is an end-user of the products and increase the confidence of obtaining revenue from the sale of the by-products.
• Safety plans, with detailed guidance on safe operations of the facility, including maintaining a no smoking/no open flame buffer around biogas projects due to the flammable nature of biogas. These plans can protect project staff and avoid project shutdowns due to unsafe conditions.
• Equipment management plans, including information on the proper operations and maintenance of project equipment, procedures for troubleshooting issues with equipment, and a contingency plan for dealing with equipment failures.
• Staff training on operation and maintenance best practices to address shortages of qualified staff and minimize impacts from unplanned operational challenges and closures.
• Contingency plan for external events, which includes a list of potential external risks (i.e., power outages, natural disasters, strikes) and prioritizes them according to likelihood and severity, response plans for each potential threat, and regular reassessment of the contingency plan.

Mitigate financial risks
Financial risks are the possibility of losing money on an investment. There are many potential financial risks, including financing, liquidity, market, and currency risks (see Step 2 for more details). Below are potential risk mitigants:

• Contract design for organic waste management projects can help mitigate business and inflation risks.
  • Feedstock agreements demonstrate a contractual agreement to procure feedstock (e.g., food waste, green waste). These agreements improve a project’s financial certainty because they can specify the volumes, quality, and price of the feedstocks. Examples of feedstock agreements include contracts with large waste generators such as city parks and public works, large institutions (e.g., hospitals and schools), and large agricultural businesses. In most cases, the generator will pay a tipping fee per kilogram for the feedstock delivered to the project
  • Offtake agreements for the recoverable products (e.g., energy, biogas, solid and liquid digestate, nutrients, or compost) establish the prices and quantities of the products to be provided, constituting a significant portion, if not all, of the project revenues. City parks and public works, road maintenance agencies (e.g., for erosion control, vegetation), landfills, and large agricultural businesses can be a source for offtake agreements for compost or digestate.
• Contract term lengths for feedstock or offtake agreements are important to mitigate risks. Longer-term contracts are more favorable because they improve a project’s financial certainty.
• Financial assistance instruments to improve bankability, improve lending terms, strengthen credit, improve returns, and strengthen government participation and commitment to mobilize private investment may include the following:
  • Financial guarantees are a promise through an agreement by the guarantor, or borrower, to pay all or part of the costs incurred by a project under certain conditions. A guarantee does not involve giving money directly but ensures that the project’s obligations will be met. Guarantees for renewable energy projects are typically issued by public entities, such as governments or international finance institutions.
  • Insurance instruments aim to reduce the financial impact of project interruption, loss, or damage to the infrastructure facility or equipment. Insurance can protect against risks during the construction and operation phases and help mitigate uncertainties surrounding project financing. Unlike a guarantee, insurance requires upfront payments, or premiums, for the insurance company to provide compensation in the event of project damage or loss.
  • Grants, described in Step 2, help mitigate risk by providing additional capital to fund the project. Grants can help enhance investor returns, project creditworthiness, and viability of the financing structure.
  • Governmental incentive schemes are designed to incentivize investment by lowering the financial risk of investments and to improve bankability. These schemes include renewable energy certificates, low-carbon fuel standards, carbon offset programs, green technology investment and import incentives programs, among others.
• Instruments to address liquidity risks when a borrower cannot meet its financial obligations (e.g., pay its debts) on time may include the following:
  • Internal liquidity refers to the borrower’s ability to generate and manage cash flows from the project’s own operations to meet its short-term financial obligations without needing external funding. Having internal liquidity helps in the event of short-term cash flow problems with the project and to ensure payments to vendors are made on time. Examples of internal liquidity include cash or debt service reserves or excess spread accounts to serve as a source of funding in times when the project’s cash flow is limited.
  • External liquidity refers to the borrower’s ability to generate and manage cash flows from outside the existing project finance structure. This could include lines of credit from financial institutions or contingent equity commitments in which external funders commit to injecting additional equity if needed to cover shortfalls. When distinguishing between internal and external liquidity in organic waste management projects, the primary consideration is the perspective of the lead project developer. For a municipality-developed project, internal liquidity measures would include cash reserves, excess spread accounts, and contingent equity set up by the municipality itself. However, a private company would establish a similar mechanism. External liquidity typically involves support from entities outside the lead or primary developer, such as national governments or banks, regardless of whether the developer is a local government or a private company. Service providers, such as digestate offtakers, feedstock providers, and subcontractors, generally fall under the external liquidity category. However, if these entities are subsidiaries of the municipality in a municipal project, they might be considered part of the internal liquidity mechanisms. National or subnational governments can reduce liquidity risks by providing loan guarantees, offering credit enhancements, establishing green funds, and enabling policies to ensure stable revenue streams. If collaborating municipalities have some stake in the project, they can contribute to both internal liquidity through their equity stake and external liquidity by leveraging their public status for additional credit support.

Key Tools/Resources Related to this Step

Risk Analysis Checklist for Biogas Projects 
U.S. Environmental Protection Agency
2023. This checklist is intended to help project developers, government agencies, financial institutions, and other stakeholders assess the feasibility of a proposed anaerobic digestion or biogas project to ensure the project addresses critical technical and financial aspects.

Financing Readiness Questionnaire for Municipal Solid Waste Sector 
Climate and Clean Air Coalition
2018. You can use this questionnaire to identify financial weaknesses or potential financial risks of your project.

Landfill Gas Project Development Handbook 
U.S. Environmental Protection Agency
2021. Chapters 4 and 6 of this Handbook address financial and technical risks of landfill gas energy projects.

AgSTAR Project Development Handbook – A Handbook for Developing Anaerobic Digestion/Biogas Systems on Farms in the United States 
U.S. Environmental Protection Agency
2020. This Handbook includes discussions of potential technical and financial risks and risk mitigants. Chapter 6 discusses economic and financial factors.

Public Policy Recommendations to Overcome Barriers for Methane Mitigation in the Solid Waste Sector in Six Latin American Countries 
Recycle Organics
2023. This report provides a set of public policy recommendations to overcome the main barriers that prevent the implementation of methane mitigation actions in the waste sector, specifically in the management of organic waste.

Case Studies

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Offtake Agreement Guarantees in India In India, the Sustainable Alternative Towards Affordable Transportation (SATAT) initiative engaged the government-owned oil and gas companies to establish fixed pricing for bio-CNG and offer a guaranteed price at pre-determined rates. This approach aims to reduce market risks for developers and maintain the economic attractiveness for bio-CNG projects irrespective of market price fluctuation. Read about India