Posted By Eric Paul,
Wednesday, June 08, 2011
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This past week I attended the Advanced Renewable Energy Project Finance and Analysis conference hosted by Infocast in San Francisco. The conference, which was designed to provide a tutorial on developing and financing large-scale renewable energy projects, drew a diverse crowd from various professions and industries. The popularity of the conference was an indication of increased interest by the business community in developing and financing renewable energy projects. Many of the attendees were from real estate or construction firms, which are exploring how to incorporate renewable energy into their current offerings and properties. Others are interested in starting up their own development companies.
Project financing is by all means a complex and strenuous process even for someone with years of experience. There are no cookie-cutter deals; every transaction will bring its own unique set of challenges and opportunities. From identifying a site to getting the appropriate permits to determining transmission requirements, there are hundreds of different risks that developers and investors must address before a project can be financed. The ability of a developer to solve many of these challenges is crucial for a project to receive financing.
For some project financing is seen as a way for organizations to develop a renewable energy project while parking assets off of their balance sheet, avoiding restrictions on debt, or shifting their debt to offshore accounts. However, this cynical view is simply not the case. Large-scale renewable energy projects, which can easily cost in excess of $100 million, require investors to help developers finance projects, monetize tax credits, and achieve more favorable financing terms.
A few other observations from the conference:
As the renewable energy industries continue to grow and large-scale projects become more common, a strong understanding of project financing is important for anyone involved in the renewable energy space.
- Strong credit rating of off-takers is vital. Investors and financiers need to be confident that whoever is buying the energy will be around to buy energy for the life of the project.
- The further developed a project is, the easier it will be to get financing. Investors and financiers want the developer to have resolved all issues before they begin looking for financing.
- Investors and financiers are inherently risk averse. Financiers want a project to have as little risk as possible to ensure their returns. This means that financiers are less likely to finance new technologies and are happier working with established EPC firms and developers.
- Low natural gas prices continue to be a barrier for renewable energy. For utilities and other off-takers of renewable energy, natural gas prices often set the marginal price of electricity, against which renewable energy must compete. With low prices many of these organizations will simply install greater natural gas capacity.