GENERAL RENEWABLE ENERGY PROJECT FUNDING OPTIONS
RE financing decisions depend on a number of determinants; natural resource availability, technical maturity (stage of development), financial viability of the project, and the regulatory environment, amidst others. For example, hydro-electric projects require pre-investment funding due to land resumption (land acquisition by the government) and the impact of the project on the local communities in the area, which might necessitate resettlement and compensation of the locals by the promoters. Solar energy projects often require huge sums in investment subsidies to cater for up-front payments and involves the exploitation of tax incentives, but they are generally less reliant on debts. Debt financing is usually employed for wind farm projects due to lower debt service costs compared to equity dividend pay-outs etcetera.
Generally, equity, debt, grant and subsidies, are the prominent types of financing options for RE projects. Debt may be raised in the form of bank loans or loans from private persons (natural & artificial) and issuance of bonds via the capital market. Debt financing is common for up-front and on-going project costs, depending largely on the relative cost and tenures of the instrument. Concessional finance is a low-cost debt at below market rates, with long repayment tenures provided by major financial institutions, such as development banks and multilateral funds, to developing countries to accelerate development objectives. Concessional finance is used for high-impact projects responding to globally significant development challenges – from climate change mitigation and resilience to vaccine deployment, and similar projects that otherwise could not go ahead without specialised financial support. Government agencies and development finance institutions (DFIs) provide loan guarantees and credit guarantees for RE projects as credit enhancement measures. DFIs often underwrite loans and provide liquidity amenities at concessional rates. These credits, advanced through commercial financing institutions (CFIs) allow the mix of commercial and concessionary loans to lessen overall costs. Bond financing can be cheaper than commercial loans for RE projects, while also providing recycling opportunities to limited amount of development capital via refinancing initial project expenditures. Projects bonds – which offer an opportunity for institutional investors to participate in infrastructure projects through listed, tradable securities that can offer superior risk-adjusted returns – are used to fund undertakings, with the debt commitment to be met by the cash flow generated from the project. Green bonds have become popular financing options for climate change purposes; they are issued by governments, banks, multilateral development agencies, corporations and project companies raising funds to finance projects aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management. They also finance the cultivation of environmentally friendly technologies and the mitigation of climate change. The European Investment Bank (EIB) for example, issues Climate Awareness Bonds for lending to renewables and energy efficiency projects in the European Union. Nigeria was the first country on the African continent and the fourth globally to issue a security that raises funds for environmental projects after the launch of its first and second tranches of a N150bn Sovereign Green Bond programme. It partnered with World Bank Group, IFC, AfDB, UNEP-CBI to issue same.
Equity is raised from shareholders in different settings which include private equity funds, venture capital, and capital market offers. The type of equity investors to be engaged in RE projects depend on the stage of the technology development, rate of returns and the extent of risk associated with the project. Venture capitalists provide early stage financing which exposes them to significant risk but grants them a better positioning for higher returns. Private equity investors come in later stages and look out for more mature technologies and projects, with the aim of ‘exiting’ with maximum returns within 3-5 years. Grant and subsidies on the third leg are usually provided by governments and public agencies for projects that are commercially marginal.
Typically, larger RE projects rely on long-term financing acquired on a project finance basis, while smaller projects rely on corporate finance. Project financing involves the creation of a special purpose vehicle (SPV), which raises the required loan capital, the repayment of which comes from the cash flow of the project itself, with limited recourse to the assets of the parent company/companies. It allows for large amount of financing, with a tiny effect on the balance sheet or creditworthiness of the company. For corporate finance, the decision of lenders and subscribers is often influenced by the creditworthiness and risk profile of the borrowing company. Corporate loans serve as a quicker financing option for small RE projects, while also providing low cost of arrangement. Multinational companies and other large companies such as utilities operating in the RE market use their access to cheap capital in raising finance. They only have to issue bonds and equity to an already insatiable public.
THE STAGES OF RENEWABLE ENERGY TECHNOLOGIES VIS-A-VIS FINANCING DECISIONS
As discussed in 2.0 above, the cost of RE technologies depend on; natural resource availability, technical maturity (stage of development), financial viability of the project, and the regulatory environment. For example, photovoltaic and solar thermal technologies are not yet produced in market size, compared to RE technologies used in wind projects. The photovoltaic systems are strategically placed to face the sun, whereas solar thermal systems generate electricity after dark. The cost of solar thermal systems is however higher, owing to its sophistication. Information appearing this little, are crucial making RE financing decisions, both for the operator/sponsor and the potential investor. Another example, is the installation, maintenance and operation of offshore wind turbines which require higher capital than that of onshore wind systems, due to transportation and the installation conditions. The three major stages of energy-related technologies in the market economy are: research and development (R&D), marketization, and market penetration. Each stage is driven by both technology pull and market pull, and each require specific financing options for maximum efficiency.
At these different stages, various financing means can be deployed. At the R&D stage, technology development is mostly financed by the government or through public funds. The cost of entry at this stage is high, as the technology is at this stage, new and unproven, and not produced at scale. At the inception, an initial tranche, albeit relatively small, is necessary for feasibility and commercial studies. Grants are often coupled with technical assistance to maximize the gains of early-stage investment. Technological development is often financed by early-stage venture capital investors or private equities. Venture capital investors are often the first movers in promoting new technology owing to their high-risk high-reward appetite. After this early stage, smaller developers are often prone to selling their shares to entities in the form of shareholder equity. If the project succeeds, the financing options automatically become wider. Banks often come in when the technologies have passes the technological and commercialization phases and they require contractual commitments of the stakeholders. Corporate and project finance fund most of the setting up for manufacturing and facilities building after market accumulation and diffusion has taken place.
