Funding your renewable energy plant
Constructing plants to utilise renewable sources of energy entails initial investments for which various forms of funding are available. The choice of the right combination of financing depends on a variety of factors, including the type of plant, the size of the plant or project, and the conditions for grants, if any, at the site of the investment. Typically, a combination of financing from borrowed capital, equity and public grants is used.
A foreseeable cash flow from which the debts of the respective project can be serviced can, for example, be ensured by guaranteed public feed-in compensation or the revenues from winning a contract. Financial support can also be obtained by way of investment subsidies through funding institutions or municipalities, tax breaks or marketing so-called “green certificates”. If no public funding is offered at your site, you can use the money saved on buying energy (private consumption) or the revenues from direct marketing of the regenerative energy produced to refinance the loans.
Large-scale projects, such as constructing and operating a wind farm, are often handled within the framework of so-called project financing. To this end, various stakeholders (operating consortium, manufacturer, supplier, etc.) join to form their own company, a so-called special purpose vehicle (SPV). The stakeholders bring a share of their own equity into the SPV; following a due diligence process (review of credit and business), banks then provide debt capital.
The shareholders in a renewable energy project company expect high profits from their investment. With this goal in mind, private equity companies, such as pension and environmental funds, for instance, invest in wind and solar farms around the world. Projects of strategic investors are financed in advance largely from the total assets of the respective stakeholders. Energy suppliers, manufacturers of wind turbines and photovoltaic modules, but also food chains, for instance, are important stakeholders in this segment. So-called “citizens’ parks” are also widespread in Germany, in which private investors get together to carry out a project.
When it comes to financing large-scale projects in the renewable energy sector, extension of credit is directly linked to the specific project and thus to the expected annual profit. Many national and international banking institutions offer services in this area. Owing to the complicated, expensive preliminary work, only projects whose investment volume is upwards of about € 10 million are worthwhile.
Banks affiliated with companies grant purchasers of goods (orderers) several years of credit within the scope of so-called export financing, where the exporter is paid their purchase price from the buyer’s credit immediately after proper delivery and installation. Normally, the loan is granted on condition that it is covered by the official German export credit insurer, Euler Hermes Deutschland AG (so-called Hermes cover). This covers around 85 percent of the economic and 95 percent of the political risk. You will find more information on Hermes cover in the section on “Advantages of importing German goods and services”.
The federally owned KfW Bank Group plays a pivotal role in providing credit facilities for investments in renewable energy projects in Germany and around the world. In 2012, € 787 million (66 percent of the total commitments in the energy sector) were granted for renewable energies within the scope of financial cooperation with developing nations. The KfW development bank is counted among the world’s largest financiers for renewable energies in developing countries.
Other major lenders to projects outside the OECD are, for example, the national development agencies, the Global Environment Facility (GEF), the World Bank and the regional development banks. Apart from conventional financial instruments, bilateral and multilateral lenders also provide loans in the form of so-called “on-lending”. With this kind of lending, an international organisation extends credit to local banks in the respective eligible countries. The local banks can re-lend this credit under certain conditions. Thus the importer can obtain support on terms which are often quite favourable (for example, longer durations).
Flexible mechanisms of the Kyoto Protocol
The flexible mechanisms of the Kyoto Protocol are another way to fund large-scale renewable energy projects. German companies, for instance, fund projects in developing and threshold countries within the scope of the CDM mechanism. The foreign target country receives investments and usually a better starting base thanks to the technology transfer. In exchange, the German companies obtain emission rights they can use to meet their emission reduction obligations under the European Emissions Trading Scheme. For this instrument to work as an incentive, however, the trading price for certificates must be at a certain level.
Individual plants / smaller projects
Individual plants or smaller projects are often executed by individual companies. They are funded through a combination of equity and outside capital, or by leasing a plant. The latter puts no burden on an entrepreneur’s balance sheet. Income gained from selling the energy produced (for example, electricity or heat) or from the financial savings achieved thanks to the plant’s efficiency (lower energy supply costs) can be used to refinance a loan.
Local banks also offer possible loans to private persons and entrepreneurs. The conditions can vary widely. Experience gained by banks in the area of renewable energies is significant with regard to correct risk assessment.
Depending on the country or site, investments can be facilitated by public subsidies, such as low-interest loans, investment subsidies or tax breaks. Here too, funds from bilateral and multilateral lenders can come into play through the method of “on-lending” described above (see the heading “Investment promotion” in the section on “Large-scale projects”).
Leasing is an alternative to buying a plant, and represents a sort of hybrid between purchasing and hiring investment goods. Compared to buying, leasing has the advantage of being off the balance sheet and not affecting an entrepreneur’s equity – thus preserving the entrepreneur’s liquidity. Leasing offers planning certainty and cost transparency. Revenue can be generated by selling the energy produced.