How to Identify and Secure Finance for Renewable Energy Projects

secure finance for renuable projects

How to Identify and Secure Finance for Renewable Energy Projects

Renewable energy is becoming increasingly popular as the world seeks to reduce its carbon footprint. However, these projects often require significant upfront investments and securing finance for renewable energy projects can be challenging. The initial capital costs, including equipment and infrastructure, can be substantial.

Additionally, navigating through complex permitting processes and obtaining necessary approvals can be time-consuming and challenging. Grid integration, compliance with environmental regulations and addressing potential public concerns are key considerations. Furthermore, the regulatory environment for renewable energy projects can be complex and can vary by jurisdiction, which can make it difficult to navigate the financing process.

In this post, we will discuss ways to correctly structure a renewable energy project to secure appropriate financing.

Solar panels are a cost-effective renewable energy solution, converting sunlight into electricity while reducing long-term energy expenses.
Solar panels are a cost-effective renewable energy solution, converting sunlight into electricity while reducing long-term energy expenses.

Structuring Your Project

Typical Capital Structure

Structuring a renewable energy project correctly is crucial for several key reasons. Firstly, it ensures financial viability and attracts necessary investment by establishing a robust financial framework with accurate cost assessments, realistic revenue projections, and a well-defined financing plan. This enhances the project’s appeal to investors, lenders, and stakeholders, increasing the chances of securing funding and minimising financial risks.

Furthermore, proper project structuring enables effective risk management and mitigation. Renewable energy projects entail risks such as regulatory uncertainties, technology performance, market fluctuations, and operational challenges. Through proactive structuring, these risks can be identified, assessed, and addressed. Implementing risk mitigation strategies like contract structures, insurance coverage, and contingency plans minimises disruptions and safeguards the project’s financial and operational integrity. Clear legal and contractual frameworks, stakeholder engagement, and compliance with regulations also contribute to risk mitigation and project stability.

A typical capital structure for a power infrastructure project.

Once the structure has been established, the immediate next step in securing finance for renewable energy projects is to identify potential financing options. Several financing options are available for large infrastructure projects, including equity, debt, and, on rare occasions, grants.

Correct structuring of a renewable energy project is pivotal. It attracts investment, manages financial risks, and establishes a solid legal and regulatory foundation. By addressing these aspects meticulously, developers enhance project viability and mitigate challenges.

Find the right equity partner

Equity partners are crucial to a successful project. Equity partners help developers to cover the upfront costs of developing and implementing the project, can be a major hurdle for many renewable energy projects.

Private equity funds, strategic investors and private investors are a great place to start when beginning to finance renewable energy projects. Equity partners will require a share of the profits generated by the project, often in the form of dividends, but they can also provide a significant amount of financing and, by having ownership in the project, will be extremely attentive to the risks and strategy involved in development.

Private equity companies that focus on infrastructure, like Brookfield Infrastructure, KKR, Global Infrastructure Partners, will provide more than simply funding for an infrastructure project. One key advantage is that private equity companies focusing on infrastructure typically have a lot of experience in the renewable energy sector, which means that they can provide valuable expertise and guidance to developers. This can be particularly helpful for developers who are new to the industry or who are working on particularly complex projects.

Some investors and funds may have different ticket sizes and investment criteria, so it is important to research potential investment funds before approaching them with a proposal.

Finding the right equity partner can be time consuming and difficult but thorough discussion, due diligence and patience can ensure a successful business relationship for your project. Expertise and guidance to developers from equity partners, as well as a significant amount of financing, is essential for large-scale infrastructure projects.

The best equity partners will provide guidance and access to networks alongside capital inflows.
The best equity partners will provide guidance and access to networks alongside capital inflows.

Debt

Senior debt are the most popular financing option for renewable energy projects and debt will often comprise between 70-80% of your capital structure. Senior debt can be obtained from banks, credit unions, governments, private companies or other financial institutions.

For example, the African Finance Corporation (AFC) provides debt to develop and construct renewable energy projects in Africa, while the European Bank for Reconstruction and Development (EBRD) provides financing for renewable energy projects in Central Asia.

Debt has tiers of seniority, starting with lead debt arrangers (senior debt) to mezzanine lenders. Mezzanine lenders are typically the lowest tranche of debt. Senior lenders will require a number of guarantees and security, sometimes capping dividend payments in the early stages of projects or requiring certain terms with your offtaker in the PPA.

International financial institutions, such as EBRD, provide loans for infrastructure projects.
International financial institutions, such as EBRD, provide loans for infrastructure projects.

Financing via debt has its pros and cons. On the one hand, debt financing allows developers to retain more ownership and control of the project. It can also provide a significant amount of financing, which can be useful for larger projects, and lead arrangers of senior debt will pay careful attention to cashflows, ensuring accountability and foundational due diligence for your projects. On the other hand, debt financing comes with the risk of default and can put a strain on the developer’s cash flow.

When considering debt financing, it is important to understand the difference between senior and mezzanine debt. Senior debt has priority over other forms of debt in the event of default and is therefore considered less risky. Mezzanine debt, on the other hand, is considered more risky and may come with a higher interest rate to compensate for the additional risk.

Developers should carefully consider the lender of each type of debt financing before making a decision.

Grants

Grants are typically provided by non-profit organizations or governments and do not have to be repaid. However, grants are extremely rare to secure, are often limited in scope and are rarely sufficient to cover the entire cost of a project.

In the United States, the Department of Energy’s Office of Energy Efficiency and Renewable Energy offers grants for renewable energy projects through its various programs, such as the Solar Energy Technologies Office and the Wind Energy Technologies Office.

Similarly, in the European Union, the European Climate, Infrastructure and Environment Executive Agency (CINEA) offers loans and grants for renewable energy projects. One such fund eligible for distributing grants to projects that meet their criteria is the LIFE Clean Energy Transition sub-program. This program has a budget of nearly EUR 1 billion (until 2027).

In most cases, developers will need to seek additional financing options alongside grant funding in order to cover the remaining costs of the project.

Securing Financing

Once you have identified the appropriate capital structure and the financing options available, the next step is to secure financing for your renewable energy project. The process of securing financing can be complex and time-consuming, but there are several steps you can take to increase your chances of success.

GIA works with developers to ensure materials pass due diligence and attract new financing options.
GIA works with developers to ensure materials pass due diligence and attract new financing options.
Financial Model and Timeline

It is important to have a solid business plan in place. Your business plan should include a detailed description of your renewable energy project, as well as a detailed financial model and a timeline for completion.

Research Funding Sources

Second, you should research potential lenders or investors to determine their requirements and preferences. This will help you tailor your financing proposal to meet their specific needs.

Feasibility Studies

You should be prepared to provide detailed information about your project, including technical specifications, environmental and social impact assessments, and hone in the assumptions of your financial model. This information will help lenders and investors evaluate the feasibility of your project.

If you need advice structuring your project and securing finance, we can help you put together best-in-class materials to present your renewable energy project in the most compelling way to potential lenders or investors. GIA can provide valuable guidance on your financial model, develop an information memorandum for investors and source the right partners for your project.

With our expertise, you can increase your chances of securing financing for your project and make your renewable energy goals a reality.

Conclusion

Securing financing for renewable energy projects can be challenging and, in reality, there is vast graveyard of unfunded projects. By identifying potential financing options and taking the necessary steps to structure your project correctly, you can keep your renewable energy project moving forward.


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