How to finance a renewable energy project

Start with the revenue contract

A power purchase agreement (PPA) with a creditworthy utility or corporate buyer converts a construction project into a predictable annuity, and that is what lenders are actually buying. The tenor of the PPA sets the outer limit of the debt term, and the counterparty's credit quality sets much of the margin.

Where a scheme sells into the wholesale market instead, the revenue becomes merchant. That is financeable, but the lender will assume conservative prices, size the debt lower and price the risk higher. Hybrid structures — a contracted floor with merchant upside — sit between the two.

Grid connection is the schedule risk

Panels and turbines arrive on time far more often than connection agreements do. Before a facility is drawn, we look for the connection offer, the agreed energisation date, the substation works scope and who is responsible for each element.

Projects that treat connection as an afterthought build an asset that cannot sell anything. Where the connection is conditional, the drawdown schedule should be built around it rather than around civil works.

How the debt is sized

Lenders do not size debt as a percentage of cost. They forecast the project's net operating cash flow, apply a debt service cover ratio, and lend whatever principal that cash flow can service with headroom. Contracted revenue supports a tighter ratio; merchant revenue demands a wider one.

Two consequences follow. First, cutting capital cost helps less than improving the revenue contract. Second, an over-optimistic yield assumption in the model does not increase the loan — it just gets sensitised away in diligence.

The diligence pack

For a renewable scheme we expect the following before a credit committee will look at the file.

• Feasibility study and independent yield or resource assessment.
• Signed or heads-of-terms PPA / offtake agreement.
• EPC or construction contract with a fixed or capped price.
• Grid connection offer and energisation programme.
• Land title, lease or easement documents for the whole footprint.
• Planning consent and environmental and social impact assessment clearance.
• Financial model with base and downside cases.
• Insurance schedule covering construction and operating phases.

Pricing expectations

Institutional, large-scale renewable project finance can price at roughly 5%–9% APR, but only for heavily vetted deals with strong sponsors, government guarantees or multilateral development bank support. Bank commercial and project loans more commonly sit at 7%–12% APR, tracking central bank base rates plus a margin for borrower risk, collateral and loan-to-value.

In certain circumstances our lender may be able to finance a project at 0% APR, subject to the specific details, scope and financial requirements of the plan.