The importance of project finance for renewable energy projects

By Bjarne Steffen. 2018

286 citations recorded by the source corpus.

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.

Subfields: Electrical and Electronic Engineering, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/9aa042edd30dea41a34ecae9f349c0697bb9d27a

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Electrical and Electronic Engineering

1. F. Egli
2. Tobias S. Schmidt
3. Bjarne Steffen
4. F. Polzin

In Finance

1. F. Egli
2. Tobias S. Schmidt
3. F. Polzin
4. Bjarne Steffen

In Strategy and Management

1. F. Egli
2. Tobias S. Schmidt
3. F. Polzin
4. Bjarne Steffen

Citations in the corpus

• How do policies mobilize private finance for renewable energy?—A systematic review with an investor perspective (2019, background): “Especially in projectfinance setups, which are particularly important for RE investments, higher project risks translate directly into higher required returns [38,39], because the only collateral available to financiers is the RE asset and its expected future cash flows [40].”