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The importance of project finance for renewable energy projects

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  • Steffen, Bjarne

Abstract

Given the magnitude of investment needs into low-carbon power generation, the availability and cost of capital is crucial for successful energy transitions. Recently, a strong increase of non-recourse project finance (as compared to corporate finance on a project sponsor's balance sheets) could be observed for power generation projects. Classical economic motivations for project finance are the prevention of contamination risk, and agency conflicts – however, these reasons do not apply for comparably small projects in low-risk environments, such as many renewable energy projects being realized today. This paper therefore assesses the importance of project finance for renewable energy projects in investment-grade countries, and the underlying drivers to use this kind of finance. Eight potential reasons for using project finance are distilled from economic and finance theory, and then empirically evaluated using a novel dataset for new power plant investments in Germany 2010–2015. Results show that in this extreme case with particularly low investment risks, project finance has much larger importance for renewables than for fossil fuel-based power plants. It is not used to reduce contamination risk or agency conflicts, but, instead driven by the “debt overhang” of non-utility sponsors such as independent project developers. We discuss implications for policy makers, the financial sector, as well as energy scholars concerned with power generation investment decisions.

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  • Steffen, Bjarne, 2018. "The importance of project finance for renewable energy projects," Energy Economics, Elsevier, vol. 69(C), pages 280-294.
    • Handle: RePEc:eee:eneeco:v:69:y:2018:i:c:p:280-294
    DOI: 10.1016/j.eneco.2017.11.006
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    More about this item

    Keywords

    Investment decision; Special purpose vehicle; Renewable energy; Solar PV; Wind; Yieldco;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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