The manufacturing and commercialization phase can be financed by the flotation of stocks. At the latter stage of the investment circle, refinancing early stage borrowings and transfer of ownership takes place. To re-finance assets, and to recycle capital for new projects, project bonds are used in the post-completion stages. There is not a fit for purpose structure, and as earlier said and resaid, each project comes with its inherent peculiarities which necessitates a financing option suitable for each stage of the project. The possibilities of disaggregating RE financing options is imminent, with cases of crowdfunding for smaller RE projects found in Asia, and also the peer-to-peer lending opportunities block chain technology has presented. Financing the future promises to be a lot more exciting if all stakeholders are adequately informed.
The cost of production and installation of RE technologies means that for investors to pool their funds in, governmental support through policies must be extant. RE is only marginally competitive today comparative to conventional energies, owing to the well-established market structures and regulatory framework for conventional energies. Public policies play a significant role in the development of RE technologies. Fiscal support in the guise of tax incentives and credits, and subsidies focused on increasing returns from RE investments make them commercially attractive.
Furthermore, governments should fund more R&D in the RE economy, and also enact legislations/policies which would (indirectly) increase the market value of carbon eradication and reduction technologies, for example cap-and-trade arrangements or carbon taxes. To support solar energies, as seen in other jurisdictions like India, quantum based policies such as feed-in-tariffs (FIT’s) should be introduced to support and incentivise investment. Similarly, an environmental policy encouraging wind technology may indirectly reduce the financial risk associated with wind technology, thus opening the door for lower-cost debts to be deployed for proven wind technologies.
It is noteworthy to mention that the climate change bill recently assented to by the Nigerian President is highly commendable in being one of the first of numerous steps needed to combat climate change and energy sustainability in the country. However, it must be stated that issues of climate change and sustainable energy usage would require much more. As earlier hinted, challenges in the global RE transitioning include to a large extent; lack of long-term financing, existence of various risks, low rate of return and lack of capacity among market players. Therefore, it cannot be overemphasised that the government has a major role to play in providing the atmosphere for both developers and investors to thrive by part-funding projects in the RE economy and through favourable and well-considered laws and policies.
The Blackspring Ridge Wind Project, Alberta, Canada
Greengate Power Corporation’s C$600 M Blackspring Ridge Wind Project in Alberta, Canada demonstrates a very top-level financing decision. The 300 MW Blackspring Ridge farm was acquired by Enbridge and EDF EN Canada in 2013. In a first transaction of its kind, Pacific Gas & Electric (PG&E) agreed to purchase its renewable energy credits (RECs) generated by the farm under a 20-year contract. Greengate was allowed to sell its energy and RECs to PG&E, and PG&E was allowed to receive credit towards its renewable portfolio standard RPS requirement in California even though it will not be selling renewable energy in the state. This shows that adequate understanding of all the cost components and various financing options is integral in the RE industry. It also shows room for creativity and innovation in deal financing.
Ouarzazate I Concentrated Solar Power Project in Morocco
The financial closure for phase one of the Ouarzazate concentrated solar power station was announced in June 2013, while phase two achieved financial closure in May 2015.
The estimated investment for phase one was €500m ($537m). It was solely financed by the African Development Bank (‘AfDB’) Group. The overall investment for phase two of the Noor complex was $2bn funded through 80% debt and 20% equity. The debt facility was entirely provided by Masen with funds secured from the AfDB, the Agence Française de Développement, the Clean Technology Fund, the European Commission, the European Investment Bank, Kreditanstalt für Wiederaufbau and the World Bank.
The Government of Morocco offered a substantial subsidy in the form of a Power Purchase Agreements (PPAs) with a premium over grid price, spanning the expected 25-year operating life of the project. This shows that significant government subsidy and up-front international concessional finance are required for the CSP technology development in order to attract private financing in the start-up phases and allow unproven technologies enter a competitive RE market.
Ivanpah Solar Thermal Power Plants in the United States
The Ivanpah project comprised of 3 separate solar thermal power towers with a gross capacity of 329 MW. It was the largest solar thermal electricity generating facility in the world. It cost $2.2 billion and is situated on US federal lands in California. The Ivanpah Solar Complex received a US$1.6 billion loan guarantee from the US Department of Energy to support loans secured from the Federal Financing Bank. On the other hand, the project sponsor, BrightSource raised private equity financing for the project, including a power generator company NRG Energy contributing $US300 million, and a US $168 million tax-motivated investment from Google. The developer maintained an equity share of the project (US$130million) and provided technological support. Electricity from Ivanpah power plants is sold through 3 long-term and fixed price PPAs with Pacific Gas and Electric and Southern California Edison, each of 20-25-year duration.
The Ivanpah case shows that provision of a loan guarantee shares the risk of project failure with the government while the low-cost public-debt ensures good returns. Revenue support policies and PPAs ensuring significant and stable revenues also attracted equity participation by institutional investors.
This paper has provided a guide, albeit not exhaustive, on the various financing options available for RE projects and particularly considered the suitability of the various options in light of the stage of the technological development involved. It has shown that the financing structures for RE projects depend heavily on natural resource availability, financial viability of RE technologies, the regulatory environment as well as governmental intervention.
Currently, for RE to be deployed on a large and affordable scale, governmental support through funding and policy making is pertinent, and this was well captured in the case studies highlighted. It is believed that the issues engaged in this paper would contributes to the literature on RE financing and provides a helpful reference for stakeholders in reaching profitable and efficient financial decisions throughout the lifecycle of RE projects, as funding decisions are critical for the success of RE development particularly for innovative technologies at their early developmental stage.