• We all also know about the main advantage of renewable energy projects: reduction of CO2 emissions

• Required low-carbon investment levels in green infrastructure to keep temperature increase below 1.5ºC threshold are enormous ($460B/yr until 2030, $1560B/yr thereafter)*

• There are additional considerations:

  • What if your country does import oil and/or gas?

  • Take advantage of your local resources

  • Fuel is free! All countries have wind and/or solar to some extent

  • Benefits to local communities

  * What investments are needed in the global energy system in order to satisfy the NDCs and 2 and 1.5 °C goals? – International Institute for Applied System Analysis

• Electricity is generated from a renewable energy source (e.g. wind, solar, hydro, biomass, tides, geothermal)

• Instance of infrastructure projects. As such, characterized by:

  • Capital intensive before any revenue is generated

  • High risk / high return

  • Long term investment horizons (10+ years)

  • Complex contractual interplay between many parties (construction contracts, loan agreements, land leases, offtake agreements, interconnection rights, operation and maintenance, and many more)

• Once these projects are up and running, the cost of running them is almost zero!

• Not so quick… what options are available?

  • You can start a development from scratch (greenfield projects) - High risk and high return

    • Long development times

    • High probability of failure, project development is complex and risky

  • You can acquire a partially developed project (brownfield projects) – Medium risk and medium return

    • Usually ready to build

    • Construction risk

  • Or you can acquire a project already in operation – Low risk and low return

    • Think of it as a bond

    • Stable and predictable cash flows

    • All major risks behind

• Once project development is ready, the time has come to commit serious money (mostly construction and purchase of equipment)

• The most common tool used to finance renewable energy projects is Project Finance:

  • Project owned by a SPV (Special Purpose Vehicle), completely separated from the project Sponsor

  • Finance is provided to the SPV, that assumes the risks and the financial consequences

  • If things go south, banks have no recourse to the project Sponsor, “only” the equity is exposed

  • The project Sponsor keeps a “clean” balance sheet

• Renewable energy projects have big capital expenditure requirements (CAPEX) and are highly leveraged (small equity vs. big debt)

• Banks tend to be wary

  • If things go well, no upside

  • If things go wrong… only recourse to the SPV

• Process to finance a renewable energy project tends to be long and complex

  • Banks spend a high amount of time studying in detail the project (Due Diligence)

  • Usually they do not want to do it alone – Syndicate of banks

• Renewable energy projects rely on electricity generation to generate cash flows

• The problem with renewable energy generation: you cannot control when it is going to be sunny or windy

• Through thorough measurement campaigns, it is possible to estimate the level of renewable energy resource of a project

• Banks rely on these analysis to estimate the amount of debt the project is able to accommodate:

  • P-levels: Annual generation levels to be exceeded (P50 and P90)

  • Coverage Ratios: CFs available vs. debt service

* Quote attributed to baseball-playing philosopher Yogi Berra

• Historically renewable energy projects have been developed leveraging government support

• Goal: Achievement of technological maturity through subsidized tariffs

• Every unit of renewable energy generated was paid at a fixed price not determined by the market (Feed-In-Tariffs)

• This model has worked very well in the past: Renewable energy technology has achieved grid parity

• Now what? An additional layer of complexity enters the game

* Again Yogi Berra

• Governments around the globe have slashed subsidized tariffs

• Renewable energy projects sell electricity directly to the market

• Electricity market price tends to be volatile and unpredictable, hence direct exposure to market risk

• Debt tenors tend to be long (10+ years)

• The project needs stable cash flows to pay back the loan

• Banks get scared off, cancelling lending or reducing debt size and at hardened terms

• There are several tools available to transform volatile market prices into stable and predictable cash flows:

• Power futures

  • Traded in exchanges (e.g. European Energy Exchange EEX)

  • Shorter-termed than required (max. 10 years) and low liquidity

• Insurance products

  • Derived from weather insurance

  • Revenue swaps exchanging variable revenues for a fixed payment

• Long-term electricity contracts (aka PPAs)

  • PPA stand for Power Purchase Agreement

  • An agreement between a buyer and a seller to sell a certain amount of electricity for an agreed term at an agreed price

  • OTC market, bespoke agreements

• Preferred tool

• PPAs can be physical or virtual

  • Physical: there is a physical link between the renewable energy project and the off-taker

  • Virtual: Financial contract (CfD); the renewable energy project and the off-taker can be not connected by a grid or even in different countries

• As OTC products, PPAs can have several structures

  • Fixed price

  • Discount to market with floor (basically a put option)

  • Cap and floor (collar)

• PPAs are not risk-free

  • Market risk, shaping risk, volume risk, balancing risk…

• Leveraging renewable energy projects with debt usually adds value to investors

• Most common metrics to evaluate renewable energy projects (i.a.):

  • For investors:

    • NPV, IRR, MOI…

  • For banks:

    • Debt-to-Equity ratio, Debt Service Coverage Ratio (DSCR), Loan Life Coverage Ratio (LLC)

• Building renewable energy projects require big capital investments upfront and feature long investment horizons

• Project Finance is the preferred tool to finance renewable energy projects

• Financing renewable energy projects is challenging due to volatility of cash flows (intermittent generation and market risk) – Tools available to mitigate these risks

• There are several metrics available to evaluate the quality of renewable energy projects from a financing perspective, depending on your side in the transaction (investor vs bank)

• Rubén Martínez Fanals

• agilibus.es