Risk assessment of financing renewable energy projects: A case study of financing a small hydropower plant project in Serbia

This study proposed a novel approach for conducting the credit risk assessment of financing a small hydropower plant (SHPP) project in Serbia via the failure mode and effects analysis (FMEA), which was modified by the Dempster-Shafer Theory (DST). A qualitative analysis of financing the SHPP project was performed to identify and describe the risk events that may cause loan default. To conduct the risk assessment, experts with experience in SHPP project financing in Serbia were required to evaluate the occurrence and severity of the identified risk events and their ability to detect them. Considering the epistemic uncertainty to which they were exposed, the experts assigned multiple ratings and their mass functions according to DST. Thereafter, the proposed FMEA-DST methodology was applied to identify the risk events that required the special attention of credit risk managers. Finally, adequate mitigation strategies that will reduce the credit risk of SHPP project finance in Serbia were proposed for the identified risk events. The research results demonstrated the effectiveness of the proposed approach as a comprehensive framework, which credit risk managers can employ to evaluate project finance requests.(c) 2022 The Author(s). Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Automated summary

This study proposes a novel approach for assessing the credit risk of financing small hydropower plant projects in Serbia using the failure mode and effects analysis modified by the Dempster-Shafer Theory. Through qualitative analysis, the study identifies and describes risk events that may result in loan defaults. Experts in SHPP project financing evaluate the occurrence, severity, and detectability of these events, and assign multiple ratings and mass functions to account for epistemic uncertainty. The study demonstrates the effectiveness of the proposed approach as a comprehensive framework for credit risk assessment in project finance.