IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v69y2018icp280-294.html
   My bibliography  Save this article

The importance of project finance for renewable energy projects

Author

Listed:
  • Steffen, Bjarne

Abstract

Given the magnitude of investment needs into low-carbon power generation, the availability and cost of capital is crucial for successful energy transitions. Recently, a strong increase of non-recourse project finance (as compared to corporate finance on a project sponsor's balance sheets) could be observed for power generation projects. Classical economic motivations for project finance are the prevention of contamination risk, and agency conflicts – however, these reasons do not apply for comparably small projects in low-risk environments, such as many renewable energy projects being realized today. This paper therefore assesses the importance of project finance for renewable energy projects in investment-grade countries, and the underlying drivers to use this kind of finance. Eight potential reasons for using project finance are distilled from economic and finance theory, and then empirically evaluated using a novel dataset for new power plant investments in Germany 2010–2015. Results show that in this extreme case with particularly low investment risks, project finance has much larger importance for renewables than for fossil fuel-based power plants. It is not used to reduce contamination risk or agency conflicts, but, instead driven by the “debt overhang” of non-utility sponsors such as independent project developers. We discuss implications for policy makers, the financial sector, as well as energy scholars concerned with power generation investment decisions.

Suggested Citation

  • Steffen, Bjarne, 2018. "The importance of project finance for renewable energy projects," Energy Economics, Elsevier, vol. 69(C), pages 280-294.
  • Handle: RePEc:eee:eneeco:v:69:y:2018:i:c:p:280-294
    DOI: 10.1016/j.eneco.2017.11.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988317303870
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kallabis, Thomas & Pape, Christian & Weber, Christoph, 2016. "The plunge in German electricity futures prices – Analysis using a parsimonious fundamental model," Energy Policy, Elsevier, vol. 95(C), pages 280-290.
    2. M. Pahle and H. Schweizerhof, 2016. "Time for Tough Love: Towards Gradual Risk Transfer to Renewables in Germany," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
    3. Francesco Corielli & Stefano Gatti & Alessandro Steffanoni, 2010. "Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1295-1320, October.
    4. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    5. Rajeev J Sawant, 2010. "The economics of large-scale infrastructure FDI: The case of project finance," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(6), pages 1036-1055, August.
    6. Holstenkamp, Lars & Kahla, Franziska, 2016. "What are community energy companies trying to accomplish? An empirical investigation of investment motives in the German case," Energy Policy, Elsevier, vol. 97(C), pages 112-122.
    7. Arturo Bris & Ivo Welch & Ning Zhu, 2006. "The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance, American Finance Association, vol. 61(3), pages 1253-1303, June.
    8. Yescombe, E. R., 2013. "Principles of Project Finance," Elsevier Monographs, Elsevier, edition 2, number 9780123910585, July.
    9. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    10. Arnold, Uwe & Yildiz, Özgür, 2015. "Economic risk analysis of decentralized renewable energy infrastructures – A Monte Carlo Simulation approach," Renewable Energy, Elsevier, vol. 77(C), pages 227-239.
    11. Polzin, Friedemann & Migendt, Michael & Täube, Florian A. & von Flotow, Paschen, 2015. "Public policy influence on renewable energy investments—A panel data study across OECD countries," Energy Policy, Elsevier, vol. 80(C), pages 98-111.
    12. Traber, Thure & Kemfert, Claudia, 2011. "Gone with the wind? -- Electricity market prices and incentives to invest in thermal power plants under increasing wind energy supply," Energy Economics, Elsevier, vol. 33(2), pages 249-256, March.
    13. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    14. Shah, Salman & Thakor, Anjan V., 1987. "Optimal capital structure and project financing," Journal of Economic Theory, Elsevier, vol. 42(2), pages 209-243, August.
