Finding funds for large projects today is one of the major barriers to the development of the renewable energy sources (RES). The development of such projects requires significant capital expenditures for planning and designing, purchasing and installing equipment, as well as training or hiring personnel to operate and maintain the installed systems. This is especially true when it comes to geothermal power plants or other advanced technologies. They are perceived by financial institutions as high-risk investments and, therefore, companies have limited access to finance.
Some difficulties in financing renewable energy projects:
•High initial investment compared to other traditional energy sources.
•Biased attitude towards RES as projects with high investment and operational risk.
•Constant changes in the regulatory framework and associated uncertainty.
•Lack of experience in financing RES and poor culture of asset-based finance.
•A narrow circle of contractors implementing large projects in this area.
All of the above issues determine the low availability of funding for this type of project.
REAL BRIDGING FINANCE LIMITED is ready to offer its clients financing of large renewable energy projects, including investment loans for the construction of solar power plants, wind farms, hydroelectric power plants, substations, etc.
We also offer a wide range of financial, legal and engineering services to solve any problem for your business. Contact us to find out more! Financing renewable energy projects: available options In general, there are three main types of financing — equity capital, investment lending and grant financing.
Grant financing, common in European countries, is hardly used in developing countries. Investment loans remain the main sources of funds for domestic energy companies.
Equity capital Energy, companies can raise funds from investors in exchange for shares. This entails the highest risk, as equity investors are only allowed to distribute the dividends received after all financial and tax obligations have been met. Investors expect a high return on investment. On the other hand, investing in shares implies ownership and the right to participate in decision-making. From the point of view of the implementation of an energy project, money can be attracted in the form of investment loans and various project finance schemes. In the case of a loan, the borrowed funds must be repaid, albeit with flexible repayment terms.
Mezzanine financing Mezzanine financing (mezzanine) is an effective debt instrument intermediate between bank lending and equity capital. By definition, mezzanine funds are investments in an energy project with subsequent participation in business under certain conditions, for example, after the commissioning of a power plant. This scheme is considered impractical for most projects, therefore it is rarely used by companies when there are no other options for financing the project. For his part, the investor assumes a significant risk, because the project may not be completed at all. In return, the investor expects high returns to offset this risk. Usually mezzanine financing is provided for large projects.
Investment lending, In recent years, investment loans for the construction of solar power plants and other renewable energy projects have gained tremendous importance for the industry. Debt financing consists of obtaining a loan or issuing bonds to raise capital and requires the company to return the borrowed funds and interest. Lenders traditionally bear less risk than shareholders.
Project finance (PF), applicable to large-scale capital intensive energy projects, is also referred to as off-balance sheet finance. This is a long-term funding based on the future cash flows of the project and not on the current financial health of the initiators. In this case, the assets of a special-purpose vehicle, including contracts that generate income, become a collateral.
This model is of limited suitability for renewable energy projects, since the cost of selling equipment (collateral) of such facilities can be low. A special purpose vehicle (SPV) isolates the project risk from the initiator’s assets. It is a legal entity created to separate cash flows and venture risk. The creation of an SPV implies fixed costs that are considered appropriate only for large projects.
Financing the RES sector through leasing Leasing for renewable energy projects remains popular, gradually becoming more complex and acquiring new forms of contractual relationships. There are two fundamentally different leasing options with their pros and cons. If the leasing company retains ownership, it is an operating lease. If ownership passes to the buyer, this is called a finance or capital lease. In both cases, the payments fully cover the cost of the leasing company’s equipment minus a small residual value, interest plus insurance costs and profits. Operating leases are not reported on the company’s balance sheet and lease payments are recognized as an expense in the income statement.
In the case of finance leases, the lessee must disclose the leased equipment on its balance sheet as assets and the present value of the lease payments as debt. Some finance lease programs allow a client to purchase an item at the end of the lease term. Supplier investment financing Investment financing of renewable energy projects by equipment and service providers becomes possible when the financing organization provides the supplier with capital that allows him to sell products without immediate payment. This method of financing large projects allows the manufacturer to supply the necessary equipment to the company in advance, receiving payment on a pre-agreed payment schedule, in accordance with the cash flows of the future project. Leasing is the most common form of supplier financing for projects. Entrepreneurs often use factoring to support ongoing financial activities or to overcome potential disbursements. Meanwhile, factoring is a service that works as a source of investment financing.
The main role of factoring is to finance the client’s business. In many European countries, such as the UK or Italy, factoring is widely recognized as a way to reduce risk in doing business, as well as a tool to support projects. Companies turn to factoring for help in obtaining funds for the construction and modernization of energy facilities. As a rule, such companies do not have the opportunity to obtain an investment loan due to one reason or another. Bonds Another important debt instrument is bond financing. These are fixed-term securities issued by corporations or governments that entitle the bondholder to receive principal and interest. It is difficult to structure the financing of renewable energy projects by issuing bonds. In this regard, it is important for companies to minimize or eliminate construction or technological risks. An example of bond financing suitable for renewable energy projects is the issuance of municipal bonds for local energy projects. Grants for strategic projects Grants for the implementation of strategic renewable energy projects do not require payment. They are usually allocated by governments and international organizations to promote environmental and economic development projects.
Allocated funds are often tied to the specific requirements, conditions of use and time constraints of the project. Grants are often used as an incentive to make attractive investments in new markets or in projects for which economic benefits have not been proven. Government subsidies take the form of soft loans, tax cuts, etc.
Contact REAL BRIDGING FINANCING TEAM for a preliminary consultation.
Our services includes:
• Preparation of a feasibility study for the project.
• Creation and management of SPV.
• Financing projects / investment lending.
• Financial consulting / modeling.
• Credit guarantees.
• Engineering design.
• Industrial engineering.
• Power engineering.
• Construction and modernization.
• Operation of facilities.
• Safety management.