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Risk mitigation in project finance for utility-scale solar PV projects

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  • Jadidi, Hossein
  • Firouzi, Afshin
  • Rastegar, Mohammad Ali
  • Zandi, Majid
  • Eicker, Ursula

Abstract

This study explores strategies to de-risk renewable energy investments in project finance (PF) deals, primarily focusing on enhancing the prosperity of such deals by mitigating default risk. The success of PF deals is intricately linked to ensuring reliable future revenues, and by addressing default risk, the overall viability of the agreement is significantly improved. The primary objective of this research is to introduce a financial instrument leveraging credit default swaps (CDS) and to delineate its pricing methodology. The effectiveness of this financial instrument is demonstrated through its application to a 10 MW solar photovoltaic power plant project. The study reveals that the instrument efficiently transfers default risk to a protection seller at an affordable cost, showcasing the impact of using the instrument on the levelized cost of electricity (LCOE) for different leverage ratios. This outcome augments the viability of PF deals and mitigates the risks associated with long-term financing, particularly in high-leverage scenarios. Additionally, a comprehensive sensitivity analysis is conducted, examining the impact of default probability and the financial instrument price under varying financial leverage ratios, power purchase agreement (PPA) prices, and tax rates. The insights derived from this analysis provide valuable information for banks, investors, solar power plant developers, and policymakers, enabling them to make more reliable decisions in their decision-making processes.

Suggested Citation

  • Jadidi, Hossein & Firouzi, Afshin & Rastegar, Mohammad Ali & Zandi, Majid & Eicker, Ursula, 2025. "Risk mitigation in project finance for utility-scale solar PV projects," Energy Economics, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988325000441
    DOI: 10.1016/j.eneco.2025.108221
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    More about this item

    Keywords

    Debt Service Coverage Ratio; Default probability; Financial instrument; Levelized cost of electricity; Power purchase agreement; Project finance; Risk mitigation; Utility-scale solar PV; Tax rate;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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