Renewable energy
targets are implemented in as many as 164 countries. Many developing countries have
some challenges to face such as financing renewable energy projects, knowledge
of managing renewable energy and legal framework for such migration and finally
the political leadership and the transparency required for this significant the shift in energy technology
Funding Sources
Renewable energy(RE)
has traditionally two ways of sourcing investment.
Loan Funds:
Bank borrowings
focus more on the return on capital over a fixed period, and as such, the
return on investment (ROI) is not the critical component of the transaction. As
such, the return on investments is lower than other funding methods. Oil & gas
m&a usually
prefer this route.
Equity Capital
Here the capital
infused by shareholders is for a longer period, and the expected returns are
much higher as higher risk is assumed. The private lenders put more pressure
for better returns as compared to a traditional financial institution. Infrastructure
Fundraising for any new projects source infrastructure equity funds from venture capital or private equity funds.
The third option is
that many existing oil and gas companies go for mergers with RE start-ups for
greater synergy. Such oil and gas mergers and acquisitions fund the RE
projects from their funds or reserves as a part of their corporate strategy
throughout the life cycle of the project. The same internal investment may get
refinanced depending on existing or new players who may benefit from the
project then.
Key features of funding for RE projects.
· Source of funding – Equity funds can be
from a wide range of sources such as insurance companies, pension funds, stock
markets, Real estate, and more. The loan funds are traditionally from banks.
· Target –Equity funds are
not averse to new technologies, greenfield projects, whereas the Loans provided
by banks want mature technology with a proven track record of the borrower.
· Risk –The categories vary from low. Medium to high risk depending on the lenders, but banks prefer low
risk.
· Returns-Equity Funds are
for a longer period, typically ranging from 3-10 years depending on the project
and the expected returns, which is higher compared to banks that have specific
terms of the loan with a maximum period of 5 years.
· Benefits- Equity
borrowings give the project diversity, liquidity, and transparency with a high return
on investment. Guarantees, collaterals, low returns back a loan from Financial
institution. No involvement of the lenders in the project though it does
provide tax benefits.
