5 Things you need to know about financing a renewable energy project

Peter Brading, a Senior Associate in our Banking and Finance Team, will be hosting a panel discussion on the financing of renewable energy projects as part of AIJA's upcoming seminar on renewable energy projects: 'Saving the planet and ourselves - increasing the share of renewables in the energy mix', which will be held in Gdańsk between 9 and 11 May 2024.

The panel will tackle the complexities of financing renewable energy projects, explore the main risks and drivers for financing projects during their lifetime, and delve into the legal documentation required.

In the meantime, here are 5 key things to know about financing a renewable energy project:

1. Bespoke borrower entity: a special purpose vehicle (SPV) will be established to hold all rights and assets required for building and running the project, and will be the main borrower under the facilities agreement.
2. Income stream predictability: unlike social infrastructure projects (e.g. schools, hospitals etc), power projects, renewable energy projects in particular, will not typically benefit from a long-term "public" concession agreement. Instead, an off-take agreement or power purchase agreement of sufficient length and with a counterparty of acceptable covenant strength to the funders, will be needed for the project to be 'bankable'.
3. Limited recourse: although secured through a full suite of security (including fixed and floating charges over the borrower's assets, and security over the shares in the SPV), the main recourse available to the funders in the event of a default is to the cash flow generated by the project, rather than the specific assets of the borrower or sponsors. As with other forms of project finance, financing a renewable energy project is generally known as ‘limited recourse’ or ‘non-recourse’ finance. Focus will therefore be very much on the step-in rights granted under direct agreements that will allow the funder to take control of the project in the event of a default by the borrower.
4. Debt vs equity: the majority of financing made available on a renewable energy project finance deal is debt, with a smaller amount of equity investment being injected by a sponsor (i.e. the ultimate owner of the SPV). The split of debt vs equity will vary from transaction to transaction and can depend on the class of renewable energy project involved as well as the risk profile of the particular project. For wind projects, a range of 70 to 80% debt and 20 to 30% equity would be fairly typical.
5. Allocation of risk: due to the exposure of longer-term projects such as renewable energy projects to policy and wider macroeconomic factors (amongst other risks), the allocation of risk between the parties and risk mitigation are often some of the most important and hotly negotiated points on any particular transaction.

For more information on Brodies' renewable energy expertise, please visit here and for more information on our project finance credentials, please see here. Brodies LLP is proud to be a sponsor of the seminar. If you wish to find out more information or register your attendance – please visit: 'Saving the planet and ourselves – increasing the share of renewables in the energy mix'.