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What Is the Connection between Renewable Energy and Project Finance?

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  • Written By: Geri Terzo
  • Edited By: A. Joseph
  • Last Modified Date: 09 September 2016
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Renewable energy projects are often capital-intensive ventures because of the land as well as technology and equipment needed to begin. Also, many project operators, including participants in wind power and solar energy, have no proven revenues yet because of the somewhat nascent and sometimes volatile nature of the industry. The nature of renewable energy is quite conducive to project finance. Renewable energy and project finance have something of a symbiotic relationship under certain conditions. Project finance is the extension of capital to risky projects, and renewable energy is a volatile industry that is influenced by external factors.

Wind power is a sector that underscores the fact that there is a connection between renewable energy and project finance. The wind farms that are created to generate power require an investment in individual turbines in addition to pieces of land on which to build the facilities. Often, the developers of these sites can front only some of the capital that is needed to bring the development into operation. Additionally, wind farms typically are constructed long before any revenues are earned from the venture, which is a component of project finance. In project finance, the capital is provided on the premise that future revenues will be used to repay any debt, and the assets in the project are treated as collateral.

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Solar power development is another area in which renewable energy and project finance come together. The adoption of solar power by the commercial industry and individual residences creates an intriguing proposition for financiers. Also, the expense of new technologies keeps solar power companies in need of financing opportunities as cash flow generated from this sector takes shape. Lenders recognize an opportunity in the growth potential of solar power and are not likely to miss out on that.

Trends involving renewable energy and project finance surrounding solar power have continued to unfold and are shaped somewhat by regulatory standards in different regions. For instance, governments that provide certain tax credits for renewable energy production help create solar development and will benefit the banks that are extending the project finance. Risks still exist when the revenues have not reached their expected potential, but banks and developers still create deals that involve renewable energy and project finance. Renewable energy opportunities are often global in nature, and banks from around the world participate in project finance activities.

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