    15. Pahle, Michael, 2010. "Germany's dash for coal: Exploring drivers and factors," Energy Policy, Elsevier, vol. 38(7), pages 3431-3442, July.
    16. Shahriyar Nasirov & Carlos Silva & Claudio A. Agostini, 2015. "Investors’ Perspectives on Barriers to the Deployment of Renewable Energy Sources in Chile," Energies, MDPI, Open Access Journal, vol. 8(5), pages 1-21, April.
    17. Lewellen, Katharina, 2006. "Financing decisions when managers are risk averse," Journal of Financial Economics, Elsevier, vol. 82(3), pages 551-589, December.
    18. Hainz, Christa & Kleimeier, Stefanie, 2012. "Political risk, project finance, and the participation of development banks in syndicated lending," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 287-314.
    19. Benjamin C. Esty, 2004. "Why Study Large Projects? An Introduction to Research on Project Finance," European Financial Management, European Financial Management Association, vol. 10(2), pages 213-224, June.
    20. Yildiz, Özgür, 2014. "Financing renewable energy infrastructures via financial citizen participation – The case of Germany," Renewable Energy, Elsevier, vol. 68(C), pages 677-685.
    21. Pollio, Gerald, 1998. "Project finance and international energy development," Energy Policy, Elsevier, vol. 26(9), pages 687-697, August.
    22. Steffen, Bjarne & Weber, Christoph, 2013. "Efficient storage capacity in power systems with thermal and renewable generation," Energy Economics, Elsevier, vol. 36(C), pages 556-567.
    23. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    24. Claudio Agostini & Shahriyar Nasirov & Carlos Silva, 2015. "Investors perspectives on barriers to renewables deployment in Chile," Working Papers wp_044, Adolfo Ibáñez University, School of Government.
    25. Miguel Cárdenas Rodríguez & Ivan Haščič & Nick Johnstone & Jérôme Silva & Antoine Ferey, 2015. "Renewable Energy Policies and Private Sector Investment: Evidence from Financial Microdata," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(1), pages 163-188, September.
    26. Hayne E. Leland, 2007. "Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spinoffs, and Structured Finance," Journal of Finance, American Finance Association, vol. 62(2), pages 765-807, April.
    27. Kann, Shayle, 2009. "Overcoming barriers to wind project finance in Australia," Energy Policy, Elsevier, vol. 37(8), pages 3139-3148, August.
    28. Mariana Mazzucato & Gregor Semieniuk, 2016. "Financing Renewable Energy: Who is Financing What and Why it Matters," SPRU Working Paper Series 2016-12, SPRU - Science Policy Research Unit, University of Sussex Business School.
    29. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
    30. Daniel J. Tulloch, Ivan Diaz-Rainey, and I.M. Premachandra, 2017. "The Impact of Liberalization and Environmental Policy on the Financial Returns of European Energy Utilities," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    31. Enzensberger, N. & Fichtner, W. & Rentz, O., 2003. "Financing renewable energy projects via closed-end funds—a German case study," Renewable Energy, Elsevier, vol. 28(13), pages 2023-2036.
    32. Kim, Jeayoon & Park, Kwangwoo, 2016. "Financial development and deployment of renewable energy technologies," Energy Economics, Elsevier, vol. 59(C), pages 238-250.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Karsten Neuhoff & Nils May & Jörn C. Richstein, 2018. "Renewable Energy Policy in the Age of Falling Technology Costs," Discussion Papers of DIW Berlin 1746, DIW Berlin, German Institute for Economic Research.
    2. repec:eee:appene:v:236:y:2019:i:c:p:1249-1268 is not listed on IDEAS
    3. repec:eee:energy:v:161:y:2018:i:c:p:1096-1114 is not listed on IDEAS
    4. repec:eee:energy:v:166:y:2019:i:c:p:1047-1062 is not listed on IDEAS
    5. repec:eee:enepol:v:121:y:2018:i:c:p:383-393 is not listed on IDEAS

    More about this item

    Keywords

    Investment decision; Special purpose vehicle; Renewable energy; Solar PV; Wind; Yieldco;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:69:y:2018:i:c:p:280-294. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eneco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.