renewable energy project finance companies

renewable energy project finance companies

Exploring the Role of Renewable Energy Project Finance Companies in Accelerating the Transition to Sustainable Energy

1. Introduction to Renewable Energy Project Finance Companies

Such a transition appears as an increasingly attractive opportunity for institutional and private investors in search of high risk-adjusted returns. This wave of capital is, even more so, drawn to the global market of emerging countries where reliable and clean energy production has become a major concern to over 20 billion people. With long-lasting solar radiation and wind resources that significantly exceed local demand, emerging economies are looking as win-win investment destinations. Given the developing status of many emerging countries, under preferential conditions laid out by multilateral and bilateral development finance institutions, the local deployment of clean, cost-effective, and rapidly implemented renewable energy systems is well advanced. Since long-term and attractive investment conditions for anyone who is not an ideal project sponsor or an institutional investor have equally become apparent, bringing large pools of such third-party equity to finance the increasingly abundant pipeline of renewable energy power projects has, however, repeatedly come as a challenge.

Almost two centuries after the invention of the first solar photovoltaic cell, it is utterly disappointing that the share of fossil fuels in the global energy mix continues to account for about three quarters of the world’s total energy consumption, as it did in the early nineteen sixties. Meanwhile, the demand for alternative, sustainable energy sources has been accelerating. With substantial associated human well-being benefits in mind, as well as Earth’s physical limitations and integrating climate-related vulnerabilities, the transition to cleaner and more efficient energy sources is now considered not only a commercial but a moral need.

2. Key Financial Mechanisms and Instruments Utilized by Renewable Energy Project Finance Companies

Tax-Advantaged Structures and Benefits: Renewable energy generation projects are often eligible to enjoy a variety of tax-advantaged financing, legal, and status-related benefits. These tax-advantaged benefits reduce the cost of capital and improve investor returns by enabling more debt funding to be raised in relation to the amount of equity required. By providing more leverage and tax efficiency between the rates of return available to the equity and debt, tax-advantaged financing also improves the overall cost of capital.

Low Cost of Capital Mechanisms: Financial mechanisms have been developed to ensure that debt and equity investors have the confidence to invest in a partially leveraged capital structure with a large proportion of lower-cost debt financing. These mechanisms are designed to enable smaller and less capitalized investors to participate, enhance liquidity, reduce the risk of requiring costly and cumbersome forms of government intervention, reduce the cost of equity capital or leveraged capital, and increase the weighting of lower-cost tax equity or project debt financing. Some of these cost of capital mechanisms have similar functional objectives but operate on different parts of the project financial structure.

Cost and Risk Mitigation Mechanisms: Demand risk-related mechanisms aim to mitigate market price volatility or the risk of electricity price drops or declining demand for electricity overall and include several types of off-take agreements. Production risk mechanisms provide investors with confidence in their long-term production expectations, and examples include performance guarantees or long-term service agreements. Counterparty risk-related mechanisms are designed to ensure that a project is not overly reliant on or exposed to a single buyer or off-taker and include diversifying or strengthening the credit of the off-taker.

Renewable energy project finance companies employ a diverse array of financial strategies and instruments to enable the large-scale deployment of projects supplying renewable-generated electricity to the grid. These mechanisms are not unique to renewable energy projects but have proven to be particularly well-suited and effective in the context of long-term renewable energy generation projects.

3. Case Studies of Successful Renewable Energy Projects Financed by Project Finance Companies

Publisher case studies and ‘how we did it’ presentations made by PFC’s also contain useful information, but the figures available are often not detailed enough to compose a comprehensive model. Dates, financial structuring, and specific institutions involved are often left out. In an academic or policy design context, more control over project details is required to generalize the system. As a number of successful case studies by PFC’s can always be included, no limitation is perceived in terms of this type of requirement, and a matching of process-focused case study information with presented model inclusions is encouraged. In the review conducted, the information from the cases of noted confusion or general lack of detail has still been included in all chapters of the thesis.

Included in what will always be a limited sample size and case studies that can be considered as positive examples of successful renewable energy projects, three of those have been highlighted and reviewed: Krafla (Yesabel, Iceland), Roscoe Wind Farm (Texas, USA), and Reindeer Lake (Ontario, Canada). What draws special attention to Roscoe Wind Farm is its status as the largest wind farm in the world. In these cases, PFC’s have played a crucial role. While the general structure of renewable energy companies and their functions differ from case to case due to national regulations, owner priorities, and other factors, PFC’s have played a crucial role in gaining the necessary experience and in having a critical role in successful outcomes when needed.

4. Challenges and Opportunities for Renewable Energy Project Finance Companies in the Current Market Environment

Despite these challenges, renewable project finance companies operate in a very large and growing market for capital. DOE estimates upwards of $95B/y in new assets and BP Energy projects that renewable energy will be the largest new power source over the next twenty years. Renewable energy also tends to provide low resource and operational risk. Further, renewable energy is considered to be an essential part of an environmentally responsible energy policy, as mandated by the Energy Policy Act of 2006 (EPACT), President Obama, the United Nations, and the European Union. Renewable energy projects allow customers to meet established RPS targets. The renewable projects enjoy significant federal, state, and local subsidies. This concept paper posits that the low risk underlying the support from multiple sources of subsidies result in an ideal investment for a finance company.

One of the primary challenges facing renewable energy project finance companies is low interest rates caused by a lack of demand from low-risk borrowers. Low interest rates result in low senior debt returns, an increase in the required leverage to achieve targeted returns, and general underperformance of new build renewable energy projects. Additionally, volatile oil prices impact the ability of renewable energy to compete. Large scale buildings that were once considered a niche market and subject to less competition now compete squarely with renewables for energy portfolios.

5. Future Outlook: Innovations and Trends Shaping the Role of Project Finance Companies in the Renewable Energy Sector

1. REPF are subject to market trends. 2. New business models. 3. IRR. 4. Creditor reporting. 5. Off-grid projects and new technologies. 6. Prosumer projects. 7. Conclusion.

Renewable energy project finance (REPF) companies have become integral players in facilitating the required investment for the development and operation of renewable energy (RE) projects globally. Given the distinctive features of the RE sector, investors face several challenges, such as increased risk, complexity, and resource intensity of the investment. REPF companies have introduced new business models and have succeeded in mitigating these obstacles. In the wake of the COVID-19 crisis and as countries try to recover and transition to a more sustainable energy system, REPF companies will become even more relevant to the capital market and the RE sector. In this review, we explore the unique role played by these sectors and provide a brief perspective for the REPF market in the future.